Friday, November 09, 2007

Ron Paul is not as bright as Ben Bernanke nor Steve Conover

I think Ron makes a good congressman like Barack makes a good senator. President, less so:

Ron Paul defines inflation as any increase in the "money supply" (which, by itself, begs several questions; see the end notes). Ben Bernanke defines inflation as an increase in the price level. To Ron Paul, zero inflation happens when zero "new money" is created. To Ben Bernanke, zero inflation is the scenario in which the prices we pay for goods and services do not increase in the aggregate.

Let's temporarily make the dubious assumption that we are able to measure and control the "money supply"—in spite of Milton Friedman's admission that that's nearly impossible. In a growing economy, there's a growing amount of goods and services, by definition. It takes money to make and buy those goods and services. How much money? That's the question, and there are at least two possible answers:

• In Ron Paul's zero-inflation scenario, the "money supply" stays unchanged, which implies that, in a growing economy, wages and prices must decrease. In simplified terms, the same amount of money paid out for producing and purchasing more goods and services translates to lower wages and prices in the aggregate. Ron Paul's definition of zero-inflation, in a growing economy, equates to what many others think of as "deflation." [Would you feel comfortable with a pay cut, just because Congressman X said "don't worry, prices are dropping too, and there's no inflation"?]

• In Ben Bernanke's zero-inflation scenario, the "money supply" grows at the same rate as goods and services. In simplified terms, x% more money paid out for producing and purchasing x% more goods and services translates to unchanged wages and prices in the aggregate. [Wouldn't you feel more comfortable with constant wages and constant prices?]

Most of us, I think, implicitly agree with the "inflation" definition Ben Bernanke is using: rising prices = inflation; falling prices = deflation. I also think most of us would be averse to wage cuts—even if prices were falling at the same rate—just to hold (Congressman X's definition of) the "money supply" constant. [Can you picture a future economy, after decades of holding the money supply constant, in which a large pizza costs ten cents and the average wage is fifteen cents an hour? I can't. Apparently, Ron Paul can, however.]
I think Paul can go farther when he tells us how he solves for this. (DISCLOSURE: I am short 2008.GOP.NOM.PAUL)

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