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Roubini on Structural Problems in the World Economy
In an interesting piece, Roubini points to structural problems in the world economy:
There is a huge excess capacity for the production of manufactured goods in the global economy, as the massive, and excessive, capital expenditure in China and Asia (Chinese real investment is now close to 50% of gross domestic product) has created an excess supply of goods that will remain unsold as global aggregate demand falls.
Odd company or not, note that to the extent that Roubini is correct that past credit excesses have resulted in over-capacity (ala ABC) then our present problems go considerably beyond credit supply. Tyler is more optimistic than me on these matters.
Posted by Alex Tabarrok on October 31, 2008 at 07:05 AM in Economics | Permalink
Comments
Sigh. I have to remind you AGAIN that libertarianism is dead and ABCT is completely discredited. Am I going to have to remind you every time new evidence supporting them comes in?
I wonder if this is the beginnings of the assimilation of ABCT into the mainstream without the mainstream having to ever admit it. We out here in the hinterland are even hearing some mainstream critiques of FDR. Revisionism for The Dear Leader ain't no joke.
What's remarkable about Roubini is that it's always the same "boost aggregate demand" line. He called the crisis, but that doesn't necessarily qualify him for the fix. I would think that every time an economist or journalist says something like "the biggest government intervention since the Great Depression" that would give them at least a moments pause. Oh well, maybe next downturn.
It would seem that I have enough LCD TVs, and trying to boost my aggregate demand is throwing good money after bad, but Indians might be able to use more computer monitors. Better yet, cut those LCDs into 8ths and make a better Kindle. Pre-load that joker with Austro-libertarian tomes, Ben Graham, Warren Buffett, Peter Drucker, Naomi Klein...just kidding. And, maybe we can write off all the malinvestment as capitalism training for the third world- kind of a countercyclical make-work project.
Well, the nice thing is that those factories are sunk costs. Is it possible that they can lower prices and sell their wares to new demand markets, e.g. poor Africans, etc.? And, the newly minted Chinese factory workers can always go back and be farmers, right? At least a lot easier than I could go be a farmer. I can't even keep my lawn green without painting it.
Posted by: Andrew at Oct 31, 2008 7:47:03 AM
Excess supply of goods? I can't find a pair of decent black shoes of my size, which is 44, thus no anomaly! I have hard times when buying a toy for my six years old son, because there are very few quality toys in the market. Toy shops are full of poor quality Chinese crap, but I wouldn't call it oversupply of goods. And that's not only toys.
Posted by: Pavel at Oct 31, 2008 8:28:19 AM
Excess supply of goods? I can't find a pair of decent black shoes of my size, which is 44, thus no anomaly! I have hard times when buying a toy for my six years old son, because there are very few quality toys in the market. Toy shops are full of poor quality Chinese crap, but I wouldn't call it oversupply of goods. And that's not only toys.
Posted by: Pavel at Oct 31, 2008 8:30:24 AM
Marx also said that capitalism problems go along with destructive competition and excess capacity To the extent that the rate of credit and debt growth is unsustainable and no equilibrium is reached, a crisis of overproduction is granted. This is what Marx said more than 150 years ago.
"The process of production appears merely as an unavoidable intermediate link, as a necessary evil for the sake of money-making. All nations with a capitalist mode of production are therefore seized periodically by a feverish attempt to make money without the intervention of the process of production.” —Karl Marx, Capital, Volume II, “The Circuit of Money Capital”.
Make money without the intervention of the process of production or financial theory of over-investment (for instance excess liquidity in the house market)? Let's read Marx again to understand what happened in the finacial markets...
Posted by: Massimo GIANNINI at Oct 31, 2008 8:42:14 AM
@Pavel: That's not disproving excess production. It's a problem of spatial matching of demand and supply.
Posted by: HeShootsAndScores at Oct 31, 2008 10:53:22 AM
Alex is right: considerably beyond credit supply. We're doomed.
HeShootsAndScores is right, too, though I'd save some of the blame for intertemporal matching as well. We've made too much of the wrong stuff, and the markets are going to take a little while working out what the right stuff is, and starting to produce it.
Posted by: dWj at Oct 31, 2008 11:50:46 AM
Yeah, I realize Austrians can be...dogmatic...online, but c'mon folks, this was a textbook Austrian business cycle theory. I'm not saying all you need to do is read Hayek and that's it, but really, this is textbook. Greenspan lowers rates to a ridiculous 1% (the lowest in inflation-adjusted levels since 1979 btw), we get a boom in consumption and high-end durable goods (housing), and--assuming Roubini is right--there is massive overinvestment in manufacturing capacity. The Fed chickens out because inflation starts rising, it raises rates back up, and then everything goes to h*ll.
I realize there are other factors involved, but I think that is the main driver in all this.
