Must It Come Down?

IN a recent article in the Economist, Baker Professor of Economics Martin S. Feldstein offers President-elect George Bush some advice.

Feldstein argues that the United States should not try to slow the dollar's fall by pegging it to other nation's currencies or by setting target ranges. In order to act with maximum efficiency, Feldstein believes the Federal Reserve Board should let markets determine the value of the dollar (however low that may be) and focus its monetary weapons on controlling inflation at home.

Yet Feldstein goes a step beyond a dispassionate economic argument by making his plan into a panacea for the trade deficit--when it's not. The United States could let the dollar fall to eliminate its huge trade deficit. As American goods get relatively cheaper and foreign goods more expensive, America will be selling more and buying less, until eventually our trading accounts balance. In fact, Bush may choose to follow this plan to eliminate the deficit.

Yet, this approach sacrifices America's long term economic wellbeing and ignores the human cost of a lower dollar.

MOST economic experts agree that the trade deficit is the result of more than an overvalued dollar. American industry is getting beaten in the world market by being slow to innovate. Surpluses that foreign countries channel into research and development are divied up by American companies as short-term profits. While foreign governments help develop new competitive advantages for their companies, our elected leaders allow Wall Street executives to squander time and money on corporate takeovers, which produce nothing.

UNFORTUNATELY, Feldstein accepts these trends as a given. He wrote, "...the dollar now has to be lower than would have been necessary a decade ago. This is reinforced by such fundamental factors as the increasing competitiveness of the newly industrialized countries of Asia..."

Feldstein refers to the "fundamental factor" of declining American competitiveness because he does not believe it needs to be reversed. In fact, making America more competitive should be our economy's top priority.

No low dollar value can compensate for a massively inefficient, stagnating industrial sector. In the book "The Zero-Sum Solution," MIT economist Lester Thurow pointed out that "problems of international competitiveness will be with Americans even after the dollar falls."

THERE are also more immediate harmful consequences of a lower dollar. As American goods get cheaper, so do American land, assets and factories. Already more than one-fifth of all domestic bank assets are owned by foreign banks.

Foreign ownership of American farms, companies, banks and bonds has almost doubled since 1981 and now approaches $1.5 trillion. A lower dollar will eventually increase American exports--but will it be America any longer?

A lower dollar also means a decrease in the standard of living for many Americans. Prices of all imported goods will rise, as will those of many American goods whose producers see a way to increase profits and still compete. According to Thurow, there would be a serious risk of the United States heading "back to double-digit inflation" and suffering "a noticeable reduction in the American standard of living."

The real issue isn't whether it might be more efficient in the short-run to let the market decide the value of the dollar. It is whether we should be satisfied with eliminating the trade deficit by compromising future competitiveness and our present standard of living.

Hopefully Bush will take his own advice in this case, and not rely on Harvard for counsel.