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Fiscal policy leaving unemployed on their own and killing the dollar
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The Dow Jones industrial average gained almost 204 points yesterday, spurred on by news that the G-20 will keep pumping stimulus dollars into the global economy. On November 7, 2009, Treasury Secretary Timothy F. Geithner urged fellow finance ministers and central bankers not to withdraw stimulus funding too early unless they wanted to risk the global economy withdrawing to that darkplace of slow growth and higher unemployment.
Maybe we don't need withdrawal so much as we need to wear some type of economic nicotine patch. The Obama administration appears to like our current weak dollar policy. The prevailing argument for the weak dollar is that as its value falls, so falls the prices for the goods that we sell abroad.
For example, an individual in England (we'll call him Hans) wants to visit Orlando, Florida and enjoy Mickey Mouse before he takes on his new darkside video game persona ala the Steamboat Willie days. To buy that trip to Disney World, Hans will need U.S. dollars. Let's say that the cost to visit the Sunshine State is $1,000. It will cost Hans one pound to buy one dollar. At that price, Hans figures a 500-pounds getaway with his wife to Scotland would be better for his budget (although not as romantic for the wife). Hans hears word that the price for a U.S. dollar falls to half a pound for one U.S. dollar. Hans is happy and his marriage is saved. He can now purchase that trip, those U.S. dollars, for 500 pounds. More importantly, as far as we Americans are concerned, Hans is one more tourist that we can attract and that makes us happy.
Wall Street has been happy of late as well. The U.S. dollar index, which measures the performance of the U.S. dollar against a basket of foreign currencies, has been falling steadily since it peaked this year at 88.008 in February. The index is currently at 75.08. The lower the index, the lower the cost of American goods and services purchased by foreigners. More foreign purchases of American goods and services begets more exports which begets a higher level of profits for American companies.
That would be great news for investors and for our free market system as a whole. But what about the average consumer/worker? For one thing, the weak dollar theory is not translating into jobs. Unemployment rose from 9.8% in September to 10.2% in October. By my back-of-the napkin estimate, the unemployment rate should hit between 10.3% to 10.5% in November. Given our level of technology we were able to increase productivity by 9.5% last month meaning that management is getting more out of the currently employed without having to increase wages or hire more workers.
The Obama administration may want to attribute this to the increase in exports resulting from a weakened dollar but this would be a mistake. In the fourth quarter of 2008 we exported or sold abroad $1,706.2 billion in goods and services. At the end of the third quarter 2009, exports were $1,563.2 billion. In addition, we are still importing more than we export given that net exports were a negative $387.5 billion in the third quarter and will probably be a negative $370 billion in the fourth quarter of this year.
The Obama administration is trying. Over the past couple of weeks, the administration has been contemplating a number of policy options including tax credits to employers; increasing export sales as a percentage of GDP; creating a national infrastructure bank; and boosting the number of workers that make buildings more energy efficient. All sound well intentioned but right now are not practical, especially the "snowy owl" stuff about making buildings more green.
I believe what we need to do right now is what we are good at. First, increase the incentives to move manufacturing jobs back to the United States. We are creators, builders, and innovators. Second, we need to sell what we produce. Contrary to what the liberal naysayers may think, the world wants what we produce. We need to build it here and sell it from here. Its the fastest and most direct way to increase exports without sacrificing the dollar to a continued beating.
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