October 19, 2003

There Is No Such Thing as Overinvestment! There Is Only Deficient Demand

Louis Uchitelle frames the issue the wrong way around: there is no such thing as "overinvestment," there is only too little aggregate demand. If you think that there is "overinvestment," dropping the interest rate will cure you of that belief. At least, it will until you hit a liquidity trap... But it looks like that is no longer a dangerous possibility.

Overcapacity Stalls New Jobs: But another dynamic closer to home is weighing on job creation -- the slow process of working through a glut of boom-era investment that continues to litter the economy with underused factories. Procter & Gamble, for example, has been dumping its weakest brands and the plants that produce them. At its Ivorydale industrial complex here, in Procter's hometown, the company has sold factories that make Crisco shortening, Olean fat substitute and Ivory soap to three manufacturers, each with plans for squeezing efficiencies from the operations. Hiring more workers is the last item on their agendas.

"As long as there is extra capacity available in manufacturing, there is going to be room to move work around among companies without having to add workers," said Thomas A. Kochan, a labor and management expert at the Sloan School of Management of the Massachusetts Institute of Technology. That is true with a vengeance today. Not since the severe recession of the early 1980's has capacity use in manufacturing stayed so low for so long, government data show. Production as a percentage of total capacity fell precipitously in the aftermath of the last recession, which ended in 2001, and 23 months into the recovery, the upturn has still not come. On average, manufacturers are using less than 73 percent of their capacity...

Posted by DeLong at October 19, 2003 11:38 AM | TrackBack

Comments

Excellent post!

Posted by: Charles on October 19, 2003 12:44 PM

Dear Brad,

Bingo!

Go, go Brad go!

Posted by: Justin on October 19, 2003 12:59 PM

Dear Brad,

Bingo!

Go, go Brad go!

Posted by: Justin on October 19, 2003 01:01 PM

Dear Brad,


Bingo!

Go, go Brad go!

Posted by: Justin on October 19, 2003 01:05 PM

Dear Brad,

Bingo!This is the essence of the post-modern and global macro-economy!

Go, go Brad go!

Posted by: Justin on October 19, 2003 01:14 PM

Gilder is one of those who endorsed Julian Simons' idea that we can never run out of resources, since a line can be divided into an infinite number of points. To me that's silly enough to discredit the rest of his life work, in and of itself.

The "dose of religion" part is all to true. There's an ungodly mess of pyramid marketers, cult prophets, self-help authors, investment counselors, futurologists, and management consultants out there all saying the same loopy thing.

Posted by: Zizka on October 19, 2003 01:22 PM

Gilder is one of those who endorsed Julian Simons' idea that we can never run out of resources, since a line can be divided into an infinite number of points. To me that's silly enough to discredit the rest of his life work, in and of itself.

The "dose of religion" part is all to true. There's an ungodly mess of pyramid marketers, cult prophets, self-help authors, investment counselors, futurologists, and management consultants out there all saying the same loopy thing.

Posted by: Zizka on October 19, 2003 01:27 PM

Why is it that such experienced writers on the economy can not seem to get economics right or simply ask for critiques from fine academic economists. Yes, there is no over-capacity for the economy as a whole, there is a need for more demand. Really, really, really.

Posted by: anne on October 19, 2003 01:35 PM

It's not overinvestment, it's malinvestment.

Investment is not a lump you can just label "K".

Posted by: ac on October 19, 2003 02:05 PM

'zackly. call it the buggy-whip principle.

Posted by: wcw on October 19, 2003 03:43 PM

The available bandwidth from fiber optic cables was increased five-fold even as new techniques enabled each cable to increase its information carrying capacity 10-fold- a 50-fold increase- when demand increased 4-fold. Most of this new capacity will never be used, since by the time increased demand would have caught up with it, new technologies will already have taken hold, as is already the case with wireless.

Love covereth a multitude of sins and strong aggregate demand covereth a multitude of investment losses. But even if there had been a proper fiscal policy to better induce a more robust level of demand, there would still be this legacy of malinvestment to clear up, and would not something of this issue of much higher productivity leading to declining demand for labor still remain underneath it all. Is there no issue here of structural readjustment, of developing new areas of investment and transitioning labor "markets"? And didn't these misinvestments occur precisely under high demand conditions? So that perhaps demanding demand without any idea of where demand is directed might lead to a similar impasse? Perhaps rather than covering a multitude of sins, one should clarify them.

Posted by: john c. halasz on October 20, 2003 12:19 AM

Brad has made this point before, but I don't understand why, in principle, there can't be at least temporary overinvestment. Let's say businesses in the aggregate overestimate trend growth and invest in capital at a rate that produces overcapacity, even at full employment. Then they cut back on capital spending, producing unemployment, which in turn results in lower aggregate demand, and even more overcapacity. I thought this is what was meant when people speak of "overinvestment" as causing a recession. It may or may not be a true story, but it's not an incoherent idea. Maybe Brad's point is empirical, because he says "If you think that there is "overinvestment", dropping the interest rate will cure you of that belief...until you hit a liquidity trap". However, what's been distinctive about the current cycle is that capital spending had been very slow to respond to interest rate cuts, which seems to confirm rather than refute the overinvestment idea. Unless Brad thinks we've been in a liquidity trap; if so that seems more like a description of the problem than an explanation. I honestly don't understand what Brad's objection to the Uchitelle article is. Any economists out there who can enlighten me?

Posted by: Phil P on October 20, 2003 12:16 PM
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