Wednesday, March 21, 2012

Does this Washington politician deserve this defense?

Mattheus von Guttenberg defends career politician Ron Paul thusly:

"Paul doesn't highlight it often (because he is not speaking to a crowd of students or postdocs trained in economics) but the whole point of talking about the erosion of the monetary unit is to emphasize the non-neutrality of money in the short run.

But of course, money is neutral in the long run. Who cares if the money unit is 50% of what it used to be if your paycheck is 200% what it used to be? I understand that point, Daniel. But Paul is trying to bring attention to the interim process. In the short run, money is most certainly not neutral and large influxes of it benefit specific people and organizations at the expense of other people and organizations."

Do you all think this is justified? My first thought was that accepting the short-run non-neutrality of money is pretty coincident with advocacy of expansive monetary policy. That's sort of where it all starts. But I suppose that's not strictly necessary, so we can let that one go.

Still, I think Mattheus is wrong. If you know money is neutral in the long run, you don't go around spouting as your main argument against the Fed that the dollar has lost 95% of its value since 1913 (or whatever the number is). If you actually know that non-neutrality is a short-run issue, what Ron Paul goes around saying is precisely what you wouldn't want to say if you thought most people don't understand short-run non-neutrality.

If you understood economics, but were worried other people didn't, what you would do is talk about real wage trends and trends in the real value of fixed incomes and the minimum wage. That's a short-run non-neutrality point.


  1. I don't know why I post about Ron Paul right after a more interesting post - now no one's going to read that!

    Read the post about licensing first - much more interesting than this one.

  2. I'm not an economist (obviously), but I can kind of see both sides of this one. When I've heard Paul talk about things like this in more detail, I've always got the impression that he was indeed setting his aim at long-term effects of monetary policy...but not particularly wages. You brought up fixed incomes towards the end of your post. I don't have time to fish out quotes and details, but (IIRC) he more specifically addresses those policies' imposition on savings in general - which stands to reason considering the school of thought he's coming from. I suppose, reciprocally, long term loans, mortgages, and credit in general would be affected, although I don't recall him focusing on that too much.

    Of course, there remains the possibility that he's saying some of the things you pointed out because it holds rhetorical value. But I don't get the impression that he's that kind of person either. In any case, I'd have to go dig through some of his more substantial statements on it to get a better idea of his personal view/understanding. I don't think your criticism, on its face, is particularly unfair though.

  3. I've just done some very, very brief browsing on this (it made me curious), and it does appear to me that most of the time, when he's talking about the danger of the dollar's devaluation, it's in the context of peoples' savings (and subsequently purchasing power) taking a hit.

    The following site had some typical examples regarding what Paul actually says when he talks about monetary policy. It might be useful in fleshing things out a bit more:

    1. So there's a big difference between saying that unexpected inflation hurts savings - that's one thing.

      But you don't refer to the dollar's loss of 95% of its value to talk about these things. Why? Because nominal interest rates include inflation premiums.

      It's precisely because he's tying these two things together that people should really stop taking this man seriously.

  4. Ryan: Expected inflation shouldn't matter for saving. It will matter for the form that saving takes. Inflation acts a tax on real money, so people will hold less wealth in money form and more in non-money from. The "revenues" from this "tax" accrue to the government - this is what economists call seignorage - so they are not a net loss to society. But, as with any tax, there are deadweight losses; people lose the benefits associated with the higher levels of money balances they would have held if not for the inflation. For the sort of inflation we have had in the US, these costs are trivial. (In a hyperinflation, these costs may be very high: people may resort to barter to avoid holding any money at all.)

  5. "If you actually know that non-neutrality is a short-run issue, what Ron Paul goes around saying is precisely what you wouldn't want to say if you thought most people don't understand short-run non-neutrality."

    Possibly, but most people sense something sinister when they are told that the value of their money has depreciated 95% over the course of a century. And for good reason, I think. I would be very upset if I suddenly realized that money inflation, which tends to benefit certain already well-endowed people, is destroying the value of my money. Even over a long period of time. It's an emotional argument that he's using to try to win people over against the Fed. And I support that. Emotional arguments aren't the end of the road, but they are certainly a good place to begin. And if you go into detail on his economic arguments against the Fed (in End the Fed), he expresses a lot more knowledge than simple inflation rates. I think the practice of locking teenagers and blacks up for possessing marijuana is outrageous, and a good way to get people on my side is to highlight the emotional argument behind it. Paul Supporters understand that he has a limited amount of time to say what he has to say; I don't fault him for making a big deal out of something that is technically innocuous in the long run.

  6. Ron Paul would demand that you read Salerno on long-run neutrality.


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