What Explains the Decline in Business Investment?

A conservative economist has received a lot of attention from a graph that he published on his blog showing that unemployment is correlated with the decline in business investment. He explains this relationship by arguing that job loss is due to government over-regulation which has affected business confidence and the fall in business investment. What does the correlation explain, however?

Business investment is a broad concept that includes residential real estate investment as well as business investment in plant and equipment. When the business investment data are decomposed it is apparent that investment in plant and equipment is similar to what it was in the same stage of the modest recession in 2001. The big change in business investment has been the busting of the housing bubble. The resulting recession, of course, has cut into consumption and business has done what it always does when consumption falls. It burns down inventory and it puts off investment in plant and equipment.

John Taylor is a smart guy and he knows that business investment includes residential real estate investment. Its hard to understand why he explained the relationship between business investment and job loss the way that he did. It makes sense, however, when we relate it to ideology. Conservative economists have a propensity to explain almost every economic problem on the same enemy. The government, and not the market economy, is always the cause of our economic problems. This was true of the Great Depression and it is the conservative explanation of the Great Recession and high unemployment.