Just how big a problem is falling capacity utilisation?

Discussion in 'Economics' started by ASusilovic, Apr 29, 2009.

  1. ...

    Firstly, US sector utilisation rates at the peak of the last business cycle’s downturn:


    And here are current US sector utilisation rates (note particularly the variation and degree to which specific industries have been affected above others):


    Austrian School economist Josef Steindl was among the most prominent academics to tie growing spare capacity, unemployment and general economic deterioration together. He did so in specific reference to the Great Depression.

    For those unfamiliar with his work here follows a neat summary of his theories by Michael A. Bernstein, a history and economics professor at the University of California. As Bernstein wrote in a 2001 paper, Steindl saw all three of these factors influencing each other in snow-ball type effect (our emphasis):

    At the macroeconomic level the implications of inelastic profit margins are most profound. In these circumstances, price reductions do not compensate for declines in the rate of growth, and thus companies tend to reduce their rate of capacity utilization.

    Reductions in capacity utilization imply not only declines in national income but also increases in unemployment. In the presence of underutilized capacity, firms will be increasingly disinclined to undertake any net investment. A cumulative process is thereby established wherein a decline in the rate of growth, by generating reductions in the rate of capacity utilization, will lead to a further decline in the rate of expansion as net investment is reduced.

    Individual firms, by believing that decreases in their own investment will alleviate their own burden of excess capacity, merely intensify the problem economy-wide. The greater the proportion of the nation’s industry that is highly concentrated, the greater the tendency for a cyclical downturn to develop into a progressive (and seemingly endless) decline.

    But if that seems familiar, there may be even greater synergies between what is happening now and what happened back then.

    First, Bernstein goes on to argue that there is a slight flaw in Steindl’s observation that the tendency for a cyclical downturn to turn into a progressive decline increases as the proportion of the nation’s industry becomes more highly concentrated.

    In contrast, Bernstein argues that the depth and persistence of the Great Depression cannot be explained by cyclical theories alone. Instead he says the Great Depression manifested itself exactly because a financial market crisis happened to coincide with a long-run transformation in the kinds of goods and services being required by firms and households. These two factors together, he says, turned what would have been a severe cyclical downturn into a Great Depression.

    None of which bodes well for the current financial crisis, given it coincides directly with “the great renewable-energy shift” happening across the world. As Merrill Lynch observes:

    In our view, a global misallocation of capital sits at the heart of the current economic crisis. As we first highlighted in our September 24 Global Energy Weekly (”Credit crunch & energy crunch: same market failure?”), capital markets failed in recent years and channelled too much money into real estate, too little into energy. If capital had been efficiently allocated to the most productive sectors in the global economy, high savings rates in emerging economies would have enabled a high investment rate in key sectors (Chart 2).

    Furthermore, Merrill’s industry utilisation breakdown appears, at first glance, to further support the above notion given non-environmentally focused industries are indeed the ones piling up spare capacity most.

    The key question now is — will our ‘green rebalancing’ intensify the recession into a full-on depression to the same degree? One thing is sure, industry is already being forced to stop, take stock and adapt.


    People have yet not recognized that there is a MASSIVE GLOBAL over-capacity
  2. Some have, they are called bears. :D
  3. Overcapacity in labor, too... which is why we'll end up with an excruciatingly high, structural unemployment rate.

    Even China has overcapacity in labor... has closed 40,000 manufacturing facilities during this decline.
  4. I'm alone to notice that in a world where 2/3 of people has not access to the same goods we have there's a big market for that capacity? Shouldn't we find a way for them to pay for that goods?