Thursday, March 31, 2011

Krugman right on the mark!


Krugman (and here too) follows on the Mankiw/Taylor correlation between unemployment and investment.  Gets causality right, and by updating the data shows that if anything investment is actually kind of strong. We need more autonomous demand, that is, a good old fashioned fiscal expansion, and investment will follow. In other words, this crisis is NOT the result of anti-business bias in government policy. Otherwise investment would be weaker.

PS: Note Taylor's reply here. Besides being dense, as Krugman points out quite politely, he gets causality wrong. Yes residential investment is probably, to some degree, autonomous, and, hence not caused by demand expansion (or inversely by unemployment). But the evidence on non-residential investment being determined by variations in the level of output is overwhelming. Thanks to Laura Carvalho for pointing this out!

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