01/30/2012 01:53 pm ET Updated Mar 31, 2012

A Competitive Dollar: The Missing Link in President Obama's Manufacturing Agenda

In his State of the Union Address last week, President Obama announced a renewed commitment to manufacturing in the United States. While the commitment to rebuilding the country's manufacturing base is welcome -- manufacturing has historically been a source of good-paying jobs for workers without college degrees -- he unfortunately left the most important item on the list off the agenda.

President Obama failed to commit himself to restoring the competitiveness of dollar as part of his agenda for bringing back manufacturing jobs. The value of the dollar really has to be front and central in any effort to restore U.S. competitiveness since it is by far the most important factor determining the relative cost of U.S. goods compared with goods produced elsewhere.

If the dollar is 20 percent above its proper value then it is equivalent to putting a 20 percent tariff on all of our exports. If the price of U.S. made goods are 20 percent higher for people living in other countries because of an over-valued dollar, we are not going to be able to export very much.

The opposite is true with imports. The over-valued dollar is equivalent to giving a 20 percent subsidy to people who import goods from other countries. This places U.S.-made products at an enormous disadvantage competing with imports. This explains the flood of imports coming into the country over the last 15 years.

President Obama's plans to improve education and training and provide support for research and long-term planning are all great, but if we don't address the fundamental problem of an over-valued dollar, then his agenda will have little impact on manufacturing in the United States. This is sort of like preparing the soil and carefully watering your garden but forgetting to plant the seeds.

The idea of the dollar falling in response to a trade deficit is actually fairly basic economics. In a system of floating exchange rates, countries with large trade deficits, like the United States, are supposed to see their currency fall, which brings trade back into balance. The lower-valued dollar has little effect on the price of most goods and services people in the United States consume. It just raises the price of imports, which is necessary if we are not going to keep borrowing money to pay for the fact that we consume more imports than we export.

The trade deficit is not leading to a fall in the dollar now because the central banks in many countries (most importantly China) are buying up large amounts of dollars precisely to keep the dollar from declining and eliminating their trade surpluses and our trade deficit. President Obama must persuade these countries to change their practice or take steps to force the dollar down. If he doesn't, then he is largely wasting our time with his "built to last" agenda.

Balanced trade would have a huge impact on U.S. labor markets. It would lead to more than 5 million new jobs in manufacturing. If we had balanced trade, as opposed to a $580 billion trade deficit (4 percent of GDP), we could get back to full employment without needing either the stimulus from large budget deficits or the boost from the demand generated by a housing bubble.

Imagine the 4.0 percent unemployment of the late 90s coming back. This would make a real difference in the lives of tens of millions of workers.

As a matter of accounting, the gap in demand created by a trade deficit can only be filled by either negative public saving (a budget deficit) or negative private saving, as we experienced with the housing-bubble-driven consumption boom. There is literally no way around this story.

Unfortunately it is not clear that President Obama is prepared to push for a lower-valued dollar. Robert Rubin, the Treasury Secretary under President Clinton whose views still capture the thinking of most centrist Democrats, was the main promulgator of the high dollar policy that caused our trade deficit to explode in the first place.

There is a real class dimension to the high dollar since it means that Wall Street's money will go further when it invests overseas. It also helps to keep down inflation, Wall Street's nemesis. In other words the value of the dollar is another one of those 99 percent versus the 1 percent issues.

In short, if we actually want to see results in the form of more manufacturing jobs, rather than just a good speech, we will have to press President Obama to challenge the 1 percent. A more competitive dollar must be at center of a serious manufacturing policy. Everything else on President Obama's Built to Last agenda is just window dressing.