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Whether
it’s the advent of warm, sunny weather here in New York
or the anticipation of those lazy, hazy, crazy days of
summer, people are starting to get daffy in the head.
Folks who are educated enough to know better have
started to spout some serious economic nonsense.
Here’s a
sampling of some of the silliness I’ve read or heard in
the past two weeks:
1. Home
sales won’t pick up until housing prices stop falling.
Who’s on
first? Or what came first? Why did prices start falling
in the first place?
Home
prices fell because no one was willing to pay the listed
price. They had to fall in order to attract buyers.
Expressed in economic terms, the demand curve shifted
inward, to the left. That means people are willing to
pay less for any given house than they were before.
What
could possibly make people start buying again? According
to the confused thinking above, prices will levitate
spontaneously, encouraging buyers back into the market.
Not
exactly. Demand has to pick up first.
Of
course, if the supply of unsold homes declined,
represented by a shift back in the supply curve, the
result would be higher prices but fewer sales.
“Too
many people slept through that lecture in Econ 101,”
says Paul Kasriel, chief economist at the Northern Trust
Corp. in Chicago. “It’s all about demand.”
Cheap
for reason
2.
Housing affordability has turned up, which is a
harbinger of stronger sales ahead.
Not so
fast. Housing affordability has picked up in recent
months as a result of weak demand and falling prices,
which doesn’t augur well for sales.
The
National Association of Realtors housing affordability
index measures whether a family earning the median
household income could qualify for a mortgage loan at
the prevailing interest rate on a median-priced existing
single-family home.
The
composite affordability index moved up to 130 in the
first quarter of this year from 105 in the second
quarter of last year. (A reading of 100 means that a
median-income family has exactly enough income to
qualify for a mortgage, assuming a 20-percent down
payment.)
“If you
observe falling prices, it can come about either because
of an increase in supply or a fall in demand,” Kasriel
says. “If the supply curve has shifted out, we ought to
observe an increase in the quantity of houses sold. If
the demand curve shifts back, we ought to observe a
decrease in the quantity sold. We’re observing a
decrease.”
Median
nonsense
Median
income isn’t rising. “If prices are falling and quantity
is falling, that’s a pretty strong indication that
demand is falling,” not rising, Kasriel says.
Chicken-and-egg economics has been finding applications
outside housing. This goofy thinking has crossed
barriers to infiltrate commodities.
3.
Slower global growth will push commodity prices down;
lower prices will goose the economy.
Come
again? If commodity prices fall because demand is weak,
lower prices are the result, not the cause of increased
demand in the future.
Think
how easy it would be to manage the business cycle
through the purchase and sale of raw materials. Instead
of relying on the Federal Reserve’s interest-rate
policies, the government could create an Office of
Commodity Management, or OCM (is that acronym already
taken?), to buy and sell oil, copper, wheat and corn.
That’s a lot easier than trying to calibrate the banking
system’s demand for reserves during volatile times.
Holiday on ice
4.
Banning trade will fix the shortages.
Many
Asian countries, including India and Vietnam, are
banning rice exports to ensure adequate domestic
supplies. Last week Indonesia stepped up border patrols
to guard against rice smuggling.
By
barring producers from selling overseas, demand for rice
in any given country is lower than if the Asian food
staple were freely traded internationally. The demand
curve shifts back, the price and quantity demanded are
reduced.
“Export
restrictions send a message to farmers that their crops
are least profitable precisely when they are most
needed,” writes Tyler Cowen, professor of economist at
George Mason University
in Fairfax, Virginia, in the April 27 issue of the New
York Times. “There is little incentive to plant, harvest
or store enough rice. Export restrictions treat rice
trade and production as a zero- or negative-sum game.”
It may
be a noble idea for poor countries to transfer income
from producers to consumers, but it’s one that comes
with a long history of unintended consequences.
Governments continue to interfere with the law of supply
and demand; that’s to be expected. What’s surprising is
that so many practitioners of the dismal science can’t
seem to get it right, either. |
