"So the hangover theory, which I wrote about a decade ago, is still out there."

Paul Krugman with a good post:

"Somehow I missed this: via Steve Levitt, John Cochrane explaining that recessions are good for you:

“We should( THERE IS NO 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.”( CREATIVE DESTRUCTION )

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 ( TO THE EXTENT THAT THEY WERE EMPLOYED IN CONSTRUCTION, THAT COULD SIMPLY BE THE CASE ).

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( BECAUSE THEY WOULD IMMEDIATELY BE EMPLOYED )?

2. It doesn’t explain why recessions reduce unemployment across the board, not just in industries that were bloated by a bubble.( FEAR AND AVERSION TO RISK. IN ALL RECESSIONS, THERE IS SOME PROACTIVE AND UNNECESSARY FIRING OF WORKERS )

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. Here’s a convenient table from the BLS, ranking states by the rise in unemployment over the past year. Unemployment is up everywhere( HENCE, MY POINT. THE FUNDAMENTALS CAN'T BE THE SAME EVERYWHERE ). And while the centers of the bubble, Florida and California, are high in the rankings, so are Georgia, Alabama, and the Carolinas.

So the liquidationists are still with us. 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.( THERE WILL PROBABLY BE RECESSIONS, BUT WE SHOULD TRY AND STOP THEM. )

Update: Not to mention the idea that employment is dropping because workers don’t feel like working."

That's not what the post says. I argue that Productivity is Higher because Demand is higher than the firings warrant, due to the Fear and Aversion to Risk.

In any case, since we should adequately help people through a recession with our social safety net spending, it hardly makes sense to wish for one, if you want the government to stay out of the economy. Recessions and Crises always increase the size of government.

I believe that we will probably always have recessions, bubbles, and unemployment, not for lack of trying, but for lack of knowledge. Once again, we should try and eliminate them, even if that's true.