We are seven months from probably the most momentous U.S. election in more than a century, yet we have heard little of specific economic policies each candidate proposes to follow. A majority of the population think that the economy was better under former President Donald Trump from January 2017 to January 2021, despite economic indicators to the contrary.
Edward Lotterman
Yet, President Joe Biden has not articulated an economic platform with any specifics while Trump talks about little but his personal agenda of retribution against those he thinks crossed him. What are voters to do?
Trump is the candidate with the biggest question mark. Expect Biden and Vice President Kamala Harris to continue much of the same. Their first term yielded large outlays on highways, airports and other infrastructure, regulatory mandates and subsidies to reduce carbon emissions, various ploys to circumvent Congress so as to forgive tens of billions in student debt plus greater support for labor unions.
Biden named Janet Yellen, a warhorse from the Obama and Clinton administrations, as Treasury secretary and reappointed Republican Jerome Powell, a Wall Street lawyer who had served in the Treasury in the George H.W. Bush administration, as chair at the Fed. Neither made many waves.
Trump is a mercurial character, to put it mildly, and doesn’t seem to understand or care about coherence in economic policies. Unfair treatment by other trading nations, especially Mexico and China, was the centerpiece of his 2016 campaign along with a reduction of regulation and a reduction in taxes. He imposed tariffs on imports, especially from China but also from Canada, our closest friend and ally, bypassing any action by Congress using policy loopholes created in the past by Democrats. He did ask Congress for, and got, a substantial tax cut highly skewed toward high-income individuals.
He generally left details to his Treasury secretary, Stephen Mnuchin, a once-little-known Wall Streeter who made billions from the mortgage crisis by abusive foreclosing on defaulted home loans. Trump also reappointed Powell to a four-year term as chair at the Fed.
The safest forecast is that when either is re-elected, they will largely continue policies from their first administration. Powell will stay into 2026 in either case. Biden will not precipitously replace Yellen. The question is who Trump would choose for Treasury and what policies each would stress.
There are three possibilities for Trump: recalling Mnuchin, naming some other Wall Streeter or economist, or boosting his U.S. trade representative, Robert Lighthizer, to Treasury.
The last option is tantalizing. Lighthizer is an experienced D.C.-based trade lawyer with no Wall Street connections. He served as a key Senate staffer for the committee headed by GOP Sen. Bob Dole that designed the Reagan tax cuts plus the 1983 Social Security overhaul that, among other things, raised the full retirement age. As U.S. trade representative, a quasi-Cabinet post, for Trump, he designed the tariffs on imports and the superficial overhaul of NAFTA into the U.S.-Mexico-Canada Agreement, or USMCA.
Lighthizer clearly wants the job and has been in the news. One of his key ideas is to reduce the value of the U.S. dollar internationally, relative to other major currencies. See “Trump trade advisers plot dollar devaluation,” by Gavin Bade in the April 15 issue of Politico for details. Lighthizer is the odds-on candidate for Treasury and, if appointed, probably would push to implement the measures to lower the international value of the dollar as listed in Politico.
So what does this have to do with Minnesota, the U.S. economy in general or key sectors, including medical technology and agriculture in particular?
The answer is “a lot,” but one must start by understanding some basic terms and issues.
The “value of the dollar” is the number of units of currencies of other countries needed to buy one dollar. Most commonly, our dollar is the “reference currency” with the price as the number of Japanese yen, Brazilian reis, Chinese yuan or others needed to purchase one U.S. dollar. But it can be the number of U.S. dollars for each of the Euros used by 20 European Union countries.
Understand that for any given set of prices for U.S. goods, fluctuations in exchange rates vary the prices for each of these goods to foreign buyers. Similarly, for any given set of foreign prices, ups and downs in the value of the dollar change the cost of foreign goods to U.S. buyers.
Also, and very crucially for the Twin Cities, understand that exchange rates affect how the profits of U.S. companies with operations abroad end up on their U.S. corporate earnings statements. Several of our medical technology companies have significant subsidiaries in Europe and Asia. If the European subsidiaries of, say, Medtronic, make 10 million Euros in profits, what that contributes to the parent corporation profits in dollars can be high or low depending on the relative worths of the two currencies.
Take some examples. A $6 bushel of U.S. soybeans would have varied from 12 to 52 yuan over the last 40 years. In 2008, I ate a bad dinner in Switzerland that cost $30. Over the last 40 years, that same Swiss franc meal might have been as high as U.S. $74 or as low as U.S. $23. And, in the 25 years the Euro has been used, a $10 million profit by the European subsidiary of Medtronic or 3M might have returned anywhere from $8.5 million here or $15.7 million.
So why would a Trump administration want to lower the cost of our currency in terms of those of other nations? It’s simple: to sell more U.S. goods and services abroad and buy fewer foreign ones. This is good for U.S. producers but bad for U.S. consumers, good for farmers and med tech, bad for Target and its customers.
There are two important caveats. First, it is not just the value of the dollar versus the value of the currency of a trading partner. For a Chinese soybean buyer, it is not just what U.S. beans cost but what they are relative to Brazilian ones. So the U.S. dollar versus Brazilian real relative values are what matter. Moreover, for any particular retailer like Target, a lowering of the dollar relative to the yuan and other Asian currencies is not as big a deal as long as Walmart and all its other competitors buy similar fractions of their products from the same exporters.
Higher U.S. interest rates and the safety of our country as a place to park money in politically turbulent times increase the value of the dollar. The average exchange value of the dollar rose sharply at the end of the Trump administration then plunged with COVID. It rose sharply from early 2021 to late 2022 and then eased downward to its current position somewhat above its long-run average.
So Lighthizer, a prominent contender for a key Cabinet position in a second Trump administration, wants to somehow manipulate the international value of our currency to spur producers and retard consumers. Many questions remain. Would it benefit our economy as a whole? Can it even be accomplished, and how? What other collateral effects, especially on inflation and employment, might result? And would it do anything to reduce the large and long-term imbalances in our trade and international payments generally? Those issues must wait for a later column.
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