Krugman seems particularly proud of a piece he wrote a decade ago. His new remake, Hangover Theorists, is as wrong now as it was then. Let's take a look.



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 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.

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

2.A.1. What Goes Into The House

2.A.2 Shipping and Trucking

2.A.3 Landscaping and Maintenance Items

2.A.4 Cash Out Refis

2.A.5 Commercial Real Estate

2.A.6 Financial Engineering

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2.A.7 The Stock Market Boom

2.A.8 Property Taxes and Sales Taxes Soar

2.A.9 The Stock Market Bust

2.A.10 The Shopping Center Economic Model Dies

2A Summary

why recessions reduce unemployment across the board, not just in industries that were bloated by a bubble

Direct Impact of Housing Slowdown

Manufacturing

Retail

Shipping

Finance

Construction

Travel

Leisure

Restaurants

Energy

Commodities

Trucks and SUVs

City, State, Local Government Spending



Little Impact of Housing Slowdown

Health care

Education

Point Number 1 Rebuttal

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?

Free Lunch Theory

high priest

Fred Thompson On The Economy

Fred explains exactly how Krugman's theory works. It's a hilarious must see video that explains Keynesian economics in a nutshell.

Ideas So Simple, Only Academic Wonks Cannot Understand



