The points made here are:

• Private investment in structures, equipment and inventory is an important source of aggregate demand for the products of the American economy.
• Investment demand is the most volatile element of aggregate demand because proposed changes in taxes and regulation can cause business to cancel any plans for expansion. That is to say, a particular business typically does not cut back its investment purchases by a few percent it cancels them entirely. Even uncertainty about taxes and regulation is enough to cause businesses to cancel such investment.
• When businesses cutback on investment the economy suffers a recession. The immediate cause of all recessions and depressions is the significant reduction in investment purchases. The 1930's recession resulted from private investment purchases decreasing 90 percent. There may be a chain of causes that leads to a recession or depression but they have to work through a decrease in investment.
• When the electorate elects a president who promises-threatens to redistribute income and wealth businesses react by reducing their investment. Thus the voters who vote for a redistribution of wealth and income get a recession instead.

The Importance of Private Investment in Plant,
Equipment and Inventory in Aggregate Demand

In the fourth quarter of 2011 the U.S. economy produced and sold about $15.3 trillion of goods and services. There are four categories of purchasers of the output of an economy: 1. Consumers, 2. Investors, 3. Governments 4. Foreign buyers (Exports). The levels of the purchases by these four type are shown below.

In the second column is the total purchases by these four categories of purchasers. Some of these purchases were for foreign products. The third column provides estimates of those purchases of foreign products; i.e., imports. The total imports were about $2.7 trillion. When those purchases are deducted from the total purchases in the first column the result is the figures shown in the fourth column. The total for the fourth column is the Gross Domestic Product of the U.S.

So the purchases of U.S. goods and services as private investment was about $1.7 trillion and constituted about 11 percent of aggregate demand. That is $1700 billion and it is a lot of demand for U.S. production.

The Volatility of Private Investment Demand

To make comparisons over time it is necessary to have the production of goods and services expressed in constant prices. The recent statistics are in terms of the prices of the year 2005 ($2005). Here is what happened to private domestic investment purchases since the first quarter of 2004.

Private investment purchases peaked in early 2006 and are now still below that peak. There was a decline from that peak in subsequent quarters and a small rise and then again a decline, but it was not until 2009 that private investment began to fall like a rock. There were quarters where the rate of decrease at an annual rate was in the range of 40 to 50 percent.

The decline in private investment purchases between 2006 and 2008 had largely to do with the decline in residential housing construction.

There are various ways of making the point that investment demand is volatile. Here is one of them. What is shown is the ratio of the various components of aggregate demand to their values in the fourth quarter of 2007.

Source Material on the Depressions of the United States