Prof. Schlevogt’s Compass No. 41: Dutch disease, US strain – Dollar dominance hollows out industry

The US labors under a paradox of preeminence: the dollar’s exclusive status as the world’s reserve currency, a structural advantage so durable it has come to feel like destiny.

The “exorbitant privilege” lowers borrowing costs and weakens fiscal discipline, catalyzing chronic budget deficits and propelling public debt onto an exponential trajectory. At the same time, persistent global demand for dollars keeps the exchange rate structurally elevated, undermining exports and entrenching current-account deficits.

These imbalances are financed, with disarming ease, through foreign absorption of US assets that entrench latent yet binding leverage over the American economy. In the process, they conjure a reassuring but ultimately illusory sense of equilibrium.

The deceptive accommodation operates not as a pendulum but as a ratchet turning in only one direction. Its effect is to conceal the cumulative reallocation of productive capacity in the US away from tradable industries and toward finance and consumption.

This trend reveals that America’s monetary primacy amounts less to a costless, salubrious windfall than to an insidious, long-running variant of Dutch disease, masked by the veneer of exceptional and ostensibly unassailable prowess. Economic history, cursorily consulted, places this pattern in sharper relief.

The logic of Dutch disease: How narrow success breeds broad failure

Dutch disease is the counterintuitive economic pathology whereby a putatively auspicious development, such as the discovery of vast natural resources, insensibly erodes an economy’s productive foundations.

Coined in the wake of the Netherlands’ gas bonanza in the 1960s, the term designates the dynamic whereby windfall revenues draw investment and labor into a booming sector and, by elevating demand for the domestic currency, induce a real exchange rate appreciation that undermines the competitiveness of other tradable industries.

From a political-economy perspective, the concentration of resource rents (excess returns beyond normal market profits derived from ownership of natural resources rather than diversified productive activity) and fiscal reliance on them reorient incentives toward their extraction and distribution rather than productive diversification.

Rent allocation yields immediate and visible political payoffs. Diversification, by contrast, demands widely dispersed and slow-maturing investment that lacks a concentrated constituency, rendering it politically riskier. This asymmetry in political incentives entrenches dependence on a single, volatile source of income across the broader economy.