Ron Paul’s economics

Ron Paul is a big fan of the gold standard. The problem with the gold standard, which caused every nation to have to abandon it during the Great Depression (no nation began to recover economically until after they dumped the gold standard), is that it is fundamentally deflationary. Productivity rises over time — we learn new ways to increase the amount of goods and services that each person in the workforce can produce. Population also rises over time — people have kids, immigrants enter the country, and so forth. The end result is that the amount of goods and services in the economy grows over time – but gold doesn’t. The amount of gold is pretty much fixed, and grows only slowly, as new sources of gold are discovered then exhausted.

So why is deflation so bad? First, let’s look at price deflation. Price deflation is so bad because it makes businesses unprofitable. They can no longer sell their goods for more than the price they paid for their goods because price deflation has reduced prices in the meantime. The goal is to buy low, sell high. If you’re instead buying high, selling low, you’re a former business.

Which is why there’s price stickiness during monetary deflation (a reduction of the money supply) — but that means businesses have to lay off people because their goods are now more expensive relative to the now-scarcer dollars, and thus they sell fewer goods. So basically the gold standard artificially reduces economic activity to match the amount of gold in the economy. Which is a great thing if you’re wanting to reduce people’s standard of living and create lots of unemployment, but *not* a great thing if you want jobs for people.

So anyhow, Paul Krugman, Brad DeLong and even our very own Jazzbumpa have all produced graphs showing that the #1 indicator of economic recovery during the Great Depression was abandonment of the gold standard. When the gold standard was abandoned and the printing presses fired up to produce enough currency so that prices were rising again rather than falling, businesses could make a profit since they were no longer buying high and selling low.

And profitable businesses can hire people, and hired people can buy more, which in turn causes *more* economical activity, a virtuous circle that keeps going upwards until you have near-full employment again, at which point you have to stop printing so much money otherwise you start going Weimar.

So anyhow, to summarize the effects of Ron Paul’s economic policies if adopted: If Ron Paul got his way, it would be legal to buy weed — but you wouldn’t be able to afford it. Which means the Ron Paul Youth who support Ron ’cause, like, they wanna be able to buy weed without The Man arresting them, are sorta barking up the wrong tree. What good is it to have weed be legal, if you can’t afford it (and can’t afford food, for that matter)?

This post appears courtesy of Badtux the Snarky Penguin.