Well, technically, this doesn’t answer Krugman’s critique. Krugman is not talking about the number of units of consumer goods sold he is talking about income (measured nationally as GDP). And every dollar I spend on consumer goods will be an additional dollar of income recieved by consumer goods manufacturers regardless of how many units they sell me for that additional dollar. Krugman’s point is essentially that falling interest rates explain why the composition of spending/income shifts from investment to consumption goods, but it doesn’t explain why the LEVEL of spending/income drops. In other words, Krugman is saying that a simple shift from investment to consumer goods doesn’t explain why would we have a recession.
I think a more appropriate Austrian response to your question MDay1985 would be that what Krugman is ignoring is the impact malinvestments have on the capital structure and how this impacts total output. If you read some of Roger Garrison’s work, like this essay, you will see that Austrians believe that spending on BOTH investment and consumer goods increases during the boom and that this has a nasty consequence on the capital structure. Specifically, increased consumer spending leads capital resources to be shifted toward the late stage production of consumer goods, while at the same time, lower interest rates leads to capital resources being also shifted to earlier stages of production. Middle stages are neglected and capital there may actually depreciate without replacement.
In the end, we are left with a capital structure that is out of whack as resources are tugged to early and late stages of production. As Garrison puts it: " Outputs of earlier stages feed successively into subsequent stages. At some stage in this process, the viability of the policy-induced capital restructuring comes into question. Capital and labor resources complementary to those already committed to earlier stages are in short supply (Hayek, 1967, pp. 85-91)."
As result , we simply can’t produce as much as we used to produce until it brought back into alignment (the production possibilities frontier has contracted). As a result, the LEVEL of income falls and we have a recession. If you want to think about it another way (a way that Garrison does not use but makes sense to me), the amount of capital in the economy may have stayed the same or even increased during the inflationary boom. But because the inflationary boom led to a realignment of the entire capital structure we no longer have the right KINDS of capital to produce the same amount of goods as before the boom. This essentially represents a productivity shock that reduces aggregate output. And this productivity shock will last so long as the capital structure is out of sorts.
At least, that’s how I understand it. Of course, I should note that I do not think the ABCT is very convincing for other reasons not mentioned in the Krugman quote. So anyone, please feel free to correct me if anything in my description above is wrong.