The Trade Deficit Is Driving Dollar's Decline

Profs. Ronald McKinnon and Steve H. Hanke in their "Rescue Plan for the Dollar" (op-ed, Dec. 27) incredibly ignore the real reason for the continuing fall in the value of the dollar relative to the euro and other currencies: the astounding U.S. trade deficit.

The 2006 deficit in trade of goods and services was a record $758.5 billion, the equivalent of 7.5 million manufacturing jobs. Strangely -- I know no economic justification for it -- they refer to those who want to balance trade as "mercantilists in Washington" whereas the essence of mercantilism is policies that seek a permanent trade surplus. Foreigners and their governments -- which accumulate dollar financial assets (the modern version of gold and which, unlike gold, earns interest) -- are what we call in a forthcoming book "dollar mercantilists." The export-based and mercantilist development strategies of Japan and China and others were at the expense of U.S. manufactures and the primary cause of wage stagnation in the U.S.

Messrs. McKinnon and Hanke are right that there is a common interest in maintaining the stability of the dollar but jawboning to convince foreign governments and their central banks to support the dollar will not solve the problem.

The best way to support the dollar is to balance our trade. The economic literature is full of the gains from trade that accrue to all trading partners, but every example to prove such gains shows trade to be in balance. Our goal should be free and balanced trade with emphasis on balance.

Raymond Richman, Ph.D.
Professor Emeritus of Public and International Affairs
University of Pittsburgh
Pittsburgh