As I noted earlier Paul Krugman rejected the Austrian business cycle theory a few years ago, calling it “about as worthy of serious study as the phlogiston theory of fire.”[A theory of fire refuted by Antoine Lavoisier in the late 18th century]. Krugman wrote that he saw no reason why a investment bust would result in a recession because it would be compensated by increased consumption.
Now , in his latest New York Times column, Krugman seems to advocate his previously so detested “hangover theory”, quoting semi-Austrian economist Stephen Roach and correctly noting that the bursting of the stock market bubble lead to the 2001 recession and that the effects of this was counteracted by the creation of a new bubble, a housing bubble. He also correctly notes that when the housing bubble bursts the Fed may have run out of bubbles to prop up the economy and that the relief provided by the housing bubble simply meant that the problems were postponed (A observation I have previously made).
It is of course nice if Krugman has finally seen the light on this issue. If that is the case, he should retract his earlier rejection of “the hangover theory” . But unfortunately, this is probably just a matter of grasping for straws -using any reasoning which could be used to attack Bush even if he really don’t believe in it- in his partisan crusade against Bush. Just like his current antiwar views is probably not based on a real opposition to war, but on the fact that is a Republican president has started it.
