At least according to the US government.

The BLS claims that housing prices are up 2.1% in the last 12 months.  Why does this matter?  For all sorts or reasons, but first let’s try to figure out what really happened.  According to the BLS, housing makes up nearly 40% of the core basket of goods and services.

Category    weight     inflation

Housing     39 %             2.1%

Other         61%              1.4%

Overall      100%             1.7%

Suppose that instead of rising 2.1%, housing costs have actually fallen 2.1% over the past 12 months?  In that case the core rate would be zero.  Which number seems more likely?  For much of the past year house prices have been falling at more than 2% a month.

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Because I picked on Ahamed a bit in the previous post, I want to make up for it by pointing out some excellent passages in his fine book.  Here he discusses the common misconception that money “goes into” markets:

There was the erroneous notion [in the 1920s] that a rising stock market “absorbs” money from the rest of the economy.  This is sheer nonsense, because for every buyer of stock there is a seller and whatever money flows into the stock market flow immediately out.

This issue has come up a lot in this blog, with some people claiming that expansionary monetary policy blows up bubbles, because the money “has to go somewhere.”

Update 7/20/09,  I misread the quotation.  In the comments below Jon points out that Ahamed ignores the increased demand for transactions balances that often accompanies a rising market.  (Although steeply falling markets also can see increases in transactions.)

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A few weeks back I did a post on a passage from Lords of Finance, trying to refute the widely held view that Keynes was a great investor.  I got some negative feedback from some commenters who knew more than I did.  But now I have completed the book, and feel even more strongly about this issue.  I’ll start with Keynes, but my real target is much bigger.

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A few days ago I debated the famous John Cochrane on monetary policy.  (No, not the “if the glove don’t fit . . . ” Johnnie Cochran, rather the University of Chicago professor.)  He seemed to go easy on me, perhaps because I was from a small school.  So it was a pleasant debate.  But we certainly found many points where we disagree.  I probably talked too much.  Here is the link.

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This post was triggered by a recent Will Wilkinson essay on inequality.  Earlier I linked to a Wilkinson essay where he cast a bemused, skeptical eye on happiness research.  His inequality essay is more serious, as the issue is much more highly charged.  BTW, it’s interesting to consider why “happiness,” the supposed goal of humanity (according to economists) is regarded by many as a fairly frivolous research topic, where as inequality is very serious.  One answer is that we can’t measure happiness very well, but as Wilkinson shows there’s no evidence that our inequality measures are any better.  Indeed I’ll add a few criticisms of my own.

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