COMBINING THE LAFFER AND J CURVES

Weaker Dollar May Boost Bush Re - Election Prospects (Reuters, 7/06/03)

Manufacturing jobs matter in these five so-called ``battleground'' states -- Illinois, Iowa, Michigan, Minnesota and Wisconsin -- where the percentage of factory jobs are above the national average, according to West Chester, Pennsylvania-based Economy.com.

Bush could win these states in 2004 if voters there view him as doing everything he can to pull the region out of a manufacturing recession.benefits of a weaker dollar on the U.S. export sector could be in full swing.

Bush won the 2000 election in the electoral college by five votes, and each of these factory-laden states has more than five electoral votes up for grabs. [...]

Typically, a decline in the dollar's value will result in higher U.S. exports only after some six to nine months. This is part of an economic phenomenon known as the ``J-curve'' effect, which predicts that after a country's currency depreciates it initially sees a worsening in its trade balance because imports cost more right away, while exports are slower to take off.

So far, the second part of that effect has not begun, largely because the rest of the world is in an economic slump, limiting the appetite for U.S. goods.

Count nine months ahead from the time Snow's commitment to the strong dollar policy was questioned, Upadhyaya argues, and that's when the second part of the J-curve effect kicks in -- in other words, just in time for the primaries.

Even if the economy strengthens before the election, helped by the stimulative effects of Bush's tax cuts, interest rates at or near four-decade lows and a record trade gap are likely to keep the dollar stuck in its downtrend, analysts said.

If a fall in the dollar helps lift exports and prompts corporations to either stop slashing jobs or even add some back, these states could feel the positive effects to their economies earlier than the rest of the nation.

Rising business sentiment and a still-strong consumer sector would send Bush into the 2004 election cycle with favorable economic winds at his back.

There's something almost perverse about using our economic hegemony to get healthy on the backs of other nations, but if such are the realities of letting the dollar seek its own level, so be it. It's not as if any of them can get healthy again until we do. Posted by Orrin Judd at July 6, 2003 12:59 PM