I was caught by a Krugman post on his blog, “The Conscience of a Liberal.” As I am not one, I like to read Krugman sometimes to challenge myself as to why I think the way I do.
In his recent post, “Why Isn’t Investment Higher,” he tries to counter the argument that regulatory uncertainty embodied in financial, healthcare, and energy “reforms” has a profound chilling effect on investment:
There is, of course, a much more prosaic alternative: businesses aren’t investing because they have lots of excess capacity. Why build new structures and buy new machines when you’re not using the ones you already have?
He shows a dandy graph showing a yawning gap between investment as a share of GDP, and the output gap (the difference between where GDP is and where CBO estimates it should be). Visit the post to see it, I won’t reproduce it here. Anyway, the argument he is making is that investment has obviously not fallen as much as we would expect it to have given how much the output gap increased.
Ok, so what? Krugman is far more economically literate than me, but I don’t see how any of that really pertains to the reasons why investment is at the levels it is. Krugman is essentially picking a fight about the level of investment to demonstrate – with an arrogant level of certitude – why investment is at the level it is. If that level happens to be surprisingly high given the output gap, then that’s interesting, but hardly relevant as my humble self sees it.
Here’s something I personally think is more salient:
What we have here is private consumption expenditures and nonresidential fixed investment (the same measure Krugman used) – both as a percentage of GDP. PCE is on the left axis and PNFI is on the right axis.
As you can see, investment’s share of GDP has continued to decline well into 2010. Consumption is doing more of a random walk, but has clearly been increasing as a share of GDP during the recession. These two measures together make up nearly 80% of GDP, so these are profound changes going on in the economy. Krugman may want to benchmark investment against the output gap, but I think it more prudential to benchmark investment against the other GDP components. You might say that maybe investment is just getting crowded out by other GDP components not shown (like government expenditures). But nominal investment was declining until Q3:2009 and Q1:2010, when it increased slightly and remained basically flat, respectively.
I am not going to be like Krugman and say definitively that this proves my point, but I am just saying that investment and consumption are the two primary GDP components, and investment is suffering compared to its partner. Now if you think that current policies that demonize business and foster a climate of regulatory uncertainty throughout the economy are adequately addressing this policy issue, then more power to you. I would say we should change course.