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In an editorial today, the Times criticized Bush administration policies for worsening the state of American savings as well as the dollar:

Over the last several years, America’s imbalances in trade and other global transactions have worsened dramatically, requiring the United States to borrow billions of dollars a day from abroad just to balance its books.

The only lasting way to fix the imbalances — and reduce that borrowing — is to increase America’s savings. But the administration has steadfastly rejected that responsible approach since it would require rolling back excessive tax cuts and engaging in government-led health care reform to rein in looming crushing costs — both, anathema to President Bush. It would also require revamping the nation’s tax incentives so that they create new savings by typical families, instead of new shelters for the existing wealth of affluent families — another nonstarter for this White House.

Stymied by what it won’t do, the administration has gone for a quicker fix — letting the dollar slide. A weaker dollar helps to ease the nation’s imbalances by making American exports more affordable, thus narrowing the trade deficit….

In the absence of leadership from the White House, the presidential candidates could elevate the issue, outlining their own plans to boost savings. But until the administration — either this one or the next — is willing to acknowledge the source of the economy’s imbalances, and starts addressing them seriously, the dollar is likely to remain weak.

Greg Mankiw, the Harvard economist, offers an intelligent critique on his blog.

First of all, I agree with the Times that policies need to be adjusted to account for America’s dismal savings rate. Such reforms should include tax reforms that shift taxation to consumption rather than income, so that greater savings is encouraged, as well as spending cuts–especially entitlements which account for a large portion of the budget, not including the fact that their costs will grow further out of hand.

However, what the Times failed to acknowledge is that an increase in national savings will only make the dollar weaker by virtue of the fact that greater savings means lower interest rates which corresponds to lower exchange rates. Thusly, the inflationary worries associated with a week dollar–that the editorial was worried about–would persist.

But, greater savings putting downward pressure on interest and exchange rates is completely natural and nothing to worry about. While there are certainly imbalances that we need be worried about in our economy, they are not the ones that the Time mentions. Rather the concerning fact is that interest rates are so low and the dollar is weak at the same time that savings is also low. That is truly an imbalance and something to be seriously worried about.

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The NYT wrong on the dollar and the trade deficit by New School Politics, unless otherwise expressly stated, is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 United States License.