The price of imported oil in the US doubled between summer 2003 and summer 2005, reducing consumers' purchasing power by more than 1 per cent of gross domestic product.
And finally, no matter how good the science gets, there are problems that inevitably depend on judgement, on art, on a feel for financial markets.
Increased government spending can provide a temporary stimulus to demand and output but in the longer run higher levels of government spending crowd out private investment or require higher taxes that weaken growth by reducing incentives to save, invest, innovate, and work.
A rise in the level of saving can reduce aggregate activity temporarily but only a sustained high level of saving makes it possible to have the sustained high level of business investment that contributes to the long-run growth of output.
Inflation is lower and more stable and the real business cycle fluctuations are more modest.
Although economists have studied the sensitivity of import and export volumes to changes in the exchange rate, there is still much uncertainty about just how much the dollar must change to bring about any given reduction in our trade deficit.
Homeowners who refinanced their mortgages took out cash and reduced their monthly payments at the same time. Much of the cash obtained by refinancing was spent on consumer durables, home improvements and the like.
If the Federal Reserve pursues a strong dollar at home while the dollar becomes more competitive in global markets, we can achieve both price stability and a more balanced path of economic growth.
The good news is that a competitive dollar in the global market and a strong dollar at home are compatible in both the long run and during the transition to a more competitive dollar.
In short, both experience and economic theory imply that the US could now t to a more competitive dollar without experiencing either increased inflation or decreased economic growth.
A second reason why science cannot replace judgement is the behavior of financial markets.
First, I think the science of monetary economics has clearly gotten better.
The only way that we can reduce our financial dependence on the inflow of funds from the rest of the world is to reduce our trade deficit.
To finance this trade deficit, the U.S. has to borrow from the rest of the world or sell American assets like stocks, businesses, and real estate to the rest of the world.
After all, an overvalued dollar gives us the ability to buy foreign goods at lower prices. And the existing volume of exports brings more yen and euros than they would if the dollar were more competitive.