Politics & Policy

Did Tax Cuts Hurt The Dollar?

Not a chance.

In its November 13 edition, the New York Times blamed the current fall of the dollar on the federal budget deficits. BuzzCharts is having a hard time figuring out how the paper can make such a claim when it doesn’t fit with the historical record.

In the late 1970s we had modest deficits and a very rapidly depreciating dollar. In the 1980s we had tax cuts, large deficits, and a very strong dollar. In the 1990s we again had a strong dollar, but ironically the lowest gold prices and some of the highest dollar valuations occurred after Bill Clinton’s capital-gains tax cut of 1997.

The New York Times also blamed the deficits on the Bush tax cuts. So, in essence, the Times is blaming the weak dollar on the Bush tax cuts.

On the contrary, tax cuts strengthen currencies, not weaken them. In America, low marginal tax rates and low capital-gains tax rates make a more inviting environment for foreign investors. These investors must first cash in their yen, euros, and yuans in order to buy dollars that they then use to purchase dollar-denominated assets. Want to create a short-term rally in the dollar? Zero out the capital-gains tax and foreigners will line up at the foreign-exchange desk to get a part of the U.S. action.

One additional point is that over the long run a strongly growing economy by definition is creating more goods and services. So the same dollars chasing more goods actually equals mild deflation.

As the chart above clearly shows, there is no correlation between federal deficits and exchange rates. The dollar problem is a real one, however, and is now the greatest threat to the Bush boom. The Federal Reserve should ignore the New York Times and realize that the Bush tax cuts are working. The Fed’s policy should reflect the fact that no country can print its way into prosperity. America needs more tax cuts and fewer dollars, not the other way around.

– Jerry Bowyer is the author of The Bush Boom and an economic advisor to Blue Vase Capital Management. He can be reached through www.BowyerMedia.com.

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