Gross Domestic Problems

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Playing ketchup to the dollar

Value matters again in currency markets

Whether a currency is cheap or dear is not always a good guide to its fortunes. It is now



IN DECEMBER a new dollar bill came into circulation adorned with the signature of Steve Mnuchin. Instead of his usual scrawl, the treasury secretary opted to print his name. If he hoped that his best handwriting would give the greenback a fillip, he may well be disappointed.

The dollar reached a peak against a basket of other currencies a year ago and has not threatened to regain it. Gurus of the foreign-exchange markets agree that 2018 is likely to be another year of modest decline. That is because of three sources of downward pressure.

The first relates to the world economy. The dollar’s descent is not so much a judgment on America’s fitness as a sign of the burgeoning health of other places. So long as America was one of the only places that could be relied upon for economic growth, there was a powerful logic to the dollar’s strength. A broad-based global upswing—evident in everything from booming stockmarkets to a surging oil price—means that investors are now rushing into currencies other than the dollar. That effect is proving stronger than the expectation that American firms will repatriate more profits thanks to the recent tax cut. And it seems likely to continue.

The second source of downward pressure reflects a change in policymakers’ attitudes. Until quite recently, no country seemed keen on a strong exchange rate. A cheap currency was prized. Curbing imports and boosting exports was a way to grab a bigger share of scarce world demand. In 2010 Brazil’s finance minister said that a “currency war” had broken out, with countries vying to weaken their exchange rates using weapons such as quantitative easing (printing money to buy bonds) or capital controls. Rich-world central banks feared that even a hint of tighter monetary policy might cause their currencies to surge against their peers, to their economy’s detriment. But now that global growth is buoyant, few countries seem to mind much if their currency rises. Interest rates have been raised, not only in America but also in Canada and Britain. The European Central Bank (ECB) has reduced its bond-buying programme, as has Japan’s central bank.

An era of currency peace

As extraordinary monetary policy is slowly withdrawn, the fundamentals matter more. This is the third force pushing down the dollar: its price against other major currencies. Benchmarks such as The Economist’s Big Mac index, based on the idea that goods and services (in this case a burger) should cost the same the world over, are useful guides to how far currency values are out of whack. According to the latest version of the index, only a handful of rich countries have dearer currencies than America’s (see article). That is a big change from a decade ago. On the same benchmark in 2008, only two rich countries had a cheaper currency than the greenback.

Some currencies have already jumped against the dollar. In a matter of weeks last summer the euro moved from $1.11 to $1.20, in response to a hint from the ECB’s boss, Mario Draghi, that the tailing off of its bond-buying would begin soon. Other currencies are more likely to strengthen than in past years. It is easy to imagine the yen snapping back towards its fair value in the way the euro did last year. There are still cheap currencies in countries with close ties to the euro area’s thriving economy, such as Poland and the Czech Republic. With the exception of Brazil’s real, emerging-market currencies in general are still very undervalued. Expect them to strengthen further.

In the short term, a consensus on a currency’s fall can be a prelude to it going the other way.

But for 2018 as a whole, further strength in the greenback seems unlikely, no matter whose autograph is on the bills.

The Right Question About Inequality and Growth

Jason Furman



CAMBRIDGE – The belief that inequality hurts economic growth is gaining currency among policymakers. Some argue forcefully that high levels of inequality can make sustained growth impossible, and may even contribute to recessions. This view stands in stark contrast to the traditional view that there is a tradeoff between equality and growth, and that greater inequality is a price that must be paid for higher output.

Lost in the discussion, however, is whether any of this is actually germane to economic policymaking. I don’t believe it is. Whether inequality is good or bad for growth should and will continue to concern social scientists. But those guiding an economy should focus on assessing outcomes and modes of distribution rather than on a puzzle that will never fully be solved.

Three developments make this refocusing necessary. For starters, while recent studies have concluded that higher levels of inequality produce lower long-term growth, other data have challenged this assumption, making definitive claims that are impossible to support, partly because different sources and types of inequality likely have different impacts on growth.

Second, most research focuses on the impact of inequality on growth, rather than on how specific policies affect growth. The former is of interest to social scientists and historians, but it is the latter that is relevant for policymakers.

And, finally, politicians generally defend their policies in terms of how they affect the middle class or the poor, not the arithmetic average of incomes across an economy – which gives equal weight to a $1 increase in the income of a poor person and that of a billionaire. So, even if reducing inequality was bad for overall growth, it might still be good for social welfare in the relevant sense, if it made many households in the middle better off.

The fact is, economic policies in the real world are nuanced and site-specific, making the search for a single answer to the question of how – and how much – inequality affects growth a Sisyphean task. Rather than concerning themselves with how to balance growth and inequality, policymakers would do better to focus on how policies impact average incomes and other welfare indicators.

Win-win policies – defined as distribution mechanisms that produce growth and reduce inequality simultaneously – are the easiest to evaluate, and the most advantageous to adopt. Education is a classic example. Reforms that cost little or no money, such as improving the quality of primary and secondary education, have been shown to encourage growth while ameliorating inequality. Even reforms that cost more – like expanding preschool education in the United States – generate economic benefits that far exceed the tax losses associated with funding them.

These types of approaches – what I call “all good things go together” policies – could be applied to other sectors of the economy that are being squeezed by imperfect competition. More vigorous antitrust policies, or increased consumer ownership of data, could strengthen competition and, in the process, boost efficiency and improve income distribution.

Any policy that promotes growth or lowers inequality without negatively affecting the other variable can also be classified as a win-win. A revenue-neutral reform of business taxes, for example, could raise the level of output with no meaningful impact on the distribution of income.

