(No. 10 in Huffington Post's America Needs Jobs series.)
With the Federal Reserve indicating that it's ready to print more money to keep interest rates down, the dollar appears to be headed lower against foreign currencies. The big question, though, is whether the dollar will lose enough value -- and fast enough -- to make a difference in the nation's job picture.
As long as the dollar remains high, it acts like an enormous tax on U.S. exports and a massive subsidy for U.S. imports. That's an equation for losing jobs, particularly in the manufacturing sector.
As progressive economist Dean Baker explains:
If the dollar is 30 percent over-valued, then it means that we are effectively providing a subsidy of 30 percent for imports and imposing a tariff of 30 percent on exports. As people who understand economics know, the over-valued dollar is the main reason that we have a trade deficit. If we got the dollar down, then our manufacturing industry would be much more competitive.
C. Fred Bergsten, director of the Peterson Institute for International Economics calls the exchange rate the most important factor in determining U.S. export competitiveness:
Every increase of 1 percent in the dollar, averaged against other major currencies, reduces our exports by about $20 billion annually and destroys about 150,000 jobs. The recurrent overvaluations of the past 30 years, when the dollar became overpriced by 30 to 40 percent, contributed significantly to the decline in manufacturing jobs and was the major cause of the huge current account deficits of most of that period.
The policy goal should be a competitive exchange rate that produces a sustainable trade balance, rather than a "strong dollar." This would help both sides of the trade account, strengthening the ability of U.S. firms and workers to compete with imports as well as to export.
A big part of the problem, of course, is China, which artificially undervalues the renminbi by somewhere between 20 and 40 percent. I wrote about that earlier in my America Needs Jobs series.
But the dollar needs to come down against other currencies, too, in order to level the playing field.
Clyde Prestowitz, a former Reagan administration official who runs the Economic Strategy Institute, argues that the dollar is key to turning around America's decline:
I think we need to really mount a major effort to reset the global exchange rates. Other currencies need to revalue against the dollar so the dollar would be worth relatively less. And I'd like to be able to do that through negotiations in the International Monetary Fund and even in the World Trade Organization. I think we should try that.
American University economist Robert Blecker estimates that the increases in the dollar's value from 1995 to 2004 lowered U.S. manufacturing investment by 61 percent relative to what it would otherwise have been.
Since then, the dollar has gone down. "In fact the dollar has fallen a lot, it's been trending downward for eight years. But not with the currencies where we have our biggest trade deficit," Blecker told the Huffington Post. "It has not fallen nearly enough with the Chinese yuan and other east Asian currencies."
Blecker said he thinks it's too late to get a lot of the lost jobs back, particularly in industries that have been the most hard-hit here, such as textiles and apparel. But, he said, what a lower dollar could do "is attract more of the industries of the future to remain here, or remaining industries to not offshore more."
It could also boost exports. "In 2006, 2007, we were seeing really strong growth in exports," Blecker said. "It was one of the strongest points in the economy, before the financial crisis. And I think that was an effect of the lower dollar."
Support for devaluing the dollar is not universal among progressive economists.
Former labor secretary and Berkeley professor Robert Reich blogged for HuffPost earlier this month criticizing the Obama administration for "actively pursuing a weak dollar as a jobs policy" and warning of currency wars and higher import costs. "It's no big accomplishment to create jobs by getting poorer," he wrote.
Blecker agreed that there is some reason to worry about currency wars, and that some lost American jobs might simply move around, rather than come back. But, he said, there's no doubt it would be good for exports.
And, he noted: "Making imports more expensive is exactly how you hope to have industries locate here instead of there."
COMING NEXT IN THE AMERICA NEEDS JOBS SERIES: Buy American
Have you missed any of the previous installments of HuffPost's America Needs Jobs series? Read the introduction, Idea No. 1: A Payroll Tax Holiday, No. 2: Rescue The States, No. 3: The Joys Of Retrofitting, No. 4: Put Young People To Work, No. 5: Gearing Up For Climate Change, No. 6: Sharing The Pain Of Layoffs, No. 7: Drawing A Line With China, No. 8: Time For A New WPA, and No. 9: Encourage Banks To Lend -- Or Else.
Got an idea you think we may be overlooking? Email froomkin@huffingtonpost.com.
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Dan Froomkin is senior Washington correspondent for the Huffington Post. You can send him an e-mail, bookmark his page; subscribe to RSS feed, follow him on Twitter, friend him on Facebook, and/or become a fan and get e-mail alerts when he writes.