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The monetary economics of Ron Paul
Here, here, and here. I agree all around, noting only that inflation does, for mysterious reasons, seem to be a slight tax on savings (nominal interest rates don't adjust completely to inflationary expectations, but don't ask me why not). But that doesn't change the overall argument very much. I'll put the main point yet another way: with a commodity standard the money supply is often pro-cyclical, shrinking during business downturns. Who wants to risk that?
I haven't followed Ron Paul closely, and while I like many of his libertarian ideas, I am discomforted by his overall anti-intellectual demeanor. He strikes me as the kind of person who has a natural attraction to conspiracy theories. However he is only allowed to believe the ones that coincide with his libertarian ideology. Which isn't so many (most of those theories are dreamt up by non-libertarians and thus have anti-libertarian elements), and that means he ends up sounding more somewhat sensible than he really is.
I don't doubt Paul's sincerity, but I would like to know his theory of why most economists -- even market-oriented ones -- don't agree with him on monetary policy. I suspect he thinks he knows some secret that others do not.
There's what a politician believes, and how a politician believes. As I get older I put increasing weight on the latter. As a protest vote, Ron Paul seems fine, but hearing him or reading about him just makes me depressed. A good rule of thumb is not to get too excited about any candidate whose actual election would make the Dow lose thousands of points.
Addendum: If you'd like a different point of view, here is Alina Stefanescu on Ron Paul.
Posted by Tyler Cowen on December 20, 2007 at 07:21 AM in Economics | Permalink
Comments
Let me be the first of many to say,
Go Ron Paul 2008!!
Away. Far, far away. I will say that even politicians like Paul can up their analysis surprisingly behind the stage. I got a chance to talk to Nader after what should have been an embarrassingly naive oratory, and he's perfectly willing to hedge and justify in person. Perhaps if his audience changed, he'd be capable of a different level of discourse.
Posted by: Chi at Dec 20, 2007 7:38:04 AM
Most of the Ron Paul fervor is driven by his anti-war stance. A more moderate Republican candidate (economically and otherwise) with an equally anti-war demeanor would likely have generated as much or more attention.
IMO selling Ron Paul Intrade contracts at 8 cents on the dollar is free money.
Posted by: Paul N at Dec 20, 2007 7:39:38 AM
But it's the "mainstream" candidates who look like a bunch of fanatics and cranks to me ...
More seriously, I think there's a lot of value in the presence of people like Ron Paul, especially if/when there's no particular reason to root for any of the respected candidates. The presence of people like Ron Paul force certain questions to the surface; they make certain conversations happen that wouldn't happen at all otherwise. They help keep the other candidates a little more honest, they force the media to take on a few issues (and register a few basic facts about the populace) that they wouldn't otherwise. They're a way of letting a little fresh oxygen into the larger political exchange. Bravo to that.
Posted by: Michael Blowhard at Dec 20, 2007 7:57:03 AM
This is a most curious argument against Paul. Anti-intellectual? But he is clearly the most intellectual of all the candidates. He's quoting Sinclair Lewis, talking about the history of WWII, etc. This is a bizarre charge. He "seems like" the type to believe in conspiracy theories? Wow, what a charge. He dismissed out of hand the other day the 9/11 stuff. And as for the Dow falling if he were to win--if the Dow is currently artificially too high due to state intervention, it needs to fall. This is standard business cycle theory.
Posted by: Stephan Kinsella at Dec 20, 2007 8:45:14 AM
Here is Tyler's colleague's take on Ron Paul's monetary beliefs.
Pete Boettke's take on the criticism of Ron Paul's monetary beliefs
Also, Ron Paul is heavily influenced by Lew Rockwell and the rest down at the Mises Institute. Rothbard did argue persuasively that a commodity standard would be better than the fickleness of a central bank. As Rothbard points out the main problem with commodity markets has been government's interference on not providing the protection for 100% reserve banking.
Posted by: Matt C. at Dec 20, 2007 8:52:10 AM
"with a commodity standard the money supply is often pro-cyclical, shrinking during business downturns"
The "business-cycle" is a product of fractional-reserve banking. Without fractional-reserve banking there would be no business cycle, and no "credit-crunch".
If you add paper money and central banks to the mix, it makes business cycles more severe, since the money multiplication is at two levels - central banks and commercial banks .
Read the Austrian School of Economics - www.mises.org - there is a whole school of economics that informs the libertarian viewpoint about honest money
Posted by: at Dec 20, 2007 9:18:37 AM
Here's a response, which shares my concern that libertarians should be wary of the huge amount of government control that is required to manage the money supply
Posted by: cvd at Dec 20, 2007 9:39:17 AM
I find it humorous that you would judge an economic policy based on the immediate reaction of the stock market.
