Matthew Yglesias » Capacity Utilization

Mar 16th, 2009 at 10:13 pm

Capacity Utilization

Via Calculated Risk and Brad DeLong here’s a look at capacity utilization in the United States of America:

This, incidentally, illustrates why people who say that it’s not possible for deficit spending to stimulate the economy because “the money has to come from somewhere” are mistaken. There are, right now, people not working who could be working. And there is productive capital standing idle that could be put to use. We have the capacity to produce more—to generate more wealth—than we currently are.

At the same time, call me crazy but isn’t there a long-term downward trend in this data series? Why would that be? This seems obvious enough that someone must have researched it.

Comments
44

Filed under: Economy, Stimulus,

44 Responses to “Capacity Utilization”

Greg Abbott Says:
March 16th, 2009 at 10:30 pm
Well, the chart starts at the height of the Vietnam War — all that guns and butter leading up to the inflation scare of the early 70’s. It would interesting to take that chart back to ‘46 or ‘47 and see if the same trend is evident. I suspect not.
Thomas Says:
March 16th, 2009 at 10:31 pm
Matt, if you say that the capital that is idle is what is being put to use, you’re adopting the Treasury view. This is, by my count, the 2nd time in two weeks you adopted the Treasury view.

Your adoption of it may do more to discredit the idea than anything else you say, so perhaps there’s a deeper game here.
jstrick Says:
March 16th, 2009 at 10:35 pm
Exactly same trend I was wondering about when I saw this chart.
Calvin Jones and the 13th Apostle Says:
March 16th, 2009 at 10:40 pm
And there is productive capital standing idle that could be put to use. We have the capacity to produce more—to generate more wealth—than we currently are.

Generate wealth for whom? As you damn well know, real wealth for the middle class has not been generated at all in the last 30 or so years.
thetenant Says:
March 16th, 2009 at 10:50 pm
Modern manufacturing techniques like lean-flexible, Just In Time (Kanban) and cell manufacture require over-capacity to be feasible. (This is taught in engineering school.)
If you work close to 100% you don’t have it in your system to be “lean”.
andthenyoufall Says:
March 16th, 2009 at 11:00 pm
Zee kontadiktions are akkumulatink!
о рыбалке Says:
March 16th, 2009 at 11:04 pm
советую ознакомиться…

Via Calculated Risk and Brad DeLong here’s a look at capacity utilization in the United States of America: This, incidentally,[...]…
Dan Says:
March 16th, 2009 at 11:16 pm
I’ll agree with Matt on the appearance of a downward trend. Looking at the 6 inter-recession peaks (in 67, 74, 79, 89, 95, and 07), it looks like each one was lower than the previous peak (although ‘89 vs. ‘95 is very close).
ferd Says:
March 16th, 2009 at 11:33 pm
Poor America. Too many houses. How will we survive?!
wiley Says:
March 16th, 2009 at 11:34 pm
Someone mentioned Random Walk the other day—that and Brownian Motion were the first things that I thought of when I looked at this chart. Not that I can do the math—I can’t. I get a gist now and then, and I’m wondering how organic this data is. I’m sure you could debate the causes for any rise or decline on this graph as much as economists can argue about the causes and cures for the Great Depression.

It seems like globalism and corporate hegemony has had such an impact on world markets, that a really telling chart might start at 67 and go to 2037.

Some mathematicians have predicted the current tsunami.

In short, this physicist’s intuition is that an overconnected system is WORSE, not BETTER, in a metastable condition, for encouraging large fluctuations. So if this argument has any validity, then the fluctuations are larger, not because of physicists making up new instruments, but rather because of the links between corporations, and the links between countries.

Shoot. Lost the link. Anyway. Just rambling.
rapier Says:
March 17th, 2009 at 12:01 am
Capacity utilization is declining in the US, if the chart is to be believed, because the world has a chronic oversupply of stuff. The world chart might look the same.

The ideology of growth has now met a brick wall. The orgy of borrowing for consumption which had been growing ever faster for two generations has met the same wall.

Total non financial credit grew 6& in the US last year, and the GDP hardly grew at all. To have any growth of consumption at all credit must continue to expand at near double digit rates, even though everyone is up to their eyeballs in debt already. Particularly at this stage, all governments.

