Why Did Investment Fall During the Recession?

My view is that investment fell largely because labor fell (and labor and capital are complements). For example, if fewer people are to be working, it’s time to slow down the building of new office buildings and factories in which they would work.

An alternative view is that businesses were actually hungry for loans to finance new investment, but that banks were in such a chaos that loans were not available. So workers who would have worked with the new capital are out of a job.

Under that alternative view, the unemployment rate for CAPITAL should be low (and its marginal product should be high — more on that later), because businesses would work their existing capital harder as an imperfect substitute for having the new capital that they really desire. But the chart below shows that the opposite was true — capital was under utilized during the recession.

My view explains why the unemployment rates of labor and capital BOTH increased for two straight years: fewer workers means a lower marginal product of capital (and a higher marginal product of labor) and thereby less capital utilization.

There may be yet another theory explaining some of these facts, but I am not aware of an explanation for all four:

  • low labor usage
  • low capital usage
  • low marginal product of capital
  • high marginal product of labor

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About Casey B. Mulligan 76 Articles

Affiliation: University of Chicago

Casey B. Mulligan is a Professor in the Department of Economics. Mulligan first joined the University of Chicago in 1991 as a graduate student, and received his Ph.D. in Economics from the University of Chicago in 1993.

He has also served as a Visiting Professor teaching public economics at Harvard University, Clemson University, and Irving B. Harris Graduate School of Public Policy Studies at the University of Chicago.

Mulligan is author of the 1997 book Parental Priorities and Economic Inequality, which studies economic models of, and statistical evidence on, the intergenerational transmission of economic status. His recent research is concerned with capital and labor taxation, with particular emphasis on tax incidence and positive theories of public policy. His recent work includes Market Responses to the Panic of 2008 (a book-in-process with Chicago graduate student Luke Threinen) and published articles such as “Selection, Investment, and Women’s Relative Wages,” “Deadweight Costs and the Size of Government,” “Do Democracies have Different Public Policies than Nondemocracies?,” “The Extent of the Market and the Supply of Regulation,” “What do Aggregate Consumption Euler Equations Say about the Capital Income Tax Burden?,” and “Public Policies as Specification Errors.” Mulligan has reported on some of these results in the Chicago Tribune, the Chicago Sun-Times, the Wall Street Journal, and the New York Times.

He is affiliated with a number of professional organizations, including the National Bureau of Economic Research, the George J. Stigler Center for the Study of the Economy and the State, and the Population Research Center. He is also the recipient of numerous awards and fellowships, including those from the National Science Foundation, the Alfred P. Sloan Foundation, the Smith- Richardson Foundation, and the John M. Olin Foundation.

Visit: Supply and Demand (in that order)

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