Let me get this straight, a bunch of worthless home loans designed to defraud people who can't afford them are good. A policy designed to create a little more reality is bad, because the stock market will go down?
Sound like a perfect setup for a Soviet Union-style collapse. But I'm sure that won't happen here, because we manage our money supply so well . Face the facts, the world is already realizing the dollar is worth nowhere near to what we thought it was, especially as we print billions a year to finance Iraq, Afghanistan and fund petty dictators in Pakistan and Saudi Arabia.
Posted by: Andy at Dec 20, 2007 9:50:06 AM
Hey Tyler, why don't nominal interest rates adjust completely to--oh, wait.
Never mind.
Posted by: Jeff H. at Dec 20, 2007 9:53:15 AM
I don't support Paul because of his gold standard views, I support him because of his political philosophy. Small, limited government, free market solutions to modern "problems," drastic reduction in taxation and spending, and a diminished role in (instigating) foreign wars.
I do notice that a knee-jerk reaction to Paul's candidacy is to call him or his supporters "kooks", "conspiracy theorists", "crazies", etc. The only honest criticism I've seen of his policy is in regards to the gold standard, which in my opinion is just a very minor part of his platform.
If Paul dropped his fiscal libertarianism, he would be the champion of the (grassroots) left. If he dropped his anti-war stance, he would be the champion of the (grassroots) right. But as he doesn't fit into the expectations of either major party, he's an outsider.
Posted by: Jarick at Dec 20, 2007 10:22:32 AM
Oh, and another benefit about Ron Paul's candidacy:
We're talking about real issues, not just talking points.
Posted by: Jarick at Dec 20, 2007 10:26:39 AM
Force always eats itself.
The Perfect Example can be found here.
But beware. As Mark Twain was supposed to have said, "History doesn't
repeat itself, but it rhymes."
I'm sure Ron knows all that very well and is what he's trying to avoid.
I say he has two chances even if elected: (I think he also knows this.)
Slim and none, and slim just left town.
Posted by: jomama at Dec 20, 2007 10:36:45 AM
Jarick said:
"Oh, and another benefit about Ron Paul's candidacy:
We're talking about real issues, not just talking points."
Even if Paul is right or wrong, this is absolutely the most positive development as a result of his candidacy. Every discussion about Paul centers around his beliefs and not the extemporaneous stuff.
Posted by: John Pertz at Dec 20, 2007 10:38:44 AM
Being against central planning of the economy but advocating central planning of banking and the money supply makes no sense whatsoever.
Posted by: andy at Dec 20, 2007 10:44:34 AM
The idea of rule of law, with equality before the law, is a pretty compelling one. There are no other candidates who are willing to stand for justice and liberty. That's pretty simple. Game over. Need more? Everyone else advocates selling our children into slavery. Really. Get real. Look at the budget. The dollar is worth about 5% of what it was worth before it was turned over to private bankers, and that massive century-long robbery is just a weak foreshadowing of the collapse occuring today. By 2020, the dollar will be worth less than 20% of what it is worth today. Essentially all of the wealth of the US is being drained into Europe and China at an ever-increasing rate. This is inherently unsustainable, of course. Ron Paul FTW.
I strongly advocate backing the currency with a rolling basket of futures to insure that the PPI is always flat.
Posted by: Ally Kendall at Dec 20, 2007 10:46:24 AM
It concerns me that some of you are not able to detect that Ron Paul has some sort of weird brain thing going on. I can imagine a sensible person advocating many of his policies, but he is not a sensible person. The guy just seems like he might have a van out in the woods with landmines around it.
Posted by: Lee B at Dec 20, 2007 10:56:13 AM
Tyler,
I'm no professional economist; I have a difficult time understanding fiat money vs. gold standard. It seems like whatever I'm reading at the moment makes sense. This is Greenspan's (in)famous treatise on the virtues of the gold standard:
http://www.gold-eagle.com/greenspan011098.html
Can you comment? Thanks
Posted by: Eric at Dec 20, 2007 10:58:19 AM
One statement and three innuendos is not economics. The DOW lost 3000 points in 2002... the liquid injections and rate cuts are killing the US dollar, my mortgage is now double baked into a security and sold overseas robbing the US economy of that revenue, and my 100k savings are now worth less than 80k since 2005. Yeah everything is fine people just go shopping...
