The benefits of English

Rick says that the spread of English as a, well, lingua franca might not benefit native English speakers. I agree, in the context he's writing. But in a wider sense, the spread is surely to our advantage.

What I mean is: why do non-US investors hold $5.7 trillion of low-returning US Treasuries? From a narrow economic perspective, the answer's not obvious. The country runs consistent external deficits (though there might be a good reason for this) and the CBO reckons public debt is on an "unsustainable" trajectory. This makes the country seem a poor safe haven.

However, the US has a massive advantage over other nations.The dominance of the American language is accompanied by a cultural hegemony; US TV shows, films and popular music are vastly more popular globally than their French or German counterparts. As a result, foreigners see the US as being more familiar than other countries. This in turn means that whilst US assets carry risk, they are seen as carrying less uncertainty or ambiguity. And because investors really do hate uncertainty, this relative lack of ambiguity means the US can borrow more cheaply than its economic fundamentals would warrant.The US owes some of its "exorbitant privilege" to the popularity of Baywatch.

But there's more. Deirdre McCloskey has estimated that around a quarter (pdf) of US GDP is talk: think of lawyers, salesmen, journalists and managers among others. The proportion is so large because communication facilitates trade, entrepreneurship and the division of labour. It's difficult to buy and sell without talking - at least if the products are complicated. The division of labour requires coordination between individuals, which requires communication. And you learn about profitable opportunities through listening and reading.

You might object that we don't need a common language to achieve these, because we can use translators. Not so. Three things suggest a lingua franca helps:

 - Trade is much higher between countries if they have a common language - 1.8 times as high according to one estimate (pdf).

 - Countries with linguistic heterogeneity, other things equal, tend to have less successful football teams. This suggests that a common language can promote learning and productivity; the "language of football" is not enough.

 - Some firms have begun to reverse offshoring. One reason for this might be that language barriers - and the associated cultural differences - can hamper effective management.

In these senses a common language is probably a great economic benefit. Whether it is a cultural boon is, however, another matter. If language shapes thought, then the loss of languages might mean the loss of useful ways of thinking. And then there's the matter of whether you side with Douglas Adams' view that the Babel fish caused bloody wars, or with Stephen Pinker's that cosmopolitanism has contributed (pdf) to declining violence.

Comments

[Sanjay Mittal]

Re the CBO's claim that the deficit is "unsustainable", the CBO is composed of economically illiterate, mentally sub-normal neanderthals. Or as Dean Baker put it, "In elite Washington circles, ignorance is a credential".

[Leslie48]

Surely and most worryingly it's that 'cultural hegemony' which is most concerning to us all- for America is often seen as some ideal type of society with cereal packet families, vast wealth and beautiful people all living like the Kardashians in a materialist heaven = Baudrillard's 'Hyper-reality'if ever I saw it.

It comes as quite a shock when you tell the teenagers here about the US murder rate, its drugs misery , its drop outs on the streets, its 'have you got medical cover as you are wheeled into A&E?'. But all of its drama and showbiz in an non-political world where the poor and sick and disadvantaged are invisible and appalling inequality is snow pegged out of the entertainment world.

[Anders]

"why do non-US investors hold $5.7 trillion of low-returning US Treasuries? From a narrow economic perspective, the answer's not obvious"

Chris - you answer your own question. The large foreign holdings of Tsys are a function of the persistent current account deficits; and the latter are a function of the Bretton Woods II system.

Why is the USD the international reserve currency? Other factors are more obvious than language.

(1) many (but ever fewer) countries want to pick a 'neutral' currency for trade, and the USD is the most obvious owing to its size

(2) strong rule of law and decent judicial support for contracts

[Anders]

@Sanjay Mittal - you may be right that the CBO are ignorant, but the relevant fact is that international investors don't perceive the US debt arithmetic to be unsustainable. I don't imagine many of them read CBO reports. They just assume the US will cut spending or raise tax when the time comes. Entitlement reform is just a distributional issue - not a question of solvency.

[Keith]

"Entitlement reform is just a distributional issue - not a question of solvency."

Do the American voters agree with this rosy view? You could have said this about France before the revolution. Surely the wealthiest county in Europe could not collapse in revolution and civil war over who should pay the bills?

[Anders]

@Keith

"Entitlement reform is a purely distributional matter" - this is just an analytical fact.

All I'm saying is that the US will need a reconfiguration from a distributional perspective, which could involve entitlement cuts, but could equally involve higher taxes (eg Georgist land taxes), or cuts in non-entitlement spending such as defence.

I'm not saying the resolution of the distributional readjustment will be easy, just that the difficulties don't entail insolvency. Just because the French state presumably defaulted on its foreign debts in 1789, doesn't imply that any other redistributional shift would involve the same. For one thing, the shift could be gradual in the case of the US, and not sudden.

[John H. Morrison]

I suppose those who express concern about US insolvency and the sustainability of our debt aren't lying -- not even most of those whose views depend on the President's party (D or R). (That's probably just a consequence of group-think or herd mentality.) They probably just don't realize that it's impossible for the US to become insolvent -- run out of dollars to pay its debts and expenses.

If the President had minted the trillion-dollar coins, and settled our debt-ceiling crises once and for all, at least some persons would have understood what a fiat currency system means. To a currency creator, the currency resembles coupons, or points awarded in football games. (Try shouting about football stadiums' unsustainable deficit trajectory in awarding points.)

I don't know the consequences of a common understanding of this point. They could be disastrous -- returning to a gold standard, or alternatively thinking we could create any amount we want without regard to inflation or deflation. Or they could be beneficial -- if it's understood that too little currency-creation would be deflationary and undermine economic growth, that too much currency-creation would be overly inflationary, and that taxation is essential for supporting the currency value (and only that).