Paul Krugman: The dollar is getting stronger -- and that's a bad thing

Amid Europe's debt disputes, the dollar is strengthening -- and the U.S. economy could suffer as a result

Published March 13, 2015 12:45PM (EDT)

 Paul Krugman                                                                                                                (Screen shot, Bloomberg)
Paul Krugman (Screen shot, Bloomberg)

One euro is now worth about $1.06 -- a sharp decline from a few months ago, when a euro could buy you roughly $1.50. The euro's decline, amid ongoing debt disputes between Greece and its creditors and broader deflation on the continent, is good news for Americans planning junkets to Paris or Athens: Their dollars now get them considerably further. But for the U.S. economy as a whole, the strengthening dollar is bad news.

So argues Nobel Prize-winning economist Paul Krugman in his New York Times column today. Quite simply, Krugman notes, "a weaker euro makes European industry more competitive against rivals, boosting both exports and firms that compete with imports, and the effect is to mitigate the euroslump." That means U.S. industry becomes less competitive, threatening the modest manufacturing resurgence and sending trade deficits ever higher.

And yet, Krugman laments, monetary policymakers don't seem fully awake to the very real and present danger:

One thing that worries me is that I’m not at all sure that policy makers have fully taken the implications of a rising dollar into account. The Fed, still eager to raise interest rates despite low inflation and stagnant wages, seems to me to be too sanguine about the economic drag. And the most recent Fed minutes suggested that some members of the committee that governs monetary policy were thoroughly clueless, apparently believing that inflows of capital would make the U.S. economy stronger, not weaker.

Oh, and one more thing: a lot of businesses around the world have borrowed heavily in dollars, which means that a rising dollar may create a whole new set of debt crises. Just what the global economy needed.

Not only do the discontents of a strong dollar underscore the need for the Fed to think twice before raising interest rates; the phenomenon also brings home the importance of a robust U.S. industrial policy aimed at tackling trade deficits. For all the Beltway's pearl-clutching about the budget deficit (which, by the way, continues to fall), it's the gap between the U.S. and its trade competitors that endangers jobs and the economic recovery. Economist Dean Baker calculated last year that bringing trade into balance would generate more than six million new jobs.

Alas, the workers who would fill them have nowhere near the financial might and political clout of the bond market, the god to which we must always bow down.

By Luke Brinker

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