Ron Paul’s straw poll “victory” at last week’s Conservative Political Action Conference was surprising. It leads one to believe conservatives retain the ability to snap defeat from the jaws of victory this coming Fall. Ann Coulter reflects the opinion of many conservatives when she claims agreement with Ron Paul on almost all issues except for foreign policy goals. Paul, who has Pat Buchanan isolationist tendencies, claims to be an economic libertarian and has many credentials, which support that claim. He is a member, for example, of the Ludwig Von Mises Institute. Von Mises and, later, F.H. Hayek, contributed greatly to the intellectual debate demonstrating the inherent weakness of national central planning as an economic organizing principle. Paul supports smaller government, balanced budgets, less entitlements, and lower taxes. He wants the private sector to drive economic growth. As far as his economic policies are concerned, what’s not to like?
It is difficult to carve an individual’s views up into his component views. They really bleed into each other. But as far as his economic policies are concerned, there are two tendencies that are objectionable: 1) his monetary views; and, 2) his ideological rigidity. This essay will deal with his monetary policies. Part 2 will discuss Paul’s ideological rigidity.
In 2002, Paul gave a speech on the floor of the House seeking to Abolish the Federal Reserve. It is unclear what “problem” this proposed “solution” was designed to fix. One can support the Federal Reserve’s continued existence and still disagree with many of its actions and policies. Conversely, one can even support its abolition but not support Paul’s alternative, which is to have our currency fixed to the price of gold and/or a “basket of commodities”. Intertwined in his House speech was also a small dose of conspiracy thinking.
I never will understand the appeal of linking money to “gold” or any basket of commodities. It is usually the intellectual tendency of the left to believe some mechanistic rule can solve what is fundamentally a human nature and political problem. The most common argument made in favor of fixing money’s price to gold that is it puts a natural constraint on inflation. This limits politicians’ ability to devalue our currency by “printing” money. Gold bugs believe if we create a rule fixing the amount of dollars purchasable for an ounce of gold we can constrain politicians from these behaviors. But nothing prevents politicians from creating any number of problems under a gold standard as under any other monetary standard. Any desirable policy objective is as achievable (or not) under our current “monetary fiat” system as under any gold or commodity linked standard. Paul’s 2002 speech was the ultimate intellectual punt. Free market libertarian economist, Megan McArdle, a coherent critic of Paul for several years, eviscerated this speech’s naiveté.
Ironically, for a gold standard to even function as intended, the rest of the world would have to be on the gold standard for it to perform its inflation preventing function. This is ironic because Paul generally opposes the kind of international organizations required to get this done. Gold standard supporters generally look to the period of 1880-1914 as the “golden age” of gold (pun intended). The strongest economies were on the gold standard. Over longer time frames there tends to be price stability when the world agrees to have fixed exchange rates tied to gold (and therefore fixed to each other). But historically, this came with costs.
There is no such thing as a free lunch. Between 1880 and 1914, inflation averaged almost zero. But low average inflation rates did not isolate economies from other supply or demand shocks. If this were the case, we would have never had recessions prior to 1914. Nor does low average inflation insulate us from short-term price shocks. Real prices and economic growth fluctuated as or more significantly in the short run than they have since the world has gone off the gold standard. There is no evidence that mechanistic linkages of money to commodity prices benefit the long run stability of economies.
The biggest enemy to long run economic growth and monetary soundness has been expansive fiscal policies, not the lack of attachment to mechanistic monetary standards. When Governments promise its citizenry more output than that citizenry produces, it is then tempted to use expansive monetary policy to get out of the jam. Under a gold standard, it can simply induce a one-time devaluation to accomplish this objective, just as we now can continue to print and borrow money over time. Any system of rules can be distorted against the good of the people.
Republican and Conservative politicians will succeed if they focus the electorate’s attention on sound fiscal policies. Diving deep into the weeds of arcane monetary theories, linked to shadowy conspiratorial behaviors, is a surefire formula for political defeat. The objective of a stable currency, low deficits, smaller government, and lower taxes are worthy ends, which Paul seems to support.
But to conflate these fiscal goals with the gold standard, eliminating the Federal Reserve, and creating competing private currencies (Paul’s latest monetary idea) is a political loser and an economic non sequitur. I hope the conservative wing of the Republican Party loses its infatuation with Paul. If not, he will become for them this decade’s version of Ross Perot.
Editor’s note: for an additional critique of Ron Paul’s economics at Time Magazine click here.