In a recent column (The Monroe Times, Jan. 8) we noted President Harry Truman's desire for a "one-handed economist." His lament is valid in that when economists weigh in on economic events and policy decisions, we often add, "But on the other hand..."
That's because it's reality - the real world. It's a matter of intellectual honesty. Economic events and policy decisions have multiple consequences, some positive, some negative, depending on how different parties are affected. Economic decisions are about weighing the results, the consequences, of alternative courses of action. A competent economist will attempt to spell them out.
Let's look at a few examples. Is it desirable for the U.S. to have a strong dollar or a lower valued dollar? ("Weak" is a pejorative term, so let's say "lower valued," or "cheaper.") To the frustration of a politician seeking advice, or to the reader looking for an unqualified answer, it depends, namely on for whom, and what the objective is.
If you are an American tourist visiting Europe, for example, a strong dollar will buy more Euros, resulting in a less expensive trip. In this case, the strong dollar is good. But if you are an exporter of American goods, a strong dollar makes your goods more expensive, hence less competitive with foreign sellers. A strong dollar is bad in that case.
If you are an American selling goods and services to tourists visiting from abroad, a lower valued dollar makes your goods cheaper to visitors. The cheaper dollar is good. But for an American visiting a foreign country, or importing foreign goods, the cheaper dollar is bad.
If the objective is to reduce inflation, by making imports cheaper and reducing American exports, a stronger dollar acts as a counter force against inflation. In contrast, a lower valued dollar makes imports more expensive and American exports more competitive, hence decreasing domestic supply and increasing prices. The weaker dollar therefore tends to be inflationary.
So the short answer is that a strong dollar favors importers (includes American tourists abroad as they are buying foreign services), and is anti-inflationary. A weaker dollar favors American exporters, attracts foreign tourists, and tends to increase price levels.
Okay, so what is best for the nation as a whole? Obviously, there is no one good answer that would satisfy all. We resort to the "Goldilocks analogy" where her porridge was "not to hot and not to cold, but just right." The dollar should not be so strong as to discourage our more efficient producers and exporters, and not so weak as to make our imports prohibitively expensive and inflationary. If there is not a single hard answer on which all agree, that's life.
In reality, the value of the dollar "floats" in world currency markets, depending on many factors, including purchase and sale of currencies by the world's central banks.
This brings us to our own Federal Reserve System and monetary policy, another instance of multiple consequences. Its expansionary monetary policy of low interest rates is intended to encourage borrowing by businesses and consumers to stimulate the economy. While on balance, most economists agree that this is the rational course since the Great Recession, there are downsides, not without controversy. The low interest rates work against savers, particularly retirees who depend on interest generated by fixed assets.
Critics of the Fed's expansionary monetary policy express fears of its inflationary effects. Thus far, those fears have not materialized. However, even those who agree that low interest rates have been the right course disagree on the timing of raising interest rates. So again, the Goldilocks analogy - interest rates low enough to encourage economic activity, and raising them with a gradually expanding economy, but not raising them so fast as to discourage economic activity and have to abruptly change course and retract.
Nobody can wave a magic wand with which to achieve this balancing act. That's the task of the Fed's Federal Open Market Committee.
A recent example of multiple consequences of economic events is the crash of crude oil prices. It doesn't seem that long ago that OPEC was playing the role of the world's Satan in keeping oil prices high. Politicians cried out for "energy independence" as gas prices soared. High prices paid at the gas pump act as a "tax," reducing money consumers can spend on other items.
However, on the other hand - sorry - high gas prices encouraged production of more fuel-efficient vehicles and alternative sources of energy. It increased domestic production in making economically marginal "stripper wells" profitable, and it dramatically increased employment in the American oil industry. Perhaps the most dramatic consequence was "fracking," a process that, while increasing domestic oil production, has questionable environmental consequences. Remote areas such as western North Dakota experienced a boom, with some consequences desirable, others not.
Now with the dramatic reduction in price of crude oil from more than $100 per barrel down to around $30, the consequences are legion, some good, and some bad, depending on who you are and where you stand.
Low prices at the gasoline pump are welcome to consumers. The long-suffering airline industry now enjoys lower fuel costs. However, there are significant layoffs of employees in the American oil patch, especially in exploration and drilling firms. There are reports of new residential developments in Houston lacking buyers. States that depend on oil revenue will have to seek other revenues. Increased sales and income taxes anyone?
Lower crude oil prices are even linked to the recent pull-back in the stock market. Rising crude prices, once seen as an economic albatross, are now seen as causing, or at least, correlated with, rising financial markets. This rather unusual correlation probably won't last.
So, low crude oil prices are good for consumers at the gas pumps. On the other hand ... well, you get the picture. That's why there are no "one-handed economists," or at least intellectually honest ones.
