The Baseline Scenario
By James Kwak
In a Congressional hearing today, Representative Paul Ryan (R-WI), chair of the House Budget Committee, strongly criticized Federal Reserve Chair Ben Bernanke for failing to contain the severe inflation threat posed by the Tooth Fairy.
Ryan pointed to numerous studies showing that, despite ongoing economic sluggishness, the Tooth Fairy is paying much more for children’s baby teeth than in past years. In neighborhoods such as Winnetka, Cleveland Park, the Upper East Side, and Palo Alto, children can receive more than $20 per tooth — a dramatic increase from the 25-50 cents that the Tooth Fairy paid only a decade or two ago. In the Hamptons, summertime prices for teeth can easily exceed $100, according to a survey commissioned by the American Enterprise Institute.* Because the Tooth Fairy is able to create money magically, her purchases of unused teeth (with no apparent economic value**) increase the money supply, fueling inflation. Without explicitly accusing Bernanke of participation in the Tooth Fairy’s scheme, Ryan implied that the Tooth Fairy’s higher payouts may be part of the Federal Reserve’s quantitative easing scheme.
Ryan pointed to Tooth Fairy-driven inflation as part of “a sharp rise in a variety of key global commodity and basic material prices” that, he said, threaten to produce higher overall inflation and reduce the value of the dollar. “The inflation dynamic can be quick to materialize and painful to eradicate once it takes hold,” said Ryan, calling on Bernanke to end the quantitative easing program and raise interest rates in order to counteract the expansionary policies of the Tooth Fairy.
Bernanke responded, “On the inflation front, we have recently seen increases in some highly visible prices, notably for children’s teeth. . . . Nonetheless, overall inflation is still quite low and longer-term inflation expectations have remained stable.” He pointed out that all measures of domestic inflation — the prices that real Americans pay for the real stuff that they actually buy — are at historic lows: core inflation of 0.7 percent in 2010, the price index for personal consumption expenditures at 1.2 percent, and average hourly earnings at 1.7 percent. He also pointed out that inflation in emerging markets is higher because those economies are growing faster and that commodity prices are always volatile. But Ryan insisted that the Fed take aggressive action against the Tooth Fairy because an unemployment level of 9 percent would fail to contain the inflationary spiral that would inevitably result from this particularly sinister form of monetary expansion, taking place quietly, in the dark, in our children’s own bedrooms.
“There is nothing more insidious that a country can do to its citizens than debase its currency,” he said, apparently forgetting for a moment that he has proposed replacing Medicare with a voucher system whose benefits are explicitly designed to grow slower than the rate of health care cost inflation.*** Ryan also apparently believes that a more valuable currency is always better than a less valuable currency, which is crazier than a kid believing in the Tooth Fairy. After all, if you’re six years old and the tooth under your pillow gets replaced by money and a note from the Tooth Fairy, then that’s physical evidence in favor of her existence. Paul Ryan seems to believe that China (like Korea, Taiwan, Germany, and France before it) is hurting its economy by keeping the value of its currency low in order to promote exports and create jobs. This fetishization of the dollar’s exchange rate is even crazier than the typical fetish, which at least attaches to some object. Paul Ryan’s fetish attaches to an abstract ratio and elevates it to moralistic terms.
* In inner-city Detroit, however, survey respondents gave answers such as, “No Tooth Fairy comes around here. Haven’t you seen nobody has a job anymore?” The AEI report concluded that the Tooth Fairy must value teeth from the Upper East Side more than teeth from Detroit.
** See the introduction to a This American Life episode for some children’s theories about what the Tooth Fairy does with all those teeth.
*** The growth rate of benefits is capped at GDP plus one percentage point. Historically health care costs have grown significantly faster. More to the point, the whole point of the Ryan-Rivlin plan is to force Medicare to grow more slowly than health care costs overall; if health care cost growth is GDP plus one percentage point or less, then converting Medicare to a voucher system provides no fiscal benefits.