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Menzie Chinn on Barro and Mankiw Investment Behavior and Policy Implications

Econbrowser Investment Behavior and Policy Implications

Menzie Chinn:

Econbrowser: Investment Behavior and Policy Implications: Over the weekend, both Professors Barro and Mankiw wrote on investment… the focus on business fixed investment (BFI) or nonresidential investment was somewhat odd because BFI behavior had not been particularly anomalous…. [T]aking into account the depth of the recession, one finds that BFI is doing better than in the recovery from the previous recession (as well as the previous recession+recovery). It makes one wonder about this argument that great regulatory uncertainty is dampening business enthusiasm for capacity increases. After all, this bivariate logic would imply that regulatory uncertainty was greater in the years after the first Bush recession, relative to now….

Professor Mankiw [seeks]… "a cut in the taxation of income from corporate capital." I’ll just observe while the US corporate tax rate is relatively high, according to the CBO, it isn’t relative to other G-7, and the effective corporate tax rate is not particularly high…. Professor Barro['s]… fiscal reform package includes abolishing the corporate and estate taxes, implementing a VAT… cutting government spending… reducing regulatory uncertainty…

As Menzie noted, the truly screwy thing about both op-eds is that they both pretend that the problem that caused the recession was a downturn in business investment, with Barro saying not a word about construction and Mankiw only slightly better:


How to Really Save the Economy: [T]he main driver of business cycles is investment… the main decline in G.D.P. during the recession showed up in the form of reduced investment…. What drives investment? Stable expectations of a sound economic environment…


Business Investment as a Key to Recovery: "he most volatile component of G.D.P. over the business cycle is spending on investment…. From the economy’s peak in the fourth quarter of 2007 to the recession’s official end, G.D.P. fell by only 5.1 percent, while investment spending fell by a whopping 34 percent. The subpar recovery has coincided with a historically weak investment recovery. Compare our recent experience with that of the early 1980s, when the nation last experienc…. While the sluggish housing market can explain the slow pace of residential investment, it is not the whole story…