[Marxism] The High Dollar: Clinton's Unaffordable Tax Cut

Dbachmozart at aol.com Dbachmozart at aol.com
Wed Nov 15 18:44:11 MST 2006

By Dean Baker  
t r u t h o u t | Columnist  
Wednesday 15 November 2006 
Everyone knows about George W. Bush's unaffordable  tax cuts, the big tax 
breaks that gave millions to millionaires and billions to  billionaires, but few 
people are aware of the even more unaffordable tax cut  from the Clinton 
administration. That is because President Clinton's tax cut  took a somewhat 
different form: an over-valued dollar. 
While few people recognize it, the effect of an  over-valued dollar on the US 
economy is very similar to the effect of large tax  cuts. Tax cuts reduce 
revenue, which leads to deficits and a growing debt, which  will impose a larger 
interest burden on the country in the future. In the same  way, an over-valued 
dollar leads to a trade deficit, which results in borrowing  from abroad. In 
future years, the country will have to pay interest on the money  it borrows 
from abroad today, leading to lower living standards in the future.  In fact, 
the most important difference between the two is that the trade deficit  is 
much larger, clocking in at more than $800 billion in 2006 (6.1 percent of  GDP), 
while the budget deficit is a comparatively modest $260 billion (2.0  percent 
of GDP). 
Clinton did not start his administration with a high  dollar policy. Lloyd 
Bentsen, his first Treasury Secretary, deliberately allowed  the dollar to 
weaken in the first years of the Clinton administration, with the  hope of keeping 
the trade deficit at a manageable level. When he left office in  1994, the 
trade deficit was less than 1.5 percent of GDP, a level that could be  sustained 
The high dollar policy came into being under  Bentsen's replacement, Robert 
Rubin. Rubin argued that a high dollar would help  control inflation. He made 
it the official policy of the Clinton administration  to support a high dollar. 
As a short-term measure, Rubin is exactly right; a  high dollar does help to 
control inflation by making imports available at a  lower cost. This has the 
effect of keeping prices lower in the United States and  putting US 
manufacturing firms at an enormous competitive disadvantage. The  basic story is 
relatively simple - if the dollar is over-valued by 20 percent,  then this is 
equivalent to providing a 20 percent subsidy to imports, while  placing a 20 percent 
tariff on all goods exported from the United States. With  the high dollar 
policy in place, it should not be a surprise that we have lost  more than 3 
million manufacturing jobs in the last decade. 
But, it is important to realize that the feel good  part of the high dollar 
policy is only a short-term story. Just as a tax cut can  put more money in 
people's pockets until the interest burden starts to exceed  the size of the tax 
cut, eventually the foreign debt builds to the point where  it is no longer 
possible to sustain the over-valued dollar. At some point in the  future, the 
dollar will fall, and it will hit a level that is much lower than  would have 
been the case if we had not built up a massive foreign debt (now more  than $3 
trillion) during the years of the high dollar. As a result future  generations 
will be paying much more for everything that the country imports  from abroad 
- oil, other raw materials, manufactured goods and services. In  other words, 
future generations will experience lower standards of living  because of 
today's high dollar, and the impact is more than three times as large  as the 
impact of the budget deficit. 
The blame for the high dollar policy is bi-partisan.  It started under 
Clinton-Rubin, but it has continued in the Bush years, even as  the trade deficit 
exploded to more than twice its previous record (measured  relative to the size 
of the economy). The Bush administration could have taken  steps to bring down 
the value of the dollar and thereby reduce the trade  deficit, but this would 
have meant sharp increases in import prices, which would  lower living 
standards. This would be no more popular than tax increases - it is  not surprising 
that Bush would not choose to go this route. 
Instead, President Bush continued the high dollar  policy that he inherited 
from Clinton, obviously hoping that its collapse occurs  when someone else is 
sitting in the White House. For the politicians, this is a  convenient pass the 
buck story; only the person sitting there at the time will  have to take the 
blame when the bill from the high dollar policy comes due. But,  those of us 
who will have to pay this bill should be clear, it was Bill Clinton  and Robert 
Rubin who started the tab running and George W. Bush who lacked the  courage 
to close the account. 
_Dean Baker_ (http://www.cepr.net/)  is the  co-director of the Center for 
Economic and Policy Research (CEPR). He is the  author of The Conservative Nanny 
State: How the Wealthy Use the Government  to Stay Rich and Get Richer 
(_www.conservativenannystate.org_ (http://www.conservativenannystate.org/) ). He 
also has a blog, "Beat the  Press," where he discusses the media's coverage of 
economic issues. You can find  it at the _American Prospect's web  site._ 

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