Krugman Puzzled by Housing Asymmetry

Paul Krugman asks:

why, say, a housing boom — which requires shifting resources into housing — doesn’t produce the same kind of unemployment as a housing bust that shifts resources out of housing.

Well, if there's demand for housing, firms in that field are hiring people with specific skills related to building housing, and all the logistics that surround it (home appliances, landscaping, financing). Not, if we know people don't want housing, that merely tells us what not to do. So, if you know that making houses is not profitable, what should you do? That's highly ambiguous.

I don't see why he thinks doing X, and not doing X, are symmetric. There are always many more different ways to not do X, and most of them do not have value (eg, making buggy whips, building pyramids). It's not like people can short housing with their labor. The idea that the 'sets' A and not-A are 'the same' is an idea that has some logic, but shows an insane lack of practical intuition.

What would Krugman do if he could no longer write on economics and politics? I have no idea, and bet he would take a year to figure it out himself.

Comments

[po folks:]

Many "resources" came from monetization of an asset. i.e.: homes were ATM cash machines in exchange for debt, which would fade away as housing values inexorably and irreversibly rose. This created consumer demand that became a significant part of the general economy.

Simple. You take away the money, you lose the demand.

(Surely a brilliant, high Nobel-prize pedigree academic asking the question for rhetorical purposes, no?)

Oct 06 09:51 AM

[nym:]

Quite right, po folks: Krugman is thinking out loud and allowing others to comment, a technique also used by DeLong and Salmon. Anyone wanting in on the action should follow the links back.

One the other hand, Falkenstein has clipped, pasted and taken a shot at his better.

Oct 06 11:10 AM

[TonyCinTX:]

You completely misunderstand Krugman's point; he DOES know why that is true, he is saying that Arnold King is re-inventing 1934 macro-economic theory that FAILED to understand this point and therefore treated these two situations as EQUAL.

It is clear when the referenced article is read that Krugman understands this point completely and is criticizing Arnold King (and others) for failing to understand it. This headline is as foolish and misleading as 1934 macro-economics. Either the author has a problem with reading comprehension, or just wants to bash Krugman and hopes we don't notice.

Oct 06 12:10 PM

[Barbarous R...:]

It's called malinvestment -- the newly printed money from the last boom built up a whole host of industries beyond that warranted by sustainable demand (not just the housing sector). These expansions were proven uneconomic once money supply ceased growing last summer.

Money supply growth has taken off again in 2009, but now it is being used to bid up risk assets (equities, bonds, and commodities), rather than to fuel consumption. This simply reflects the buying preferences of the current group of lucky early recipients of the new money.

There is nothing magical or mysterious about this -- this is a logical outcome of money printing on an economy.

Oct 06 12:22 PM

[Tony Petroski:]

From the article:

"What would Krugman do if he could no longer write on economics and politics? I have no idea, and bet he would take a year to figure it out himself."

He would get a University to pay him for two years during his "sabbatical" and then he would join Jimmy Carter with a hammer in his hand building housing for "humanity" during a housing glut.

Oct 06 02:55 PM

[Russ Wetherill:]

Yes, Krugman is saying that recalculation is the same as the 1934 macroeconomic theory. But, that isn't the author's point. The author's point is that Krugman's logic in refuting both of these theories makes no sense.

Recalculation says that high rates of unemployment are necessary following booming periods in sectors of the economy and that stimulus does not help to ameliorate the downturn.

Krugman disagrees with the recalculation/1934 theories, stating:

"And now as then, the whole notion {that unemployment is necessary and that stimulus slows the recovery process} falls apart when you ask why, say, a housing boom — which requires shifting resources into housing — doesn’t produce the same kind of unemployment as a housing bust that shifts resources out of housing."

The problem with Krugman's recalculation calculus is that, as the author points out, this is not an irreversible process. By undoing that which has been done, you don't necessarily return to the same prior state.

Climbing a cliff and then jumping off may complete a journey, but when you land you won't be in same condition as when you started. You will be much worse off. Same thing holds for a boom-bust cycle. Stimulus may prolong the fall, but that may just increase the speed at impact, thus deepening the crater.

On Oct 06 12:10 PM TonyCinTX wrote:

> You completely misunderstand Krugman's point; he DOES know why that
> is true, he is saying that Arnold King is re-inventing 1934 macro-economic
> theory that FAILED to understand this point and therefore treated
> these two situations as EQUAL.
>
> It is clear when the referenced article is read that Krugman understands
> this point completely and is criticizing Arnold King (and others)
> for failing to understand it. This headline is as foolish and misleading
> as 1934 macro-economics. Either the author has a problem with reading
> comprehension, or just wants to bash Krugman and hopes we don't notice.

Oct 08 05:29 PM

[Russ Wetherill:]

Correction to the above comment:

The problem with Krugman's recalculation calculus is that, as the author points out, this an irreversible process. By undoing that which has been done, you don't necessarily return to the same prior state.

That's what happens when you don't proofread!

Oct 08 05:37 PM