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I agree. The article isn't very clear on what the problem would be, though it does mention deflation. Deflation is bad by axiom, and we must be pathologically a

I agree. The article isn't very clear on what the problem would be, though it does mention deflation. Deflation is bad by axiom, and we must be pathologically afraid of it. If housing prices sink enough, that may mean that the overall inflation rate turns negative, which is deflation, and thus bad. Even if this "bad" thing, in this case, would just mean that people could consume, save, and invest more.

sliverstorm 9y ago
People don't consume more in a deflationary world, per the economists, because that dollar you've got today is worth more tomorrow, so you put off as many purchases as possible. Fewer people would take out loans as well, because the loan would become harder and harder to repay over it's life (which means fewer opportunities for investors)
- asabjorn 9y ago
  That doesn’t make sense at all except for with housing. If I want to go vacation I will, if I need a new washing machine I will get it, if I want a cappuccino every morning now I can afford it no matter who I am!
  - sliverstorm 9y ago
    If you want to go on vacation, but you can go on a little bit of a nicer vacation if you wait until next spring... If your old washing machine still mostly works, the new one will be cheaper if you can get the old one to limp along for a while longer... People don't completely stop buying things; life must go on. But people would start to drag out purchases where ever they can. Have you ever put off buying a computer or phone because you know next year's chips will be faster and batteries will last longer?
    - asabjorn 9y ago
      What seems to matter more is that there has been a productive deployment of capital that gives you a reason to buy a new product, and that you have discretionary income after housing cost and other fixed costs are paid. High housing costs are an incredibly unproductive use of capital unless it leads to building new supply and is therefore effectively a temporary incentive for developers to build more. Landlords on the other hand want there to be an undersupply, and don’t fully align with developer interests. Prices for consumer goods have decreased for quite a while and people still buy. And even when computers were improving significantly every year and prices went down people on average still increased their buying of new computers.
      - sliverstorm 9y ago
        productive deployment of capital Right, and the economists argue a deflationary market makes capital scarce High housing costs are an incredibly unproductive use of capital Right; it seems desirable for housing costs to keep even pace with the rest of the market, and ideally stay close to depreciated replacement cost And even when computers were improving significantly every year and prices went down people on average still increased their buying of new computers. I still buy computers in the deflationary technology market, like everyone else. But because I am putting off purchases and cannot recoup my costs with a sale, I probably buy a lot less computing hardware than I would if, for example, improvements were still just as big but much less frequent. I'm not saying it would be better for the world if computers improved more slowly- but clearly market behavior would change.
        asabjorn 9y ago
        > Right; it seems desirable for housing costs to keep even pace with the rest of the market, and ideally stay close to depreciated replacement cost In markets where there is enough housing supply, do we see people change housing ownership more often? E.g. buy a bigger apartment when they get kids or downsize when they are empty nesters. In markets with enough housing supply, do we see higher expectations for housing being modernized and up to code instead of being resold with only cosmetic changes? E.g. most bay area housing is very drafty and energy inefficient since it was built in the 60s/70s.
    - tjoff 9y ago
      Yeah, let's hold up the vacation so that we can get that airport sandwich for free. I don't even think people have a grasp of the effects on inflation/deflation in practice anyway, let alone suddenly make strategic decisions upon it.
      - nerfhammer 9y ago
        Different types of goods are affected differently. Groceries aren't affected at all, but for large purchases there is empirical evidence that expectations of deflation lead to a general decrease in spending: e.g. https://www.dallasfed.org/assets/documents/institute/wpapers/2015/0226.pdf https://www.dallasfed.org/assets/documents/institute/wpapers... , http://www.tandfonline.com/doi/abs/10.1080/13504851.2015.1100242?journalCode=rael20 http://www.tandfonline.com/doi/abs/10.1080/13504851.2015.110...
- skybrian 9y ago
  On the other hand, prices of computers and electronics are always dropping due to technology improvements. Stocking up on computer equipment in advance rarely makes sense since next year it will be better. But this doesn't seem like a bad thing. Would you prefer the alternative, that technology improvements stop and computers become more expensive, so they become good investments? And people do still seem to buy lots of electronics even though they don't hold their value. Generally speaking, lower prices are better. There are only a few exceptions such fossil fuels and cigarettes where you can say cheaper is worse, due to externalities. To be sure, if tomorrow a magical new technology gave us free, clean energy, health care, or housing, this would be a tremendous financial shock. Many investments would be worthless. But this is because it's a big, sudden change, not because it's inherently bad. A more gradual decrease in prices is a good thing.
