The Trump administration and Republicans in Congress have passed one of the best pro-growth tax bills ever. The Tax Cuts and Jobs Act of 2017 makes it to the pro-growth hall of fame along with Ronald Reagan’s 1981 and 1986 tax acts and John F. Kennedy’s posthumous tax cuts of 1964. Announcements of multi-billion dollar investments in the U.S. by more than 300 companies — including Apple, FedEx, ATT, and Fiat Chrysler — are lead indicators of good things to come from these tax-rate cuts.
And when you combine this policy action with President Trump’s deregulation agenda, we see no reason why the economy cannot grow for a sustained period at 3 to 4 percent — well up from the 1.6 percent of President Obama’s last year in office.
But there is a missing pillar of prosperity in the Trump economic agenda. It’s a sound dollar strategy. The dollar weakened in 2017 and needs to be stabilized. Little in this world can bring our economy to its knees faster than a weak dollar in the foreign-exchange markets. Just ask the people who served in the Nixon, Ford, Carter, and Bush II administrations, or during Obama’s first term. Each of these periods was marred by a weak and depreciating dollar, surging inflation, and spiking interest rates, along with financial or commodity bubbles.
In contrast, under Reagan through 1985, the U.S. dollar increased in value by 67 percent in the foreign-exchange markets. Meanwhile, the price of gold, interest rates, and inflation fell from double-digit inflationary highs, the American economy reignited, and the stock market launched into what would be an 18-year bull run.
Going back a little further, the Kennedy administration offers another example of the forgotten pillar of prosperity that is a sound dollar. When the Revenue Act of 1962 was passed, President Kennedy reaffirmed that the U.S. dollar was as “good as gold,” thus launching the incredible boom known as the Go-Go Sixties.
A strong dollar is an essential pillar of economic prosperity with minimal inflation. And while the Trump tax cut is a pro-growth home run, we worry that the White House has not adopted this strategy. So we urge the Trump administration to return to the successful King Dollar policies that worked in the ’60s, ’80s, and ’90s.
Let’s be clear: Devaluations and weak currencies do not create U.S. jobs. Instead, weakened currencies are accompanied by relative price changes that lead to inflation in the devaluing country. (Americans can, by definition, buy less with weak dollars in their wallets than strong dollars.)
The stock market’s big sell-off a week ago followed a weak dollar and rising gold and commodity prices. And it may well have stoked inflation fears and higher bond yields, which come on top of a healthy rise in real rates in a growing economy. But the dollar has still not strengthened — perhaps because the Trump administration fumbled the ball in Davos, equating a weaker dollar with upsides for trade and considering it “not a concern” in the short term.
We also worry that the recent widening trade deficit will further tempt the administration into a weak-dollar strategy. The trade gap — imports over exports — widened by 12 percent last year to $566 billion, the highest level since 2008. But a widening trade deficit is actually a symptom of Trump’s pro-growth tax-and-deregulation policies, which, by the way, are working.
The last time the trade deficit fell sharply was in 2009 and 2010. Why? A steep recession.
Trump was right when he once acknowledged the irony that his pro-growth tax-and-deregulation policies are partly responsible for the higher dollar that he seems not to want. The fact is, trade deficits are nothing more than the flip side of large capitals inflows from around the world. This is a good thing. Before long the trade gap will narrow, with the U.S. becoming more competitive and once again the most hospitable investment environment in the world.
A return to King Dollar will bring more jobs, higher wages, and increased investment flows to the United States. It will confirm that, as Trump told world leaders and CEOs in Davos, that “America is open for business again.”
We caution that if the dollar continues to trend lower, the Fed should step in to retire reserves and withdraw excess money. That will leave us with lower tax rates, strong growth, and a low-inflation prosperity.
But a sound dollar is the pro-growth pillar that Trump must not leave out. A great country must have a reliable currency. This administration needs to speak of a sound dollar, a stable dollar, a strong dollar. A King Dollar.
If history is any guide, embracing this pillar raises the probability that President Trump gets reelected in a landslide.
— Larry Kudlow, Arthur B. Laffer, and Stephen Moore are co-founders of the Committee to Unleash Prosperity.