The problem is not C or G, but I

Steve Horowitz has a great post on Coordination Problem regarding economic historian Bob Higgs.  Principles of macroeconomic students know that national income Y = C+I+G+(X-M).  Keynesian theory argues that when C, consumption declines, aggregate demand is less than the full employment level that we need to increase G, government spending to fill the gap.  This was the point of the stimulus spending.  Horowitz notes "Bob [Higgs] points out that all the talk about "stimulating consumption" is beside the point because consumption spending is not the problem! Real personal consumption spending is now above its pre-recession peak. And Lord knows government spending isn't the issue either. Anyone who's taken intermediate macro knows what's coming next: if GDP is lagging, and it's neither C nor G that's the problem, it's a pretty good bet that it's investment."  Higgs writes:

"The economy remains moribund not because consumption spending has failed to recover and not because government spending has failed to increase, but because the true driver of economic growth—private investment—remains deeply depressed. Gross private domestic fixed investment fell steeply after the second quarter of 2007, and in the second quarter of 2011 it remained 19 percent below its pre-recession peak. This figure fails to show how bad the investment situation really is, however, because the bulk of the investment spending now taking place is for what the accountants call the ”capital consumption allowance,” the amount estimated as necessary to compensate for the wear and tear and obsolescence of the existing capital stock.

The key variable is net private domestic fixed investment—the investment that builds the productive private capital stock. Quarterly data through this year are not currently available at the BEA website, but the annual data show that an index of its real amount peaked in 2006, fell substantially in each of the following three years, and recovered only slightly in 2010, when the index showed net private domestic fixed investment was running about 78 percent below its level in 2005 and 2006. Here is the true reason for the recession’s persistence.

Private investors, despite the full recovery of real consumer spending and the increase of real government spending for final goods and services, remain apprehensive about the future of new investments, especially new long-term investments."

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