  - sliverstorm 9y ago
    Generally speaking, lower prices are better. Not an economist, but I believe that statement needs to be indexed to inflation/deflation. Lower prices relative to income, in other words higher purchasing power, is good. But you can't inflate/deflate your way to lower real production costs or higher wages. prices of computers and electronics are always dropping due to technology improvements Right, the electronics market is in some senses an example of the behavior of a deflationary market, but it is also different than prices dropping due to financial wizardry. Would you prefer the alternative, that technology improvements stop In many parts of the market, improvements have stopped. Continuing improvement is clearly best, but not always an option. A gallon of milk or a shovel isn't getting any better next year. So what then?
    - skybrian 9y ago
      Yes, I agree, lower prices are better except for wages. If most prices go down and wages stay the same, that's measured as an increase in productivity. Technology hasn't stopped in agriculture. For example, there are automatic milking machines [1], and there's a well-funded startup that wants to grow lettuce in warehouses built near distribution centers [2]. I wouldn't expect the price of milk to change much in the short term. In the long run, who knows? Maybe biotech improvements will mean we don't need cows? [1] https://www.nytimes.com/2014/04/23/nyregion/with-farm-robotics-the-cows-decide-when-its-milking-time.html?_r=0 https://www.nytimes.com/2014/04/23/nyregion/with-farm-roboti... [2] https://www.bloomberg.com/news/features/2017-09-06/this-high-tech-vertical-farm-promises-whole-foods-quality-at-walmart-prices https://www.bloomberg.com/news/features/2017-09-06/this-high...
saosebastiao 9y ago
The fact that you take that as an axiom is frightening. Moderate deflation is no more scary than moderate inflation, and the idea that an "overall inflation rate" determines people's behavior is laughably wrong. I mean, which of the thousands of inflation rate definitions are you talking about? The FRED database tracks 34,000 different series of some 10,000 inflation measures. More importantly, people don't sense overall inflation at all, they make decisions on domain specific inflation. Prices dropping for farm equipment or homes does not mean businesses stop buying computers and homes stop buying washing machines. It is entirely possible for housing prices to tank while prices for nearly everything else increase...in fact, we've already seen it happen. Think about what you are proposing: you're saying that even if prices are irrational and we are in a bubble, the only response is to maintain those irrational prices for that bubbled item and inflate everything else until we reach equilibrium. That is insane. If we did that, we'd still be trying to catch up with railway mania. And it puts us at far more of a risk of runaway inflation problems than letting housing prices drop would ever put us at a risk of a deflationary spiral. It's time to start questioning your axioms. Don't get me wrong, there are plenty of blowhard macroeconomists out there that share the idea, but there are far more economists that have far more nuanced views and understanding of inflation and how it really affects people's behavior, and it is nowhere near axiomatic.
- RobertoG 9y ago
  Is it not deflation a signal of underutilization of available resources in the economy, and necessarily, in the long term, of diminishing capacity?
- graedus 9y ago
  I think the post you're responding to is being critical of the unexplained/unexamined axiom that "deflation is bad", which is usually an underlying assumption in the financial press.
  - saosebastiao 9y ago
    Wow. I had to take a look at the grandparent comment to understand he was being sarcastic. Thanks for the correction.
JumpCrisscross 9y ago
Deflation means a drop in price levels, a systematic effect. Housing prices falling while consumer prices hold steady isn’t deflation. Deflation is scary because (a) it encourages capital to hold money over productive investments and (b) it is very difficult to fight. Deflation usually occurs once an economy is already at the zero bound of interest rates; no help there. You could monetise a bunch of fiscal spending, but that, too, has a bunch of nasty side effects.
- tom_mellior 9y ago
  > Housing prices falling while consumer prices hold steady isn’t deflation. We're both handwaving here, but Wikipedia says: "In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate)." https://en.wikipedia.org/wiki/Deflation https://en.wikipedia.org/wiki/Deflation The inflation rate is given by a price index which typically includes housing. If housing prices fall while everything else holds steady, that index has nowhere to go but below 0%. I realize that this is distinct from a systematic deflationary spiral that affects the entire economy. The point was, some people might only look at the inflation rate, see it's below 0, and start panicking and doing stuff to "prop up" prices instead of letting people profit from affordable housing.

