Commentary by Caroline Baum
April 29 (Bloomberg) -- 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 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.
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