I know people cringe when they hear an Austrian advocate disaggregation, but humor me a bit.

Paul Davidson posits that the problem is a lack of demand. Very well, what does this mean? Given the example he starts the article off with, a restaurant with no customers, I sense he is referring to consumption. Well, let’s look at the evidence (all FRED data).

What the evidence seems to confirm is that the problem isn’t with consumption, but investment. Further, despite real private consumption rising near pre-recession levels, real gross and net fixed private investment continue to lag. I’m not saying the problem doesn’t manifest in depressed aggregate demand — clearly, investment needs to recover and this would increase total spending —, but this is why I advocate disaggregation.

What is the cause of the problem? I too have grown skeptical of the “confidence fairy.” Given the tendency to blame just about everything — healthcare legislation, taxes, regulations, et cetera — on holding investment back, it’s clear that advocates of “regime uncertainty” might not really have a clear idea of what exactly scares investment and what doesn’t. But, we can be more sure that the problem doesn’t lie with insufficient consumption. My guess is on the banking system: rotten balance sheets and paid interest on reserves go a long way to reduce lending to businesses.