sliverstorm 9y ago

People don't consume more in a deflationary world, per the economists, because that dollar you've got today is worth more tomorrow, so you put off as many purchases as possible. Fewer people would take out loans as well, because the loan would become harder and harder to repay over it's life (which means fewer opportunities for investors)

asabjorn 9y ago
That doesn’t make sense at all except for with housing. If I want to go vacation I will, if I need a new washing machine I will get it, if I want a cappuccino every morning now I can afford it no matter who I am!
- sliverstorm 9y ago
  If you want to go on vacation, but you can go on a little bit of a nicer vacation if you wait until next spring... If your old washing machine still mostly works, the new one will be cheaper if you can get the old one to limp along for a while longer... People don't completely stop buying things; life must go on. But people would start to drag out purchases where ever they can. Have you ever put off buying a computer or phone because you know next year's chips will be faster and batteries will last longer?
  - asabjorn 9y ago
    What seems to matter more is that there has been a productive deployment of capital that gives you a reason to buy a new product, and that you have discretionary income after housing cost and other fixed costs are paid. High housing costs are an incredibly unproductive use of capital unless it leads to building new supply and is therefore effectively a temporary incentive for developers to build more. Landlords on the other hand want there to be an undersupply, and don’t fully align with developer interests. Prices for consumer goods have decreased for quite a while and people still buy. And even when computers were improving significantly every year and prices went down people on average still increased their buying of new computers.
    - sliverstorm 9y ago
      productive deployment of capital Right, and the economists argue a deflationary market makes capital scarce High housing costs are an incredibly unproductive use of capital Right; it seems desirable for housing costs to keep even pace with the rest of the market, and ideally stay close to depreciated replacement cost And even when computers were improving significantly every year and prices went down people on average still increased their buying of new computers. I still buy computers in the deflationary technology market, like everyone else. But because I am putting off purchases and cannot recoup my costs with a sale, I probably buy a lot less computing hardware than I would if, for example, improvements were still just as big but much less frequent. I'm not saying it would be better for the world if computers improved more slowly- but clearly market behavior would change.
      - asabjorn 9y ago
        > Right; it seems desirable for housing costs to keep even pace with the rest of the market, and ideally stay close to depreciated replacement cost In markets where there is enough housing supply, do we see people change housing ownership more often? E.g. buy a bigger apartment when they get kids or downsize when they are empty nesters. In markets with enough housing supply, do we see higher expectations for housing being modernized and up to code instead of being resold with only cosmetic changes? E.g. most bay area housing is very drafty and energy inefficient since it was built in the 60s/70s.
  - tjoff 9y ago
    Yeah, let's hold up the vacation so that we can get that airport sandwich for free. I don't even think people have a grasp of the effects on inflation/deflation in practice anyway, let alone suddenly make strategic decisions upon it.
    - nerfhammer 9y ago
      Different types of goods are affected differently. Groceries aren't affected at all, but for large purchases there is empirical evidence that expectations of deflation lead to a general decrease in spending: e.g. https://www.dallasfed.org/assets/documents/institute/wpapers/2015/0226.pdf https://www.dallasfed.org/assets/documents/institute/wpapers... , http://www.tandfonline.com/doi/abs/10.1080/13504851.2015.1100242?journalCode=rael20 http://www.tandfonline.com/doi/abs/10.1080/13504851.2015.110...
skybrian 9y ago
On the other hand, prices of computers and electronics are always dropping due to technology improvements. Stocking up on computer equipment in advance rarely makes sense since next year it will be better. But this doesn't seem like a bad thing. Would you prefer the alternative, that technology improvements stop and computers become more expensive, so they become good investments? And people do still seem to buy lots of electronics even though they don't hold their value. Generally speaking, lower prices are better. There are only a few exceptions such fossil fuels and cigarettes where you can say cheaper is worse, due to externalities. To be sure, if tomorrow a magical new technology gave us free, clean energy, health care, or housing, this would be a tremendous financial shock. Many investments would be worthless. But this is because it's a big, sudden change, not because it's inherently bad. A more gradual decrease in prices is a good thing.
- sliverstorm 9y ago
  Generally speaking, lower prices are better. Not an economist, but I believe that statement needs to be indexed to inflation/deflation. Lower prices relative to income, in other words higher purchasing power, is good. But you can't inflate/deflate your way to lower real production costs or higher wages. prices of computers and electronics are always dropping due to technology improvements Right, the electronics market is in some senses an example of the behavior of a deflationary market, but it is also different than prices dropping due to financial wizardry. Would you prefer the alternative, that technology improvements stop In many parts of the market, improvements have stopped. Continuing improvement is clearly best, but not always an option. A gallon of milk or a shovel isn't getting any better next year. So what then?
  - skybrian 9y ago
    Yes, I agree, lower prices are better except for wages. If most prices go down and wages stay the same, that's measured as an increase in productivity. Technology hasn't stopped in agriculture. For example, there are automatic milking machines [1], and there's a well-funded startup that wants to grow lettuce in warehouses built near distribution centers [2]. I wouldn't expect the price of milk to change much in the short term. In the long run, who knows? Maybe biotech improvements will mean we don't need cows? [1] https://www.nytimes.com/2014/04/23/nyregion/with-farm-robotics-the-cows-decide-when-its-milking-time.html?_r=0 https://www.nytimes.com/2014/04/23/nyregion/with-farm-roboti... [2] https://www.bloomberg.com/news/features/2017-09-06/this-high-tech-vertical-farm-promises-whole-foods-quality-at-walmart-prices https://www.bloomberg.com/news/features/2017-09-06/this-high...

