Inflation

Just one of the many things Ron Paul acolytes have spent the last 3 years getting completely wrong is inflation.  They KNEW that lowering interest rates (they call it "printing money" would cause inflation.  People who read John Hicks knew that, as long as the economy stayed depressed, no such thing would happen.  Unsurprisingly, Hicksian models were proved right, and the hard money crowd was proved wrong.  But instead of accepting that their worldview was wrong, they came up with a series of new explanations.  First, it was that core inflation (essentially, inflation minus volatile food and energy prices driven by supply and demand shifts in global markets) was a bad measure, since food and energy prices are what REALLY matters to most people (which is true but irrelevant; if "printing money" is causing inflation, we should expect to see prices go up across the board, not just in food and energy markets; also, we'd expect these prices to rise more in the US than in other countries- that's also not the case).  

Once food and fuel prices also tanked (probably temporarily; again, these prices respond significantly to global markets and not what the Fed decides to do with interest rate policy), the hard money crowd needed to move the goalposts again.  Their new explanation is that the way inflation is measured changed since the Carter Administration.  If we still measured inflation the way we did under Carter, inflation would be measured at around 10%.  Which is, again, true.  And again, it's, completely unsurprisingly given these people's ignorance, completely irrelevant.  The way we measure inflation since 1970 has changed because we buy different things in 2011 than we did in 1979.  So we need a different way to measure inflation that fits the things we buy today.

Now, I know as well as everyone else that this explanation won't convince the hard money crowd, so there's another way to do the analysis that's more intuitive.  Simply put, it's by analyzing the relationship between unemployment, inflation, and GDP growth.  While measuring economic growth is done in nominal terms, real growth is discounted by the rate of inflation.  Put simply, if the economy grows by 10%, but wages and prices also rise by 10%, there isn't any real economic growth at all.  The extra 10% in wages doesn't buy any more goods and services, so the real size of the economy is constant.  And if the population is rising during that period, unemployment will actually rise, since there will be more people looking for jobs, but the growth in wages will match the growth rate of the economy, so there won't actually be any more jobs created.  Which brings us to the present situation.  If the hard money crowd is right, and we should be measuring inflation the way we did during the Carter years, then roughly 2% annual economic growth combined with 10% inflation means the economy has shrank by 8% annually over the last 2 years, in real terms.  Applying Okun's law (the historical relationship between economic growth and unemployment), we'd have expected the unemployment rate to grow by 4% per year each of the last two years, and for the economy to shed millions of jobs.  So what's happened? Well, job growth has been disappointing, but jobs have been created.  In fact, unemployment has behaved about as we'd expect given the measures of inflation currently being used-- the economy has grown slowly, and has created jobs slowly.  It hasn't been shedding jobs rapidly the way it would have had inflation been anywhere close to 10%.  Or even 5%.  

So, again unsurprisingly, Ron Paul and company have been proven completely wrong by the facts. Though that's not going to stop them from making up another explanation when things still don't go as they expect.