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Against Zombie Macroeconomics One More Time

Paul Krugman says they are back:

Zombies on ABC: Boy, that was a morning of the undead. First, we had DeMint assuring us that businessmen he talks to say that fear of regulation — and the National Labor Relations Board!– is holding them back. Strange to say, actual attempts to talk to businesspeople, like this excellent McClatchy report, don’t find anything like that. Then Douglas Holtz-Eakin repeated the claim, and also did the “we’re about to be Greece” thing after a week in which the 10-year Treasury fell to 2 percent.

OK, that’s what happens with zombie ideas– no matter how often you kill them, they keep coming back. But don’t these people ever get embarrassed?

John Quiggin tried to dispatch them, but to no avail…

Zombie Claim #1: American businesses are scared and pulling in their horns because they lack confidence.

  • To the contrary, American businesses are not scared and are not pulling in their horns--rather, they are investing for the future at a furious rate. Business investment in equipment and software is back to its pre-recession peak--it is investment in residential construction that is depressed:

FRED Graph  St Louis Fed 3

Zombie Claim #2: America has overinvested in housing and needs the construction sector to be depressed for a while.

  • To the contrary, the housing bust has now been much longer and deeper than the mid-2000s housing boom--we are now far below trend in the cumulative number of houses built:

FRED Graph  St Louis Fed 4

Zombie Claim #3: America has too much public debt.

  • To the contrary, the public debt of America is selling at unbelievably high prices because savers are desperate to hold it. With $1 of cash flow devoted to interest payments you can currently borrow $50 long-term if you are the U.S. government but only $18.20 if you are a U.S. Baa corporation. When the public sector has such an enormous market advantage over the private sector in its cost of funds, the market is telling us as loudly as it possibly can that now is the time for the government to be spending more and taxing less than usual and thus running up its debt.