June 8, 2010 | 4 Comments
Maxime Bernier, Conservative MP for the riding of Beauce, QC, has an op-ed today in National Post‘s Full Comment titled, ‘Inflation should be 0%’. Now, this is an interesting debate; a few months ago, Michael Kinsley and Paul Krugman went a few rounds on the subject, with Ryan Avent scoring the bout in favour of Prof. Krugman.
Sadly, Mr. Bernier’s column did not live up to the standards of reasoned economic debate. A snippet:
Let’s start with common sense and what’s happening in our daily lives. Do you, as consumers, prefer to buy stuff that is cheaper or more expensive? I think we all know the answer to that!
We are all consumers, and we all benefit when prices go down. If we pay less for one good, it means we have some money left to buy other goods. More purchasing power means a higher standard of living for everyone.
Well, sure, I guess “we” all like it when prices go down… assuming our purchasing power, measured in nominal dollars, remains the same. Thankfully, according to Mr. Bernier, everything else will remain the same:
Every year, however, we become a little bit more productive. We create new goods and services. We find new methods to produce them more efficiently. Technology gets better. And if there is population growth, there are also more people working.
So there are always more and more goods and services available in the economy, but we have the same quantity of money to buy them. Prices will obviously have to adjust by going down. If the economy grows, let’s say, by 3% a year, while the money supply grows by 0%, then we will necessarily get price deflation.
All right, fine, every year we become more productive… and this will happen forever and at a sufficient rate to make the economy expand appropriately, right? There’s absolutely no chance that we might not see sufficient productivity gains, right?
And how about that population growth, how on earth do we assume that “if there is population growth, there are also more people working”? Will we magically solve unemployment? There are just too many wishes in this op-ed to really take it seriously. Mr. Bernier assumes that there will be work for an expanded population. He assumes businesses will always be making a profit. He assumes that a fixed money supply will result in this expanded population having the exact same amount of money as everyone has today. He assumes that productivity gains, in a vacuum, will cure all.
This folksie economics sounds all nice and good. It’s full of “common sense”, but it breaks down at the point that we actually investigate the underlying economics of it all. Mr. Bernier writes much about buying products at lower prices, but he never discusses reductions in the price of labour – reductions in income. There’s no discussion of multipliers or the velocity of money. No discussion of savings or credit, debt or deficits. There is just the assumption that the money supply is perfect right now, and, thus, should never change.
Oh, there is some discussions of computers:
In fact, there is nothing mysterious about the effects of lower prices. Think about computers. Fifteen years ago, they were big, not very powerful, had few gadgets, and cost a lot more than today. Prices in the computer business have been going down all the time since then.
Have people stopped buying computers or waited years before buying a new one to benefit from even lower prices? Absolutely not. On the contrary, more computers are being sold as their prices go down.
What? We should have zero inflation because computers have gone down in price? Sure, we may like to buy stuff when it’s cheap, but that narrow analysis of consumer behaviour has little bearing on monetary policy.
But eventually, we get to the crux of the matter:
Note that in this context, businesses are still able to make profits, because their costs also go down.
This is not just theory. It is what happened several times in the 19th century, in an era of rapid economic development. At a time when there were no central banks and when money was calculated as a certain quantity of gold or silver.
I believe that within a few years, we will need to hold a serious debate about returning to the gold standard.
So the gold bug has come to the Conservative caucus. I’d like to get into a big discussion about the benefits of not being on the gold standard, but it’s late, and I’m just not up for it. However, I would like to leave y’all with one question:
The argument against fiat money seems to be its arbitrary nature; governments just “decide” what the value of the currency is. In what way is that substantially different than a government arbitrarily deciding which precious metal will determine the value of the currency? Fiat by proxy is still fiat.