Must-Read: Paul Krugman: The Investment Accelerator and the Woes of the World

Must-Read: I must say, I want to go back to Larry Summers’s and my discussants for our 2012 paper, and ask them whether they want to amend their remarks, or whether they still stand by them.

Valerie Ramey: Do you still believe that any valid inferences can be made about long-run properties from AR models that match the first several autocorrelations? And do you still believe that the rate of long-run potential output growth is invariant to whether the short-run sees depression or boom?

Marty Feldstein: Do you still believe that a downturn like the one that began in 2008 is “cleansing” and leads potential output onto a higher growth path in the long run?

Paul Krugman: The Investment Accelerator and the Woes of the World: “Jason Furman… refuting the ‘Ma! He’s looking at me funny!’ school…

…which attributes US economic weakness to the way the Obama administration has created uncertainty, or hurt businessmen’s feelings, or something…. It’s a global slowdown, very much consistent with the ‘accelerator’ model, in which the level of investment demand depends on the rate of growth of overall demand…. If weak demand leads to lower investment, which it does, and if fiscal austerity is contractionary, which it is, then in a depressed economy deficit spending… crowds investment in…. Austerity policies [then] don’t release resources for private investment… [but] reduce future capacity in addition to causing present pain, [while] stimulus… supports, not hinders, long-run growth…

And let me say two further things to Jason Furman:

1. Housing: the failure of the Obama administration to do anything to set the pattern of housing finance in stone may well be boosting uncertainty, and retarding investment in housing

2. Investment and interest rates: If you are unhappy with a Federal Reserve that thinks that investment is growing too rapidly and needs to be cooled-off with interest rate increases, there is, on January 4, 2017, a recess of the Congress, during which recess appointments can be made.