That’s how capitalism works!
John Taylor (and, following him, Gregory Mankiw) presents the graph above as if they’ve made some brilliant new discovery: there’s a negative correlation between unemployment and private investment (such that, as unemployment declines private investment goes up—and, conversely, as private investment rises unemployment falls). They’ve discovered nothing but that, within capitalism, private investment is related—as a consequence and determinant (since they’ve measured a correlation, not a relationship of causation in either direction)—to how many jobs are created and people employed.
But, of course, it’s not an iron law. What they’d like to show is that higher capitalist profits lead to more investment and then to lower unemployment. The problem is, first, profits can rise while corporate investment remains stagnant (because of “animal spirits” and capitalists’ unwillingness to make new investments at a particular point in time, as against using profits to buy back equity or to engage in mergers and acquisitions) and, even if investment does go up, it’s quite possible not enough new jobs will be created to keep up with the growth of the labor force (if, for example, the capital-labor ratio rises).
And that’s a pretty good description of what’s happening with U.S. capitalism right now. But you won’t hear that from Professors Taylor and Mankiw, who prefer to stop at the lessons of Capitalism 101.
As it turns out, Taylor arbitrarily chose the initial year—and thus cherry-picked the data—to get the nice correlation he was looking for (and that Mankiw liked so much). According to Justin Wolfers, here’s what the scatter plot looks like if data going back to 1970 are included: