THERE are few truisms about the world economy, but
for decades, one has been the role of the United States dollar as the world’s
reserve currency. It’s a core principle of American economic policy. After
all, who wouldn’t want their currency to be the one that foreign banks and
governments want to hold in reserve?
But new research reveals that what was once a privilege is now a
burden, undermining job growth, pumping up budget and trade deficits
and inflating financial bubbles. To get the American economy on track,
the government needs to drop its commitment to maintaining the dollar’s
reserve-currency status.
The reasons are best articulated by Kenneth Austin, a Treasury
Department economist, in the latest issue of The Journal of Post Keynesian
Economics (needless to say, it’s his opinion, not necessarily the
department’s). On the assumption that you don’t have the journal on your
coffee table, allow me to summarize.
It is widely recognized that various countries, including China,
Singapore and South Korea, suppress the value of their currency relative to
the dollar to boost their exports to the United States and reduce its exports
to them. They buy lots of dollars, which increases the dollar’s value relative
to their own currencies, thus making their exports to us cheaper and our
exports to them more expensive.
In 2013, America’s trade deficit was about $475 billion. Its deficit
with China alone was $318 billion.
Though Mr. Austin doesn’t say it explicitly, his work shows that, far
from being a victim of managed trade, the United States is a willing
participant through its efforts to keep the dollar as the world’s most
prominent reserve currency.
When a country wants to boost its exports by making them cheaper
using the aforementioned process, its central bank accumulates currency
from countries that issue reserves. To support this process, these countries
suppress their consumption and boost their national savings. Since global
accounts must balance, when “currency accumulators” save more and
consume less than they produce, other countries — “currency issuers,” like
the United States — must save less and consume more than they produce
(i.e., run trade deficits).
This means that Americans alone do not determine their rates of
savings and consumption. Think of an open, global economy as having one
huge, aggregated amount of income that must all be consumed, saved or
invested. That means individual countries must adjust to one another. If
trade-surplus countries suppress their own consumption and use their
excess savings to accumulate dollars, trade-deficit countries must absorb
those excess savings to finance their excess consumption or investment.
Note that as long as the dollar is the reserve currency, America’s trade
deficit can worsen even when we’re not directly in on the trade. Suppose
South Korea runs a surplus with Brazil. By storing its surplus export
revenues in Treasury bonds, South Korea nudges up the relative value of
the dollar against our competitors’ currencies, and our trade deficit
increases, even though the original transaction had nothing to do with the
United States.
This isn’t just a matter of one academic writing one article. Mr.
Austin’s analysis builds off work by the economist Michael Pettis and,
notably, by the former Federal Reserve chairman Ben S. Bernanke.
A result of this dance, as seen throughout the tepid recovery from the
Great Recession, is insufficient domestic demand in America’s own labor
market. Mr. Austin argues convincingly that the correct metric for
estimating the cost in jobs is the dollar value of reserve sales to foreign
buyers. By his estimation, that amounted to six million jobs in 2008, and
these would tend to be the sort of high-wage manufacturing jobs that are
most vulnerable to changes in exports.
Dethroning “king dollar” would be easier than people think. America
could, for example, enforce rules to prevent other countries from
accumulating too much of our currency. In fact, others do just that
precisely to avoid exporting jobs. The most recent example is Japan’s
intervention to hold down the value of the yen when central banks in Asia
and Latin America started buying Japanese debt.
Of course, if fewer people demanded dollars, interest rates — i.e.,
what America would pay people to hold its debt — might rise, especially if
stronger domestic manufacturers demanded more investment. But there’s
no clear empirical, negative relationship between interest rates and trade
deficits, and in the long run, as Mr. Pettis observes, “Countries with
balanced trade or trade surpluses tend to enjoy lower interest rates on
average than countries with large current account deficits, which are
handicapped by slower growth and higher debt.”
Others worry that higher import prices would increase inflation. But
consider the results when we “pay” to keep price growth so low through
artificially cheap exports and large trade deficits: weakened
manufacturing, wage stagnation (even with low inflation) and deficits and
bubbles to offset the imbalanced trade.
But while more balanced trade might raise prices, there’s no reason it
should persistently increase the inflation rate. We might settle into a norm
of 2 to 3 percent inflation, versus the current 1 to 2 percent. But that’s a
price worth paying for more and higher-quality jobs, more stable
recoveries and a revitalized manufacturing sector. The privilege of having
the world’s reserve currency is one America can no longer afford.
Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities.
A version of this op-ed appears in print on August 28, 2014, on page A25 of the New York edition
