Why oh why can't we have a better internet? A correspondent who must wish me ill asks me to respond to Robert Murphy. It's a mistake for me to oblige. But I will…
I looked at a graph of the components of investment spending:
And I thought: "Gee. Housing investment is depressed because the Obama Administration gave fixing housing finance a priority urgency of zero and it has not fixed itself, so low housing investment is no mystery. But equipment investment is doing quite well, especially since demand is so low--there are no signs that businesses have run out of their ability or desire to adopt machinery that incorporates new and more productive technologies."
And so I wrote a five-word clause to that effect in my post Brad DeLong: And I Do Not Understand the Federal Reserve's Current Thinking at All... in the sentence: "There are no signs in the pace of technological progress, in the level of investment, in the pace at which the American labor force educates itself, in measures of capacity utilization, in signs of upward wage pressure due to labor quality bottlenecks, or in surging commodity prices due to supply bottlenecks to suggest that the path of growth of U.S. sustainable potential GDP is materially lower today than was believed back in 2007."
Now comes Robert Murphy, who proceeds to multiply my five-word clause by a factor of 120 and write a 600-word irrelevant rant:
Brad DeLong has this habit where he makes it look as if he’s walked through several different strands of evidence, and they all come down squarely on the position he agreed with at the start of his investigation–even though some of the evidence obviously cuts the other way. It’s like we’re arguing over whether the Beatles ever released goofy songs, and he says, “I have considered John, Paul, George, and Ringo, and see no reason to support your wild accusation.”
Case in point: In his most recent post, DeLong is baffled that the Fed is still gung-ho about tapering later this year. Here’s DeLong, who first posts this chart and then comments:
There are no signs in the pace of technological progress, in the level of investment, in the pace at which the American labor force educates itself, in measures of capacity utilization, in signs of upward wage pressure due to labor quality bottlenecks, or in surging commodity prices due to supply bottlenecks to suggest that the path of growth of U.S. sustainable potential GDP is materially lower today than was believed back in 2007. [Bold added.]
Now I could quibble with all of those “indicators,” incidentally, because according to DeLong’s own framework, we’re well below potential GDP. So the fact that, say, wages aren’t rising rapidly, doesn’t mean that potential GDP is growing as before; even if potential GDP growth had sharply decelerated in 2008, the “real GDP” line could still be well below it, meaning you would see the weak pressure on wages that we are currently seeing. (Again, I’m doing this whole post within DeLong’s framework, just to show he’s making a non sequitur even on his own terms.)
But the most egregious claim above is that there’s nothing “in the level of investment…to suggest that the path of growth of U.S. sustainable potential GDP is materially lower today than was believed back in 2007.” Oh really? Here’s the official government statistics showing gross private domestic investment as a percentage of potential GDP. To keep potential GDP chugging along at its previous pace, you’d think GPDI should stay about the same percentage as it was from 2005-2007. But this is what actually happened:
Incidentally, I’m not purposely loading the deck against DeLong by only including private domestic investment; FRED doesn’t seem to have a single series adding government and private investment spending. But, I hardly think DeLong is able to claim that the above chart is more than offset by the huge surge in government investment spending (at federal, state, and local levels) from 2008 – present, what with the Republicans’ vicious austerity and all.
So not only are the Austrians (and Larry Summers in the occasional op ed) the only ones who think the composition of investment spending is important for sustainable growth, but apparently we’re the only ones who think going from 23% down to 15% of total potential devoted to investment, might slow down the growth of potential output.
And then his commenters write double again in comments that make Murphy's post look smart to make the whole thing now some 1800 words long…
Does Murphy note, anywhere, that business equipment investment, which ought to fall as capital lifetimes are extended if the pace of trend economic growth markedly slows, has not?
Does Murphy note that the shortfall in residential construction investment has a financial explanation and is not credibly blamed on a lower future potential output growth path?
Does Murphy note, anywhere, that at a 5% real rate of return on capital the reduction in potential as a result of the post-2008 investment shortfall is now (19%-14% fall in investment share) x 4 years x 5%/year return on capital = 1% reduction in potential GDP, which is why I said that the path of growth is not "materially lower" rather than not lower when you compare it to the 5.5% real aggregate demand shortfall relative to trend?
There is an ongoing (and interesting, and insightful) academic discussion of potential GDP and its growth going on. But does Murphy participate in it at all, or recognize its existence?
Tell me how I am to interpret this other than as: "Oh. It's Murphy not doing his homework yet again"?
No link, because it's time to start saving links for things that deserve it: You can go to https://consultingbyrpm.com/blog/2013/08/delong-sees-nothing-in-the-investment-data-that-would-slow-capacity-growth.html