It is far more difficult to evaluate policies that involve a tradeoff between growth and inequality. For the sake of illustration, consider the effects of a hypothetical 10% reduction in labor taxes paid for by a lump-sum tax modeled using a neo-classical Ramsey growth model – a scenario that I detailed in a recent paper for the Olivier Blanchard and Lawrence Summers series on Rethinking Macroeconomics. This plan is good for growth, with average output increasing by 1%. But to understand how this policy would actually play out for taxpayers, I applied the scenario to the real distribution of US household incomes in 2010.

Nearly all households in the model experienced an increase in pre-tax income. But taxes increased for two-thirds of households. For middle-income households, the increased taxation was offset by earnings, but leisure also fell. As a result, the tax change left around 60% of households worse off, even as average household income grew, driven by gains at the top.

This analysis does not answer the question of whether this illustrative tax policy is a good idea. But most policymakers would likely object if they understood that growth would be achieved by higher taxes on two-thirds of households, leaving the median household working harder to earn the same after-tax income.

Social scientists should continue to ask whether inequality is good or bad for economic growth. More research is needed on the variables that affect growth, such as median income. Economists should also pay less attention to inequality in the aggregate, and more on the specific policies that might increase or reduce inequality.

But policymakers have different priorities than economists do. Rather than rethinking macroeconomics, policymakers must consider whether specific goals for social welfare and distribution can be achieved through win-win measures or through policies that make worthwhile tradeoffs. The answer may be to obsess less over aggregate data, and to focus more on how policy decisions impact real people.


Jason Furman, Professor of the Practice of Economic Policy at the Harvard Kennedy School and Senior Fellow at the Peterson Institute for International Economics, was Chairman of President Barack Obama’s Council of Economic Advisers from 2013-2017.

Russia and the Limits of Power

By George Friedman


The government of Belarus has announced that it will not permit more than two foreign military bases on its territory. There are now two Russian military bases in Belarus, and it is unlikely that any other country has suggested placing bases there. It is therefore reasonable to assume that the Russians have asked Belarus for additional facilities and that the Belarusians have turned them down.

The reason for Russia’s interest in Belarus is obvious. The Baltics are part of NATO, Ukraine has a pro-Western government, and Belarus is the last piece of the Russian buffer zone that is not overtly anti-Russian. If Belarus were to shift its stance and turn against Russia, the entire buffer zone would be gone and with it the strategic depth Russia has depended on. Obviously, more bases would strengthen Russia’s position in Belarus.

The ability to base larger, more significant forces in Belarus would also give Russia offensive capabilities. Ukraine’s northern frontier would be vulnerable, and the ability of Russia to project forces westward would also increase. The Russians are unlikely to launch an offensive, since war is always risky: The outcome is unknown and the cost of defeat could be destabilizing for Russia. But the ability to do so would put pressure on the region. Belarus’ rebuff to the idea of more bases shows that Russia is reaching the limits of its power, or in other words, encountering the turbulence that comes with expanding power, precisely because it has few options.


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The Russians have been trying to increase the perception of their power since the West turned on them following the Ukraine crisis of 2014. To a great extent, Russia has convinced other countries that it is a rising power. But being a rising power always brings resistance from those who fear its rise. It also forces Russia to be concerned with events that are in its putative area of interest, forcing it to diffuse its attention and its power. That there is a desire to convince other countries that Russia is a rising power is indicative of the limits of its power.

Entanglements in the Región

Russia has been examining possibilities in the Balkans, and in particular has drawn close to the Serbians, who are unhappy with the rise of Albanian power in Kosovo in particular and the region in general. The initial decision by Macedonia to recognize Albanian as an official language was made in order to manage its internal realities and also to placate Albania. The introduction of the second language was backed by Macedonian Prime Minister Zoran Zaev, who gained power with the support of Albanian partners. He wants to maintain this support to include Albanians in the solution of the Macedonian question and to accelerate Macedonia’s accession to the European Union and NATO.

Though Macedonian President Gjorge Ivanov vetoed the measure a week later, the general trend of supporting Albania remains. Normally this issue would not interest the Russians. However, Serbia is extremely alarmed by it, and therefore the Russians were compelled to take a stand, condemning Macedonia’s decision. Russia’s attempt to present itself as a major power led to its involvement with Serbia, thus entangling it with Serbian interests.

A similar situation exists in Turkey. The Russians intervened in Syria to preserve the regime of President Bashar Assad. This was not of overwhelming strategic importance to them, but it appeared to be a low-risk path to demonstrating their power. The evolution of events in Syria has led the Turks to the verge of intervening against the Kurds. Russia wants good relationships with Turkey, in spite of Turkey’s hostility to the Assad regime, but it does not have a major stake in the future of the Kurds (except that Turkish hostility toward the United States’ attempt to defend the Kurds must delight the Russians). The Syrian government has threatened to intercept Turkish aircraft over Syria, which complicates Turkey’s strategy to deal with the Kurds, prompting Turkey’s head of intelligence to fly to Moscow to talk to the Russians about the matter. This puts the Russians in a difficult position, since the Turks will hold them responsible.

All of these matters – Belarusian military bases, language laws in Macedonia and Syrian airspace – were not important to Russia before 2014. Now the Russians must feel like the Americans always do, trying to solve a problem that is not really their concern to protect a foreign policy interest that is real, but three or four links down the line. Russian power is perhaps better managed at the moment than American power, but it is not nearly as deep. And Russia has entangled itself in affairs over which it has little power, or which lead to an untenable situation. The risks of foreign entanglement increase the less fundamental power a nation has. Russia, like the United States, is experiencing the limits of that power, a limit that is more daunting precisely because of the Russians’ need to demonstrate that they have more power than they actually have.

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