Feldstein on the Dollar II

In today's Wall Street Journal, my colleague Martin Feldstein continues his call for the dollar to weaken in foreign-exchange markets:

the primary reason for wanting the dollar to become more competitive in the near future is that we may need an improved trade balance over the next few years to sustain the economy's expansion. Although forecasters generally believe that the likely outlook for the economy in 2006 and 2007 is a continuation of solid economic growth, there is a serious risk that the combination of falling house values and an end to the low-interest incentive to refinance mortgages will cause consumer spending to decline relative to incomes. A sharp slowdown in consumer spending could cause an economic downturn.

What can take the place of the lower consumer spending to maintain overall aggregate demand? Business investment is unlikely to rise faster when sales to consumers are declining. Housing construction is already in decline. The key to maintaining aggregate demand, i.e., the key to our continued expansion if consumer spending slows, must be a shift in our trade balance -- increased exports, lower imports and more spending on goods and services produced in the U.S. For this, the dollar must decline to make U.S. goods and services more attractive.

Even if the dollar does decline during the coming months, the delays in the response of exports and imports to the more competitive dollar will mean that the increase in aggregate demand from this source may not happen for a year or more. That's why the U.S. needs to shift to a more competitive dollar as soon as possible.