Low capacity utilization rates mean low margins. Thus investment in new plant and equipment is doomed to be slack. Which means even less demand in a vicious circle.

There are dilemmas within dilemmas here and one key to finding a way out is to know that growth is a false god.
swuesquire Says:
March 17th, 2009 at 12:07 am
@rapier

“growth is a false god”

How can you say that when growth promises us the Singularity?
Jake in Milwaukee Says:
March 17th, 2009 at 12:12 am
Looks like a slightly negative slope to me. I’m curious to see DeLong or CR release the raw data going back to the beginning of the index. Looks can be deceiving, but a closer look might yield some interesting conclusions to be drawn.
DMonteith Says:
March 17th, 2009 at 12:30 am
How can you say that when growth promises us the Singularity?

The novels of Vernor Vinge are the only things that redeem the concept of the singularity from utterly useless stupidity. Anything that can inspire such kick ass sci-fi can’t be totally worthless.
brendan Says:
March 17th, 2009 at 12:42 am
Capacity utilization is the inverse of productivity, IF demand is kept constant or is shrinking. We are not suffering from a static or shrinking demand for more million dollar weddings or bigger mcmansions–20 rooms instead of 18 or like that–but because the real wages and real net wealth of the middle and working classes, and of the poor, have been static or shrinking. and these groups combine to make up by far the bulk of the country and of consumer demand.

so, even tho the masters of the universe (and their predecessor geniuses like the dot com millionaires) were buying like crazy at the top of the income/wealth continuum, the rest of us couldn’t keep up. we tried like hell–that’s where all that insane debt came in, credit card and home equity debt especially. but even borrowing so heavily, we could not buy or deploy as quickly as productivity grew, because our real wages sucked and kept sucking more as time went on. so, even tho the big guys were spending, there are MANY more of us not-quite-so-big guys, and we just could not generate enough demand to use all that capacity.

finally, the recession hit and the capacity that was in ourselves (employment) was so obviously excess and so much easier to reduce than would it be to close a factory or a data center, that we are being dropped. we are to a large extent the very capacity that we cannot generate enough demand to keep busy. so goodbye to us.

stimulus, massive, massive stimulus is what is needed to slow and then reverse this immediate threat–to keep recession moderate and begin a recovery. but income redistribution (omg! did he really say that??!!) is the only long term remedy. many more of the nation’s dollars–and the world’s–have to get down to the people who actually spend them on necessities rather than ‘invest’ them in frivolous leveraging gambles.

or, us working and spending folk, when not spending might SAVE the dollars, as i hope we remember how to do, so that when the bad days come we each have our own little counter-cyclical ’stimulus’ account to draw upon through the rainy days. And, as we draw down those savings in bad times, to spend the bucks again on rent and food and clothes etc., we would not know it maybe, but we would be doing what the economy would need to get back on its feet.

it all depends on getting more of the income and wealth (related but not identical concepts) down the food chain. if the term ‘redistribution’ is too scary, think of it as ‘capacity utilization optimization.’ there, that feels better, doesn’t it?
StevenAttewell Says:
March 17th, 2009 at 1:08 am
Well, a (crude) Marxist would tell you it’s the inherent contradictions of capitalism showing the inevitable downfall of capitalism.

However, my opinion would be this: the period 45-69 had much lower average unemployment than the period 69-09. Higher unemployment means both a loss of labor power and a loss of purchasing power which would otherwise boost production closer to 100% of capacity. Similarly, the trend in incomes since the mid 1970s has been stagnation and decline for all but the richest Americans, who’ve made out like bandits – it’s basic Keynesian theory that this would tend to decrease the propensity to consume, which would lower demand for goods, and thus production of goods.

