Arnold Kling

Journalism Flunks Economics

Arnold Kling, Great Questions of Economics
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In an otherwise interesting commentary about the relationship between the stock market and economic performance, The Economist makes this elementary error.

A softer dollar has already contributed to a reduction of capital flowing from Europe to America.

This type of statement is made often in the business press. Yet professional economists would argue that it gets causality exactly backwards. It is the reduction in capital flows that weakens the dollar. What has happened is that the growth in demand for U.S. financial assets finally slowed down, which reduced the capital inflow and weakened the dollar.

Discussion Question. Is the drop in the value of the dollar a bad thing?

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