Does Obama have a secret plan to boost job growth in the Midwest via a weak dollar policy? That's the provocative thesis offered by Simon Johnson, the former IMF chief economist who has been one of the most vocal critics of how the current administration has handled the financial crisis.
Writing in the Daily Beast, Johnson notes that G-7 "met this weekend and made no statement about the dollar -- despite what must have been considerable pressure from Japan, France, Germany, and Italy, all of which are always worried about a rapid weakening of the dollar because they are so dependent on exports."
Johnson attributes this to "adroit maneuvering" by the Obama administration "in the corridors of high international finance."
The reasoning goes like this. Normally a weaker dollar would imply inflation risks, but currently the main threat on the table is still deflation, so the Obama administration is safe on that ground. Meanwhile, a weaker dollar makes U.S. exports more attractive, and that means "our car companies, machinery makers, and turbine blade manufacturers will soon be rehiring and we'll finally get some job growth as part of our sputtering economic recovery."
Which in turn means good news for Rust Belt Democrats facing the likelihood of hotly contested midterm elections.
So forget all that fuss about the "demise of the dollar." Johnson's theory is not without merit, especially with respect to China. The U.S. has long complained that China has kept the value of the yuan artificially low, giving Chinese exports advantage -- which is essentially the same thing as advocating a weaker dollar, vis-a-vis the yuan. But I'm a little skeptical as to the supposed political payoff. The midterm elections are now just a little over a year away. How far down will the dollar have to go and how long will it need to stay down to make a significant impact on job growth in recession-plagued America?
Perhaps in connection with a tax credit for job creation, and the continued disbursement of stimulus funds, a weak dollar over the next year could make a real difference, but time is quickly becoming of the essence. The more likely political scenario might be to aim for real job growth by 2012 ... instead of 2010.