This Recession Not A Paradox Of Thrift: Krugman, Keynesians Got It Wrong

it seems more likely that the reduced consumer spending was mainly a reaction to layoffs and hours cuts. The roots of this recession go a lot deeper than the paradox of thrift.

Read Casey Mulligan's piece on The New York Times Economix, "The Recession and the ‘Paradox of Thrift’." Also reprinted on Casey Mulligan's blog, supply and demand (in that order).

I will add that layoffs will also cause a decline in home prices, increase unemployment, increase the rate of mortgage defaults, and these consequences will substantially contribute to, if not directly cause, the financial crisis. Read my previous post, "Factors Affecting Mortgage Defaults."

There are economists, such as James Hamilton, who see the previous sharp rise in oil prices as the cause of the layoffs and the recession. See my previous post, "2007-08 Oil Price Run-up Caused Recession" on Oct 16, 2009.

Despite the severity and the numerous depression alarms from the media and government, this recession may be much more mundane than we have thought so far. The recession could be just a sharp response to the economic shock caused by a significant increase in oil prices. The high unemployment is a response to a US structural change in response to high oil prices (exacerbated by additional cost of proposed cap and trade laws) and to a production shift away from residential real estate.