By Phil Izzo
A roundup of economic news from around the Web.
?Stable Prices: Ryan Avent examines the mystery of stable prices. ?Why hasn?t there been deflation? That has been one of the central mysteries of the Great Recession and its aftermath. In the 1930s soaring unemployment led to galloping deflation. In the early 1980s a 4.5 percentage point increase in the unemployment rate came alongside a drop in the core inflation rate from about 12% to under 3%. American unemployment rose by more between 2007 and 2010. And yet core inflation dropped only a bit, from a little over 2% prior to the recession to a low of 0.6% in 2010. Inflation has since recovered to 2% despite continued high unemployment. The experience across the rich world has been broadly similar. On the face of things, the answer is simple: inflation did not fall by much because central banks did not want it to.?
?Household Finances: Emily Oster says you?re probably doing your household budget all wrong. ?Most people who want to know about household budgeting turn to someone like Dave Ramsey, who has a carefully crafted household budgeting system. His, like many others, relies on a simple idea?sometimes called the ?envelope system??where you put your gas money in one envelope , your grocery money in another, etc., and spend only within a category? The system works great, as long as nothing ever changes. But the minute that some price changes, you?re in trouble. Here?s an extreme example. Imagine you drive to work, and your ?gas money? envelope contains enough money to get you to work for the month, and maybe a little cushion. But then gas gets more expensive. You may first react by switching to a worse grade?say, from premium to regular (research shows many people do this). But if gas prices go up even more you simply will run out of money in the gas envelope. And then you won?t be able to get to work. Strictly following the envelope system here would be much, much worse than ?cheating?: It?s certainly bad for your household budget if you miss work.?
?Real Estate Commissions:?Alex Tabarrok revives some work he?s done on the inefficient system of real estate commissions. ?Consider, house prices are much higher in California than in Idaho but commissions are stable at around six percent. Thus, even though the realtor?s job, brokering a deal, is the same in California as in Idaho, a realtor in California will make much more per-house. As a result, there are far too many realtors in California and many of them will spend an entire year selling only a handful of houses. [At the height of the real estate boom in CA there were 437,000 real estate agents and only 680,000 home sales a year!, AT added 2013] Indeed, many realtor?s spend most of their time prospecting for clients rather than actually selling houses ? this is a huge waste of resources. The same relationship holds over time as over space. That is, when house prices go up we don?t see a fall in commission rates. Instead, we see more entry. Since the same number of houses are being bought and sold, the extra realtors don?t make the buyer or seller better off and sadly the realtors aren?t better off either ? instead the excess return is siphoned off in wasteful prospecting for clients. Unfortunately, no one really understands why commissions are stable.?
Compiled by Phil Izzo
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