Updated: now with high-speed bling. See below.
I’ve had a brief exchange with Russ Nelson, of The Angry Economist fame. It looked like this:
I’ve read an weblog entry of yours recently, “Offshoring“, and I have
a question about it. In it, you say:
“The dollars that we pay to Indians don’t get magically converted into
rupees. They stay as dollars, and have absolutely no value to Indians unless they are ultimately spent as dollars back in the good old USA.”
Being a humble student, I haven’t travelled the world over, but I’ve moved around a little and I’ve never been anywhere that didn’t accept U.S. dollars, something that’s likely not true of rupees.
I’m not sure how this argument I’m making plays out, not being an economist myself, but here it is; I agree with you that jobs will be created when those dollars find their way back to the States, but if the U.S. dollar is a de-facto international currency, then those offshored dollars might take an awfully long time to come back to roost. I don’t think that it’s just the temporary loss of jobs that people are concerned about, but the possiblity that “temporarily”
could be a distressingly long time, whereas local investment, while less cost-effective also guarantees that the inherent lag in the process will be much, much shorter.
I’m trying to draw an analogy here to insurance costs and general risk-aversion, but I’m not sure I can fully articulate it – maybe that the inefficiency of the buy-local mindset is an acceptable price to pay for the prospect of a briefer downturn in employment opportunities?
Mr. Nelson replies:
Any dollar that does not come back to the United States becomes a green collectible presidential portrait. We are happy to supply the world with currency, as long as they’re willing to accept it.
Let me put it another way: dollars get used to buy things. Therefore, there should be as many dollars as things, otherwise dollars will become more or less valuable relative to things. This change will promptly be reflected in the prices of things. If you want stable prices (and you do, more or less), then the number of dollars should match the number of things that they’re traded for.
If a new country starts buying or selling things for dollars, suddenly there aren’t enough dollars to go around, so the price of dollars goes up. This mean that the federal government can print more dollars and spend them. A dollar that goes overseas and never returns inures to all US citizens because it means that we bought things for paper. This is a good thing.
I’m not sure what I think about this, or even if he really answered my question. This is clearly not my area of expertise, so I’m going to have to find some time to read up about it and think about this some more. I don’t know how delta T works itself into opportunity costs or other economic arguments, but I’d sure love to see a good reference.
Update: It turns out that, in the relevant money markets, delta-T is as close to zero as makes no difference at all: money markets are just about the fastest, most efficient markets out there, so my posited lag is really a non-factor. So yes, he did in fact answer the question, and is right. So much for my clever idea.