The Federal Reserve Bank of the United States ought to be abolished

In responding, point by point, to the criticisms by my opponent, I shall expound further upon my contentions as well. Let's begin "I would like to ask my opponent what his definition of price stability is." Price stability describes a long-run trend in prices throughout an economy to not experience unexpected, or volatile, inflation or deflation. Price stability absolutely does not necessarily imply that prices do not change at all. The allocative effects of a monetary regime where prices do not change at all are not different from the effects of a monetary regime where prices constantly rise by 2% every year. "It seems like all the Federal Reserve does is increase the money supply, which in turn causes inflation, and then makes the prices of goods appear to go up." There are two kinds of prices in economics, and I think that my opponent deserves some credit for keeping this in mind. There are nominal prices, which are the actual dollar figure that appear on goods and services at the point of sale, and there are relative prices, which are the real prices, or the prices relative to other goods and services. The price of, say, cars has skyrocketed since 1924, but relative to most other goods and services, such as the labor he or I sell to our employers, the prices of cars have fallen, assuming quality parity (A car that you could get 75,000 miles out of at most today before junking it is much better than a new car in 1924, which could never get 75,000 miles before junking) This is the importance of prices. They convey certain vital information to producers, consumers, workers, and investors, and that information is a quick assessment of the economic cost, which is the cost of the next-best alternative use of that resource. Imagine I have a choice of two mutual funds, one to build a hydroelectric dam, and another to build a computer factory, and the one building a hydroelectric dam promises to offer a 5% return on my investment over the next 10 years. That information isn't useful unless I know the price of hte next-best foregone alternative, which is the computer factory investment. Similarly, I don't know how much my labor is actually worth at McDonalds if I don't know the price my labor can fetch at the next best alternative workplace. This information, conveyed in prices, allows everyone to make economic decisions which maximize their welfare. "They do this by creating money from nothing. This money is then pumped into the economy and dilutes the currency. This causes prices to appear to go up. Prices don’t really go up because the ways goods are produced stay the same. It just takes more money to produce the goods because of inflation."Having informed his readers of the classical dichotomy between real and nominal factors, my opponent appears to confuse the two in the last sentence. Inflation does not make it more difficult to produce goods by making nominal prices rise. A layperson might forgivably think that, since a brand new car cost roughly 500$ in 1929, but almost $20,000 today, that it is therefore 40 times harder to buy that car today than in 1929. An economist would say, however, that the price of the good that the layperson sells in order to buy that car, his labour, has risen by an even higher amount than the price that the car has risen. One could say that had prices not risen, it would still be easier, but if overall prices throughout the economy had not risen, then the price of the labor that he sells in order to pay for the car would not have risen either, and it would be no easier to buy that car. "Inflation is also a tax. It is our most unfair tax. I really hate explaining this because its time consuming, so I'm just going to let Ron Paul do it for me. It’s a quick video, don’t worry."This is probably one of the most misunderstood concepts in macroeconomics, and I assign every ounce of blame for that to Ron Paul. Inflation is only a tax if said inflation actually takes away output that can be purchased by consumers and gives that ability to investors and the government. Now it is true that some of our government spending is, effectively, funded by seigniorage, or the printing of money in place of taxes, but this is peanuts compared to the actual tax take of the United States Government. However, how does the Federal Reserve buying securities from banks, who then simply hoard the cash in their vaults because of the market interest rate (I will explain the zero lower-bound if challenged) cause consumers to be unable to buy as much output? Ron Paul never explains this, and for that reason alone this argument does not carry. However, there are good reasons to think that, rather than a tax on the poor, a moderate (3-4%) inflation target would help the poor. I hesitate to argue this because there is contradictory evidence on the distribution of income between wages and yields to capital. However, for now, I will say this, Some evidence indicates that the ratio of labor incomes to capital incomes has remained steady at about .7 for hte past 40 years, which indicates that inflation has not created a "regressive tax." There is, however, some evidence, based on the possibly-widening gap between labour productivity and total labor compensation that the low-inflation regime created by Paul Volcker has redistributed income from workers to investors. This gap, however, only appeared after Paul Volcker, and did not occur when the Federal Reserve had a high inflation target between the 1950s and the 1970s. Once again, I hesitate to argue this because, depending on what source you use, or even when you use one source (Paul Krugman now thinks that the gap between worker productivity and wage income has grown in the past 40 years today, however in his 1996 paper "Ricardo's Difficult Idea", when he was still a neo-liberal defending NAFTA against cooks and cranks like Ross Perot, he showed that the evidence which indicatessuch a gap is very poorly used.), you will get different answers. "Can it? I don’t think I have ever heard of that happening."Sure it can. In 1986 there was a massive plunge in the stock market amid the savings and loan crisis. Ordinarily this would have caused a massive decline in investment spending and, consequently, a recession, but the Federal Reserve turned on the printing presses and flooded the market with liquidity, ensuring that the 1980s economic expansion would continue on. "And in fact, the Federal Reserve was created before the Great Depression. It did not maintain the economy."Notice that my contention was "can provide economically useful counter-cyclical policy", not that it always does. There are examples, for instance in 1921 and 1933, of the Federal Reserve reneging on its authority to act as a lender of last resort in the event of a downturn in the economy, but that simply does not mean that these crises would not have happened if we didn't have a Federal Reserve.