Hangover theorists - Paul Krugman Blog - NYTimes.com

Hangover theorists - Paul Krugman Blog - NYTimes.com:

Somehow I missed this: via Steve Levitt, John Cochrane explaining that recessions are good for you:

“We should have a recession,” Cochrane said in November, speaking to students and investors in a conference room that looks out on Lake Michigan. “People who spend their lives pounding nails in Nevada need something else to do.”

So the hangover theory, which I wrote about a decade ago, is still out there.

The basic idea is that a recession, even a depression, is somehow a necessary thing, part of the process of “adapting the structure of production.” We have to get those people who were pounding nails in Nevada into other places and occupation, which is why unemployment has to be high in the housing bubble states for a while.

The basic idea is that a recession, even a depression, is somehow a necessary thing, part of the process of “adapting the structure of production.” We have to get those people who were pounding nails in Nevada into other places and occupation, which is why unemployment has to be high in the housing bubble states for a while.

The trouble with this theory, as I pointed out way back when, is twofold:

1. It doesn’t explain why there isn’t mass unemployment when bubbles are growing as well as shrinking — why didn’t we need high unemployment elsewhere to get those people into the nail-pounding-in-Nevada business?

2. It doesn’t explain why recessions reduce unemployment across the board, not just in industries that were bloated by a bubble.

One striking fact, which I’ve already written about, is that the current slump is affecting some non-housing-bubble states as or more severely as the epicenters of the bubble. Here’s a convenient table from the BLS, ranking states by the rise in unemployment over the past year. Unemployment is up everywhere. And while the centers of the bubble, Florida and California, are high in the rankings, so are Georgia, Alabama, and the Carolinas.

So the liquidationists are still with us. According to Brad DeLong,

Milton Friedman would recall that at the Chicago where he went to graduate school such dangerous nonsense was not taught

But now, apparently, it is.

Update: Not to mention the idea that employment is dropping because workers don’t feel like working.

Also see Arnold Kling’s recalculation theory of business cycles.
Why doesn't a housing boom — which requires shifting resources into housing — produce the same kind of unemployment as a housing bust that shifts resources out of housing.