How much of my wages goes to health care?

How does weak dollar affect us?
QUESTION: The U.S. dollar has fallen in value around 20 to 30 percent vs. the euro and Canadian dollar. Since the vast majority of our goods are imported, doesn't that mean that inflation has truly risen 20 to 30 percent over the same time period regardless of the "'politically biased" inflation numbers released by our government?
— Bill, Albany, N.Y.

ANSWERS:

Bob McTeer, former Federal Reserve bank president:

Www.bobmcteer.com

Not quite. While the percentage would be greater for goods only (14 percent), the percentage of goods and services that are imported is about 17 percent — far from 100 percent. Also, producing accurate inflation statistics is inherently difficult, but I don’t believe or shortcomings result from political bias, even though most of those who produce the numbers probably have politics different from mine, I’ve met many government “bureaucrats” over the years; they value their integrity above all else, and protect it jealously.

Your basic point that a declining currency is inflationary is correct, however. So is the point that inflation may be the cause of the decline as well. Sometimes it doesn’t matter which came first, the chicken or the egg, when we know which comes next.

A declining currency is generally not good, but under certain circumstances it may be the least-worst alternative. For example, if a large current account deficit puts downward pressure on the domestic currency, which is successfully pegged, the required adjustment is shifted to the broader economy. Correction of the deficit requires a reduction in domestic absorption of goods and services relative to domestic production. This requires a change in price signals and incentives. If the adjustment doesn’t come through a change in the exchange rate it will come through deflation or recession in the deficit country and inflation in the surplus country. It may be better for a decline in the currency to reduce the purchasing power of each of us a little bit than for a recession to place the full burden of adjustment on those who lose their jobs. 

Adjustment is inevitable. And, as Ben Stein’s father, Herb Stein, is alleged to have said:  “If something is inevitable, it will happen.”

He probably should have added, “sooner or later,” since the adjustment in our current account deficit has been a long time coming. If adjustment is inevitable, the question is whether it is best done through the exchange rate or through changes in internal economies.

Robert B. Reich, Clinton administration labor secretary:

Perian Flaherty

You're correct that, as the dollar falls, everything we import costs more. But there's so much competition among retailers that they've been reluctant to raise prices. Instead, they've sought other ways to cut costs, and thereby keep prices as low as possible — sometimes by substituting software and automated machinery for employees, sometimes by cutting wages or benefits of employees, sometimes by finding new means of delivering goods and services more efficiently.

Arthur B. Laffer, 'Father of supply-side economics’:
It is true that the real value of the dollar has been falling in the international exchange since its value peaked in 2002. You have accurately pointed out that the fall in value of the dollar translates into higher dollar prices of imported goods, and the fall in the value of the dollar (along with the huge global boom) has also contributed to the run-up in energy prices. 

That being said, unless you purchased 100 percent of your goods and services from abroad, you would not face a 30 percent increase in prices for a 30 percent decrease in the value of the dollar. Furthermore, increases in prices of imported goods are taken into account in the inflation numbers. Each inflation number (whether you are looking at the CPI, PPI, GDP deflator, or what-have-you) is carefully measured based upon the definition of the statistic, and goods from other countries are included in the calculations. The measurement does not change by administration, so while each has its own potential to be upwardly or downwardly biased based upon how it is measured, I don’t believe that any of them are politically biased per se. If anything, research has demonstrated that the CPI Index may actually overstate inflation due to a failure to account for quality improvements, among other reasons.

Technicalities aside, I believe that the Federal Reserve has been doing such a good job in terms of monetary policy that the only inflation we have had in the United States over the past few years has been due to the weak value of the dollar and temporarily high energy prices.

Fortunately, the Senate thus far has been unable to convince China to devalue its currency, or else inflation would have risen much more. With the yuan pegged to the dollar, our weak dollar does not affect the price of goods traded with China.  Remember, without China there is no Walmart, and without Walmart America would be a lot poorer.

MORE FROM GUT CHECK AMERICA

Gut Check America Section Front

Minn. economy buffeted by crosscurrents Still in a home, by the skin of her teeth Is it really just 'the economy, stupid?' FirstPerson: Minnesota readers discuss economy High energy costs cut two ways in Colorado Struggling at a million-dollar horse stable FirstPerson: Colorado readers discuss economy How are you faring in Colorado, Minnesota? Gut Check America Section Front   Add Gut Check America headlines to your news reader: