Saturday, March 5, 2011

What Andolfatto said about Ron Paul

Bob Murphy provides a link to the text that was taken down. The sacred cow that is Ron Paul needs to be approached head on. When I was born in 1984, Ron Paul was my representative in Congress. He'd been in power a little under a decade at that point, and he's been in power ever since. The man's life is about getting votes and sitting in Congress. He doesn't think very highly of his colleagues in Washington. He's explicitly said Obama is not a "socialist", strictly speaking, but that he is "socialistic" and "authoritarian", and noted in the same paragraph that the Nazis were another group that was authoritarian with socialistic leanings even if they weren't strictly socialists. I'm confident Obama thinks more highly of Paul than vice versa. And don't think for a minute this view of Paul's is reserved for Obama alone (that's just an easy one to find a quote for).

This man is a politician and he's a very frustrating, condescending politician. But most important, he's simply a politician! We need to speak bluntly to politicians when they're wrong. Andolfatto did that - he pointed out that the emperor (or to use Dan Klein's words, the "overlord") has no clothes, and people who care about liberty should celebrate someone willing to do that. Andolfatto didn't pile it on. He didn't paint a Hitler mustache on Paul. He called him a "pinhead", that's all. That's nothing. And then he followed it up with several paragraphs outlining why he thought Paul largely has no idea what he's talking about when he talks about monetary policy. Not only did Andolfatto speak truth to power - he said it to the politician that controls the committee that oversees the Fed (where Andolfatto works). That takes balls, people. I'm genuinely disappointed libertarians are rushing to Paul's defense over this. I'm shocked people are angered by a relatively tame blog post, and I'm sick of people fawning over Paul (one supporter being interviewed on one of the networks said he was today's Thomas Jefferson!!!).

Anyway, I'm glad Andolfatto said it. I understand he's in a tough position, but I wish he hadn't taken it down. This is what he said:

I can appreciate Ron Paul’s libertarian philosophy. And because this is so, it pains me all the more to say what I am about to say. The guy can be a real pinhead at times. And this is never so evident as in his persistent “attacks” against the Fed.

Now, of course, I work at the Fed, so maybe you think I’m just complaining for the sake of defending my employer. If you think that, I can understand why you do. It is because you do not know me.

There are legitimate arguments one could make against the Fed as an institution and/or about the conduct of Fed policy. And then there are the stupid arguments, for example, the one contained on pg. 25 of his book End the Fed:

"One only needs to reflect on the dramatic decline in the value of the dollar that has taken place since the Fed was established in 1913. The goods and services you could buy for $1.00 in 1913 now cost nearly $21.00. Another way to look at this is from the perspective of the purchasing power of the dollar itself. It has fallen to less than $0.05 of its 1913 value. We might say that the government and its banking cartel have together stolen $0.95 of every dollar as they have pursued a relentlessly inflationary policy."

One might indeed say that, Mr. Congressman. But if one did, one would behaving like an opportunistic politician, which I know you are not.

Now, let us examine what is wrong or misleading in the statement above.

First, with the exception of the last sentence (which he weasels around with his “one might say”), there is nothing factually incorrect. Indeed, the data source cited by Paul is (ironically enough) the Federal Reserve Bank of St. Louis. (I’m glad he trusts us enough for some things.)

So the question is not whether he has his facts straight on this matter. The question is whether these facts matter at all.

There is this old idea in monetary theory called money neutrality. Money neutrality means that larger quantities of money ultimately manifest themselves in the form of higher nominal prices (and wages), and not on real quantities. No serious economist disputes the idea of long-run money neutrality.

Yes, what cost $1 in 1913 now costs $20. But so what? Money neutrality states that if you were earning $1 per hour in 1913, you are now earning $20 per hour (and even more, if labor productivity is higher).

So there you go, the Fed is responsible for increasing your nominal wage by a factor of 20. How do all you workers out there like them apples? Ron Paul wants to rob you of these wage increases!

Here is another example of the Congressman misleading the public (perhaps unintentionally); see his recent interview here with CNBC’s Larry Kudlow: Fed Under Fire.

At the 3:50 mark, Kudlow asks Paul: “Would oil be at $102 a barrel now if we had a sound dollar policy?” Paul’s reply is that, if Bretton Woods had not been abandoned (in 1971), oil would now be trading closer to $5 a barrel.

I ask you…how embarrassing of an answer is that? I mean, maybe oil would be trading at $5 a barrel. But what he is implicitly suggesting is that your nominal wage would not be scaled back in proportion. That is, he is suggesting that by cutting the value of paper, the Fed has somehow diminished the purchasing power of your labor over the past 100 years. Can he be serious?

The Congressman evidently suffers from money illusion. It is an affliction that can be forgiven in most people. But not one who likes to think of himself as a person learned in the finer principles of monetary theory.

And, as an aside, am I the only one who chuckles whenever he berates the Fed for creating money “out of thin air?” (I reiterate, there may be many legitimate complaints one could make against the Fed, but the “out of thin air” charge…well, let’s just say it…lacks substance).

Is it not true that the Treasury also creates its debt “out of thin air?” Do you think getting rid of the Fed (which, in conducting monetary policy, is simply swapping one form of thin air for another) will prevent Congress from issuing its own thin air? Do you really believe that a gold standard would mitigate the government’s ability to tax? (Seigniorage revenue for the U.S. is peanuts as a fraction of total taxation. Moreover, keep in mind that the inflation tax is collected off of foreigners as well.)

Let me conclude by saying that I think that America is, on the whole, well-served by having a voice like Ron Paul in Congress. I’d like to invite him to the SL Fed for lunch one day. I’d ask him to tone down his rhetoric and present his (frequently very good) arguments in a more sober manner.

But maybe this is too much to ask of a politician. Even a libertarian one.

25 comments:

  1. Obama is an authoritarian - as is evidenced by his national security policy, etc. The Fourth Amendment essentially doesn't exist to these people.

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  2. It would have done the writer a greater service to use the "pinhead" comment at the end of the post, than at the start. A severe tactical error.

    As for the rest of the comments they seem appropriate. I've never been a Paulite on much of anything but foreign policy and national security issues.

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  3. That Ron Paul persistently attacks the Federal Reserve does not represent his "political" motivations, rather his ideology. He attacks the Fed, because he genuinely believes the Fed should be abolished. If he is a "pinhead", it is because he has stayed, more or less, true to his libertarian beliefs, not because he's a politician.

    By the way, his views on socialism and fascism are not his own, and he's said that (I think he even names "Mises" when he defended Obama against claims that he was socialist). They are Mises's views; Ron Paul was trying to stick true to Mises's economic definitions of those words.

    Socialism: Collective ownership of the means of production.

    Fascism: A method towards socialism through the implementation of price controls. Ron Paul might actually be slightly incorrect here, as fascism may be socialism, whereas the German interventionism prior to fascism was that escalation of price controls. I don't remember; it's in Human Action.

    Also, while Andolfatto is prob. right about rise in wages, there hasn't been a proportional rise in bottom wages and the general price level since the 1970s. In fact, my dad made more making minimum wage in 1970 than I do today (about $3 more). It's also worth noting that Austrians don't like to assume long-run money neutrality, either. Monetary inflation does effect the underlying real economy, and even though even the Austrians argue that the economy re-coordinates, it doesn't mean that prices will have risen proportionally amongst all markets. So, Ron Paul's statement (a popular one, so you can't really blame Paul for being a politician - that claim is repeated by a lot of people, including "economists") is misleading (because you haven't loss that much of your aggregate purchasing power), but it's true that we've lost purchasing power (even if it's not 95%).

    Also, it's ironic that he talks about misleading people, and then he writes,

    "Ron Paul wants to rob you of these wage increases!"

    What wage increases? [Real] wages remain the same, according to him. Or, is he being facetious? I really can't tell.

    I don't really get his criticism about Paul's comments on debt, either. What does taxation have to do with debt? Debt is spending not covered by tax receipts. And, it is true that if the Federal Reserve is restricted in monetizing public debt, then the government is more likely to restrict debt expansion.

    Ron Paul is a politician, but that only means that he's not a professional economist. You can't expect him to argue like one. But, for a politician, he's astonishingly true to his beliefs. He's not a politician in the sense that Andolfatto is trying to accuse him of.

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  4. Jon - his point is that Paul makes hay over nominal decreases in the value of money but conveniently fails to mention nominal increases in wages. That's the whole point. Real wages are the issue - why is Paul so insistent on one nominal figure, but not the other.

    Either he really hasn't thought about it and he's shockingly ignorant, or he knows that line will get him re-elected year after year.

    He's not a politician in the sense that Andolfatto is trying to accuse him of.

    HA!

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  5. Does that "line" get him re-elected? I don't think that's the reason he's re-elected. In large part, he's probably lucky enough not to have serious alternatives in his district (in Texas).

    Anyways, it doesn't help you to exaggerate things. Yes, it is misleading. That is, if you interpret "the dollar has lost 95% of its original value" as "you have lost 95% of your wage". The two aren't the same.

    Is he wrong? No. 95% of the value of the dollar has really eroded since 1913. Do we make a lot more dollars than we did in 1913? Yes. But, Ron Paul is trying to illustrate the inflationary consequences of central banking; wages are superfluous (and, money is not neutral in the long-run; it's perfectly possible that some things have risen in price more than our wages have - we're also helped by increases in productivity).

    In what sense has Paul been a "politician"? Apart from his stance on gay rights and all that. I'm not sure if he is abiding by his personal beliefs there, or he's trying to maintain his Republican backing (he gets away with it by saying he believes in "non-government marriage").

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  6. So, when are you going to get on twitter Daniel? :)

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  7. "In what sense has Paul been a "politician"?"

    What? You do realize he has sought elective office for decades now, right? You do realize every two years he makes the deliberate choice to try to win people's votes and serve as a Congressman in Washington, right? In what sense is he not a politician?

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  8. What? You do realize he has sought elective office for decades now, right? You do realize every two years he makes the deliberate choice to try to win people's votes and serve as a Congressman in Washington, right? In what sense is he not a politician?

    I think we can all agree that the word "politician" doesn't really tell us much. It merely describes someone who is elected to serve in politics. It doesn't tell us anything about the actions or beliefs of any given politician.

    I get that you are sick of people fawning over Paul, but you seem equally sick of libertarians fawning over Paul, and that is what I don't understand. Ron Paul is a libertarian. Libertarians believe in limiting the power of the state. Ron Paul has done a pretty decent job of attempting this since he was first elected.

    It makes perfect sense why Ron Paul has the support of many libertarians. The question for you is, in what sense isn't he a libertarian? If you can find a good number of examples where he diverges from his libertarianism, then you probably have a good argument for why libertarians shouldn't defend him. But if his record shows a pretty consistent libertarian stance it should come as no surprise why libertarians generally like the guy.

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  9. Ron Paul called Obama--the guy who is nominally in charge of the FBI, Predator drones, special forces, psy ops units that turn on US senators--a socialist! That takes balls, people.

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  10. DK, I'm assuming you can point us to the blog post where you defended McChrystal for criticizing his boss's foreign policy decisions, right? (The analogy's not perfect but I thought close enough to warrant a joke.)

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  11. Samuel W. said:

    I get that you are sick of people fawning over Paul, but you seem equally sick of libertarians fawning over Paul, and that is what I don't understand. Ron Paul is a libertarian.

    It's even worse than that, Sam. It was a big wig at the Fed who called Ron Paul a pinhead in his criticisms of the Fed. So DK can't understand why a bunch of people who (rightly or wrongly) believe the Fed is controlled by elite bankers and causes the business cycle...might be a little upset at that.

    No, DK expects libertarians to applaud the guy for speaking truth to power. Just like DK expects libertarians to applaud military contractors when they speak out against proposed cuts to the defense budget.

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  12. Sorry for the multiple posts DK but I finally put my finger on what is so particularly absurd (in my mind of course) about your stance here: You think a guy who works for and is defending a monopoly institution controlling money and banking, is speaking "truth to power" when he criticizes the guy who is trying to tear down that institution?

    If you want to say Ron Paul is putting on a big show and doesn't really care about ending the Fed, OK that would be coherent. But it makes no sense to say someone who defends the Fed against Ron Paul's attacks is "speaking truth to power."

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  13. Daniel, I kinda chuckled at the "I'm sick of people fawning over Paul (one supporter being interviewed on one of the networks said he was today's Thomas Jefferson!!!)".

    Why?

    Because Thomas Jefferson himself wasn't that great a statesman. He was a stutterer and failed at giving public speeches - the main highlight of a statesman's everyday work. That instantly puts Jefferson far behind even Churchill. Furthermore, Jefferson's support for civil disobedience shows that French side of him, even though civil disobedience itself makes for very bad philosophy.

    All this aside, I found silly Ron Paul's "$1 of goods buys you $0.21 of 1913's goods." Oh really? How much did airplane tickets cost in 1913...oh right, they weren't there. How much did we pay for a good quality automobile back then? Oh right, they didn't even have cars of the same quality.

    There is no comparison of price level increase, and all CPI indicators are reliable only for comparing between one year and the next. Otherwise, the very assumption of CPI under which we keep the basket of goods the same is faulty, because the basket of goods themselves don't remain the same.

