Anybody care about the dollar?

I watched a fair bit of both US political conventions. Despite a large amount of discussion amongst economists and even people on the street, as far as I could tell, the value of the US dollar – if it is too high or too low, if the changes in its value have meant anything positive or negative to the US –barely made an appearance at the conventions.

The only time I saw anyone mention the dollar was when Rudy Giuliani included a line about McCain saying, “He will reduce government spending to strengthen our dollar.” Now the exact mechanism was not spelled out. In a number of models, cutting government spending might simply shift the demand for home goods down (weakening the dollar) or shift in any curve dependent on aggregate demand (depending on which model you are using) leading again to a weakening of the dollar. Alternatively, if the idea was to cut spending and not cut taxes (thereby increasing national savings and possibly reducing the current account deficit) perhaps there would be a shift in expectations about the long run value of the dollar. But, these issues were not fleshed out in Giuliani’s speech, and in truth the line was barely audible as the line preceding it was “He will lower taxes so our economy can grow” which had sent the crowd into a frenzy.

Google helped me find one other instance (Rep Jim Leach, a Republican speaking at the Democratic Convention) argued that Obama’s policies would be more responsible and that America needed to decide “Whether it is prudent to borrow from future generations to pay for today’s reckless fiscal policies or elect a leader who will shore up our budgets and return to a strong dollar.” (with the clear implication from the speech being that McCain would have the reckless fiscal policies and Obama would shore up budgets and return to a strong dollar). Here again, many of our simple macro models would argue that raising taxes or cutting spending (shoring up budgets) would not necessarily strengthen the dollar, though again a more expectations oriented model might say that by shoring up the budget we make it less likely we’ll try to inflate away debt and hence strengthen expectations about the long run value of the dollar. But again, this was a line in passing and not even directly about the dollar, but again about fiscal policy.

Given that the last time the Democratic party met in Denver (1908) they nominated William Jennings Bryan, a man who is famous for his speeches railing against the US exchange rate and monetary policy of his day (his famed cross of gold speech actually came 12 years earlier in Chicago), it is striking how the dollar or anything related to its movements is now removed from US political debate. The occasional candidate will call for a return to the Gold Standard (Steve Forbes in 1996, Ron Paul this time around), but for the most part, the notion that the dollar fluctuates in a market and its movements are either unimportant or not something we really want the government doing a lot about seems to have become the majority opinion.

When economists think about exchange rate regime choice (to peg or not to peg is the question), they argue democracies are more apt to float because it gives them the flexibility to juice the economy when needed to maintain office. And, in truth, democracies ARE more apt to float when one looks at the data (despite the democratic and peg happy countries of Western Europe), and for many countries this may be because it gives more flexibility to manipulate the economy, but looking at this US case, it is hard to say the floating is part of leaving freedom to the government to fiddle with the economy. Instead, monetary and exchange rate policy have been so successfully removed from partisan politics that it seems that politicians don’t have any interest in wading into the debate about where the dollar goes next.