The notion of tying the value of the dollar to a basket of commodities sounds at first glance like a sophisticated alternative to the crudeness of a gold standard. But the problem and the merits of the gold standard are one and the same—it’s basically arbitrary. You’re letting the supply of money be determined by fluctuations in the gold mining industry that have nothing to do with anything. That’s annoying, but it’s not catastrophic. Money based on a broader set of actually useful commodities is much more problematic. It means that if a drought devastates the corn crop or a war disrupts Persian Gulf oil supplies, we automatically respond with tight money and a demand-induced recession. Alternatively, if someone discovers a cheap pollution free method of generating unlimited electricity we’d end up with a ton of inflation.
What is Yglesias talking about here? Is he saying a lot of electricity is currently produced by oil? Or is he saying the world would quickly switch over to electric vehicles, if electricity were really cheap to generate?
If the first door, the problem is that in the U.S., in 2010 petroleum accounted for only about 5% of total electrical generation capacity. (Natural gas was 39%, coal was 30%, and nuclear was 9.8%.) I don’t know the numbers for Earth, but my point is that even if we could produce unlimited, pollution-free electricity from Yglesias’ blog posts, the world price of oil probably wouldn’t tumble. The United States imports so much oil right now, in order to make gasoline, not electricity.
If the second door, the problem is that nobody wants to buy electric cars right now, because they don’t go as fast or as far (without hauling along backup batteries) as conventional powered vehicles.
Anyway not a big deal, just that I suspect Yglesias is once again pontificating on matters where his understanding is not as deep as offshore drilling.