Posted by: Bob Murphy at Oct 31, 2008 12:17:19 PM
Bob,
I don't know for fact if Austrians are right, partly right, or exclusively right. But, it is really bizarre for people to be using current events to pillory ABCT and its proponents. You'd at least think they'd have the good sense to hide. Look at the traders, these people have no interest in philosophy, they would sell their mothers to make money.
http://finance.yahoo.com/tech-ticker/article/104704/What-Does-'Deleveraging'-Really-Mean-Cutting-Our-Addiction-to-Debt?
Posted by: Andrew at Oct 31, 2008 12:30:02 PM
@Pavel: I hear ya. The solution is simple: buy custom-made bespoke shoes online from Argentina. You can get a great handmade pair starting at about US$149.00/€109.37 just by sending good outlines and measurements of your feet. In 6-8 weeks, voila! Many many people I know do this now.
Posted by: StreetWalker at Oct 31, 2008 12:39:24 PM
Alex.
Take it calmly. We have known for over a year that a sharp downturn was on the cards. A downturn shakes out real misinvestment in surplus houses or Chinese factories as well as finacial misinvestment. The Chinese private sector has been growing so rapidly that it is used to writing off a lot of investment as they go; the USA (and others) know about absorbng surplus houses, surplus office space, etc. etc. from past downturns. Sure, credit supply is in an unusual mess (though as you keep pointing out, not an unmitigated one) but what is wrong there is bankers are still not readjuted to the idea that other banks may pay their debts as they always have done - and given the recapitalisation, etc., the risk of the other bank not paying is really just about negligible. Once a few bankers start acting normally, the rest will. Following the herd is too deeply embedded a banking custom for them not too retreat from the cliff with teh same unanimity with which they rushed towards it.
Posted by: David Heigham at Oct 31, 2008 1:37:29 PM
@streetwalker: Got a url for the shoe place?
Posted by: Chris at Oct 31, 2008 2:15:46 PM
I always thought the end to the tech bubble left us at an odd place. It had created a tremendous amount of investment and capacity that had no demand to meet it. Then when 9/11 hit the Greenspan tried the 1% rate, which spurred investment. Yet since demand hadn't exceeded capacity the investment went to productivity. This created the 'jobless' expansion. Throughout it most companies had very little pricing power. No one could raise prices, even with input costs going up, since there was still more capacity than was necessary. The building boom, with its increase in the most marginal of workers, stirred some demand. But just as it was getting effective the market collapsed. Now there is no demand, tremendous over capacity, and no good way to fix either long term. We're F'd.
Posted by: crack at Oct 31, 2008 4:42:25 PM
Can someone explain to this young econ student why Roubini needs to make up a new term for a deflationary recession? I thought recessions with inflation were the anomaly that required funny terms like stagflation and deflationary recessions were what standard theory predicted?
Posted by: Nylund at Oct 31, 2008 5:16:30 PM
Nylund, you are absolutely correct.
He makes up new terms because almost no one believes in ABCT anymore. If he used normal ABCT terms, people would point and say "CRAZY AUSTRIAN" then plug their fingers in their ears.
Posted by: Jorge Landivar at Oct 31, 2008 7:59:43 PM
Structural problems?
We don't have enough oil / cheap, clean energy. (That situation is 'quasi-structural').
The auto industry, living on borrowed time now for almost a decade, has to restructure, some more, even as they face radical changes in technology (that should be reshaping the industry, instead of being weighed down by it).
Something is wrong with natural gas prices in the U.S., to the point it looks "structural".
People seem to be talked out on whether we have structural problems with the trade accounts.
Because of the electioneering of "no new taxes" and the Grover-Norquist next-generation tax-overhang it has created, we probably have something close to a structural fiscal problem. Were the IMF bailing us out, instead of our grandkids, we'd probably have to cut our massive, low/no productivity investment: the military. (Someone has to say it).
The rest looks ... "over argued". Yes, there may be some deflation. 'Awash in supply' looks like as much of a non-thesis as the prior 'awash in liquidity' (that was supposed to generate huge amounts of inflation, that never came).
Posted by: Amicus at Nov 1, 2008 9:05:01 AM
Alex, I wonder if you think this supports the arguments made by James Livingston (posted by Mark Thoma recently): that the structural fact underlying the Great Depression and the current...contraction...was too much money with not enough productive uses available.
http://72.36.139.202/politicsandletters/showDiary.do;jsessionid=8898C77D7625F3BCC427379E08163CAA?diaryId=161
If yes, it suggests to me that we should take more of that money--which the rich aren't investing productively--and put it into infrastructure, education, and other uses that have been proven to increase prosperity.
Posted by: Steve Roth at Nov 1, 2008 3:09:46 PM
> China
Yeah, but the steel is radioactive, the food has melamine and crap in it, and don't even ask about the counterfeit stuff.
What China needs is a capacity to make _good_s. You know, the Union Made with Pride kind where the workers actually sign their work and spit in management's eye when asked to make shoddy stuff.
Come to think of it, the USA could do with more of that too.
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