Him:How should the excess capacity in the current economy be handled?
Me: I don’t understand the question.
Capacity for what?
Him: C + I + G + (X - M)
C & I are operating ‘under capacity’.
X is growing
M is growing faster than X and producing a deficit.
Me: Why didn’t you just ask me “how do we boost consumption and investment without government intervention?”
Him: Because that’s not the question.
What?? Help me guys, what am I missing here?
By the way, this discussion followed someone posting this article: By Stiglitz
And I said: The left can blow the “blame Bush” horn as much as they want, that’s to be expected. As long as they focus on bringing down the deficit, I, as a Republican, will be satisfied.
EDIT: Yes, I read the article, I know he warns against “deficit fetishism” but I don’t think my deficit fetishism is as bad as the “state solution fetishism” floating around the left right now.
To which he asked me: How should the excess capacity in the current economy be handled?
The answer is easy. Let market handle it.
I agree. But did I really get confused about what he was asking?
It’s not even clear what he’s asking. I think what he is saying is “how do we boost exports”, under the assumption that trade deficits actually exist (trade deficits by private individuals versus trade deficits created out of government borrowing).
“Excess capacity” in the economic sense is nonsense. But in the businesses sense, any “excesses” are liquidated. Examples:
Problem: A factory producing GM cars has excess capacity. Solution: Sell the factory, make something else, lower price of GM cars, or don’t mess with anything and wait for there to be a surge in demand that would require that “excess capacity.”
Problem: Macy’s has “excess” Alfani suits. Solution: Have a clearance sale. 70% off everything ya’ll!
Problem: Warehouse has “excess” warehouse space. Solution: Find other stuff to fill the space with, lease-sub0lease the extra space.
Problem: Office building has “excess capacity.” Solution: Sub-lease space, convert space to other uses, or lower lease price.
hmm, I see. I wonder what kind of excess capacity he’s talking about. I asked but apparently that’s a stupid question.
EDIT: Because, see I thought we were talking about unemployment. Stiglitz says in the article that employment legislation is more important than deficit reduction and that spending and investment have to be boosted by means of government intervention, deficits be damned.
So when he starts talking about excess capacity, naturally I have to ask “in what?”
He’s speaking of excess in an economic sense. I think Jonathan may have understood the “actual” question the guy was asking.
I think he is making a Keynesian assumption. Say you have an existing factory that makes, say, cars, and no one is buying the cars. So the factory stops making them. It fires workers, since there is nothing for them to do. The workers, having no money, can’t support the stores they always buy at. An ever increasing circle of disaster is spreading, all of it ripples from the original problem, which is that nobody is buying cars from that factory anymore.
They call this “the factory is operating under capacity.” It could be making more cars, employing all those workers and spreading prosperity in waves, but it isn’t.
So the obvious solution is to somehow get the factory to make the cars anyway, even though nobody wants them. This is done by taking money away from everyone in taxes and buying cars with the money. Another is by printing money and buying cars with it. There is some infighting amongst the Keynesian which of these two options is better.
Your friend is asking, “If everyone can do as they please with their money, and none is taken away from them forcefully to give to the auto factory, how are you going to have the factory produce cars nobody wants?”
He is right. This is a completely different q from the one you proposed instead.
As for the answer to his q, the answer is “If someone built a factory today for dull knives, and nobody bought any of his crummy knives, shoould the govt step in and buy the knives to save the jobs of the factory workers? No they shouldn’t, for reasons which I hoope are obvious. The useless factory should close down, the workers will seek other jobs, perhaps in the same factory if is converted to making laptops by someone competent.”
If this was the question, what would this have to do with what Stiglitz was saying about prioritizing jobs legislation and increasing government ‘investment?’
Thanks for this.