Greenspan and the Dutch Disease
In an op-ed in the Wall Street Journal on March 8, 2008, reprinted as a blog posting — Valuing the Dollar — I called attention to the fact that any particular exchange rate is rather arbitrary and that changes help some and harm others through no fault of their own. I said that a good sound business could go under because of the exchange-rate effects off a totally unrelated development. While I didn't think that was totally original with me, I didn't recall ever reading a discussion of that particular point.
In reading Alan Greenspan's book recently, I was reminded once again that nothing is new under the sun. I'm embarrassed to admit that I did not recall the term "Dutch disease," which is a label that fits my "original" insight pretty well.
According to Greenspan the term was coined by The Economist in the 1970s "to describe the travails of manufacturers in the Netherlands after the discovery there of natural gas. Dutch disease strikes when foreign demand for an export drives up the exchange value of the exporting country's currency. This increase in the currency's value makes the nation's other export products less competitive."
So there! While I was intrigued with the coincidence of finding a name for a phenomenon I was struggling to describe, the term is usually associated with — as was the case with Greenspan — the role of natural resources in economic growth. As he put it on page 257 of his book,
"Paradoxically, most analysts conclude that, particularly in developing countries, natural-resource bonanzas tend to reduce rather than enhance living standards."
In addition to the impact of Dutch disease on other exportable goods or services, there appears to be a stifling of productivity and hard work when wealth is found underground. It reminds me of Dolly Parton-who else?-who said she was lucky enough to be born poor.
While any movement in the dollar helps some people and industries and hurts others, the consensus is that the combination of winners and losers created by a strong dollar is ideal. My efforts to remind people of the need to use our temporarily "weak" dollar to reduce our humongous trade deficit and provide stimulus to a weak economy as well as slow the foreign accumulation of dollar assets haven't produced any kudos. One reason, I believe, is my rookie's mistake in using the term "weak." Since then, I happened to see Marty Feldstein on TV making similar points to mine, which pleased me greatly since I believe him to be at the top of the profession. However, he wasn't touting a "weak" dollar; he was describing the advantages just now of a "competitive" dollar. And, to think, I've read Frank Luntz's excellent book, Words that Work. Hey, guys, I meant a competitive dollar.
Of course, as I attempted to demonstrate in my blog posting on the Big Mac Index, the dollar is not easily characterized as weak or strong, as competitive or not competitive. It's weak, and increasingly competitive, against the Euro, but strong against many other currencies, particularly Asian countries. I guess what I meant was that capital inflows had prevented its depreciation from correcting the trade balance. I still think it's fortunate that that has changed somewhat recently and that the smaller drag on GDP from the foreign trade sector is keeping us out of recession. So far! The correction has begun and the dollar can gradually climb back to its lofty heights on the sounder basis of more balanced trade.