Towards A Good Samaritan World

Monday, November 29, 2004


This Buttonwood column highlights how Asian countries are propping up the sinking dollar and concludes on this rather damning note:

The incentives to flee the Asian cartel (to give it its proper name) thus increase the bigger the game becomes. Why take the risk that another central bank will leave you carrying the can? Better to get out early. Because the game is thus so unstable it will come to an end, and probably a messy one. And what will then happen to the dollar? It is hard to imagine its hegemony remaining unchallenged when so many will have lost so much. And doubly so given that America has abused the dollar’s reserve-currency role so egregiously that its finances now look more like those of a banana republic than an economic superpower.

This raises the interesting question: was our "abuse" of our reserve-currency role voluntary or involuntary? People who dislike Bush will point to the deficit and say that this administration has been squandering our reserve-currency status. But the trade deficit has trended upwards for more than a decade. It grew even faster in the late 1990s when the government was running a surplus. It appears rather as if the "twin deficits" are independent of each other, and in particular that the country will spend, one way or another, the extra slack it gets for borrowing from printing the world's reserve currency. If the government doesn't, the private sector will. (On the other hand, Jagadeesh Gokhale argues that our low savings rate results from the increased annuitization of incomes among the elderly, as a result of the Social Security program.)

If having the world's reserve currency causes us to run a trade deficit, would we be better off without it? My old prof Ricardo Hausmann liked to emphasize that some of developing countries' chronic instability was a result of being unable to borrow in their own currencies; he calls this "original sin." Now The Economist hints that the US could end up like a banana republic... On the other hand, the Asian countries do just fine without owning the world's reserve currency. They work hard, save more, spend less, and run trade surpluses. If "the dollar's demise" stops the inflow of foreign capital, boosts the competitiveness of our exports, and pushes up inflation and interest rates, we could find ourselves doing just that: working harder, saving more, spending less, and running trade surpluses. And growing faster than ever. All that is fine by me. I do think, though, that the dollar has a certain propaganda power abroad, for better or worse: not the flag, but the dollar, is the most recognizable rectangular symbol of America.

But if we want to keep our reserve-currency role, let's remember we have one BIG asset we're still stashing in the cupboard: the right to live, work and travel in the US, which many foreigners want, and which we sell much less freely than we could. At present, it is very difficult for foreigners to visit the US. The process is long and tortuous, and dependent on the discretion of a US State Department official. We could establish a simple visa process: say, deposit $5,000 plus the price of a plane ticket at a US consulate abroad, and get a one-year work-and-travel visa within a week. (People could borrow the $5,000 using collateral in their home countries.) If you find a job here, we would convert your visa to a guest-worker visa. If you are admitted to a university, we would convert your visa to a student visa. Such a visa system would put a safety net under the dollar, because whenever the trade deficit spilled too many dollars abroad, foreign tourists and students and investors would buoy it back up.

And by the way, tourism is a good industry to be in. It creates the right incentives to make your country real nice and fun. Being the world's college town is a great job too: you get all smart and have lots of jobs for academics.


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