Paul Krugman looks at the scatter of private investment and unemployment and comments:
More on Unemployment and Investment - NYTimes.com: To follow up on John Taylor: suppose we look only at nonresidential investment, and suppose that we think (as we should) that the causation runs mainly from unemployment — a proxy for excess capacity — to business investment, rather than the other way around.... [T]he data since 1990 look like this.... Investment is low as a share of GDP; well, that’s no surprise given how depressed the economy is. And if anything investment is a bit stronger than you might have expected from past behavior.
Not just a bit stronger: substantially stronger. 2% of GDP stronger--that's $300 billion a year more in business investment than we would have expected to see with the unemployment rate this high.
Part of this relationship is reverse causation, sure. But that means that 2% underestimates the effect of policy on investment: had there been no fiscal and banking rescue policies and if investment had not been boosted by policy, the unemployment rate might as a result be at the 16% of the Blinder-Zandi Republican policy baseline, and only THE ONE WHO IS knows how low business investment spending would be--but it would surely be a lot lower than it is now.
