Next, suppose that there is a bubble in housing, and when the bubble pops, many people want to put less income into expanding the housing stock and more income into investing in venture capital. This shift disrupts the economy and requires a major recalculation.There would have been this effect in the recession immediately after WWII. It is an intriguing theory with an Austrian flavor.
The economy needs to reallocate labor away from housing and related industries and into other industries. This means that the composition of the work force has to change, which takes a lot of time. Meanwhile, unemployment rises, which causes further disruption (there are multiplier effects).
Sunday, April 18, 2010
Arnold Kling is pushing a recalculation theory of why the economy has the high levels of unemployment that it has: