A couple less than stellar posts on the investment op-eds since this morning. This is a particularly bad one from Matt Yglesias.
He notes that the change in investment is doing OK right now. It's a fair enough observation. It is true we are not going through doomsday. Investment is occuring.
But using this to say that weak investment isn't our problem right now is like pointing to the fact that the unemployment rate hasn't increased and saying that that means unemployment isn't a problem.
Matt is right to highlight what Andrew Bossie has been saying here in the comment section and what most people who have weighed in on this have acknowledged by now: residential investment is particularly bad.
So - is investment such that we have achieved an equilibrium in the labor market? Sure. Take a look at employment-to-population ratios. They've been pretty stable. Investment - the change in K - has been keeping pace with changes in L. So we have something like a stable equilibrium. But it's not a full employment equilibrium, and that's the whole point. Decisions are made on the margin, and change depends on the margin, but life is lived in levels.
I literally laughed out loud when I read K and L.
ReplyDeleteMy undergraduate macro professor knows this aggregation is worthless.
Just to clarify, I recognize that nonresidential investment is also below trend. However, pointing out that investment is lagging is almost always immediately followed by some kind of policy prescription. While your point seems more academic than anything else it does seem to point to a "well then what?" in which we start talking about "business" incentives like the one that seems to be the focal point of the Obama jobs package or we start talking about something empty like "confidence".
ReplyDeleteI think this is wrong headed and that the real policy push needs to be in the direction of dealing with residential investment.
Mattheus - you may not be getting your money's worth.
ReplyDeleteDoes this mean you've chosen to abandon Hayek? After all in P&P he presents an aggregate of consumer goods and an aggregate of factors of production - not JUST K or L, but both K and L! That's even more aggregated than I have here!!!
So if you want anyone to take you seriously here, you're going to have to be consistent and denounce every explication of ABCT I've ever seen (others of which follow the same conventions).
Does this mean you've chosen to abandon Hayek? After all in P&P he presents an aggregate of consumer goods and an aggregate of factors of production - not JUST K or L, but both K and L! That's even more aggregated than I have here!!!
ReplyDeleteYou read Prices and Production, Daniel. You should know better. In the first place, making a distinction between early and late stage capital goods - as well as specific versus nonspecific capital goods - is not as aggregated as "K and l;" CERTAINLY not more so.
In the second place, P&P was made simple for exposition. The aggregation and algebraic simplification were made to allow the reader a basic overview of his theory because it was a pretty new theory.
If you read Pure Theory of Capital and come back to me that it's all K and L, I'll stop giving Hayek the benefit of the doubt.
And you say this about Hayek knowing full well that Solow's growth models and all Cobb Douglas derivative functions are predicated on exactly K and L. Cmon man, let's get serious.
ReplyDeleteSo what you're telling me, Mattheus, is that Hayek used aggregation repeatedly in the book to provide a useful abstraction of a theory which did not imply the homogenization of the variables involved. Is that what you're telling me?
ReplyDeleteI'd agree - but that's precisely what you're coming out against in other peoples' usage of it.
So be consistent one way or another. Reject Hayek and Solow and Cobb-Douglas over this or reject none of them over this.