The next President and the dollar.

• Author: Adams, Timothy D.

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1. A Republican Perspective

   Former Treasury Secretary Paul O'Neill remarked early in his tenure that he would march a brass band through Yankee Stadium if there was change in support for the "strong dollar" policy. My advice to the next president is to keep the tuba players busy with State dinners and south lawn barbecues and leave in place a policy that's worked well for the past decade. That's not to say it's without imperfection, but to jettison the strong dollar now could trip up the swaying greenback, send gyrating shock waves through fragile global markets, and signal a U.S. retreat from global financial leadership.

   Instead of digressing into doomsday dollar scenarios, it's worth backing up a moment and asking a threshold question: just what does the slogan "strong dollar" mean, anyway? Obviously, there's certain degree of designed ambiguity regarding its meaning, and woe to those who dare to offer even a glimpse of explanatory thinking behind the sound bite. That said, I regard the strong dollar mantra as a pledge that United States will not use the currency as tool to gain competitive advantage in a beggar-thy-neighbor manner. The dollar is simply a derivative of other factors--a reflection of relative cyclical and structural fundamentals and policy--and not a direct target of policy. The policy is also a pledge to protect the value of Treasury-issued U.S. debt, which is the modern gold standard for all other debt instruments.

   The key, therefore, is to pursue sound policies that give rise to a strong currency. First and foremost is to maintain a near-rabid support for an open economy and the free flow of goods, services, and capital. A misguided lurch to protectionism in an effort to sooth the middle-class angst over globalization may offer a temporary anesthetic to voters, but will prove damaging in the longer term. The same is true of possible responses to the current housing correction, with a large portion of the ever-proliferating set of prescriptions running counter to our greatest strengths, such as sanctity of contracts, cutting-edge innovation, and access to credit and capital.

   The next President also needs to focus on sound fiscal policy, keeping tax rates at growth-generating levels while courageously attacking the monster of entitlement spending, which will painfully gobble up ever-larger chunks of the Federal budget. An independent, inflation-focused central bank is also critical, and any effort to install a new, decidedly dovish chairman at the Federal Reserve would undermine the attractiveness of dollar-denominated assets and therefore the dollar itself. Finally, the next President should encourage the productive capacity of the economy, emphasizing capital formation and a world-class system of education.

   Of course, this assumes that the next President wants a strong dollar policy. It may prove a close call. Some will argue that continuing the policy will disadvantage the United States because other countries actually engage in what we pledge to avoid, targeting the exchange rates to achieve competitive advantage. These charges are not without merit as in fact some do, and are worthy of our sober engagement. But rather than jettison our values in what will be a fruitless and possibly dangerous game of competitive currency manipulation, the better path is to embrace a fair and functioning system of universal rules and ensure that those rules are enforced--objectively, equally, and visibly. Enter the International Monetary Fund, which recognized that business as usual was doomed to failure and, along with G7 leadership, launched an historic reform effort, including a more muscular approach to foreign exchange surveillance. The new managing director, Dominique Strauss-Kahn, has accelerated reform, and is elevating the IMF to its respected position and role. The next President should embrace this effort...