Posted by: Exotic Electron at Dec 20, 2007 11:12:34 AM
@Ally Kendall: A flat price index only works if you have totally unsticky prices for everything. It does not work with wage rigidity very well (and many wages are nominally rigid to some extent), if you have wages that are nominally rigid, some inflation may over time in fact be beneficial as it allows relative prices to be fixed.
Posted by: Cynical Masters Student at Dec 20, 2007 11:30:05 AM
Read the comments at the links provided in the blog post. Many refute the arguments made by the author and are persuasive, while the author does little damage control.
Posted by: Cliff at Dec 20, 2007 12:10:33 PM
@Lee: that's exactly the kind of comments I'm referring to. What exactly is it about libertarianism that no only precludes mental deficiency in your mind but also criminality? I'm assuming you're just trying to be humorous, but either way, it doesn't move the ball forward.
Posted by: Jarick at Dec 20, 2007 12:13:47 PM
I don't get it. Are there some drawbacks to the Gold Standard? Of course. It can be a bit unforgiving. But those who denounce completely ignore the problems facing today's monetary system. Are we not, as a nation, $9 trillion in debt? Do we not have roughly $60 trillion in unfunded future obligations? And what of inflation? CPI index figures are not all that frightening, but how can we explain the drastic increases in the price of education, real estate, and healthcare? Somehow, goods that are not easily imported from China have increased in price a far faster rate than those goods measured by the CPI. Didn't we have an $850 billion dollar current account deficit last year, which has been allowed to grow so large because of government manipulations in the market? Is it possible that the benefactors of all of this "market smoothing" and "liquidity facilitation" go mostly to those that are in the business of managing money? Bear Sterns just announced their first quarterly loss ever. Are they really so adept that they only lose money when they make catastrophic mistakes, or is the system perhaps rigged in their favor? How efficient is an economy whose most successful businesses are those that are essentially non-productive. The FEDs success has been predicated on being able pay for it's fast and loose monetary policy by leveraging the US's economic power abroad. The economy's ability to grow will be increasingly crippled by debt and inflation going forward. This does not lead me to believe our current system is so great. If congress where to pass a substantive balanced budget amendment, perhaps there would be hope for the US's ability to manage the money supply, but for now, a commodity based system should be strongly considered.
Posted by: Kris at Dec 20, 2007 12:14:52 PM
The other thing is that there is a difference between Paul's view that a monetary system is a better system than a centrally controlled system, and his views on how he expects to change monetary policy if he were to be elected president. He has said many times that he doesn't advocate trying to dismantle the FED once in office because doing so would be impractical. At most, he wants to legalize competing currencies. What he would likely do as president is be a cautionary voice and influence with regards to fiscal policy and against reckless monetary expansion. Would it be so bad to have a president that has conservative views on monetary policy? If Paul has one failing as a candidate, it is that he makes it very difficult to determine the difference between his idealogical positions and his practical ones. Other candidates present very clearly that their idealogical and practical policy positions are one in the same, even though they likely are not. Paul often falls into the trap of allowing his ideals speak for his policy. For instance, social security is a bad long-term program, and Paul acknowledges that, but many think he wants to deep-six social security when in actuality he has the only practical plan for saving it.
Posted by: Kris at Dec 20, 2007 12:25:56 PM
None of that rot matters. What matters is that Paul believes in the Constitution. None of the other candidates do, and whichever one of them wins will be lying when they take the oath, which they will violate on their first day in office, and every day thereafter.
Posted by: Noah Yetter at Dec 20, 2007 12:28:53 PM
Dr. Cowen,
I see a positive corollary in your post:
I haven't followed Ron Paul closely.......He strikes me as the kind of person who has a natural attraction to conspiracy theories.
It's quite common. I suggest you read him a little more closely for a few days and ask yourself if he still strikes you this way.
On a side note, I find funny to watch a libertarian economist giving a "tsk tsk wag of the finger" to someone like Paul who is probably the only man in Congress who is well read many works from Mises to Hayek to Bastiat (Works that I'm sure you are familiar with and have read during your career).
Well, then I ask you, Dr. Cowen:
If the only Congressman in the U.S. who even has a clue about these great works (that I'm sure are part of your own rearing) doesn't get it, where did he go wrong and where did you right??
If the only Congressman in U.S. who could actually sit down with you and speak intelligently and at length about economic history and thought and Austrianism with you is dead wrong or misguided, then what does that say about all us who read your blog and Boettke's and Boudreux's and so on? Should we just stop and pick up some new material??
Please explain....
Posted by: John V at Dec 20, 2007 12:29:21 PM
