And now as then, the whole notion when you ask why, say, a housing boom â€” which requires shifting resources into housing â€” doesnâ€™t produce the same kind of unemployment as a housing bust that shifts resources out of housing.
Krugman is noting that Austrian theories of business cycles, involving overinvestment in one industry and then reallocation of resources to another, should produce unemployment going in and going out (or none at all). Tyler and Arnold both argue that their are asymmetries involved. Here’s Arnold:
I would say that answer may be that the dynamics of booms and busts are asymmetric.
Note that the housing boom took place slowly, and it built up over a period of years. Several economists, Krugman included as I recall, were already talking about a housing bubble in 2004, even though in hindsight the biggest price excesses were still to come. So the housing boom must go back even further, to at least the late 1990s. In contrast, the collapse of house prices took less than two years (assuming they have bottomed out, which may be a brave assumption).
I think it is reasonable to generalize this notion that booms are longer and relatively gradual, while busts are sudden. If this generalization holds, then it ought to be harder for the economy to adjust to a bust than to a boom.
It is entirely possible that I’m still not getting aspects of this theory, but it seems to me that this explanation makes the case for stimulus. If you’re saying that the private sector is literally unable to absorb workers during the short time-frame, more or less coincident with recession, then why not pursue an aggressive stimulus? Reducing or eliminating whatever the cyclical portion of unemployment is should make it easier for new growth industries to find a footing. And if not all the structurally unemployed can be redistributed at once, there is no reason stimulus aid needs to stop with support for the cyclically unemployed.
The reason to oppose these measures, I’m guessing, is that they reduce a worker’s incentive to allow himself to be drawn into the new growth industries. But the availability of alternative opportunities didn’t prevent workers from being drawn into the old growth industry, pre-recession.
Arnold repeats Tyler’s statement that aid to state governments is delaying adjustment at the state government level:
One disadvantage of throwing money at state and local governments is that the contraction in that sector has been miniscule compared with the contraction in the private sector, and in fact in the long run we may need some contraction in the state and local government sector.
Again, I find this peculiar. I get that they feel state and local governments may be bloated — they are libertarians — but I don’t understand what this has to do with the recalculation scenario. And even if you really, really think that these governments should slim down, why would you want that slimming to happen now, when you’ve previously argued that markets are already unable to absorb all the refugees from shrinking private establishments?
This all seems to come back to the idea that it’s important for recovery that the people who are “supposed” to be unemployed actually be unemployed and stay that way until markets have a use for them. If they’re trying to tell a story that better describes the world than the traditional macro models they’re looking to replace, or update, it would seem that a failure to recognize the destructive qualities of long-term unemployment is highly problematic.