Krugman Confusion: The Business Cycle and the Unemployment Question

If the business cycle is about the shifting of assets between the capital goods sector and the consumer goods sector, why isn't there unemployment in the consumer goods sector during the boom period, asks Paul Krugman.

Mario Rizzo replies to this, as he puts it, "unoriginal question" by Krugman, here.

In the comments section of Rizzo's post, I respond with what I believe is the best explanation to the phenomena, which I originally discussed last year:

The answer to why there is unemployment during the downturn, versus no such unemployment during the boom, seems in my view to require a monetary answer.

Last October, I wrote ( http://tinyurl.com/7yssvy )in response to Krugman:

“Before a boom starts, the economy can be said to be in equilibrium between the consumer goods production and capital goods production. When a central bank then pumps in new money, new demand is created for labor in the capital goods sector causing bidding for labor away from the consumer goods sector. Thus, there is no point where rising unemployment would be a factor in this part of the cycle. However, during the downturn part of the cycle, it is not a case that the central bank is pumping money into the consumer sector. What is occurring, instead, is that a transfer of money is taking place from the capital goods sector to the consumer goods sector. It is this money drain from the capital goods sector that causes the unemployment. During the central bank induced boom, money isn’t being drained from anywhere.”

The different aggregate demand changes (as well as sectoral changes), it is true are at the core of the phenomena, but I think the best explanation must include an exact mention of the money influence that causes the differing changes in aggregate demand.

The attractiveness of this simple explanation does not seem to find fancy with me, alone. I note that Robert Murphy backs me up on this analysis by offering the same explanation in a column, Austrians Can Explain the Boom and the Bust, that he wrote some months after my original discussion of the Krugman confusion.