Investment and the Recession of 2001

J. Bradford DeLong

February 2001


  • A principal component of autonomous spending is investment.
  • When businesses start cutting back on their investment programs, the Keynesian multiplier amplifies the resulting fall in spending into a larger fall in total demand, a rise in unemployment, and a recession.
  • In the aftermath of the NASDAQ crash of mid-2000 and the Federal Reserve's interest rate hikes of 1999 and early 2000, investment spending stopped growing. In the first quarter of 2001 seasonally-adjusted non-residential fixed investment was exactly where it had been six months before.
  • Since the first quarter of 2000 investment has crashed: it is now eleven percent below what it was nine months ago.

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