Feldstein on the Dollar

My colleague Martin Feldstein gave a recent speech in which he worries about the trade deficit and calls for a "more competitive" dollar. Here is some of what he says:

My theme this evening is that America needs a competitive dollar. More specifically, we need a competitive exchange rate relative to the other major currencies of the world – an exchange rate that will make American goods more attractive to foreign buyers and that will cause American consumers and firms to choose American made goods and services.

For more than a decade, under both Democrats and Republicans, official Washington has emphasized a very different theme. That message has been that “a strong dollar is good for America.” I think it is time to change the message....

We need to see the shift to a more competitive dollar starting as soon as possible.

What would it take to make that happen? The 1985 Plaza Accord suggests one possible approach. At that meeting, in September 1985, the finance ministers of the G-5 countries acknowledged that the dollar was overvalued and needed to decline further. The markets did the rest, confident that the US government did not have a plan to punish those who sold dollars by engineering a sudden reversal of the dollar. It was the change in the official message about the dollar that caused the favorable correction.

The G-5 finance minsters (or the G-7 successor group) may not be the appropriate group now since much on the U.S. trade imbalance is with countries that are not part of the G7. It might be best to start with a meeting among major Asian trade surplus countries convened by China in which there is an agreement for a coordinated appreciation. But the specific institutional arrangement is less important than the official US acknowledgment that the dollar has to come down and that there is no program or desire to support it at its overvalued level.