Calculating Economics

Paul Krugman explores Arnold Kling's recalculation story and says it falls apart "when you ask why, say, a housing boom -- which requires shifting resources into housing -- doesn't produce the same kind of unemployment as a housing bust that shifts resources out of housing."  Kling responds:

Note that the housing boom took place slowly, and it built up over a period of years. Several economists, Krugman included as I recall, were already talking about a housing bubble in 2004, even though in hindsight the biggest price excesses were still to come. So the housing boom must go back even further, to at least the late 1990s. In contrast, the collapse of house prices took less than two years (assuming they have bottomed out, which may be a brave assumption).

I think it is reasonable to generalize this notion that booms are longer and relatively gradual, while busts are sudden. If this generalization holds, then it ought to be harder for the economy to adjust to a bust than to a boom.

I think this is not only right, but definitionally true about booms and busts.  Lots of countries have economic problems.  But sectoral shifts, or credit contractions, are not catastrophic when they are slow enough for people to plan.  We probably have a little residual unemployment left over from the decline of the steel and auto industries.  But as long as the decline happens over a period of year, the economy can absorb it.  When the economy just stops building houses, unemployment is more troublesome.

That's not an endorsement of the recalculation story, which I'm still pondering--but I think that even if you don't by it as a complete explanation of the business cycle, it's very compelling as a complication, especially when you add it to heterogenous job preferences and sticky wages.