The interesting thing about this chart is that it suggests that the ballyhooed increases in productivity, investment, and entrepreneurial endeavor that were supposed to come with deregulation and lower taxes on the rich never materialized. So much for that theory.
Ed Marshall Says:
March 17th, 2009 at 1:11 am
That thar be globalization.
Dan Says:
March 17th, 2009 at 1:28 am
I downloaded the data from DTM’s link. This isn’t the best way to look at time series data, but if you just fit a line to it there is a negative slope which implies a 1 percentage point drop in capacity utilization every 8.3 years (the slope is -.120, with a standard error of .013). Change the endpoint to exclude the latest downturn, stopping at the top of the last peak (81.4 in July 2007), and capacity utilization still drops one point every 8.6 years (slope = -.116, SE = .013). If we also change the starting point to be as unfavorable to a downward trend as possible, beginning at the bottom of the first downturn (77.8 in November 1970), the slope still implies a one point drop every 14.8 years (slope = -.067, SE = .015). All three are highly statistically significant (p less than .0001).
Matt Steinglass Says:
March 17th, 2009 at 2:17 am
At the same time, call me crazy but isn’t there a long-term downward trend in this data series? Why would that be?

Because we’re all f***ing off reading blogs on the internet instead of working.
Kevin Carson Says:
March 17th, 2009 at 2:20 am
The problem is, most of that excess capacity never produced genuine “wealth.” It produced output for planned obsolescence, taking a two-year detour through our living rooms on the way to the landfill. The whole point of such output was to keep the wheels of industry going, and worry about how to make people buy the crap later. That industrial capacity never would have been created in the first place, in a sane society. A sane society would never have reached auto sales of the current level of 10 million, let alone gone up to 17 million.

What we need to do is eliminate the portion of industrial capacity that produces waste, fixing Bastiat’s broken windows, or the moral equivalent of digging holes and filling them back up again. We need to eliminate the Rube Goldberg steps between effort and consumption, and all the artificial property rights (IP) and “safety regulations” that impose mandatory minimum overhead costs on small-batch production. Then we need to shorten the work week to two or three days with no loss in material standard of living.
wiley Says:
March 17th, 2009 at 4:38 am
There’s a little truth to most of these views. Everything is everything, including the economy. I wonder why Kevin’s view is so rarely seen. Planned obsolescence. (Spit.) It’s not just utilizing the capacity of a market—it’s utilizing the capacity of the world with all of us in it and keeping that going indefinitely.

The Middle Ages had a lot going for it. We could use more craft, and a whole lot less too-clever-by-half production, packaging, and marketing.

Why aren’t fossil fuels, machines, and robots saving us labor and providing for our needs? I think the disparity in wealth worldwide and the failed CEOs getting million dollar bonuses is about more than just greed—it’s a symptom of a huge system that has developed into a more complex system than the human race has ever know at unprecedented speed. I don’t think we can fully grok what’s happened to us.

Millions of years of human development topped by a relatively very short period of rapid acceleration in technology and complexity—going from horses and buggies, to the space shuttle in just a hundred years.

Factor in manipulation and raw power—

One of the difficulties with economic issues is that the field of economics has been primarily working for capitalists in the West, and the West has had the technology to impose itself on all else. More of the same will likely be disastrous. We can’t have a different economy without having a different life. And we really can’t afford to impose our maladapted lifestyles on others.

Anyhow, now the balance appears to be shifting from North to South and the North may not be adapting as rapidly as nations that we consider to be less sophisticated. Christ. We can’t even talk about economic rent, much less, land reform.

rant off
Mike Says:
March 17th, 2009 at 5:15 am
At the same time, call me crazy but isn’t there a long-term downward trend in this data series? Why would that be? This seems obvious enough that someone must have researched it.

Uh, productivity/technological growth? Our basic needs don’t rise along with our ability to produce. We have to come with new things to want, and turn those wants into ‘needs’ via marketing at a certain pace to keep up with the increase in our ability to produce basically everything. And we haven’t been keeping up; moreover increasing amounts of what we want and need are produced outside the United States (though I’m not sure that doesn’t show up in the chart.) But even justdomestically, our rise in productive capacity outstrips [even!] our rise demand for goods and services. Amazing, right?

The long-term trend is more and more stuff to have, but fewer and fewer sorces of income to allow people to buy it. I don’t know how that comes out. Logic would dictate a social welfare program to allow for consumption to meet production. But I don’t know if our political culture will allow it.
Mike Says:
March 17th, 2009 at 5:31 am
brendan #19 nailed this. Everyone should read that comment. My #26 doesn’t focus enough on his point: we are replacing ourselves. Engineering and offshoring oursleves out of jobs. Brendan’s right — it’s not that there isn’t the will to consume; it’s the ability of the larger numbers to do it. And hence the debt tsunami.

