Must-Read: As I first said back in 1995: Yes, Mexico had sinned against the Gods of Monetarism. But the punishment inflicted was way out of proportion to the initial sin, and strongly suggested deep fundamental flaws in the international macroeconomic order. The same is the case for Greece today.

Paul Krugman: The Awesome Gratuitousness of the Greek Crisis: “But doesn’t the ultimate cause lie in wild irresponsibility on the part of the Greek government?…

…What strikes me is how relatively mild Greek fiscal problems looked on the eve of crisis. In 2007… public debt of slightly more than 100 percent of GDP… [a] fiscal gap… around 3 points, not trivial but hardly something that should have been impossible to close…. So yes, Greece was overspending, but not by all that much. It was over indebted, but again not by all that much. How did this turn into a catastrophe that among other things saw debt soar to 170 percent of GDP despite savage austerity? The euro straitjacket, plus inadequately expansionary monetary policy within the eurozone, are the obvious culprits. But that, surely, is the deep question here. If Europe as currently organized can turn medium-sized fiscal failings into this kind of nightmare, the system is fundamentally unworkable.

Must-Read: Mike Konczal: The Hard Work of Taking Apart Post-Work Fantasy: “The preponderance of stories about work ending…

…is itself doing a certain kind of labor, one that distracts us and leads us away from questions we need to answer. These stories, beyond being untethered to the current economy, distract from current problems in the workforce, push laborers to identify with capitalists while ignoring deeper transitional matters, and don’t even challenge what a serious, radical story of ownership this would bring into question.

Must-Read: Danny Chrichton: Why Is The University Still Here?: “Universities… have been on Silicon Valley’s hit list…

…and disruption phasers… have… been set to kill…. And yet… we failed to ensure that motivation and primacy were built-in to these new products… failed to get adults to engage with education in the way that universities traditionally can…. The motivation problem should have been obvious from the start…. Primacy is making education the primary activity of a student’s day…. When we attend a physical university, we automatically give primacy to education…. There is also financial primacy that comes from paying large tuition bills…. New forms of online education like MOOCs lost both forms of primacy at once…. It doesn’t seem like we have the answers…. We need to think more deeply about motivation and primacy…

Timothy B. Lee: The euro was a big mistake, and Greece is paying the price: “The problem is that the ECB is responsible for both Greece and Germany…

…and 17 other countries as well. The right policy for Greece will be a disaster for Germany, and vice versa. Any policy the ECB picks will be either too tight for some European countries or too loose for others. The ECB is headquartered in Germany and has strong ties to German policymakers. So in practice, it tends to pay more attention to the needs of Germany than other European countries. The result has been an economic disaster for Greece. And not just Greece. Spain’s debt problems aren’t nearly as bad as Greece’s. But its 24 percent unemployment rate is nearly as high, and the Spanish unemployment rate has been above 20 percent for about five years…

Over at Grasping Reality the very sharp Charles Steindel asks:

Yes, the housing slump started well before the actual recession. We’ve now had nearly a decade of lackluster levels of homebuilding. The population is, what, 20 or 30 million larger? Why don’t we see a housing boom? Regional differences? (Demand up in crowded metro areas where there are a lot of barriers to building?). Financial constraints? Underwater owners not selling and blocking development? Are these enough to explain it, or is there something else?

I think the answer is that we really do not know. And we need to know. For the situation, looked at as a whole, is simply bonkers:

You try to do the normal thing and draw sensible long-run supply- and preference-driven trends for the share of the economy devoted to building houses and apartments, starting with an underhoused America at the end of WWII that then sees the housing stock converge to its steady-state ratio to potential GDP:

You can then assess the magnitude of the housing bubble, and then the the housing bust:

The housing boom is a triangle with a base four years long, a height of 1%-point of GDP, and thus an area of 2%-point-years of GDP. the post-2007 housing bust is–so far–a quadrilateral with an area of 14%-point-years of GDP. Relative to what we would reasonably have forecast in 2000 or so, America is now underhoused by 12% x $16 trillion = $1.9 trillion worth of houses.

Clearly there has been a big shift in both banks’ willingness to make mortgage loans and in household’s willingness to risk losing their–or their parents’–money by risking it as a down payment. What the welfare-economics consequences of the fact that America is now–relative to post-WWII trend experience–grossly underhoused has not been properly analyzed. Nor has there been proper analysis of how and whether policies should be applied to try to reverse this housing drought.

https://readfold.com/read/delong/a-problem-in-need-of-attention-assessing-the-great-21st-century-american-housing-bust-aaWWJ5wz

By coincidence, two people this past weekend have soberly informed me of what they call a “hard truth”: that nationwide employment simply had to go down in 2008 and 2009.

You see, they said, we had to move people out of me industry of building houses and the occupations connected to that industry, and it was impossible to do that without lowering employment.