    It's tragic that even Ron Paul doesn't understand this.

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  14. Samuel - re: "The question for you is, in what sense isn't he a libertarian? If you can find a good number of examples where he diverges from his libertarianism, then you probably have a good argument for why libertarians shouldn't defend him."

    I don't understand the argument here. Sure Ron Paul is a libertarian. I don't remember saying he wasn't. And I'm not saying libertarian shouldn't defend him because he's not a libertarian. I'm saying libertarians shouldn't be so eager to be defensive of a politician after such a minor slight, particularly when the critique is substantive. Offer a counter-argument if you want, sure. I don't know - that sort of devotion to a politician makes me uneasy I suppose. I like Barak Obama, who is a politician. That's fine. I hope I wouldn't go leaping to his defense over such a minor criticism. I don't think I have in the past.

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  15. Bob -
    I don't get your argument. Because Andolfatto works for the Fed and the Fed is a powerful institution we all have to kowtow to one of the more powerful Congressmen because... because why? Do libertarians suddenly <3 Congress? That Congressmen doesn't have to demonstrate a basic understanding of the role of the Fed to a frustrated Fed economist because... because you don't like the Fed? Because you don't like the Fed Congress gets a free pass and you get to defend the honor of politicians over something as minor as "pinhead". This is a weird, unusually deferential form of libertarianism Bob.

    Maybe it would make more sense if I laid out what I think it would be better for libertarians to have done:

    1. Still not liked Andolfatto's employer
    2. Not get worked up over a politician getting called a "pinhead"
    3. Expecting and pushing Paul to answer Andolfatto's questions, which are legitimate no matter who asks them

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  16. "I'm assuming you can point us to the blog post where you defended McChrystal for criticizing his boss's foreign policy decisions, right?"

    You'll find I don't blog about internal administration politics or non-economics stuff much. I did, however, make a quick favorable reference to a different policy course advocated by McChrystal here:

    http://factsandotherstubbornthings.blogspot.com/2010/01/threats-to-american-democracy.html

    This was before the major blow up with him.

    On facebook I am more willing to post and talk about things I don't know as much about than I am on here. On facebook at the time I posted this:

    http://www.washingtonpost.com/wp-dyn/content/article/2010/06/22/AR2010062200813.html?hpid=topnews

    And I wrote this in the comment to it:

    "None of these things he said are particularly disconcerting for me. I hope people are vocally disagreeing with each other in the top levels of government. The fact that he's done it in a cutting way really doesn't bother me - these aren't children - they should be able to take it. The problem with McCrystal here isn't at all what he thought or said, its the unprofessionalism of broadcasting it in the press."

    So yes, I did defend McChrystal and I also defended Andolfatto. I did say McChrystal was unprofessional about it, and on your blog, in the comment section, that happens to be the exact word I used to describe Andolfatto too. Unprofessionalism causes a little more concern for me in the military than in the Fed, for obvious reason - lives are on the line with the military, and professionalism saves lives there. But I think the cases are quite comparable. If anything, the McChrystal case had more substantial insults and less substantial voiced criticism. But if you take the time to scroll back on facebook you'll see I reacted about the same way.

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  17. Daniel,

    "What? You do realize he has sought elective office for decades now, right? You do realize every two years he makes the deliberate choice to try to win people's votes and serve as a Congressman in Washington, right? In what sense is he not a politician? "

    You are evading my question. That doesn't answer it. He could be winning re-election due to any number of reasons. Show me how he is being a politician by not being true to his ideological beliefs.

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  18. Jonathan you're really confusing me. Are you simply defining a politician as someone who isn't true to his ideological beliefs? I don't see how that's being a politician at all. Some politicians are consistently true to their beliefs, some aren't, some have no real beliefs and act like they do as it's convenient. What's your point? I'm not avoiding your question - I never claimed he wasn't true to his beliefs. What reason do you have for claiming he's not a politician. What is he if not a politician?

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  19. I don't understand the argument here. Sure Ron Paul is a libertarian. I don't remember saying he wasn't. And I'm not saying libertarian shouldn't defend him because he's not a libertarian.

    No, you didn't say he "wasn't a libertarian", but you may as well have said that by your constant shock that libertarians tend to defend him. This isn't the first place you've acted like that, either. Every time you bring up Ron Paul, it's always in the context of bashing libertarians for being devoted to him.

    Granted, your argument that RP supporters shouldn't get so angered over one little blog post is well taken. I agree with that. But you took it one step further by stating,

    and I'm sick of people fawning over Paul...

