Feldstein Says U.S. Dollar Needs to Depreciate

Martin S. Feldstein ’61, Baker professor of economics and one-time top White House economic adviser, criticized America’s “strong dollar” policy at a convention of macroeconomic and financial experts last weekend.

“We clearly need a more competitive dollar,” he said, according to reports of his remarks. “The dollar is still very high—too high to be sustained.”

In a sit-down interview yesterday, Feldstein cautioned that the dollar’s strength, along with the low U.S. savings rate, could lead to a “weakening of the U.S. economy.”

“The dollar is overvalued and our savings rate has collapsed,” Feldstein said.

Cabot Professor of Public Policy and Professor of Economics Kenneth S. Rogoff—who also sat on last weekend’s panel, convened by the American Economic Association—said that he largely supported the views voiced by his Harvard colleague.

Rogoff wrote in an e-mail after the conference that the U.S. current account, or the net flow of transactions between the U.S. and other countries, is “unsustainable.”

He estimated for The Wall Street Journal earlier this week that the dollar must fall another 20 percent, and that the odds are only increasing that an unexpected blow to the U.S. economy, like a terrorist attack or a collapse of the housing market, could prompt a financial crash.

“So far we’ve just seen a small ripple in the dollar and not the big tsunami that could hit someday,” he told the Journal. “That’s still a significant risk.”

The dollar fell only moderately last year—2 percent on average, according to media reports.

Feldstein, who is also president of the National Bureau of Economic Research, said in yesterday’s interview that devaluing the dollar would help shrink the U.S. trade deficit and stabilize global markets by encouraging foreigners to buy more U.S. goods. Americans, on the other hand, will buy more domestic products, as imports will become more expensive.

Feldstein called the U.S. trade deficit “enormous,” but said he believes that the savings rate will rise.

A U.N. economic report released on Wednesday warned that as the U.S. trade and budget deficits continue to widen, “confidence in the dollar as the world’s main reserve currency could erode rapidly.”

Gernot Doppelhofer, a university lecturer and fellow of Trinity College at the University of Cambridge, wrote in an e-mail that he believes that the current account will eventually adjust.

“Differences in productivity growth affect the real exchange rate in the long run,” he wrote.

To respond to the growing deficits, President Bush’s administration should curtail discretionary spending, he added.

Feldstein said he did not believe the dollar needed to fall immediately.

“If the savings rate doesn’t change, then depreciation won’t help,” he explained.

In his e-mail, Rogoff also highlighted China’s role in dollar politics.

“China is making a historic mistake in not allowing more flexibility against the dollar,” he wrote.