Senior Fed Economist Calls Ron Paul a Pinhead

Robert Wenzel
EconomicPolicyJournal.com
March 6, 2011

David Andolfatto, Vice President in the Research Division of the Federal Reserve Bank of St. Louis, makes one of the most ludicrous arguments against Ron Paul’s attack on the Fed that one could make. I mean even for a Fed apologist, it is off the wall.

He attacks this paragraph in Ron Paul’s 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.

What are the details of the attack?

He starts out this way:

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

So what is at the heart of Andolfatto’s defense of the Fed destroying 95% of the value of the dollar and calling Ron Paul’s argument stupid?  Here it is:

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).

• That’s it, the beginning and end of Andolfatto’s Fed defense of destroying 95% of the value of the dollar. It all works out in the end, says Andolfatto. But, please, Mr. Andolfatto explain to me how this works out for someone who has been a careful saver of his money and now sees the purchasing power of that money destroyed? Please explain to me how this works out for a retired person on a fixed income who sees the declining purchasing power of that income? Please explain to me how this works out for the rest of the country when Wall Street bankers are the first to get their hands on newly printed Fed money, so that they can bid up all kinds of prices, including rents on apartments, which makes it difficult for anyone but a Wall Streeter to afford to live in Manhattan?

These damages, Mr. Andolfatto, you somehow don’t see and even think Ron Paul is stupid and a pinhead for raising questions about them. I would say you are suffering from what I have seen a lot in those working for the government: delusion. Phil Swagel, who was the chief economic advisor to Treasury Secretary Hank Paulson, told me that he didn’t even know there was any major decline in  money supply growth during the summer of 2008. To not watch money supply growth when you are the Deputy Treasury Secretary for economic affairs is simply bizzare to me.

That you can’t see how a destruction of 95% of the value of the dollar might hurt some people, falls right into that category. You guys really suffer from what Brad DeLong has admitted he has suffered from. It is what he calls, Greenspanism, the absurd belief that whatever the Fed does is right, even if logic suggests the exact opposite.

But, hey, if you think the destruction of a currency is no biggie, here’s a job tip for you, call Robert Mugabe in Zimbabwe. He really thinks the same way you do.