Managing the US dollar to pay for congressional infrastructure plans

Congress is working hard to pass an infrastructure package that could potentially invest trillions of dollars in America’s bridges, ports, railways and electricity grid. But members of Congress in both parties still face one serious obstacle — how to pay for it.

There is a ready-made means to provide the cash for an entire infrastructure program, and then some. In fact, the right approach could also stimulate the economy — and create up to five million additional jobs over five years while raising GDP.

The answer lies in the transaction fee on foreign purchases of financial assets that Congress has already started considering. Such a fee, known as a Market Access Charge (MAC), was introduced in 2019 by Sens. Tammy Baldwin (D-Wis.) and Josh Hawley (R-M.). Their Competitive Dollar for Jobs and Prosperity Act would bring the U.S. dollar back to a more competitive level — and has since been gaining bipartisan support on Capitol Hill.  

The MAC would boost exports by double-digit percentages for America’s manufacturers and agricultural producers. But the great benefit of such dollar management is that it would likely raise between $100 billion and $200 billion each year for the U.S. Treasury. And the best part is that every single dollar of those fees would be paid by foreign investors, not Americans.  

The MAC works in a straightforward manner. It imposes a one-time charge on foreign purchases of dollar-denominated assets such as Treasury bonds or shares of stock. That fee would help to ease the flow of international capital into the U.S. that is currently driving the dollar to its overvalued, non-competitive level. 

For nearly 50 years, the dollar’s value has remained too high. This has created a flood of imports, crippling the U.S. manufacturing sector and depressing prices realized by the nation’s farmers. 

Successful nations manage their currency to ensure their economy is competitive. Taiwan is a good example: It manages its currency to control the country’s trade balance and boost exports. As a result, this island country of only 23 million people now dominates the global manufacture of semiconductors. 

The MAC would be managed by the Federal Reserve, just as the Fed currently manages interest rates. Our economic modeling at the Coalition for a Prosperous America suggests a small MAC fee of only 2 percent would be sufficient to reduce inflows for U.S. financial assets — allowing the dollar to glide downward to a competitive level. We found that a 5 percent MAC would raise even more money each year. But calculations suggest a 2 percent MAC would be sufficient.

The beauty of a tool like the MAC is that it would enable the Fed to fine-tune the value of the dollar without halting capital inflows. Today, the world is awash in trillions of dollars of capital. Investment managers in New York, London, Tokyo and a dozen lightly regulated island nations manage those trillions, constantly investing and moving that cash around. An estimated $40 trillion flows into the U.S. each year. A MAC charge of 2 percent would slow down that inflow while allowing enough investment to generate substantial revenue for the U.S. government. Foreign investors would happily pay a mere 2 percent transaction fee for the privilege of holding secure U.S. financial assets.  

Some critics argue that a MAC-driven competitive dollar would raise inflation and lift interest rates. But our modeling suggests these effects would be very small – less than a quarter of a percentage point in each case – and would be overwhelmed by the benefits of higher employment, production and jobs for U.S. workers and companies. Our research found that a 2 percent MAC would create five million U.S. jobs over five years, and boost GDP by 1 percent annually in that time.

The MAC would also help to slow down – and eventually halt – America’s ever-rising foreign debt. The U.S. owes $22 trillion to foreigners today, a number that keeps growing every year. Our nation will be safer and more secure, in both financial and national security, if we can lower our external debt, and our national debt.

A competitive currency, a new stream of tax revenue, more jobs and a healthier domestic economy are all within our grasp. Congress should pass an infrastructure package and pay for it with a MAC.

Jeff Ferry is chief economist at the Coalition for a Prosperous America (CPA). Follow him at @menloferry.