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To: CalculatedRisk who wrote (51987)	6/3/2006 2:44:35 AM
From: mishedlo	Read Replies (1) \| Respond to of 116555

Amazing I had to laugh I also forwarded that to Heinz Mish

To: CalculatedRisk who wrote (51987)	6/3/2006 8:09:07 AM
From: George K.	Read Replies (2) \| Respond to of 116555

Krugman's comment about cash hording leading to recession is interesting - "A recession happens when, for whatever reason, a large part of the private sector tries to increase its cash reserves at the same time." I see a lot of that in my microeconomy - especially in small businesses not involved with real estate. I do know a ton of that money is about to go into CDs - either in the same depository bank that holds the biz checking accounts - or elsewhere. My bank prez is worried, I think, about it going to elsewhere banks like ING or HSBC with these linked checking accounts. The attractive interest rates after years of no return on investment is the story of the year imo but I'm in a small town setting. George

To: CalculatedRisk who wrote (51987)	6/3/2006 12:16:38 PM
From: Clarksterh	Read Replies (2) \| Respond to of 116555

I love Krugman - he is so easy rip apart because his biases are so obvious. Opinion disguised as news. First he has a slam on the Austrians 'the best that they could come up with': So if people decide to spend less on investment goods, doesn't that mean that they must be deciding to spend more on consumption goods--implying that an investment slump should always be accompanied by a corresponding consumption boom? And if so why should there be a rise in unemployment? Most modern hangover theorists probably don't even realize this is a problem for their story. Nor did those supposedly deep Austrian theorists answer the riddle. The best that von Hayek or Schumpeter could come up with was the vague suggestion that unemployment was a frictional problem created as the economy transferred workers from a bloated investment goods sector back to the production of consumer goods. Then he waves his hands violently while defending the key tennet of the theory he likes: A recession happens when, for whatever reason, a large part of the private sector tries to increase its cash reserves at the same time. Note that this doesn't mean I'm happy defending some theory that just because credit expanded means that a depression is looming - just that almost everytime I run into Krugman stuff it is just overly self confident garbage. (Inre the Austrian theory, I do think there is some truth to it. If credit exands for too long that credit is taken for granted it is more likely to be spent on things producing things that people do not want so that the debt cannot be serviced. It isn't about credit growth per se, but complacency?)

To: CalculatedRisk who wrote (51987)	6/3/2006 12:46:23 PM
From: patron_anejo_por_favor	Respond to of 116555

Sounds like he visited the Thunderdome "2 go in and one comes out...a clown". Who woulda known Krugman wore floppy shoes?<G>

To: CalculatedRisk who wrote (51987)	6/4/2006 10:29:48 AM
From: gpowell	Read Replies (2) \| Respond to of 116555

Krugman's education evidently lacked a theory of capital and time, therefore all recessions must be due to shocks of one kind or another. Nice response to Krugman's original article by Roger Garrison: Krugman's view of recessions is best put in perspective by comparing it with the contrasting views of Keynes and Hayek. These arch rivals of the thirties were in agreement that the increase in money demand, the "scramble for liquidity," was a secondary aspect of the downturn but in disagreement about what the primary aspect was. Keynes thought it was investment demand, which, in a decentralized economy, is prone to collapse. Hayek thought it was malinvestment induced by short-sighted or politically motivated actions of the central bank. Krugman elevates what both Keynes and Hayek saw as a secondary aspect to the status of the primary aspect. And then, creating difficulties for the historian of thought, he attributes the high-money-demand theory of recessions to Keynes himself. Presumably rejecting all hangover theories, Krugman pronounces the Austrian variety "intellectually incoherent"—largely on the basis of a telling question: "[How can] bad investments in the past require the unemployment of good workers in the present?" Krugman's implicit answer: They can't—and therefore we need not pay any attention to Hayek. (The question itself is a good one and is likely to find its way onto a macro exam at Auburn University.) A Hayekian would answer in terms of the intertemporal complementarity that characterizes the economy's capital structure. During the downturn, good workers are out of work because the capital they need to work with is in short supply, having been committed to long-term projects now in need of liquidation. Krugman's response ("Well, fine. Junk the bad investments and write off the bad loans.") is all too facile. His advice is well taken, but the market process that implements it is time-consuming. During the junking and capital restructuring, the demand for much of the labor force (labor whose capital complement has not yet been recreated) is low. And low demand translates into unemployment—except under the decidedly unAustrian assumptions of instantaneous wage-rate adjustment and near-infinite labor mobility. Recognizing that in Austrian theory the unemployment is somehow related to capital restructuring, Krugman poses another question: "Why doesn't the investment boom—which presumably requires a transfer of workers in the opposite direction [from short term projects to long-term projects]—also generate mass unemployment?" Gottfried Haberler asked the same question in his 1937 book, Prosperity and Depression. The answer is that during the cheap-credit boom, there is a net increase in labor demand. And because of the effects of a low interest rate, many workers are bid away from jobs in the late stages of production and into jobs in the early stages. During the downturn there is a net reduction in labor demand. As liquidation gets underway, workers are released in the higher stages and (eventually) reabsorbed elsewhere in the economy. Both of these future exam questions have been answered by drawing on Hayek's contributions. Significantly, both answers involve heavy doses of capital theory, which serves as the underpinning of the Austrian theory of the business cycle. One of the most profound effects of the Keynesian Revolution was to tear macroeconomics loose from these underpinnings. Today, capital theory simply has no standing in mainstream macroeconomics. Accordingly, Hayek has no standing in the eyes of Krugman and other modern mainstream macroeconomists. It is a pity.

To: CalculatedRisk who wrote (51987)	6/4/2006 11:25:53 AM
From: Incitatus	Read Replies (1) \| Respond to of 116555

The hangover theory, then, turns out to be intellectually incoherent; nobody has managed to explain why bad investments in the past require the unemployment of good workers in the present. Because following a construction boom, the layed off construction workers don't have the skills to perform the work of the next boom. And the industry of the next big boom doesn't know it will be a boom yet, so they are concerned about overhiring. Wow, that was tough.