Monday, December 29, 2008

The Hangover Debate

Do certain economic booms inevitably require economic busts? Are recessions sometimes the painful but necessary way to correct the buildup of past economic imbalances? Paul Krugman says no to this line of reasoning and calls it the "hangover theory" of the business cycle. Steven Randy Waldman replies that while not every business cycle fits the "hangover theory", some of them do. Consequently, he believes the hangover theory should not be so easily dismissed. Mike Shedlock also replies by showing in great detail how the past housing boom-bust cycle fits quite well the hangover theory. Finally, Justin Fox weighs in on the matter, but ultimately decides to ride the fence on this question.

My own view is similar to Waldman's--some but not all boom-bust cycles fit the hangover theory. I think this view can be best illustrated by the double-dip recessions of Paul Volker in the early 1980s that are now credited with (1) eliminating double digit inflation and, in turn, (2) laying the foundation for the subsequent 20+ years relative macroeconomic stability.


  1. A macro paradox then:
    You can only have a hangover if you've had a great moderation!

  2. Funny!

    I was wondering if someone was going to raise that point. In fact, I had planned on ending the post by mentioning something like this: "(Of course, the 20+ years of macro stability planted its own seeds of destruction...)" but decided to avoid the distraction. I can never let one slip by you.

  3. Note well that Krugman is writing about a theory he doesn't understand -- and doesn't know -- when he attacks the "hangover" theory.

    His very label for it exposes something of the depth of his ignorance.

    Krugman shows ZERO evidence of every reading the work of Hayek, or Garrison, White, or Selgin, or Horwitz, or Mises, or Rothbard, or any other Hayekian macroeconomist.

    Krugman doesn't show any understanding of the mechanism of the Hayekian account.

    And he's obviously ignorant of what it does explain, and how it goes about explaining what it explains.

    The man is a massive disgrace.

  4. There is no such thing as a "hang over" theory.

    You're exposing yourself as an ignoramus for suggesting there is.

    The "hang over theory" is a figment of Paul Krugman's very, dishonest imagination.

    Did I say that Krugman is dishonest?

    Yes, I did.

    He's got to be the most dishonest man in any economics department in America. Who else comes close?

    "My own view is similar to Waldman's--some but not all boom-bust cycles fit the hangover theory"

  5. PrestoPundit: get help. I believe there are anger management classes available.