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Friday April 13th 2012

Krugman on Barro

Paul’s comment on Robert’s latest column confuses me.  Paul shows a graph establishing that the investment share of GDP is procyclical, as if that refutes Robert’s viewpoint about what ails the economy.  But that fact is hardly a surprise.  As I put it recently, “the most volatile component of G.D.P. over the business cycle is spending on investment goods.”  Moreover, I know Robert well enough, having been his colleague for about a quarter century, to know that he knows the macroeconomic time series as well as anyone.

The problem that Paul glosses over is that correlation does not imply causation.  Paul appears to jump to the conclusion that this correlation establishes that the the business cycle is the driving force behind investment spending.  But it could just as easily be the opposite (or a third factor driving both).  I am completely confused as to why Paul thinks this graph establishes much of anything at all.

I should note, as an aside, that Robert is the second most cited living economist.  That fact does not imply that everything he says is correct. (And indeed Robert and I disagree often in Harvard seminars.)  But it does suggest that one should not be so glib in summarily rejecting his point of view.

This article was originally posted on Greg Mankiw’s Blog