Martin Feldstein Quotations

A second reason why science cannot replace judgement is the behavior of financial markets.

So just as I want pilots on the planes that I fly, when it comes to monetary policy, I want to think that there is someone with sound judgement at the controls.

Inflation is lower and more stable and the real business cycle fluctuations are more modest.

The only way that we can reduce our financial dependence on the inflow of funds from the rest of the world is to reduce our trade deficit.

But because we in the United States finance our current account deficit by borrowing in our own currency, we can move to a more competitive dollar without the adverse effects that followed currency declines in other countries.

Increased government spending can provide a temporary stimulus to demand and output but in the longer run higher levels of government spending crowd out private investment or require higher taxes that weaken growth by reducing incentives to save, invest, innovate, and work.

And finally, no matter how good the science gets, there are problems that inevitably depend on judgment, on art, on a feel for financial markets.

The good news is that a competitive dollar in the global market and a strong dollar at home are compatible in both the long run and during the transition to a more competitive dollar.

But then in April of 1985 the dollar began a sharp decline. The dollar's trade weighted value fell 23 percent in just 12 months and by a total of 37 percent by the beginning of 1988.

Thirty years ago, many economists argued that inflation was a kind of minor inconvenience and that the cost of reducing inflation was too high a price to pay. No one would make those arguments today.

Although economists have studied the sensitivity of import and export volumes to changes in the exchange rate, there is still much uncertainty about just how much the dollar must change to bring about any given reduction in our trade deficit.

A rise in the level of saving can reduce aggregate activity temporarily but only a sustained high level of saving makes it possible to have the sustained high level of business investment that contributes to the long-run growth of output.

We are particularly poor at the open economy issues.

First, I think the science of monetary economics has clearly gotten better.

Even if the dollar does decline during the coming months, the delays in the response of exports and imports to the more competitive dollar will mean that the increase in aggregate demand from this source may not happen for a year or more.

Homeowners who refinanced their mortgages took out cash and reduced their monthly payments at the same time. Much of the cash obtained by refinancing was spent on consumer durables, home improvements and the like.

If the Federal Reserve pursues a strong dollar at home while the dollar becomes more competitive in global markets, we can achieve both price stability and a more balanced path of economic growth.

In short, both experience and economic theory imply that the US could now t to a more competitive dollar without experiencing either increased inflation or decreased economic growth.

But the primary reason for wanting the dollar to become more competitive in the near future is that we may need an increase in exports this year and in 2007 to sustain the economy's current pace of expansion.

We pay some price when necessary to bring down inflation but that price is temporary and is not large relative to the permanent gain from reduced inflation.

I think that over the last few decades, we have seen better economic outcomes than in the past.

My theme this evening is that America needs a competitive dollar.

The more competitive value of the dollar turned around the trade deficit.

The price of imported oil in the US doubled between summer 2003 and summer 2005, reducing consumers' purchasing power by more than 1 per cent of gross domestic product.

To finance this trade deficit, the U.S. has to borrow from the rest of the world or sell American assets like stocks, businesses, and real estate to the rest of the world.

It is certainly something to worry about. Continuing to attract funds when the current account deficit is that large and continuing to rise is bound to become a serious problem.

Today's macroeconomic problems require attention to more fundamental forces of individual incentives and institutional rigidities.

Why has this improvement in inflation and in the business cycle occurred? I think the answer is better monetary policy, better central banking.

With sound monetary policy, the increases in import prices are offset by lower inflation for domestically produced goods and services.

We do not understand the links between asset prices, monetary policy, and aggregate demand. We do not understand speculative markets adequately.

And when the dollar decline makes foreign travel much more expensive, I will do more of my vacation traveling in the United States.

Household saving fell from 2.5 per cent of after-tax income in the third quarter of 2003 to a remarkable minus 1.8 per cent two years later.

Domestic inflation reflects domestic monetary policy.

To finance this trade deficit, the U.S. has to borrow from the rest of the world or sell American assets like stocks, businesses, and real estate to the rest of the world.

After all, an overvalued dollar gives us the ability to buy foreign goods at lower prices. And the existing volume of exports brings more yen and euros than they would if the dollar were more competitive.

An increase in the relative price of products from the low wage manufacturers in Asia and Latin America will also make those products less attractive to American consumers.

Unless the trade deficit shrinks, the combination of the trade deficit and the interest and dividend payments to foreigners will grow ever more rapidly.