Greg has a piece in the NYT. A key point

While the sluggish housing market can explain the slow pace of residential investment, it is not the whole story. Business investment has also been weak. Over the last two years, nonresidential fixed investment has grown by only 12 percent, whereas during the two years after the 1982 recession, it grew by 27 percent. Similarly, the narrow category of spending on business equipment and software fell more than twice as much in this recession as it did in the 1982 recession, and it has been slower to recover.

My first inclination of course is to go straight to the data. Unfortunately FRED data only goes back to 1995 and so I have to download the archived data straight from the BEA website and for some reason that is going slow right now.

However, I can respond to this point Greg makes

The great economist John Maynard Keynes suggested that investment spending is in part determined by the “animal spirits” of investors, which he described as “a spontaneous urge to action rather than inaction.” Recessions occur when optimism turns to pessimism, and businesses are reluctant to place bets on a prosperous future. Recovery occurs when investor confidence returns.

I tend to disregard this type of thinking as astrology. Its largely prejudice on my part but I tend to think businesses can be more or less modeled as profit maximizers.

Keynes made the point that there is deep uncertainty and so maximization fails. However, this is only true if maximization is a conscious process. If instead maximization proceeds through evolutionary means this need not be true. The firm doesn’t have to understand what its doing anymore than you need to understand how you are breathing.

Now, what I do believe is that Modigliani-Miller fails and that when businesses are profitable in the current period this affects investment in the current period. This goes along with my general evolutionary view of the firm.

Anyway, that having been said I think the real interest rate is the key driver here. I don’t have a problem with trying to gin up a little business confidence but we shouldn’t see it as a replacement for greater monetary and fiscal stimulus.

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