Friday, January 14, 2011

Time Horizons: Brooklyn Currency Edition

Megan McArdle offers a passage by Matt Yglesias:
Here’s a random paragraph from Paul Krugman’s opus on the Euro:
I think of this as the Iceland-Brooklyn issue. Iceland, with only 320,000 people, has its own currency — and that fact has given it valuable room for maneuver. So why isn’t Brooklyn, with roughly eight times Iceland’s population, an even better candidate for an independent currency? The answer is that Brooklyn, located as it is in the middle of metro New York rather than in the middle of the Atlantic, has an economy deeply enmeshed with those of neighboring boroughs. And Brooklyn residents would pay a large price if they had to change currencies every time they did business in Manhattan or Queens.
I guess I wonder how inconvenient this would really be in 2010 as opposed to 1970. Individuals wouldn’t, after all, really need to “change currencies” every time they went to Manhattan. You could buy things with your credit or debit card, and if you only had Brooklyn Bucks in your pocket, American dollars are only an ATM visit away. I think the real issue here isn’t so much that it would be too inconvenient as that it wouldn’t be inconvenient enough—getting US dollars and dollar-denominated financial assets would be so simple that US dollars would circulate widely in Brooklyn and Brooklyn Bucks would wind up being marginalized.

Megan responds:
Eh, the currency exchange problem is pretty big, as long as you're forward looking. Ordinary people who don't operate businesses, and travel mostly for pleasure, don't tend to think about this so much. For us, the major problem with operating in different currency zones is the hassle of changing money. But for anyone who enters into contracts, currencies are a major problem. After all, what happens if the exchange rate changes?

Matt's analysis is always so thoroughly rooted in the present and short-term that looking to the long-term consequences or benefits that he invariably failed to even consider is the fastest way to go back to the very stable conclusion that the man is a jackass.

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