Monday, April 11, 2011

Investment and Unemployment Correlation

I took this image today from Greg Mankiw's blog that you can find by following this link. He got the graph from John Taylor and you can find the blog post that this image is from in this link. So enough with the introductions, let's see the image.

I know, we can file this in the big dud category. The image, admittedly, is not very exciting. This should be intuitive. With more investment in the economy we get higher employment. In other words, with more investment, we can furnish more jobs. So why do I even point out this graph? Because it can be misconstrued. Looking at the chart alone, you cannot tell which causes which. And what are the implications? Does this mean that we should increase government spending to combat unemployment? Greg Mankiw says that interpretation of the chart can go many ways. Greg Mankiw tries to sway the argument, but you would not be able to tell by the way he talks. He does this by taking an image from a blog post that directly states a policy implication and takes away that implication and says make your own decisions. John Taylor, the man who originally created the image, had another chart on his blog post.

John Taylor posted this image to show that decreasing government spending does not seem to have an adverse effect on unemployment. On the contrary, it actually shows that decreasing government spending will serve to decrease unemployment. Greg Mankiw conveniently forget to mention this chart, only showing the other chart which could be used to imply that increasing government spending would decrease unemployment. John Taylor has shown that this is just false. I guess Greg Mankiw simply forgot? Yes, I am sure it was an innocent omission. Another day, another fake economist.

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