Do certain economic booms inevitably require economic busts? Are recessions sometimes the painful but necessary way to correct the buildup of past economic imbalances? Paul Krugman says no to this line of reasoning and calls it the "hangover theory" of the business cycle. Steven Randy Waldman replies that while not every business cycle fits the "hangover theory", some of them do. Consequently, he believes the hangover theory should not be so easily dismissed. Mike Shedlock also replies by showing in great detail how the past housing boom-bust cycle fits quite well the hangover theory. Finally, Justin Fox weighs in on the matter, but ultimately decides to ride the fence on this question.
My own view is similar to Waldman's--some but not all boom-bust cycles fit the hangover theory. I think this view can be best illustrated by the double-dip recessions of Paul Volker in the early 1980s that are now credited with (1) eliminating double digit inflation and, in turn, (2) laying the foundation for the subsequent 20+ years relative macroeconomic stability.
My own view is similar to Waldman's--some but not all boom-bust cycles fit the hangover theory. I think this view can be best illustrated by the double-dip recessions of Paul Volker in the early 1980s that are now credited with (1) eliminating double digit inflation and, in turn, (2) laying the foundation for the subsequent 20+ years relative macroeconomic stability.
