Friday, May 30, 2008

Nonsense on monetary economics

Now that I've been stuck at O'Hare airport for the better part of the day, I've decided to abandon any sense of restraint, and turn this blog into a repository for all the gripes I've built up over the year.

Next up: How the fuck does Ron Paul get away with his nonsense on monetary economics?

In some ways, my question is silly: Ron Paul is a fringe candidate whose relative reasonableness on foreign policy overcame a jumbled and unattractive set of social and economic positions. Journalists, who already tend to shy away from "complicated" economic issues, didn't see any pressing need to investigate Paul's obsession with the gold standard, because even the vast majority of his supporters didn't care.

It's still painful, however, to see a national figure spout such tripe unpunished. From a July 2006 essay by Paul:
"All government spending represents a tax. The inflation tax, while largely ignored, hurts middle-class and low-income Americans the most. Simply put, printing money to pay for federal spending dilutes the value of the dollar, which causes higher prices for goods and services. Inflation may be an indirect tax, but it is very real – the individuals who suffer most from cost of living increases certainly pay a 'tax.'"
Except, of course, that "printing money" is a trivially insignificant piece of the federal government's revenue. Take a look at the size of the monetary base, the sum of currency in circulation and banks' federal reserve deposits. First of all, the entire monetary base is less than $900 billion, which is in turn less than the amount of federal outlays in a single year. In other words, if all the dollars in circulation were printed by the Federal Reserve in one year to pay for government expenses, they still wouldn't be enough. (In the real world, of course, such a dramatic seignorage policy would instantaneously turn a country into Zimbabwe.)

Obviously, the Federal Reserve isn't doing this; if you actually want to get an idea of the magnitude of revenue from "printing money," you should look at the increase in the size of the monetary base, also apparent from the chart linked above. You'll see that a given year only has an increase of around $20 billion. That's less than the feds spend on NASA.

In other words, when Paul claims that the government is secretly funding its operations by printing huge amounts of money, leaving the common people to suffer the effects of an "inflation tax," he is being a demagogic dimwit. Not terribly unusual for a Congressman, but still plenty irritating.


Todd said...

I just checked the link you provided to the St. Louis Fed's graph of the monetary base. As of June 7, 2009 Ron Paul seems a lot less kooky than you made him out to be in this post.

Noumenon said...

You've almost got a straw man here, who thinks only dollar bills from literal printing presses count as increasing the money supply? I know that Ron Paul supporters are hyper-aware of the concept of fractional reserve banking, so "printing money" is an acceptable figure of speech to me.