In his 7 July 2010 blog post, Why Isn’t Investment Higher?, Paul Krugman writes:

Truly, we live in a time of mass delusion — or maybe make that elite delusion — where there are lots of things that everyone believes, without a shred of evidence to back that belief. Here’s one more: everywhere you go, you encounter the claim that businesses aren’t investing, they’re just sitting on piles of cash, because they’re worried about future government policies.

There is, of course, a much more prosaic alternative: businesses aren’t investing because they have lots of excess capacity. Why build new structures and buy new machines when you’re not using the ones you already have?

So is there anything in the data suggesting that we need to invoke fear of government to explain low investment? Not a bit.

[Krugman shows a graph of output gap {difference between actual and potential GDP} and investment to make his point.]

What we see, first of all, is that business investment fluctuates with the state of the economy (duh). It’s actually a surprisingly tight relationship.

Second, we see that investment has, if anything, fallen LESS than you might have expected given the plunge in the economy. We’re much further from potential output than in 2002, yet the share of investment in GDP is only slightly lower.

In short, there’s no puzzle about business investment — and not a hint that we have to invoke some kind of oh-god-Obama’s-a-socialist story to explain low spending. It’s the economy, stupid.

Krugman follows up on 9 July 2010 with Pity the Poor C.E.O.’s.

All the buzz lately is that the Obama administration is “antibusiness.” And there are widespread claims that fears about taxes, regulation and budget deficits are holding down business spending and blocking economic recovery.

How much truth is there to these claims? None. Business spending is indeed low, but no lower than one would have expected given widespread overcapacity and weak consumer spending. Business leaders are feeling unloved, but giving them a group hug won’t cure what ails the economy.

Ask the Obama-is-scaring-business crowd for some actual evidence supporting their claim, and they’ll tell you that business spending on plant and equipment is at its lowest level, as a share of G.D.P., in 40 years. What they don’t mention is the fact that business investment always falls sharply when the economy is depressed. After all, why should businesses expand their production capacity when they’re not selling enough to use the capacity they already have? And in case you haven’t noticed, we still have a deeply depressed economy.

On 9 July 2010, Mark Thoma (U of Oregon), commenting on Krugman, says:

Why are businesses so reluctant to invest? Is it because of an antibusiness climate? Yes, but the climate wasn’t created by the Obama administration. The people who directly or indirectly blew up the financial system — something that happened before Obama took office — are the ones responsible for the discouraging climate that is making firms so unwilling to expand their operations. There is a political attempt to place the blame for the lack of investment on the administration, but there’s nothing of substance to support — and plenty to refute — the claims being made by the lobbyists behind this effort.

So let’s hear some support for another stimulus package and get the economy moving.

-RichardH