Krugman and Taylor Talk Past Eachother

This exchange between Krugman and Taylor is interesting:

http://johnbtaylorsblog.blogspot.com/2011/03/investment-and-unemployment-reply.html
http://krugman.blogs.nytimes.com/2011/03/30/more-on-unemployment-and-investment/
http://johnbtaylorsblog.blogspot.com/2011/03/investment-and-unemployment-over-longer.html
http://krugman.blogs.nytimes.com/2011/03/31/two-slumps-in-business-investment/


But they miss each-others points I think.
Taylor concludes that business investment causes employment. I think this is absolutely true - we know new and growing businesses are the biggest drivers of employment. But I don't think Krugman is arguing against this. Taylor does not address WHY businesses would invest when they have excess supply. Also, why do employment (his latest graph seems to present coincident data for investment and employment) always lag the economy overall.

But Taylor doesn't dismiss these either, his prescription is just to remove impediments to business investment. Of course this can't hurt, but what this argument comes down to is what IS the impediment to business investment. I suspect it's a range of things, but there are probably SOME things they can both agree on that we should absolutely do - reduce corporate tax rates and pay for them by removing market distorting credits like those for ethanol producers, remove barriers to trade, clean up and simplify regulations.

Instead this argument comes down to just another tired back and forth about whether government deficits are always bad, or whether they are good in a slump.

Update:

Justin Wolfers makes a pretty convincing case that the correlation is a relatively recent phenomenon - and that Taylor is cherry picking a little bit. Intuitively Taylor's position makes more sense to me, though I'm not sure I agree with his prescription.