Matt, you should really stick with this one. It’s central to the entire American endeavor, and highly intuitive. Middle-schoolers can understand it. I remember the basic lesson in h.s. freshman history the day we covered the Crash and the Depression.

Might I suggest you show this post and comments to some economists or economic historians and write up short posts on interviews with them? Or invite some guest posts? Atrios was just yesterday lamenting the silence of liberal economists. He could invite them on his blog, but it would massively change the style of it. Your blog, on the other hand, would be a perfect platform to help give sane experts a bit more of a megaphone. (And just a personal preference: if Krugman could maybe be the third or fourth one you have on if you do this, just to avoid being painfully predictable. There have to be plenty of options.)
El Cid Says:
March 17th, 2009 at 5:32 am
Even my amount of social science training would lead one to first focus on the question of ‘what’ is / has been happening, and only then move on to ‘why’.
JT Says:
March 17th, 2009 at 6:52 am
Of course our machines and people are underused or redundant; instead we are utilizing Chinese people and Chinese machines.
And more and more Chinese brains.
In short it is absurd to look only at US capacity & utilization in our Globalized economy.

And no Matt just making stuff does not create wealth.
That is as stupid as “all guv’ment spending is stimulus”.
If you make 100 million widgets nobody wants you simply destroy wealth in the process.
If you make 100 million widgets but the Chinese make them better or cheaper then you destroy wealth.
If you invent a new widget but have it made in China then you create wealth but only for the inventor and the Chinese and yes a smaller bit for Walmart.
And that dear chilluns is why we have underused or redundant capacity while consuming more and increasing wealth for our Overlords.
ипотека на блоге Says:
March 17th, 2009 at 7:17 am
интересный блог…

Via Calculated Risk and Brad DeLong here’s a look at capacity utilization in the United States of America: This, incidentally, illustrates why[...]…
duBois Says:
March 17th, 2009 at 7:58 am
because the world has a chronic oversupply of stuff.

It’s Cracker Barrel’s fault.
Allan Says:
March 17th, 2009 at 8:11 am
At the same time, call me crazy but isn’t there a long-term downward trend in this data series? Why would that be?

Prison?
Kal Says:
March 17th, 2009 at 8:20 am
On the long-term downward trend: The economic historian Robert Brenner has written a couple of books, Economics of Global Turbulance and The Boom and the Bubble which argue for systematic global overcapacity as the root cause of both the stagflation crisis of the 1970s and the slower global growth since. The latter at least is dense but very much worth reading. I don’t think Brenner’s analysis is perfect, but he did pretty much call the collapse of the asset bubble years in advance.
Tom Says:
March 17th, 2009 at 9:54 am
Like Dan (#22) I also downloaded the data and I got the same results fitting a line to the data. But I think the key point is that the trend looks much worse than it really is. Following the peaks and troughs (by eye) the change appears to range from 8-15 points down over the whole period. But if we eliminate the years before 1970 and after 2007, the slope is -0.08 / year, about 2.6 points total. So the question is whether this is statistically distinguishable from the null hypothesis of no downward change. Even if you do the right test and get a significant P value, it doesn’t look like much of an effect to me.
brendan Says:
March 17th, 2009 at 10:51 am
at post #24, if i understand him correctly, Kevin hits on a factor i wish i had included in my post, so i’d like to emphasize it here: we MIGHT have achieved a more sustainable approach to increasing productivity per unit of capacity not just by consuming more, but also by consciously, prudently, plowing planned, progressive investment of capacity and productivity into non-hard goods, like, for example, the pursuit of happiness. that is, we could take more time off work, for heaven’s sake. we could shorten the workweek or workyear. we could idle ourselves intentionally and on planned and paid time, rather than build up unsold product to the point where we are idled involuntarily and at no or greatly diminished pay.

this is not a joke point. the practices in other countries of months-long maternity and paternity leaves, the longer vacations common elsewhere, the siesta still practiced in some (but sadly, not many) cultures, and so on are all examples of ways to ’sop up,’ exploit, or simply spend some of the value created by productivity. This is hardly a guarantee against recession, but it is too rarely spoken of in our culture as a ‘good’ to be expected from a functioning, growing economy. and it would sure be a more useful good than the planned obsolesence pointed out by Mike.

