O'Neill's Strong-Dollar Talk Belies His Past
By Paul Blustein
Washington Post Staff Writer
Friday, August 3, 2001; Page A01
CORINTH, N.Y. -- Grim news came last month to workers at the International Paper Co. mill in this village on the Hudson River: The company was shutting down one of the mill's two machines and eliminating 225 jobs, largely because the strong U.S. dollar had depressed sales of the company's products.
That might seem unremarkable. American manufacturers often cut production and payrolls when the dollar surges against other currencies, because a high dollar raises the cost of U.S.-made goods compared with those from abroad.
But a twist of irony makes International Paper's case noteworthy. In the 1980s, when the company was also complaining about the dollar's strength, its president was Paul H. O'Neill, who in his current job, secretary of the Treasury, is chief defender of the strong dollar and derides those who bemoan it.
Therein lies an instructive tale about the costs and benefits of the mighty dollar, which has risen nearly 20 percent since early last year against the Japanese yen, and more than 30 percent against the euro since the debut of the 11-nation European currency in January 1999.
In currency policy, the cliche "Where you stand depends on where you sit" applies in spades. While the dollar's strength is a boon to some sectors of the U.S. economy -- and, some argue, is beneficial to the economy as a whole, which is O'Neill's realm of responsibility -- it is a bane to others, especially manufacturers facing foreign competition.
The question of whether the positive outweighs the negative has become a subject of intense debate in recent months among industry and labor groups, economists, and policymakers as the U.S. economy has slowed. Although the dollar normally would be expected to fall when U.S. economic growth falters, it has risen this year because of the belief in financial markets that economic prospects abroad are even worse than they are here.
In Corinth, workers at the International Paper mill admit to being perplexed by the issue. But they wonder why officials in Washington such as O'Neill show so little sympathy for companies buffeted by powerful forces in global currency markets. "I know how lean and mean this company has gotten," said Edd Von Seggern, a 36-year employee of the mill who also is the village's part-time mayor. The mill, he noted, employed 2,000 people when he started there; it will soon employ 279.
With O'Neill in the lead, Bush administration officials have espoused with gusto the belief voiced during the Clinton administration by Treasury secretaries Robert E. Rubin and Lawrence H. Summers: "A strong dollar is in the best interests of the United States."
The rationale for that approach is based mainly on the favorable effect on interest rates and inflation. As Europeans, Japanese and other foreign investors convert their euros, yen and other currencies into dollars, the inflow of capital helps keep interest rates relatively low in this country, boosting housing, auto sales and economic growth generally. Moreover, as the dollar goes higher, imported goods get cheaper for American consumers, helping to suppress inflation.
Anything that undermines foreigners' faith in the dollar might throw that process into reverse. So O'Neill has gone to great lengths to burnish his strong-dollar credentials in recent weeks, heaping scorn on companies that plead for a weaker greenback.
"The great ones don't worry about a weaker dollar or a stronger dollar," O'Neill said in a Fox Cable News interview June 25. The best companies hedge themselves and "perform in such a way that what the relationship is between the U.S. dollar and other currencies doesn't matter," he said.
In a like vein, he brushed off concerns voiced at a May 22 hearing on Capitol Hill. "I was the chairman of Alcoa for 13 years and at International Paper for 10," O'Neill said, "and during this period of time I ran a company that lived in a world where the yen varied between 270 and 80 [per dollar], and was always [among] the most profitable [companies] in the world, without regard to exchange-rate fluctuations."
But a look back at O'Neill's words when he was president of International Paper shows that he viewed the issue rather differently then. In several articles published in 1985, he was quoted as lamenting the dollar's ascent. The strong dollar "has turned the world on its head," he told Dallas Morning News. "We've suffered a major loss in competition position because of a loss in exchange rates," he said.
O'Neill declined to be interviewed for this story, but his spokeswoman, Michele Davis, said that even in his 1985 quotes, "he never asked the government to do anything." Furthermore, Davis said by e-mail, "he has said since then that the pressure during those times was a good thing -- it forced him and others to look for ways to improve every part of the business and become more competitive. In the end, it led to improvements in the company."
But International Paper still appears to suffer from the dollar's current strength. The company's travails are a vivid example of how the U.S. currency's rise is exacerbating the problems of American industrial firms already struggling to cope with soft demand at home. Since April, International Paper, which posted a $313 million second-quarter loss, has announced 4,000 job cuts.
The ax fell most recently on July 12, when International Paper said it was shutting a machine at the Corinth mill, which makes coated paper for magazines and catalogues. In the same announcement, the company said it was eliminating 290 jobs at its plant in Savannah, Ga., which makes containerboard, used to make cardboard boxes.
"These are difficult decisions," John Dillon, International Paper's chairman, said in announcing the moves. "However, the strong dollar has continuously weakened our export business in containerboard, while increasing imports of coated paper."
The blow mainly hit workers with the least seniority, who will be the first to go. Among them is Keith Kirchhoff, a 36-year-old production worker at the Corinth mill, who already has some promising job possibilities at a Target Stores warehouse and an Ace Hardware distribution center opening nearby. But taking those jobs would mean moving down to about $11 an hour from the $17 to $18.50 an hour he earned at the mill.
"IP has the highest-paying jobs in the area," Kirchhoff said with a sigh. His wife, a hairstylist, will probably have to increase her current work schedule of 3 1/2 days a week, he said. The family, which includes two boys, ages 11 and 5, will have to forgo a trip to Florida they had planned.
At the same time, the situation in Corinth shows the upside of the strong dollar. Thanks to the buoyancy of the housing sector, Paul Smith, one of Kirchhoff's co-workers at the mill, is taking advantage of International Paper's layoffs by accepting a severance package and starting a business as a subcontractor, installing floors and tile in homes that are being built or remodeled.
"I consider this an opportunity. The sky's the limit," said Smith, 30, who figures that in a couple of years he'll easily exceed the $40,000 a year he earned at the mill.
Not all the problems at the Corinth mill -- or other factories around the United States -- can be blamed on the strong dollar, of course. The mill is one of the oldest in the country, the machine that International Paper shut down is one of its most costly pieces of equipment, and the company has been hurt by rising energy and pulp prices as well as a general oversupply of paper-making capacity. Add to those factors the weakness of the U.S. economy, and it is not surprising that International Paper is looking for ways to cut costs.
But industry groups such as the National Association of Manufacturers say the pervasive complaints from their members leave little doubt about the adverse effect of the dollar's value. And the U.S. economic slowdown has put the debate over the strong dollar into a new light.
"In the late 1990s, Rubin and Summers had an argument for the strong dollar, because unemployment was dropping and the economy was booming," said C. Fred Bergsten, director of the Institute for International Economics. "In fact, the strong dollar was a safety valve against an overheated economy," because it dampened demand for exports, he said. "But now the situation is reversed."
The dollar's ascent is worsening the imbalance in U.S. trade, which is projected to hit a record $450 billion deficit this year, based on the broadest measure, the current account. That deficit means that foreigners are accumulating dollars as they sell more to Americans than Americans sell abroad. If foreigners suddenly unloaded their dollars en masse, the consequences in financial markets could be catastrophic.
Despite all the reasons to be concerned about the dollar's strength, however, many experts question whether Washington can do anything about it -- at least, anything that wouldn't risk backfiring.
O'Neill might change his mantra from "strong dollar" to "sound dollar" and use U.S. funds to buy euros, as Bergsten and others have proposed. But given the vast size of global currency markets, traders might simply continue to bid the dollar up. Or, instead of driving the dollar gradually lower, they might panic and send it into a free fall.
For those reasons, among others, Rubin still heartily backs O'Neill's stance. "Modifying our strong-dollar policy could adversely affect inflation, interest rates and capital inflows and would lessen the favorability of our terms of exchange with the rest of the world," the former Treasury secretary said at a Senate Banking Committee hearing July 25.
Still, the problems in places like Corinth are hard to dismiss. Even though he is content to be leaving his job at the International Paper mill, Paul Smith bridles at O'Neill's comments about how "great" companies ought to be able to slough off the dollar's strength.
"Pretty harsh words," Smith said. "The guy's rich. Must be he only wants the strong to survive, and he doesn't care about people at the bottom." |
