Another Round on Investment and Unemployment

  • Paul Krugman responded to my reply (March 31) to his two critiques (afternoon and evening of March 30) of my post (January 14) on the negative correlation between investment and unemployment. He now says that Taylor “professes himself baffled.” Of course I didn’t profess any such thing. I simply showed that that Krugman was wrong.
  • My original post showed that there is a negative correlation between total fixed investment (the sum of residential and nonresidential investment) as a share of GDP and the rate of unemployment over the past two decades. In his March 30 afternoon critique Krugman said that “It’s mostly the housing bust!” and continued that “The rest”—the business fixed investment part—“is just politically motivated mythology.”
  • In my reply I pointed out that, no, it’s not mythology; there is a strong negative correlation between business fixed investment as a share of GDP and the unemployment rate over exactly the same period as in my original post. The investment-unemployment correlation is not mostly housing. Some of the high unemployment now is due to low residential investment as it has been in many past periods of high unemployment. As I said in my original January 14 post, you should look at residential investment plus nonresidential investment.
  • Krugman devotes considerable space in his latest criticism of my January 14 post to comparisons of business investment in the Bush Administration and the Obama Administration as if that was something I did in that post. But I didn’t make such a comparison in my Janaury 14 post. If one is interested, I have found in other empirical work that policies earlier in the 2000s, including the policy that kept interest rates too low for too long in 2003-2005 and the stimulus package of February 2008, were part of what went wrong prior.
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