while using some of our economic capacity to allow more free time may not be a guarantee against recession, it sure beats unplanned layoffs, and makes the healthier periods between recessions and the recessions themselves more tolerable. i have a few children and Canadian relatives, so i feel the difference in attitude toward parental leave very personally, so this might distort my perception of this as an important aspect of WHY we even want a growing, healthy economy in the first place–so we don’t have to spend quite so much of limited lease on life just putting together each day or week what we need to get to the next day or week. (i find this very strong anti-free-time current in our culture so contrary to our thoughts of ourselves as ‘family oriented.’ What kind of family value is fostered by keeping the wage earner(s) away from the kids so much?)

put otherwise, and again speaking personally, i don’t really, really, really want a growing economy so that bill gates can build a house with more rooms than there are molecules in my morning coffee. nor so that various not-particularly-contributing, bonus-baby wall streeters can drive up the cost of vodka. i not only don’t find these very sustainable uses of the increase in productivity we are blessedly creating, i don’t find them high-priority outcomes.

so, there is a moral dimension as well–what is it, after all, that we hope our endeavors will produce? what is a good use of capital and wealth, what is a good output of all this input? t is a ‘good’? These questions–these are moral, values questions– are usually disrespected as ’soft’ or in america as ‘european’ or ’socialistic.’ But if we add to the moral issue the fact that consuming some of the benefits of productivity as free time, as childcare, as health care and so on might actually improve the economy simultaneously, well, then maybe these uses of wealth, these ‘non-productive’ values can begin to get some respect. even from Republicans.

or not.
but whether the hard-assed, hard-headed ever get it or not, i think these questions should drive a lot more of the discussion than i’ve seen to date.
curious sampler Says:
March 17th, 2009 at 11:25 am
“…call me crazy but isn’t there a long-term downward trend in this data series? Why would that be? This seems obvious enough that someone must have researched it.”

I think Karl Marx started the research ball rolling here with his notion of the falling rate of profit. 20th century economics claims to have disproved this notion, or shown it to be of no conceptual value… hmm, when I consider the source of this dismissal of this key idea of Marx’s, long-term assessment of capitalism, I think there may be something to it. Oddly, over time, with perfection of the capitalist means of production, our money buys us less and less, which is to say our work earns us less and less as prices for goods fall to their base labor cost, so we have less and less money to buy things with. ‘No problema’ in the short term: just issue massive credit.
onceler Says:
March 17th, 2009 at 11:47 am
how does this chart reconcile with overall productivity?

if your capacity is being more and more under-used, how does productivity keep going up?
brendan Says:
March 17th, 2009 at 1:53 pm
if increasing productivity (say, better automation for the simplest example)means that you need fewer workers per widget but demand does not push up the number of widgets you can sell, then you just hire fewer workers (idle human capacity there), or lay ‘em off (ditto, of course), or knock off the second or third shift at your plant (or the late night sale days at your store, or whatever) and this means idle or underutilized physical capacity as well as human. and so on.

so, you need more customers, more purchases per customer, or fewer workers or fewer workhours or days, to re-establish some balance. so, either more demand or lesser use of capacity.
that is the basic relationship between productivity and capacity utilization rates.

now, IF the value (or wealth) created by that productivity improvement is returned to consumers in higher real wages, they will keep up demand and capacity will be utilized more fully. this is the ‘redistributionist’ position.
another choice is to cut into labor utilization in a purposeful, planned, and beneficial way, such as providing more vacation days, more generous sick and child care leave policies, a shorter workweek, or similar. or all of these. that way the productivity gain is ’spent’ in providing life benefits, and does not have to be forced onto the consumer with unneeded products and services or planned obsolescence, or any such. or not so much, at least.

these are all not mutually exclusive approaches.

the improving productivity gains can also be sopped up by increasing executive pay to revolting levels, increasing dividend pay outs and stock buybacks, maximizing quarter-over-quarter revenue gains, using those higher revenues for mergers and acquistions, and so on. we’ve done rather a lot of this. But, it is pretty hard to do enough of this for long enough to keep up with productivity improvements like those we’ve been achieving. it is clearly not a sustainable way to deploy our human and physical capacity.
eventually it would lead to revolution, i imagine, unless ‘corrected’ by near-depression as is now happening.
both depression and revolution play havoc with capacity utilization, and they do other stuff, too.

so perhaps adopting more sustainable–and coincidentally much nicer–ways to distribute the benefits of rising productivity would be, as my daughters would say, gooder.
lots gooder, i think.
Dan Says:
March 17th, 2009 at 2:27 pm
I looked at one other thing: the average capacity utilization in each business cycle, measured trough to trough. I counted the troughs as 1970, 1975, 1982, 1991, 2001, and 2009. The results are:

1970-75 84.42
1975-82 80.65
1982-91 80.48
1991-01 81.83
2001-09 78.23 (and falling)

So it looks like the average capacity utilization was pretty flat from 1975 through 2000. It was higher before 1975, and lower during our most recent business cycle (which is still seeking its bottom). We already knew that the Bush recovery was lousy by a variety of measures, so I wouldn’t read too much into that. It’s hard to interpret the pre-1975 highs without more data from previous years – it could be something temporary like Vietnam (comment #1) or it could be a shift like Brenner argued (comment #33).
wiley Says:
March 17th, 2009 at 3:16 pm
I’m thinking oil might have a lot do with those troughs.
1000wayne Says:
March 17th, 2009 at 3:22 pm
Yes, Matt, you see a downward in the data series–thanks Dan!–and “tenant” and “rapier” came closest to addressing it–I stopped reading after post #35, sorry I gotta say this and go back to work:

The downward trend is because industry of all kinds is getting bigger and thus less agile, mobil and quick to react to market conditions. I learned all this from watching rural and small industry, and it was verified in the 1970’s by the great philosopher of small–E. F. Schumacher. What dy’a think? Everybody has been barking so long about efficiencies of scale that they have ignored basic ideas about communication, complete local processes and how to keep people busy and interested in their work.
wiley Says:
March 17th, 2009 at 5:51 pm
Funny, I was thinking of Schumaker and “Small Is Beautiful” while running errands today. Efficiency for its own sake (and the profit motive, without consideration for the quality of life and work) is a monster. As worn a cliche as it is, we have become slaves to our technology and the people who own it, rather than masters of our own fate and captains of our ships.

Edison couldn’t cut it today.
Ryan Says:
March 17th, 2009 at 8:49 pm
Echoing #33, Hyman Minsky says more or less directly in ‘Can “It” Happen Again?’ that late-60s through mid 70s-era Fed policy of pursuing full-employment at all costs directly led to the stagflation/unemployment situation of that period. So, seeing ‘capacity-utilization’ decline after that period makes sense because it was declining from a level that was too high for our own good, cause by bad Fed policy.
jps Says:
March 18th, 2009 at 1:30 pm
Well, we need to build terawatts of wind power and billions of plug-in hybrids, so let’s at least grow the middle class enough to put them to work on it. Otherwise the failure mode is worse. Growth is no god, but it’s still worth something if we can attain a carbon-neutral world.
purple Says:
March 21st, 2009 at 9:32 pm
Over-production happens in capitalism, it’s built in. Read an economist before Friedman. During certain periods of expansion over-capacity builds as companies rush to stay ahead of each other in production and sales. Then at a certain point, a profitability crisis hits through over-inventory, and there is liquidation, “creative destruction”, or inflation.

The problem in the West is that even long periods of liquidation have not fully restored profitability, so over-capacity is endemic at this point.
purple Says:
March 21st, 2009 at 9:39 pm
Note : “over-capacity” should read “excess capacity”
Get Your Ex Back Says:
April 8th, 2009 at 9:04 pm
The style of writing is very familiar to me. Did you write guest posts for other blogs?
Vince Delmonte Says:
April 15th, 2009 at 6:06 am
If you ever want to read a reader’s feedback , I rate this article for 4/5. Detailed info, but I just have to go to that damn msn to find the missed parts. Thank you, anyway!

Matt Yglesias

Capacity Utilization

44 Responses to “Capacity Utilization”

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