Ron Paul confused on inflation, gas prices

REP. PAUL: I'll be glad to answer that question because it's something I talk about all the time and it's a very important question. The Wall Street Journal yesterday had a very good chart that explains this. If you look at the price of oil in the last 10 years, if you look at it in terms of dollars, it went up 350 percent. If you look at it in Euros, it went up about 200 percent. If you look at it in the price of gold, it stayed flat. It's the inflation, it's the printing of money, it's the destruction of the value of the dollar.

This is a follow-up to yesterday's post, where Ron Paul managed misdiagnose American health care costs by blaming inflation. This time, Ron Paul manages to misdiagnose the oil crisis, by failing back on his old talking point.

If the issue was inflation, then the sudden increase to oil prices would have been the result of an sudden increase to to our checkbooks, which simply hasn't happened. No, the real problem is basic supply and demand. There isn't enough oil out there for everyone, which means that prices will have to rise in order to separate the people who can afford it from the people who can't. It's a natural, free market response that Ron Paul of all people should be aware of.

Ron Paul attempts to prove his point by citing price increases in other nations, but he ignores a few things: The fact that these nations have different supply/demand structures, the fact that these nations already had much higher gas prices to begin with due to taxes, and the fact that these nations aren't on the gold standard either. Further, his statements on the gold standard ignores the fact that gold would be just as scarce as oil. While the same amount of gold currency might purchase the same amount of oil, it's not like you would have a steady supply of gold currency as income, because there simply wouldn't be enough of it to go around.

Ron Paul is capitalizing on the fact that there is a lot of negative sentiment regarding oil prices, and he's attempting to blame it on his favorite scapegoat. Unfortunately, it's like watching Pat Robertson trying to blame Hurricane Katrina on Ellen Degeneres, or other comparisons that I wouldn't be able to make without invoking the wrath of Godwin. The only real solution is to either radically increase the supply of oil, which seems unlikely, or to significantly reduce demand, which would require increased mileage standards and alternative energies.

As a final note, I suggest everyone read Megan McArdle's blog post from last December, which covers the same subject: "Ron Paul's supporters see the might of his common sense slashing through the doubletalk of the financial solons. I see a really, really smart economist responding to Ron Paul the same way you react to Cousin Mildred when she corners you after Christmas dinner to complain about the flouridation of the water supply."