Kudlow: Reagan for strong dollar?

Two posts at Angry Bear tear into a recent Larry Kudlow column at the National Review about politics of the strength of the dollar relative to other currencies. Anyone that has been overseas the last few years, or anyone that lives near the Canadian border, knows that the dollar ain't what it used to be. In fact, the dollar is at historic lows against the Euro, and is really weak against a bunch other currencies, including the Canadian loonie and the Yen.

Anyway, Kudlow, who is a very prominent anchor at CNBC, could best be described as one of the nation's lead cheerleaders from which only happy-talk spills from his mouth. A column in which he admits anything negative about any facet of the economy might be seen as a very bad sign for the economy. But Kudlow makes one claim about Reagan and his policies on the dollar:

Right now the greenback is in virtual freefall. It’s a disorderly drop... Something must be done to reverse this trend, and McCain is in a good spot to do it. Remember, McCain was a foot soldier in the Reagan revolution. Borrowing a page from the Gipper — who always said a great nation has a strong currency — he should argue on the campaign trail for a dollar surge.

cactus at Angry Bear wrote a post about whether it really is true that Reagan favored a strong dollar. He noted that:

Case in point: The Federal Reserve's Major Currencies Dollar Index for January 1981 was: 96.023. In January of 1989, it was 90.5499. Sure, that wasn't the collapse we've enjoyed during the presidency of Bush the Incoherent (Jan 2001: 103.5074, Feb 2008: 72.5747) but it takes a full load of delusion to be simultaneously in favor of a strong dollar and Reagan's dollar policy.

In comments, cursed said this in response:

Please go and look at the strength of the US dollar in 1985 before the Plaza accord purposefully engineered weakening of the dollar in order for US manufactures to compete. Leave going off half cocked to me, and being a cooperate hack to Kudlow.

cursed suggested that looking at the end points of a data set may not be very informative. I have to agree. So I decided to look at the data myself. I plotted year-over-year changes in the dollar index starting from 1974. I changed the color of the bars to indicate which party controlled the white house:
If the value is positive, it means the dollar index increased from one year to the next. If it's negative, the dollar index decreased. The magnitude of the change is reflected in the size of the bar.

So cursed is right; in general, during Reagan's first term, the dollar increased in value relative to other currencies. But the bottom dropped out on the dollar in 1985 after the Plaza Accord (which I don't know much about).

In general, over the last 30 years, the dollar index has performed "better" under Democratic administrations than under Republican ones. It's also clear that, though maybe Reagan "favored" a strong dollar policy, at the very least, he was impotent to maintain a strong dollar. In addition, if the major drop in 1985 is due to the Plaza Accords, then Reagan changed his position (dare I say flip-flopped?) on the importance of a strong dollar policy.

Now, all of this is just to demonstrate that Kudlow is looking back on the Reagan administration with rose-colored glasses. He can be forgiven for this; it's a requirement to be a member of the GOP to believe in the infallibility of Saint Gipper. But he's just plain wrong in this case.

Now, I have to agree with pgl that this whole "strong dolor vs weak dollar" argument is a lot more complicated than it might appear. He says:

Prestige? Patriotism? I guess if one is as clueless about economics as Lawrence Kudlow appears to be, then maybe all one has is prestige and patriotism as excuses for a really bad policy prescription. Kudlow’s line about inflation being the cause of recessions is idiotic. Now it is a lack of aggregate demand.

Kudlow is advocating contractionary monetary policy, which will have two adverse effects on aggregate demand. One is to drive up real interest rates which will discourage both business and residential investment demand. But the main on point transmission channel is the appreciation of the dollar that Kudlow wants, which would lower net export demand.

A "weak" dollar can help during a recession. A president could make things worse by pursuing a "stronger" dollar, especially given the import/export imbalances we've experienced in recent years. A correction was necessary.

I believe that the recent collapse of the dollar is probably temporary, however. There are strong signs that currency markets are highly imbalanced, given that there are specialized US retailers accepting Euros in lieu of dollars. And the financial "ebola" in the US is very contagious and will spread to Asia and Europe, which will force the central banks there to lower interest rates.

Anyway, I have some more thoughts on this, but I've run out of time.