The Effects of Fiscal Policy in 2009 and Beyond: A Discussion of Cogan-Cwik-Taylor-Wieland
Too Funny to Be True

One Last Time: The "Austrian" Theory of the Recession Just Does Not Work


Roger Garrison writes:

Mainstream Macro in an Austrian Nutshell | The Freeman | Ideas On Liberty: For the Austrians the liquidation of malinvestments is essential to the economy’s recovery. Resources need to be reallocated. Hence, any government spending program that serves to rekindle the housing boom or even to keep resources from leaving the housing industry is counterproductive. It locks in the misallocated resources...


We have $2 trillion of losses in mortgages: we have to write down the value of the housing stock we have built over the past seven years by $2 trillion, and presumably we will be building $200 billion less of housing per year over each of the next ten years relative to what we would have done otherwise, which means that we have to reduce construction employment below trend by 2 million workers for a long time to come. If it takes us six months of job search and recombination of enterprises to find new job-firm matches for each of these workers, the consequences of this act of overinvestment should be to raise the unemployment rate by 0.6% for a year.

But it now looks as though this recession is going to raise unemployment by an average of 4% for 3 years--20 times as great as the overinvestment-and-sectoral-shift Hayekian story says.

Garrison and other Austrains have a very basic problem with their math. The story they point to of overinvestment in construction and sectoral shifts is part of the story, but only 5% of the story.

"Hamlet without the Prince of Denmark" comes to mind.