by John Young
You’ve likely never heard of David Andolfatto, but he is a Vice President in the research division of the Federal Reserve Bank in St. Louis.
He seems a nice enough and earnest enough fellow; so it may be that the word “deception” in the title of this article is too strong, and might better be replaced with “ignorance.” But, on the other hand, Mr. Andolfatto isn’t some illiterate illegal alien harvesting crops. He’s an actual Vice President at the Federal Reserve. So at that level, I think he would have a hard time claiming ignorance of basic economic facts as a defense.
Below, I have reproduced a blog posting by Mr. Andolfatto entitled “Ron Paul’s Money Illusion.”
The gist of this article is that inflation is money-neutral. That is, that wages increase at the same rate as prices; so that even if it now costs you $1 to buy what used to cost five cents, you are also earning 20 times as much as you were before; so that the net effect of inflation is neutral.
Andolfatto argues that Ron Paul is either demonstrating ignorance (at best) or deception (at worst) by referring only to the increase in prices without also referring to the commensurate increase in wages.
But it turns out that it is Andolfatto who is providing incomplete and deceptive information as well which, in effect is deceptive whether the intent to deceive is present or not.Here is the essential problem with what he is saying: our government cooks the books in terms of inflation reporting. Period. End of story.
If you go to the Bureau of Labor Statistics website and start pulling reports on inflation and wages, you will find something truly amazing. You will find that for every year, reported average wages increased at exactly the rate of reported inflation. Exactly. Without even one-tenth of one percent variation.
Come on — even at first glance, does this pass the sniff test?
Everybody knows that in the 1950’s and 1960’s, a guy working a blue collar job as a mechanic could support a wife and 2.5 kids on his wages and still go on vacation once a year.
Now, with the husband and wife both working and supporting only 1.6 kids, they are only two missed paychecks away from bankruptcy.
The reality is that REAL inflation is MUCH higher than reported inflation.
How many times have you heard that “Health care costs are increasing at 2.5 times the rate of inflation” or that “College tuition rates are increasing at 70% higher than inflation?”
The reason is because you can’t hide inflation in these things because you can’t ship them offshore to a child slave labor factory; though in the case of college education child slave laborers might produce a better quality product than most professors.
So these things aren’t really increasing at rates that are a multiple of inflation, but reflect TRUE inflation.
Our government (gasp!) lies about inflation, unemployment, underemployment and more. Just get on any straight East-West road in this country and travel more than 400 miles from the coast or a major city and open your eyes to the desperate economic situation in which most people are living.
John Williams (f/k/a Walter J. Williams) has an excellent website known as http://www.shadowstats.com in which the true and factual numbers for inflation, unemployment and other vital statistics are computed and reported.
Real inflation in the U.S. hasn’t dipped below 5% since 1987 and has been averaging 8% most years; though in 2009 it was 12%.
The real unemployment rate right now isn’t 10% as the government reports, but closer to 22% when you include people who have simply given up and quit looking.
Andolfatto’s indictment of Ron Paul is dependent upon accepting government reports of inflation as factual; when in fact they are not.
Once the true numbers are known, the one who is left as indicted is Andolfatto, whose self-interested defense of the Federal Reserve has more holes than Swiss cheese.
The original article as it appeared on the author’s website is below. The original has since been removed, and so it is reproduced here for educational and archival purposes.
Ron Paul’s Money Illusion
by David Andolfatto Mar 3, 2011, 9:11 PM Author’s Website
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.