Krugman wrong about resources

Bob Murphy blogs about Paul Krugman’s claim “that if the current recession is just a reflection of the need to reallocate resources, then why didn’t unemployment go way up during the housing boom?”

So if Austrian Business Cycle Theory is right, booms of credit promote resource reallocation. But, like Bob, I don’t think Krugman’s point holds any water. All of this was being done on cheap credit, remember, so you don’t really have to reallocate capital to housing sector. As for employment, who says that new jobs in construction and related industries was being drawn from the unemployed sector?

It seems to me that, besides for the people already in construction, we were getting a lot of immigrant labor and ‘teenagers’ growing up into the construction field. The boom doesn’t have to be preceded by unemployment, just shift resources away from potentially sustainable ones (at an opportunity cost of economic stability) to unstable ones.

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