Monday, October 05, 2009

Krugman Puzzled by 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.


Anonymous said...

When I think of Krugman I think of a flawed, reincarnated Savonarola. Savonarola wanted to change the world to fit his tastes. Krugman seems to have a firm grasp of the way he wants the world to work. However, his personality seems to turn-off many people. And perhaps the sheer offensiveness of his personality might be the best antidote to his diatribes.

Krugman seems to love his soapbox. Just as Rush Limbaugh loves his soapbox. To some, Limbaugh seems intolerant of dissenting opinions. Krugman, also, seems condescendingly dismissive of those who don't agree with his brand of totalitarian "liberalism".

Limbaugh, though, is an entertainer. Few would think that he is an intellectual. Krugman though pretends to be an intellectual. But Krugman is a particularly rabid sort of intellectual. He is, in my mind, a well educated American Trotsky.

The scary thing is how truly mean spirited Krugman and his band of kindred spirits happen to be. This merry band seems to span both coasts…from Brad DeLong on the West coast to Larry Summers on the East coast.

These folks pursue an economics tinged version of odium theologicum. Religious debates are so savage because there are only opinions, no facts. The sad thing about economics is that there are few facts and so many opinions.

Joe said...

Why do you pretend that Krugman is puzzled by this asymmetry?

He merely noted that it's an observable condition that must be able to occur in a reasonable macroeconomic model - and that a macroeconomic model like Arnold Kling's is foolish because it can't address that question.

Is there really a need to misrepresent the views of people you don't completely agree with?

Unknown said...

Two responses to Krugman: first, housing is not just another sector that makes widgets, but a large part of the wealth stock of many households. As Dean Baker keeps pointing out, whenever you have a wealth shock of this magnitude, whether positive or negative, you get effects in all sectors of the economy as households adjust their spending based on perceived wealth.

Second, the boom wasn't just in housing, but more generally in credit - resulting in booms in all sorts of things that are bought with financing - private equity buyouts, boats, shopping malls, etc.

Ritwik said...

"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?"

A vs not A? Huh?

Doing X and not doing X can be symmetric because not doing X is analogous to not doing Y and Z, which is necessary for doing X.

This has nothing to do with logic and asymmetry, and everything to do with inter-temporal optimization, multiple markets and the heterogeneity of labour.

Eric Falkenstein said...

I would agree with him that many RBC models don't adress the asymmetry well, but that wasn't my take-away. I sense that he is rather disputing not the technical deficiencies of real business cycle models, but rather the idea that booms and busts have asymmetric effects.

J Mann said...

Joe, I'm not an expert on the hangover theory, but I tend to agree with Eric's original post.

The hangover theory is basically that if a bunch of people move to Nevada and train in construction, and then the construction industry in Nevada collapses, it will take some time to get those people moved or trained to their new jobs. (Labor is "sticky", as a Keynsian might say). This increases unemployment until they are retrained and moved.

By contrast, if demand for construction in Nevada suddenly increases, the hangover theory doesn't require unemployment to move people to those jobs. The jobs will fill more gradually, or the employers will offer significantly above-market wages to draw the labor.

Ritwik said...

I can agree that booms and busts may have asymmetric effects, but it's not because doing a job and not doing a job are asymmetric.

And any asymmetric theory will have to explain why in booms and busts all industries display higher employment and unemployment.

One can say that there is a trend (NAIRU), which itself shifts and there is re-allocation around that trend. The problem is, the trend itself seems to shift as if in response to re-allocation in one industry.

J Mann said...

Zen, the reallocation model doesn't deny follow-on consumption effects, does it?

My naive assumption would be that a collapse in the real estate market in several states and a severe down turn in the real estate market in the other states would lead to an increase in overall employment in most sectors, because the people hit by the initial bust would reduce consumption, etc. What would surprise me would be if all regions and all sectors showed the same change in unemployment, but I assume that's not the case.

The ultimate question is whether hiring more state employees in Georgia can provide a stimulus effect to counteract a recession at root caused by the collapse of the housing market in Nevada. Kling seems to say that a poorly targeted stimulus is likely to divert assets that otherwise would be employed, while Krugman seems to say that it is more likely to soak up some of this follow-on employment.

J Mann said...

Whoops - I meant "would lead to a decrease in overall employment" - sorry!