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September 25, 2009

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Ulrich S

Although I don't always agree, I am very impressed with the wide-ranging and original thought on this blog.

Duncan

Chris,

I was talking about trend growth - should have been clearer. I think Dale Jorgenson's stuff on this is very interesting.

"Exploiting the new data and methodology, I have been able to show that
investment in tangible assets is the most important source of economic growth in
the G7 nations. The contribution of capital input exceeds that of total factor
productivity for all countries for all periods. The relative importance of total
factor productivity growth is far less than suggested by the traditional
methodology of Kuznets (1971) and Solow (1970), which is now obsolete."

http://www.economics.harvard.edu/faculty/jorgenson/files/acounting_for_growth_050121.pdf

AB

I think the chart above is essentially picking up the accelerator effect, no? Investment lags consumption and is more variable, so it will tend to rise as a share of GDP towards the end of the cycle as growth slows. So high investment/GDP is indeed followed by low GDP growth, but the causation is the other way round.

I suspect the current low level of investment probably mainly reflects the massive fall in overall output since Q3 last year, together with some of the capital-starving effect from the knackered financial system, suggesting it will pick up as (or a little while after) consumption does.

Diversity

I always had a hunch this graph would show a reverse slope. Partly that arises from noting how silly a lot of businees investment is (see GM). The other half of my hunch is a matter of accounting. If business is booming, you write off as much as possible as current spending. If things are slow, you write as much as possible to investment. Didn't expect as steep a slope though.

My guess still is that government investment against economic growth would show an even steeper reverse slope.

reason

Curious,
but I wonder why you wouldn't expect diminishing returns over time as capital is accumulated.
I thought that maybe there are other mechanisms involved here. Imagine there are increasing returns to scale and monopolistic competition, where market share is highly uncertain. Couldn't be that a growing market, means a fight for market share and as a result increasing excess capacity? i.e. Much more "unnecessary" investment (unnecessary from the point of view of efficiency, but maybe useful if competition is a good thing).

reason

Another potential mechanism, goes as follows - low growth, means low real interest rates. Low real interest rates and low profitability might mean lots of safe, low return cost saving investment - co-incidently reducing employment in the short term (makes sense if the opportunity cost is low).

Sarah Danes

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I really don't get the GDP growth graph but still, your article is very informative. Thanks a lot!

-James

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