    So again I will ask: why shouldn't libertarians fawn over a libertarian congressman? The only way that wouldn't make sense would be if he wasn't being consistent with his beliefs. As best I can tell, he has been pretty consistent over the years. It seems perfectly logical, to me anyways, that people who lean libertarian would admire a libertarian leaning Congressman. I don't know, is that weird to you or something?

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  20. It doesn't seem all that awful that a subset of libertarians would defend Paul, so I'm not quite sure what the big deal is really. One of the consistent themes of this blog seems to be that libertarians can't be human.

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  21. "why shouldn't libertarians fawn over a libertarian congressman"

    Because I don't think politicians should be fawned over, and when they're substantively criticized I think people should welcome that whether they like the politician or not. Maybe that's just me.

    "It seems perfectly logical, to me anyways, that people who lean libertarian would admire a libertarian leaning Congressman. I don't know, is that weird to you or something?"

    Of course it's not weird - it makes sense that libertarians admire him. When I say that people shouldn't get so worked up by a substantive critique of Paul, or that people shouldn't be so defensive of politicians in general I don't see why you're interpreting that as me being against the idea of admiring politicians that think similar to how you think. Why would you think I have a problem with that? I admire President Obama, but when someone criticizes a position of his and maybe even uses a light-tough insult like "pinhead", I don't think I have a right to react with (as Andolfatto called it) "mindless rage" such that the critiquer feels the need to take down the post. I don't know, it just feels eerie for people to be so defensive of a politician. It would be nice to have a happy medium between not trusting a word that any politician says and flying to their defense over a perceived slight by someone making a substantive critique.

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  22. I'm not sure I understand what you mean, Gary. I agree it's not "awful". I don't know when I've ever suggested "libertarians can't be human" or held libertarians to any standard that I wouldn't hold anyone else. You'll understand if I ask you for elaboration or an example, I hope. I'm really not sure why you're saying that.

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  23. I think you tend to pick on libertarians. I dunno why. Could be just my own myopic perspective.

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  24. Speaking as a non-American...

    I can admire Ron Paul for exactly the reasons that Gary, Sam, etc have highlighted above: He knows his principles and he sticks to them with remarkable persistence. I think that everyone here can agree that he has good intentions at heart, even if you reject his diagnosis and prescriptions.

    However, it becomes hard to sympathise with his cause for the reasons that Daniel pointed out. When faced with a legitimate challenge, (many of) his supporters respond with concentrated vitriol rather than provide substantive rebuttals.

    As for picking on libertarians... Well, I would say that what's good for the goose is good for the gander :)
    (By which I mean Ron Paul should be treated the same as any politician... While libertarians should be treated the same as any ideological group.)

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  25. Andolfatto is ridiculous, and if Paul hasn't answered the charges laid at him, I will:

    There is this old idea in monetary theory called money neutrality. Money neutrality means that larger quantities of money ultimately manifest themselves in the form of higher nominal prices (and wages), and not on real quantities. No serious economist disputes the idea of long-run money neutrality.

    Yes, what cost $1 in 1913 now costs $20. But so what? Money neutrality states that if you were earning $1 per hour in 1913, you are now earning $20 per hour (and even more, if labor productivity is higher).


    Money neutrality isn't relevant when discussing inflation. Inflation does not affect all markets and all prices evenly nor instantaneously, as Jon alluded to. The fact that we have lost 95%+ purchasing power of the dollar since 1913 is indicative of the massive inflation laid on us by the Fed, and how much they have taken from us by using printed dollars. It's not a question of long-run equilibrium. Even if I were to accept long-run money neutrality, it doesn't affect the short-run changes in purchasing power that Austrians and libertarians object.

    I mean, maybe oil would be trading at $5 a barrel. But what he is implicitly suggesting is that your nominal wage would not be scaled back in proportion. That is, he is suggesting that by cutting the value of paper, the Fed has somehow diminished the purchasing power of your labor over the past 100 years. Can he be serious?

    The Fed has diminished the purchasing power of the dollar, not our labor. Labor doesn't "purchase" anything; but the fact that we receive wages in units controlled by the Fed is especially relevant (really Fed economist? Couldn't figure that out?)

    The major rebuttal to make is that nearly all mainstream economists, and I will include you in this Daniel, think of inflation as a long-run process, but the damages only occur in the short run. Paul's comments about purchasing power just show how much the Fed has destroyed our dollar by its constant inflation.

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