Perhaps the subject should be Hollinshead versus
Krugman. What has struck me about the debate so far is that the
protagonists are talking about two different things. Much of what Krugman
says in attacking the once, and perhaps still, conventional (Austrian?) view of
the business cycle is valid. It is not overproduction and underconsumption
that is the problem. It is a perception that the economy is deteriorating,
and an expectation that it will deteriorate further. People then want to
put their money in a safer place, even if that happens to be under the
mattress. Tightening credit at a time like that is not appropriate.
What is needed are transactions to boost confidence and clear the market.
Therefore loosen credit; pump money into the system and make people spend.
But, as Russia has demonstrated, this may not work either. Much depends on
how bad things really are. A broken down economy is a broken down
economy.
Krugman is not talking about long-duration phenomena. His time scale
is a few years, perhaps a decade at the most. He is referring to
expansions and contractions which are not due to significant technological or
social change, but which occur nevertheless. Neither demographics
nor the exhaustion of an innovation enter into it. Something else must
therefore account for a downturn. His explanation: "A recession
happens when, for whatever reason, a large part of the private sector tries to
increase its cash reserves at the same time." While this sounds
flippant, it does seem to provide a useful starting point.
I would not want to speak for Mike Hollinshead, as he is perfectly capable
of doing that himself. However, it does seem that Mike is concerned with
things that occur over the long run: the applications of an innovation become
exhausted; the market is saturated; manufacturing centres decline, others arise;
significant demographic and locational change occurs; etc. These are very
different concerns from the short-run concerns of Krugman. All kinds of
little Krugman recessions could occur while the things Mike is concerned about
are working themselves out.
My conclusion: both are right. But I may be wrong.
Merry Christmas,
Ed Weick