This is, of course, an echo of John Cochrane’s claim in his keynote address to the 2008 CRSP Forum that:

We should have a recession,” Cochrane said in November, speaking to students and investors in a conference room that looks out on Lake Michigan. “People who spend their lives pounding nails in Nevada need something else to do…

Or, as he explained it to The New Yorker’s John Cassidy:

The baseline of an economy working well will include… some fluctuations in unemployment. When we discover we made too many houses in Nevada some people are going to have to move to different jobs, and it is going to take them a while of looking to find the right job for them. There will be some unemployment. Not as much as we have, surely, but some…. Some component of unemployment is people searching for better fits after shifts that have to happen…. That is a big and enduring contribution… [that] does come out of a perfectly functioning economy…. Is ten per cent the right number? Now we are talking opinions…. But what we need is models, data, predictions… not my opinion versus your opinion…

The point, though, is that this is simply wrong. Look at the collapse of employment in the country as a whole. It starts in the winter of 2008 and goes until the fall of 2009:

Look at the collapse of economic activity in the residential construction sector–the period of time when we are moving resources out of businesses employing people “pounding nails in Nevada”:

Does that collapse happen between February 2008 and November 2009? No. That collapse in residential construction starts in the fall of 2005. Residential construction is back to its normal-trend share of economic activity by the summer of 2006. Residential construction is 5/6 of the way down to its current–highly depressed–level of today before the fall in the nationwide employment-to-population ratio gets underway.

Thus the “hangover theory” of the 2008-2009 crash in employment fails because it simply cannot make the timing work.

The sectoral reallocation is a very different thing from the macroeconomic depression. And the fact that people since before Schumpeter have erroneously tried to conflate them does not mean that we should.

And so I need to, once again, quote Paul Krugman–explicitly commenting on the “pounding nails” quote from the 2008 CRSP Keynote–because he is right:

Paul Krugman (2008): Hangover Theorists: “So 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….

According to Brad DeLong,

Milton Friedman would recall that at the Chicago where he went to graduate school such dangerous nonsense was not taught

But now, apparently, it is.

And:

Paul Krugman (1998): The Hangover Theory: “A few weeks ago, a journalist devoted a substantial part of a profile of yours truly…

…to my failure to pay due attention to the ‘Austrian theory’ of the business cycle—a theory that I regard as being about as worthy of serious study as the phlogiston theory of fire. Oh well. But the incident set me thinking—not so much about that particular theory as about the general worldview behind it. Call it the overinvestment theory of recessions, or ‘liquidationism,’ or just call it the ‘hangover theory.’ It is the idea that slumps are the price we pay for booms, that the suffering the economy experiences during a recession is a necessary punishment for the excesses of the previous expansion.

The hangover theory is perversely seductive—not because it offers an easy way out, but because it doesn’t. It turns the wiggles on our charts into a morality play, a tale of hubris and downfall. And it offers adherents the special pleasure of dispensing painful advice with a clear conscience, secure in the belief that they are not heartless but merely practicing tough love.

Powerful as these seductions may be, they must be resisted—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. Nor is this merely an academic argument: The hangover theory can do real harm. Liquidationist views played an important role in the spread of the Great Depression—with Austrian theorists such as Friedrich von Hayek and Joseph Schumpeter strenuously arguing, in the very depths of that depression, against any attempt to restore ‘sham’ prosperity by expanding credit and the money supply. And these same views are doing their bit to inhibit recovery in the world’s depressed economies at this very moment….

Let’s ask a seemingly silly question: Why should the ups and downs of investment demand lead to ups and downs in the economy as a whole? Don’t say that it’s obvious—although investment cycles clearly are associated with economywide recessions and recoveries in practice, a theory is supposed to explain observed correlations, not just assume them. And in fact the key to the Keynesian revolution in economic thought—a revolution that made hangover theory in general and Austrian theory in particular as obsolete as epicycles—was John Maynard Keynes’ realization that the crucial question was not why investment demand sometimes declines, but why such declines cause the whole economy to slump.

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?

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. (Hence their opposition to any attempt to increase demand: This would leave ‘part of the work of depression undone,’ since mass unemployment was part of the process of ‘adapting the structure of production.’) But in that case, why doesn’t the investment boom—which presumably requires a transfer of workers in the opposite direction—also generate mass unemployment? And anyway, this story bears little resemblance to what actually happens in a recession, when every industry—not just the investment sector—normally contracts….

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. Yet the theory has powerful emotional appeal. Usually that appeal is strongest for conservatives, who can’t stand the thought that positive action by governments (let alone—horrors!—printing money) can ever be a good idea. Some libertarians extol the Austrian theory, not because they have really thought that theory through, but because they feel the need for some prestigious alternative to the perceived statist implications of Keynesianism. And some people probably are attracted to Austrianism because they imagine that it devalues the intellectual pretensions of economics professors. But moderates and liberals are not immune to the theory’s seductive charms—especially when it gives them a chance to lecture others on their failings….

The Great Depression happened largely because policy-makers imagined that austerity was the way to fight a recession; the not-so-great depression that has enveloped much of Asia has been worsened by the same instinct. Keynes had it right: Often, if not always:

it is ideas, not vested interests, that are dangerous for good or evil.’

Ian Millhiser: Chief Justice Roberts’s Current Thinking: “Read together, Roberts’s King and Obergefell opinions…

…suggest that the chief justice has grown tired of efforts to politicize the judiciary, and that he is particularly annoyed with his fellow conservatives…. Roberts[‘s] King opinion actually placed the Affordable Care Act on stronger legal footing than it would have rested on if conservatives have never brought this lawsuit…. And his Obergefell dissent is almost gratuitous in its dismissive approach to Lochner. It is difficult not to read both opinions as a rejection of the views expressed by men like Barnett, Will and Adler.
The Chief Justice of the United States, in other words, sent a clear message to the increasingly vocal forces that wish to use the Supreme Court to enact a sweeping economic agenda — not on my watch…. Roberts will eagerly give the Federalist [Society] everything they asked for up until 2009, but his King and Obergefell opinions suggest that he may give them no more.