Paul Krugman has (surprise!) another partisan rant in the NY Times claiming that the GOP is the root of all evil. In this new variant of the same article he publishes almost every week, he is picking on Paul Ryan and Rand Paul and the hearings they have been holding on US Monetary Policy.
But if we can get past all the partisan crap, this piece illustrates a profound disconnect between the economics profession and the political right. Politicians will from time to time rant about how we are no longer on a gold standard, but serious economists never do. I don’t follow the macro literature very closely, but I’ve never seen it. In my days at Chicago, the free market capital of academic economics, I never remember a single lecture or class discussion on the gold standard. The godfather of monetarists, Milton Friedman, didn’t advocate a return to the gold standard. There is a whole lot of debate on monetary policy to be sure, but it isn’t about gold. In fact, a good rule of thumb is that if someone is seriously advocating a gold standard, they probably have little professional training in economics and can be safely ignored. I mean, there are enough serious debates and uncertainties in economics to spend time listening to non-serious people.
This is not to say that we shouldn’t keep our eyes open for inflationary pressures on the horizon, but Krugman is also right that inflation isn’t what we should be worried about right now. If the economy ever heats up (or even warms up), the Fed will need to start drawing money out of the economy, just as they pumped it in during the financial crisis. This need not be rapid, but it does need to happen. Will the Fed have the political will to fight off inflation? That remains to be seen. But that question doesn’t have anything to do with the gold standard.
Ironically, the same people heaving gold bricks around Capitol Hill are the ones who really pose the greatest inflationary threat. The value of US currency has been maintained for so long not because it was backed by hard metals but because people believe the US will pay its obligations because it always has. Attempts to avoid raising the debt ceiling in the coming months could create a significant crack in that confidence. Actions by other governments, such as China, influence the value of the dollar, but the only ones who can really undermine the confidence in the dollar is the US government itself. Sadly, there are a few legislators who don’t realize that if they really care about the credibility of our currency, they need to stop behaving like they are speaking to political rallies and start behaving like the realize that they are the government now.
Addendum: This morning, NPR’s Morning Edition did a story on James Grant, a guy who writes a successful newsletter called, Grant’s Interest Rate Observer.” He’s a strong advocate of the gold standard. But at least he is somewhat self-aware. He was quoted as saying, “The argument I’m making is in fact the wingnut argument,” he said. “Every self-respecting tenured faculty member in economics this country, almost without exception, would laugh it out of court.” I don’t think a gold standard or other commodity standard is actually a wingnut argument, just that it is an argument very disconnected from what almost all macroeconomists think. As he notes, there are a few exceptions, but it isn’t an issue most are concerned about.