Advancing a Free Society

Investment and Unemployment: A Reply

Thursday, March 31, 2011

Paul Krugman wrote a post yesterday afternoon and another one last evening on a January 14 post of mine. In the Janaury post I pointed out the strong correlation between total fixed investment as a share of GDP and the unemployment rate during the past two decades; total fixed investment equals business fixed investment plus residential investment. In his afternoon post, he argued that it’s misleading to look at total fixed investment because most of the recent swing has been in residential investment. “It’s mostly the housing bust!” he argued, continuing that “The rest”—the business fixed investment part—“is just politically motivated mythology.”

But the correlation I pointed out is not just due to housing. There is a close relationship during the past two decades between business fixed investment and unemployment. In fact it’s closer than for residential investment and unemployment. Here are the time series charts for business fixed investment and residential investment.

See the graphs and continue reading John Taylor at Economics One