Arnold Kling

What's Wrong with the U.S.?

Arnold Kling, Great Questions of Economics
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Steve Roach says that revised GDP statistics show that the economy is weaker than we thought.

In my some 30 years of experience as an aficionado of the US business cycle, I can remember only one other instance when a statistical revision to the US numbers carried such weight...

Over the first three quarters of capital spending is now estimated to have declined by $88.2 billion in inflation-adjusted, or real, terms. That amounts to fully 154% of the $57.2 billion decline in real GDP over the same three-quarter interval...When the equity bubble popped, the IT bubble was quick to follow. A sharp contraction of IT spending accounted for 69% of the decline in business capital spending over the first three quarter of 2001 -- fully 106% of the decline in overall GDP during that same period.

A couple of comments on this.

  1. It validates Tobin's q (the ratio of stock market capitalization to the replacement cost of capital) as a determinant of investment.
  2. Moore's Law could lead to a lot of volatility in the estimates of investment in information technology. To translate nominal spending into real spending, the statisticians have to estimate the rate of quality improvement. This is almost impossible to do precisely these days. Are computers improving at a rate of 30 percent? 80 percent? A reasonable case can be made for either figure, with dramatically different implications for real spending.

I agree with Roach that the downside risk in the macroeconomic situation is substantial. I think that there is room for more expansionary steps in both fiscal policy (I like the idea of revenue sharing with state and local governments) and monetary policy.

Discussion Question. If business investment is difficult to measure, should policymakers be relying more on other indicators of the business cycle, such as the unemployment rate?

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