

The Hangover Theory - tyn
http://www.slate.com/id/9593/

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wolfmanstout
Notice that Krugman provides very little hard evidence to completely discard
the entire school of thought of the Austrian economists. He even sneers at
them using blatant straw-man attacks: "some people probably are attracted to
Austrianism because they imagine that it devalues the intellectual pretensions
of economics professors."

Regardless of whether all the Austrian school's claims turn out to be correct
or not, they certainly deserve a seat at the table. Hayek, in particular, was
a true polymath, contributing brilliant ideas to everything from philosophy of
science to biologically-grounded psychology. Read the first several chapters
of Law, Legislation, and Liberty, and decide for yourself if Krugman has any
right to sneer at the "supposedly deep Austrian theorists".

~~~
gabrielroth
The substance of his criticism of the Austrian school is in his fifth
paragraph. It's not "sneering" or a straw-man attack; it asks a question that
(Krugman claims) the Austrian economists' theories can't answer. If you want
to defend them, try addressing that question rather than making irrelevant
claims for Hayek's brilliance.

~~~
glymor
davetufts already covered it by posting
<http://mises.org/misesreview_detail.aspx?control=53>

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mynameishere
_for the hangover theory is disastrously wrongheaded. Recessions are not
necessary consequences of booms. They can and should be fought, not with
austerity but with liberality—with policies that encourage people to spend
more, not less_

Ten years later, well. We are coming out of a situation where 40,000/year
salaries could get you a mortgage on a 400,000 dollar house. There are 101
reasons why that situation emerged, and most of them are directly related to
prior policies to get people to buy "more". Sure, it would be stupid to
suggest a repeat of this process as a solution.

Krugman isn't stupid. Read the "stimulus" bill. Most of it doesn't even
pretend to address the situation at hand. It's a list of very expensive
programs that Democrats and their lobbyists have always wanted. Krugman
approves of this, why not?

The same thing happened with the "Patriot" bill and the TARP. Crises are
useful.

~~~
trevelyan
Read Keynes.

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SirWart
There are two ideas of the Austrians and the Keynesians that both seem true
that I have a hard time reconciling. The Keynesian idea that depressions are
caused by everyone cutting back at the same time, and results in a downward
positive feedback loop that can be combated by government spending makes
sense. But at the same time, Krugman asserts that there is no reason
unemployment should rise because of a previous misallocation of capital (ie a
bubble), and that just doesn't seem right. When a bubble bursts, there are too
many people who work in previously inflated industries, and their skill sets
and geographic location are not things that change easily. People aren't going
to learn a new trade, take a pay cut, or move unless there is a real threat to
their livelihood if they continue doing what they are doing now.

It seems like the classic conservative vs. liberal argument over social safety
nets. Yes, we need safety nets to keep people's lives from being ruined by
things largely outside their control. But at the same time, those safety nets
introduce moral hazard, and the more bad situations you promise to protect
people from, the more people who don't really need that safety net are going
to take advantage of it.

~~~
nazgulnarsil
and years of negative savings encouraged by a highly inflationary policy have
nothing to do it? this "cutting back" is consumption returning to sane levels.

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garply
I don't understand this part of the argument:

"Here's the problem: As a matter of simple arithmetic, total spending in the
economy is necessarily equal to total income (every sale is also a purchase,
and vice versa). 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?"

Isn't the issue that total spending / income decreases? I.e., people are just
putting money into the bank instead of external investments or consumption?
And the banks themselves are just sitting on the cash?

~~~
nazgulnarsil
yes, after many years of negative real savings we are now trying to make up
for it with positive real savings. but because the years of negative savings
eventually caused the loan bubble to pop now banks are doing the same thing,
saving cash instead of investing it. banks aggravate the business cycle
instead of dampen it.

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corentin
> 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?

Does he have a good reason not to mention the elephant in the room here? (I'm
thinking of monetary policy and trade partners such as China)

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davetufts
I personally consider most of what Krugman writes to be utterly non-sensical.
Unfortunately the policies of the Clinton, Bush, and Obama administrations
agree with Krugman's Keynesian view.

This article has been rebutted for the past 10 years by people a lot smarter
than me. My favorite rebuttal is David Gordon's 1999 article on Mises.org:
<http://mises.org/misesreview_detail.aspx?control=53>

Other notable rebuttals:

* <http://mises.org/story/105> \- by Gene Epstein, the original author that Krugman references in Hangover Theory's first sentence

* <http://mises.org/story/103>

* <http://mises.org/story/630>

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dmix
"The Great Depression happened largely because policy-makers imagined that
austerity was the way to fight a recession."

I have heard the opposite in many "Austrian"-tilted debates, how accurate is
that?

From checking Wikipedia, Roosevelt did try to stimulate the economy with
government investment near the end. It also says that "Keynesian economists
assumed poor people would spend new incomes; however, they saved much of the
new money."

So is it Krugman's point of view that the policies weren't Keynesian enough to
be effective (or too late)? The same arguments were made about the failure of
communism and more recently free markets.

That may be the biggest flaw in economic ideas/models, they take a high level
of purity to be effective but that's rarely the case.

~~~
mighty
<http://www.nytimes.com/2008/11/10/opinion/10krugman.html>

~~~
dmix
Thanks, that answered my question on Krugman's perspective on Roosevelt's
policies.

The current stimulus seems to be inline with Krugman's recommendation. I'm
more on the "Austrian" side but it will be an interesting experiment to see if
the Keynesian approach can be effective on such a wide scale.

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d13hard
probably the first time i vigorously disagree with krugman....and oddly he
appears to be in stark contrast to some of his own writings.

austrian economics has probably become too dogmatic for some, but i do think
there is validity in the notion that recessions realign capital flows in more
constructive directions. look at what we are trying to do now - fight excess
debt brought on by overconsumption with more debt to support overconsumption.

the stimulus bill subsidizes the purchase of new cars...but we just spent ten
years watching people blow too much of their net worth on cars...is more of
this really constructive? what next...government mandates that we all buy
(taxpayer subsidized) home theater systems?

i'm troubled that the government is working hard to promote the same reckless
overconsumption that put us in this mess to begin with...but it won't work,
people out there are getting the message that debt is poison.

~~~
corentin
> austrian economics has probably become too dogmatic for some

Milton Friedman once said "there is no Austrian economics - only good
economics, and bad economics".

The question is not whether the theories of the austrian school are too
dogmatic or not; the question is whether they are right or not.

~~~
astine
I think that what he means is whether the adherents to those theories adhere
in a dogmatic or rational fashion.