saosebastiao 9y ago

The fact that you take that as an axiom is frightening. Moderate deflation is no more scary than moderate inflation, and the idea that an "overall inflation rate" determines people's behavior is laughably wrong. I mean, which of the thousands of inflation rate definitions are you talking about? The FRED database tracks 34,000 different series of some 10,000 inflation measures. More importantly, people don't sense overall inflation at all, they make decisions on domain specific inflation. Prices dropping for farm equipment or homes does not mean businesses stop buying computers and homes stop buying washing machines. It is entirely possible for housing prices to tank while prices for nearly everything else increase...in fact, we've already seen it happen. Think about what you are proposing: you're saying that even if prices are irrational and we are in a bubble, the only response is to maintain those irrational prices for that bubbled item and inflate everything else until we reach equilibrium. That is insane. If we did that, we'd still be trying to catch up with railway mania. And it puts us at far more of a risk of runaway inflation problems than letting housing prices drop would ever put us at a risk of a deflationary spiral. It's time to start questioning your axioms. Don't get me wrong, there are plenty of blowhard macroeconomists out there that share the idea, but there are far more economists that have far more nuanced views and understanding of inflation and how it really affects people's behavior, and it is nowhere near axiomatic.

RobertoG 9y ago
Is it not deflation a signal of underutilization of available resources in the economy, and necessarily, in the long term, of diminishing capacity?
graedus 9y ago
I think the post you're responding to is being critical of the unexplained/unexamined axiom that "deflation is bad", which is usually an underlying assumption in the financial press.
- saosebastiao 9y ago
  Wow. I had to take a look at the grandparent comment to understand he was being sarcastic. Thanks for the correction.

JumpCrisscross 9y ago

Deflation means a drop in price levels, a systematic effect. Housing prices falling while consumer prices hold steady isn’t deflation. Deflation is scary because (a) it encourages capital to hold money over productive investments and (b) it is very difficult to fight. Deflation usually occurs once an economy is already at the zero bound of interest rates; no help there. You could monetise a bunch of fiscal spending, but that, too, has a bunch of nasty side effects.

tom_mellior 9y ago
> Housing prices falling while consumer prices hold steady isn’t deflation. We're both handwaving here, but Wikipedia says: "In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate)." https://en.wikipedia.org/wiki/Deflation https://en.wikipedia.org/wiki/Deflation The inflation rate is given by a price index which typically includes housing. If housing prices fall while everything else holds steady, that index has nowhere to go but below 0%. I realize that this is distinct from a systematic deflationary spiral that affects the entire economy. The point was, some people might only look at the inflation rate, see it's below 0, and start panicking and doing stuff to "prop up" prices instead of letting people profit from affordable housing.