The economic ideas of Vice-President Vance has been gather much attention, including criticism, as of late. One such criticism of Vance’s disdain of the Dollar as the world’s reserve currency comes from Phil W. Magness, which is copied here in full due to the limitations of Twitter/X’s embeds.
A quick explainer on why Vance wants a weaker dollar:
It’s not because he recognizes some underlying problem with fiat currency. It’s not because he wants to bring back the gold standard, nor is it because he envisions a future bitcoin or cryptocurrency standard.
Vance’s objection to the dollar’s reserve currency position is entirely about protectionism and tariffs.
You can see this clearly in his public commentaries about the dollar’s reserve currency status. He uses the same argument every time. It begins by likening the reserve status to a “resource curse” (which is a completely inappropriate and confused analogy). Then he claims that the dollar’s position makes consumer goods “too cheap” (via imports), while also insisting that this somehow harms US production (via exports). He frequently deprecates those “cheap” consumption goods as “mostly useless imports” and juxtaposes them to a “hollowed out” industrial production sector, while portraying the dollar’s strength as a “tax on producers.”
This is a classic protectionist fallacy, rooted in the belief that trade is a zero sum game and that trade deficits indicate that “we” as a country are losing things to the rest of the world on net. Currency enters the equation because Vance subscribes to an extremely shallow version of the “twin deficits hypothesis” – the belief that our federal budget deficit is somehow causing our trade deficit.
This theory is based upon mistaking an accounting identity for a policy tool, wherein the GDP identity (Y = C + I + G + (X-M)) can be converted by rearranging the terms to show an accounting relationship between the trade term (X-M) and government spending and taxes. The mistake here is that this is not an operationalizable formula where you can manipulate the terms – it’s simply an accounting identity. As such, the “twin deficits” hypothesis does not reliably hold in practice. Empirical evidence of it from the US over the last 75 years is thin to nonexistent, suggesting a weak spurious relationship at best and a pattern that often breaks down with the two deficits moving in opposite directions (e.g. as happened from 1998-2001) or when they evolved at wildly incongruous magnitudes (most of recent history).
Further:
Vance’s agenda also has another complication, because his marquis policy agenda in the economic realm (shared with Trump) is to impose protectionist tariffs on everything. Holding all else equal though, tariffs generally have the effect of strengthening the dollar’s position internationally because they reduce trade, and that reduces dollars flowing abroad. In simpler terms, tariffs are akin to shooting yourself in the foot if your goal is a weaker currency. Vance has therefore embraced the notion that he can simultaneously enact tariffs and offset these effects by forcing a rebalancing of the dollar’s position abroad through other levers. Vance himself is light on specifics, but this was the point of the infamous “Mar a Lago Accord” paper by former WH economic adviser Steve Miran, who Vance frequently and publicly championed.
The problem with this entire set of positions (in addition to them being premised on basic economic fallacies about how trade works) is that executing a simultaneous tariff-and-currency-rebalancing agenda is like playing with matches next to a gasoline pump. Even in theory, pulling off both policies at the same time would be nearly impossible due to the high likelihood of unintended economic harms arising from the erroneous assumptions behind Vance’s understanding of trade and international exchanges. Now take that and try to pull it off with the team of Peter Navarro-esque clowns in the current White House, and you have a recipe for stumbling headfirst into a self-inflicted recession, inflationary crisis, or both.
Anyone claiming that there’s some other takeaway message from Vance’s comments, or portraying it as him “just asking questions” about our reserve currency position, is deflecting attention away from the fact that his entire interest in this subject is motivated by trade and protectionist crankery.
More criticism of Vance’s economics (AKA, “Vancenomics”) can be found here.
