. . . in manufacturing capacity.
In his blog, Paul Krugman goes further: he divides the Federal Reserve Economic Data (FRED) manufacturing production series by the capacity utilization series to back out capacity. This results in the following chart:
What does this mean?
. . . there is a real concern that if the slump goes on long enough, it can turn into a supply-side problem, because investment will be depressed, reducing future capacity, and because workers who have been unemployed for a long time become unemployable. This is the issue of
hysteria“hysteresis”.[...] You can see that there was a mini-version of the current decline in manufacturing capacity after the 2001 recession: capacity basically stopped growing in the face of a protracted weak economy. But this time around, with manufacturers operating way below capacity with little prospect of needing more capacity any time soon, they’re both scrapping equipment and failing to expand. The result is that when we finally do have a real recovery, we’ll run up against capacity constraints much sooner than we would have if there had been no Lesser Depression.
Arguably the same thing is happening in other sectors of the economy, as the long-term unemployed begin to become unemployable, as the long shortfall in residential construction leads to rising rents (and a small uptick in core inflation) even though demand remains deeply depressed.
Hysteresis can mean that the costs of failing to pursue expansionary policies are much greater than even the direct effects on employment. And it can also mean, especially in the face of very low interest rates, that austerity policies are actually self-destructive even in purely fiscal terms: by reducing the economy’s future potential, they reduce future revenues, and can make the debt position worse in the long run.
Still more evidence, then, of the awesome folly of the current direction of policy in Europe and America.
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