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Is a strong dollar good or bad? An answer for Donald Trump.

It’s complicated, but here’s the deal.

Here’s a quick answer to a question that’s been bothering Donald Trump: If you want to improve living standards for most Americans, a strong dollar is better. But if you want to deliver on your campaign promises to the Midwest, you probably want a weaker one.

A leak to S.V. Date and Christina Wilkie of the Huffington Post reveals that on one recent night, President Trump was up at 3 am and decided to call up National Security Advisor Michael Flynn to ask him about this.

Trump, they report, “was confused about the dollar: Was it a strong one that’s good for the economy? Or a weak one?”

Flynn reportedly “told Trump he didn’t know, that it wasn’t his area of expertise, that, perhaps, Trump should ask an economist instead.”

Then he seems to have told some other people about the call, two of whom told the Huffington Post about it. Date and Wilkie take the opportunity of the leak to look at the broader question of Trump’s temperament, his leaky White House staff, and his rough adjustment to life as president. What they don’t get into is the answer to Trump’s question, which is difficult.

It matters why the dollar is getting strong

The beginning of wisdom on this matter, as actual economist Andy Harless emphasized to me, is that it makes no sense to ask whether a higher price of dollars is good or bad without context about why the price is changing.

If the Federal Reserve decided to start raising interest rates very rapidly, that would probably have the effect of raising the value of the dollar. It would also have the effect of slowing the growth of the overall economy. If inflation were high and rising, that might be smart, but under the current circumstances it would almost certainly be bad news.

On the other hand, suppose some new natural resource — call it dilithium — were discovered under American soil that allowed for the creation of unlimited quantities of cheap, clean electricity. Digging up and exporting that resource would directly create a bunch of jobs and higher incomes. But it would also push up the value of the dollar, which would increase the real purchasing power of every single American. In that case, you’d probably say the higher dollar was good for the economy because it ensured that dilithium-induced prosperity was broadly shared.

But even here, there are complexities. When natural gas was discovered in the North Sea, it pushed the value of the Netherlands’ currency so high that Dutch manufacturing companies became globally uncompetitive. Some people think this kind of “Dutch disease” can be bad for a country’s long-term growth. That’s one reason why Norway plows most of its oil revenue into a sovereign wealth fund that’s invested abroad — it not only stores money for the future but also prevents the krone from becoming so expensive as to ruin all other Norwegian exports.

Okay, but is a stronger dollar good?

George Mason University economist Tyler Cowen gets around the causal question by asking us to assume that “noise traders” operating in global foreign exchange markets just randomly push up the value of the dollar for no particular reason.

“That increases the wealth of individuals and institutions that are long dollars, and presumably this is the case for this country overall,” Cowen writes. “If you owned lots of ponies, would you not want the price of ponies to go up?”

This has been the conventional wisdom among most American politicians for decades, and it certainly seems true for most people. The big exception, however, as Jared Bernstein and Dean Baker write, is that a strong dollar is bad for Americans who work in the manufacturing sector. The high price of the dollar over the past three years is a key reason why American manufacturing employment has flatlined, after rebounding from its collapse during the Great Recession. A strong dollar makes American exports more expensive for foreigners to buy, and it makes foreign-made goods cheaper for Americans to buy. That encourages companies to invest in foreign factories rather than American ones.

What’s more, as we’ve seen over the past 15 years, a healthy manufacturing sector has benefits beyond the people directly employed by a factory. When a company shuts down or shifts activity abroad, that has knock-on effects for the entire community. Retail stores lose customers and need to lay off workers. The tax base declines, and towns need to get by with fewer teachers. The weaker economic climate encourages skilled professionals like doctors, lawyers, and accountants to leave town in search of better markets elsewhere. It’s possible for a larger cycle of decline — population flight, drug addiction, degradation of public service quality — to set in, with devastating effects.

Trump’s campaign focused heavily on a promise to revive American manufacturing, and that promise won votes precisely because of those spillover effects. A cheap dollar could be one of the most effective policies to make that happen, at least in the short term.

But Cowen’s larger point still holds. Most Americans don’t work in the manufacturing sector. And in part because that’s been true for a long time, most Americans don’t live in factory towns either. A cheap dollar boosts manufacturing by, in effect, cutting all Americans’ purchasing power. And when you put it that way, it doesn’t sound too appealing.