For the Virtual Green Room: June 20, 2011
Expansionary Fiscal Policy "Only Requires Unusual Action While the Situation Remains Grave"

Collapse of the Chicago School: Gary Becker Edition

Residential investment right now is not depressed because of fears of Barack Obama's policies. Residential investment right now is depressed because (a) some parts of the country are overbuilt, (b) mortgage finance is broken, and (c) lots of people are scared and living with their inlaws:

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Nonresidential investment is recovering from its depression lows at a healthy pace:

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And Matthew Yglesias reads Gary Becker:

Yet Another Conservative Economist Thinks Barack Obama Can Travel Through Time: In addition to repeated attacks on American business, especially banks (some of the attacks on banks were well deserved), Congress passed an expensive stimulus package that did not stimulate much. The health care bill Congress passed seems likely to increase the cost to small and large businesses of providing health insurance for employees. Congressional leaders proposed high taxes on carbon emissions, large increases in taxes on higher income individuals, corporate profits, and capital gains as part of vocal attacks on “billionaires”. Many in Congress wanted to cap, or at least control, compensation of executives. Proposals were advanced to make anti-trust laws less pro-consumer, and more protective of competitors from aggressive and innovative companies. Congress passed and the president signed a financial reform bill that is a complicated and a politically driven mixture of sensible reforms, and senseless changes that have little to do with stabilizing the financial architecture, or correcting what was defective in prior regulations. It is no surprise that this rhetoric and the proposed and actual policies discouraged business investment and slowed down the recovery.

And comments:

Admittedly, I don’t have a Nobel Prize. But I can look up the trajectory of private investment in the United States.... [B]usiness investment... did the bulk of its plunging in 2008. It also seems to me that George W Bush was president at this time. Soon after Barack Obama took office, investment bottomed-out and began to rebound. Neither Obama’s rhetoric nor his policies can possibly be responsible for the Obama-era drop in investment for the simple reason that no such drop occurred.

Indeed. As I have posted before, given the depressed state of the economy--high unemployment and slack capacity utilization--you would expect very few businesses to be interested in investing right now, for most would be waiting to invest until they were using the capacity they have already got. But that is simply not the case: conditional on the unemployment rate, nonresidential business investment is remarkably strong as a share of GDP:

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Not only is Becker's claim that Obama's policies and not the recession have "discouraged business investment" simply wrong--nonresidential business investment has grown under Obama much more strongly than other components of GDP--but the claim that business investment is lower than we would expect it to be at this stage of the recovery is simply wrong: it is higher.

Scanning over Becker, I see that those aren't the only simply wrong claims he makes. Becker writes that: "At the height of the financial crisis, the media frequently had discussions of the 'failure of capitalism'". The only such discussion I recall came not from "the media" but from Gary Becker's co-blogger Richard Posner, who used the phrase as the subtitle of a book.

Of course, his co-blogger Posner is little more reliable. I note:

Posner: Why the economic recovery is lagging: The sharp and rapid decline of the economy that began with the financial crisis of September 2008 was expected to be followed by a sharp and rapid rise (making for a V-shaped economic cycle) when the crisis was resolved by the bank bailouts and other emergency measures taken by the Federal Reserve and the Treasury Department...

Maybe by the Chicago economists that Posner talks to. But not by others like Carmen Rienhart, Ken Rogoff, Ben Bernanke, and Paul Krugman. For example, January 22, 2008:

Deep? Maybe. Long? Probably: I still keep reading articles asserting that the last two recessions were brief and shallow. Formally, that’s true. But both were followed by prolonged “jobless recoveries” that felt like continuing recessions. Below is the employment-population ratio since 1989, with shading showing the official recessions. In both cases the employment slump went on for a long time after the recession was supposedly over. There’s every reason to think that the same thing will happen this time. There’s a huge overhang of excess housing inventory; it will probably take several years before housing prices fall to realistic levels; and it’s not at all clear what will fill the gap left by weak housing and consumer spending. There’s still the question of how deep the slump will be. I can see the case for arguing that it will be nasty. The 1990-91 recession was brought on by a credit crunch, the 2001 recession by overinvestment; this time we’ve got both. I guess we’ll see. In any case, whatever happens will probably last quite a while.

Update: If this report is true, Ben B. is thinking along similar lines.

I do get the sense that these people aren't even trying any more.

They don't seem to look at data--it would not have been hard for Becker to call up a graph of nonresidential business investment.

They don't seem to survey the literature--it would not have been hard for Posner to read Reinhart and Rogoff's This Time It's Different.

They don't try to get their citations correct--Becker simply should not claim that his target is "the media" rather than Posner.

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