U.S. President George W. Bush said during this week's Group of Eight G8 meeting in Japan that he wants the dollar to strengthen. Can the other G8 countries do anything to help boost its value? No, says William A. Niskanen, an economic adviser to President Ronald Reagan in the 1980s. In an interview with RFE/RL's Andrew F. Tully in Washington, Niskanen says it's up to the U.S. government and the American people to shore up their currency.
RFE/RL: What's behind the fall in the value of the dollar?
Niskanen: I think the primary condition that has led to the weak dollar is that we have a $600 billion current-account deficit, and the major organizations that have bought that debt in the past have been the Chinese central bank, the [South] Korean central bank, now Russians and some of the oil countries. Many of them have come to a decision that it's not clear that they want that many more dollars when we're still running this $600 billion current-account deficit, because they in fact have lost money on that investment in dollars. Most of what they've invested in is U.S. government securities, the rate of interest on those securities is lower than the rate of depreciation of the dollar. So they have lost money on their investment in dollars over a period of time, and I think that's led them to question whether they want that many more dollars.
RFE/RL: Often currencies lose value because of inflation. But, at least at first glance, that doesn't seem to be an issue with the dollar's decline. Or is it?
Niskanen: It does not seem to have been very much a function of relative inflation rates. That's the first thing that people have looked at about whether the U.S. inflation rate has been higher relative to the currencies [against] which the dollar has declined, and it doesn't seem to be that much of a clear effect over a period of time. It seems to be primarily a question of the current account balance rather than monetary policy.
RFE/RL: If G8 countries want to see a strengthened dollar, what can they do to help?
Niskanen: They can buy a lot more American securities, or they can buy a lot more American products. Now the foreign central banks have shifted the nature of their purchase of securities from U.S. Treasury securities to U.S. private securities, and that's fine because there are a lot more of those out there than there are government securities. [But] this problem has to be corrected primarily in the United States, and it has to be corrected by having a smaller government deficit, by having more U.S. [private] savings. We have an unusually large government deficit. The federal deficit itself is in the $400 billion range now and going up, and Congress is adding to that substantially this year. And our household savings rate is very close to zero.
RFE/RL: But many Americans' savings have shifted from savings accounts in a bank to retirement accounts through their jobs. Is that kind of savings not widespread enough to help the dollar?
Niskanen: It isn't a uniform pattern, although a very large portion of household savings is in these retirement funds and paying down household debt. But household debt has exploded in the last four or five years because of people buying high-priced homes or buying homes with the expectation of prices going way up. So you either have to reduce government borrowing or you have to increase private savings. And I think it is not particularly a problem in the retirement programs, although not everybody has a private retirement program; it's that they've accumulated a lot of debt on their own. And I think that the highest payoff (expense) for many people is probably just paying off their private debt, including reducing their mortgages.
RFE/RL: And what's caused the large government debt that's led to such a great deficit?
Niskanen: Spending has increased by $500 billion a year relative to revenues during the Bush administration itself. When Bush came in [became president], the government had a surplus of $100 billion or so, and now it has a deficit of $400 billion. And that is a consequence, in part, of the 2001 tax cut, but it's a consequence primarily of a very rapid increase in government spending. And that's not going to slow down this year. That will increase this year with all of these programs to bail out people who've lost money in the housing market.
RFE/RL: Is the U.S. dollar's decline in some cases caused by the rise in value of certain other currencies? And could certain European central banks adjust the values of their currencies to help the dollar?
Niskanen: Well, it's an issue in some countries and not in others. There's a big difference within the euro-bloc itself on that question. Some members of the euro bloc would like to have a looser monetary policy -- like France would like to have a looser monetary policy -- and others would like a stronger, tighter monetary policy. It would not accomplish anything for us [for the U.S. dollar] necessarily. It would have significant effects on intra-European economic growth and so forth.
RFE/RL: How did the United States get into this economic hole in the first place?
Niskanen: The problem here is that our political system is responsive to very short-run conditions, and instead of addressing all kinds of important problems -- like what's happened to the dollar and the problems of Social Security (the government retirement program) and Medicare (the government health program) and so forth -- that's all delayed in the name of bailing out people who lost money in the housing market or whatever is the currently perceived problem. Our political system has a very short-run horizon. These are difficult issues. What you're asking the political system to do [is] you're asking [it] to run a balanced budget or even a surplus. We did that for three of four years in the second term of the [President Bill] Clinton administration [during the 1990s]. But that's a hard thing to do, particularly when you're starting with a $400 billion or $500 billion deficit. It is difficult politically because we have dropped any kind of a joint consensus on fiscal responsibility.
RFE/RL: What's behind the fall in the value of the dollar?
Niskanen: I think the primary condition that has led to the weak dollar is that we have a $600 billion current-account deficit, and the major organizations that have bought that debt in the past have been the Chinese central bank, the [South] Korean central bank, now Russians and some of the oil countries. Many of them have come to a decision that it's not clear that they want that many more dollars when we're still running this $600 billion current-account deficit, because they in fact have lost money on that investment in dollars. Most of what they've invested in is U.S. government securities, the rate of interest on those securities is lower than the rate of depreciation of the dollar. So they have lost money on their investment in dollars over a period of time, and I think that's led them to question whether they want that many more dollars.
RFE/RL: Often currencies lose value because of inflation. But, at least at first glance, that doesn't seem to be an issue with the dollar's decline. Or is it?
Niskanen: It does not seem to have been very much a function of relative inflation rates. That's the first thing that people have looked at about whether the U.S. inflation rate has been higher relative to the currencies [against] which the dollar has declined, and it doesn't seem to be that much of a clear effect over a period of time. It seems to be primarily a question of the current account balance rather than monetary policy.
RFE/RL: If G8 countries want to see a strengthened dollar, what can they do to help?
Niskanen: They can buy a lot more American securities, or they can buy a lot more American products. Now the foreign central banks have shifted the nature of their purchase of securities from U.S. Treasury securities to U.S. private securities, and that's fine because there are a lot more of those out there than there are government securities. [But] this problem has to be corrected primarily in the United States, and it has to be corrected by having a smaller government deficit, by having more U.S. [private] savings. We have an unusually large government deficit. The federal deficit itself is in the $400 billion range now and going up, and Congress is adding to that substantially this year. And our household savings rate is very close to zero.
RFE/RL: But many Americans' savings have shifted from savings accounts in a bank to retirement accounts through their jobs. Is that kind of savings not widespread enough to help the dollar?
Niskanen: It isn't a uniform pattern, although a very large portion of household savings is in these retirement funds and paying down household debt. But household debt has exploded in the last four or five years because of people buying high-priced homes or buying homes with the expectation of prices going way up. So you either have to reduce government borrowing or you have to increase private savings. And I think it is not particularly a problem in the retirement programs, although not everybody has a private retirement program; it's that they've accumulated a lot of debt on their own. And I think that the highest payoff (expense) for many people is probably just paying off their private debt, including reducing their mortgages.
RFE/RL: And what's caused the large government debt that's led to such a great deficit?
Niskanen: Spending has increased by $500 billion a year relative to revenues during the Bush administration itself. When Bush came in [became president], the government had a surplus of $100 billion or so, and now it has a deficit of $400 billion. And that is a consequence, in part, of the 2001 tax cut, but it's a consequence primarily of a very rapid increase in government spending. And that's not going to slow down this year. That will increase this year with all of these programs to bail out people who've lost money in the housing market.
RFE/RL: Is the U.S. dollar's decline in some cases caused by the rise in value of certain other currencies? And could certain European central banks adjust the values of their currencies to help the dollar?
Niskanen: Well, it's an issue in some countries and not in others. There's a big difference within the euro-bloc itself on that question. Some members of the euro bloc would like to have a looser monetary policy -- like France would like to have a looser monetary policy -- and others would like a stronger, tighter monetary policy. It would not accomplish anything for us [for the U.S. dollar] necessarily. It would have significant effects on intra-European economic growth and so forth.
RFE/RL: How did the United States get into this economic hole in the first place?
Niskanen: The problem here is that our political system is responsive to very short-run conditions, and instead of addressing all kinds of important problems -- like what's happened to the dollar and the problems of Social Security (the government retirement program) and Medicare (the government health program) and so forth -- that's all delayed in the name of bailing out people who lost money in the housing market or whatever is the currently perceived problem. Our political system has a very short-run horizon. These are difficult issues. What you're asking the political system to do [is] you're asking [it] to run a balanced budget or even a surplus. We did that for three of four years in the second term of the [President Bill] Clinton administration [during the 1990s]. But that's a hard thing to do, particularly when you're starting with a $400 billion or $500 billion deficit. It is difficult politically because we have dropped any kind of a joint consensus on fiscal responsibility.