- John Waelti of Monroe, a retired professor of economics, can be reached at jjwaelti1@tds.net. His column appears Fridays in The Monroe Times.
That's because it's reality - the real world. It's a matter of intellectual honesty. Economic events and policy decisions have multiple consequences, some positive, some negative, depending on how different parties are affected. Economic decisions are about weighing the results, the consequences, of alternative courses of action. A competent economist will attempt to spell them out.
Let's look at a few examples. Is it desirable for the U.S. to have a strong dollar or a lower valued dollar? ("Weak" is a pejorative term, so let's say "lower valued," or "cheaper.") To the frustration of a politician seeking advice, or to the reader looking for an unqualified answer, it depends, namely on for whom, and what the objective is.
If you are an American tourist visiting Europe, for example, a strong dollar will buy more Euros, resulting in a less expensive trip. In this case, the strong dollar is good. But if you are an exporter of American goods, a strong dollar makes your goods more expensive, hence less competitive with foreign sellers. A strong dollar is bad in that case.
If you are an American selling goods and services to tourists visiting from abroad, a lower valued dollar makes your goods cheaper to visitors. The cheaper dollar is good. But for an American visiting a foreign country, or importing foreign goods, the cheaper dollar is bad.
If the objective is to reduce inflation, by making imports cheaper and reducing American exports, a stronger dollar acts as a counter force against inflation. In contrast, a lower valued dollar makes imports more expensive and American exports more competitive, hence decreasing domestic supply and increasing prices. The weaker dollar therefore tends to be inflationary.
So the short answer is that a strong dollar favors importers (includes American tourists abroad as they are buying foreign services), and is anti-inflationary. A weaker dollar favors American exporters, attracts foreign tourists, and tends to increase price levels.
Okay, so what is best for the nation as a whole? Obviously, there is no one good answer that would satisfy all. We resort to the "Goldilocks analogy" where her porridge was "not to hot and not to cold, but just right." The dollar should not be so strong as to discourage our more efficient producers and exporters, and not so weak as to make our imports prohibitively expensive and inflationary. If there is not a single hard answer on which all agree, that's life.
In reality, the value of the dollar "floats" in world currency markets, depending on many factors, including purchase and sale of currencies by the world's central banks.
This brings us to our own Federal Reserve System and monetary policy, another instance of multiple consequences. Its expansionary monetary policy of low interest rates is intended to encourage borrowing by businesses and consumers to stimulate the economy. While on balance, most economists agree that this is the rational course since the Great Recession, there are downsides, not without controversy. The low interest rates work against savers, particularly retirees who depend on interest generated by fixed assets.
Critics of the Fed's expansionary monetary policy express fears of its inflationary effects. Thus far, those fears have not materialized. However, even those who agree that low interest rates have been the right course disagree on the timing of raising interest rates. So again, the Goldilocks analogy - interest rates low enough to encourage economic activity, and raising them with a gradually expanding economy, but not raising them so fast as to discourage economic activity and have to abruptly change course and retract.
Nobody can wave a magic wand with which to achieve this balancing act. That's the task of the Fed's Federal Open Market Committee.
A recent example of multiple consequences of economic events is the crash of crude oil prices. It doesn't seem that long ago that OPEC was playing the role of the world's Satan in keeping oil prices high. Politicians cried out for "energy independence" as gas prices soared. High prices paid at the gas pump act as a "tax," reducing money consumers can spend on other items.
However, on the other hand - sorry - high gas prices encouraged production of more fuel-efficient vehicles and alternative sources of energy. It increased domestic production in making economically marginal "stripper wells" profitable, and it dramatically increased employment in the American oil industry. Perhaps the most dramatic consequence was "fracking," a process that, while increasing domestic oil production, has questionable environmental consequences. Remote areas such as western North Dakota experienced a boom, with some consequences desirable, others not.
Now with the dramatic reduction in price of crude oil from more than $100 per barrel down to around $30, the consequences are legion, some good, and some bad, depending on who you are and where you stand.
Low prices at the gasoline pump are welcome to consumers. The long-suffering airline industry now enjoys lower fuel costs. However, there are significant layoffs of employees in the American oil patch, especially in exploration and drilling firms. There are reports of new residential developments in Houston lacking buyers. States that depend on oil revenue will have to seek other revenues. Increased sales and income taxes anyone?
Lower crude oil prices are even linked to the recent pull-back in the stock market. Rising crude prices, once seen as an economic albatross, are now seen as causing, or at least, correlated with, rising financial markets. This rather unusual correlation probably won't last.
So, low crude oil prices are good for consumers at the gas pumps. On the other hand ... well, you get the picture. That's why there are no "one-handed economists," or at least intellectually honest ones.
- John Waelti of Monroe, a retired professor of economics, can be reached at jjwaelti1@tds.net. His column appears Fridays in The Monroe Times.
