Tag: jason furman

The Dollar, Oil Prices and Exports: Lessons of Recent History

Business news pages are suddenly full of hand-wringing about how the rising dollar threatens to slash U.S. exports and economic growth.  “The strong dollar is the biggest threat to economic recovery,” warns one reporter.  Others quote White House chief economist Jason Furman saying “the strong dollar is undoubtedly a headwind” for the U.S. economy.

It’s not that simple.

dollar and exports

The graph above compares real U.S. exports with the trade-weighted exchange rate.  The dollar was rising much faster in 1995-2000, when both exports and the economy were growing at an impressive pace.  Exports eventually fell with recession, as always.  But it is much harder to blame the recession on exchange rates than on interest rates – the Fed pushed the fed funds rate 4.7 percentage points above core inflation.   

From 2001 to 2007, the dollar fell and exports rose.  That pattern might appear to justify recent lobbying for a lower dollar were it not for the familiar connection between oil prices and the dollar.  As the dollar fell, the price of West Texas crude soared from $19 a barrel in December 2001 to over $133 in June-July 2008.  Every postwar recession except 1960 was preceded by a spike in oil prices, and the Great Recession turned out to be no exception.

The dollar weakened at the start of this recovery, but related inflation cut average real wages by 1.5% in 2011 and 0.6% in 2012.   As the dollar firmed up, by contrast, real wages rose by 0.7 % in 2013 and 0.8% in 2014.

The recent rise in the dollar has merely brought it back to about where it was in 1998 or 2006, which were not bad years.  The latest exchange rate gyrations are dominated by self-inflicted wounds to the euro and yen, but U.S. exports to the EU are only 1.3% of GDP, and exports to Japan are 0.4% of GDP.

U.S. multinationals have complained about “translation losses” – the fact that profits of subsidiaries in Europe or Japan will be less valuable when translated into dollars.  But that is equally true for earnings of European and Japanese firms too (and for their stock prices when translated into dollars). And multinationals often leave foreign earnings abroad, due to the uniquely foolish U.S. tax if offshore earnings are brought home.  

The weakened euro and yen will raise the cost of living and cost of production for citizens of the afflicted countries (including the price of oil and other commodities).  It is true that such expertly planned impoverishment of such large economies can scarcely benefit the global economy. If other countries want to make their money less trustworthy and less desirable, however, there is not much we can do about that.  

Furman’s Folly: Nostalgia about 1973 and Nonsense about the Bottom 90 Percent

Jason Furman, chairman of the Council of Economic Advisers, set out to explain “middle-class economics” in the Wall Street Journal, March 11, in an earlier Vox blog and in a presentation to National Association of Business Economists (NABE), as well as the first chapter of the Economic Report of The President

The intent is to make the recent economy look healthier (massaging 2.3-2.4 percent growth for 2013-14 into 2.7 percent), and to claim that “subpar” 2010-14 income gains for the middle class (generously defined as the bottom 90 percent) are not due to a subpar recovery but to something that has gone on ever since 1973.  His Wall Street Journal article complains of “the decades-long trend of slower income growth for the middle class.”

Furman says, “Congressional Budget Office data (with a minor extrapolation) show, median U.S. incomes are up 17 percent since 1973.”  Actually, CBO data start with 1979 and end with 2011, so it takes more than minor extrapolation to extend that back to 1973 or forward to 2013.  CBO estimates show real after-tax median income rising from $45,400 in 1983 to $68,000 in 2008 (in 2011 dollars), but not yet back to the 2008 level by 2011. Making up a number for 1973 can’t undo stagnation after 2008. 

He continues: “But from 1948-73, median incomes rose 110 percent, according to broadly comparable Census estimates.”  Yet the two series aren’t remotely comparable.  Unlike pre-tax “money income” from the Census Bureau, the CBO subtracts federal taxes (middle-income tax rates were nearly cut in half since 1981) and includes rapidly increased health and other in-kind benefits from employers and government (Medicaid, SNAP, CHIP and housing allowances). 

Wal-Mart Could Help DC in More Ways than One

It’s good news for residents of Washington, D.C., that Wal-Mart is planning on opening four stores in the District. Yet Washington Post columnist Robert McCartney reports today on one curious source of opposition:

“There’ll probably be a lot of shoplifting going on. They’ll need a lot of security,” Terriea Sutton, 35, said.

Brenda Speaks, a Ward 4 ANC commissioner, actually urged blocking construction of the planned store in her ward at Georgia and Missouri avenues NW partly because of that risk. Addressing a small, anti-Wal-Mart rally at City Hall on Monday, Speaks said young people would get criminal records when they couldn’t resist the temptation to steal.

Of course, that’s a rationale for banning all stores, not just Wal-Mart. Perhaps we should isolate these youths and consign them to abject poverty, so they’ll never be around anything worth stealing.  (A Wal-Mart spokesman commented that with regard to crime, “there is no more concern over these District locations than any other store locations.”)

Or we could recognize that Wal-Mart helps pull people out of poverty.  As Obama economic adviser Jason Furman reminds us:

Wal-Mart’s low prices help to increase real wages for the 120 million Americans employed in other sectors of the economy. And the company itself does not appear to pay lower wages or benefits than similar companies, or to cause substantially lower wages in the retail sector…

[T]o the degree the anti-Wal-Mart campaign slows or halts the spread of Wal-Mart to new areas, it will lead to higher prices that disproportionately harm lower-income families…

By acting in the interests of its shareholders, Wal-Mart has innovated and expanded competition, resulting in huge benefits for the American middle class and even proportionately larger benefits for moderate-income Americans.

Wal-Mart could do even more good for District residents if these four new stores sold guns.  That would quintuple the number of firearms retailers in the District, make self-defense affordable for low-income residents, and might just add some lobbying heft to the campaign to roll back D.C.’s ridiculous gun regulations.