January 31, 2009
The Keynesian theory of government stimulus rests on the idea that economies in recessions don’t suffer from a real loss of wealth (like a famine that wipes out your crop) but an excess of economic capacity (when your crop rots in the silo because you can’t get it to the market). Keynes contrasted the two ideas by referring to “a crisis of poverty” versus “a crisis of abundance.” Money spent by the government, in addition to creating new real wealth in the form of infrastructure or whatever, works by utilizing this unused capacity — especially the human capital, by putting people to work.
But underutilized capacity isn’t just people who are out of work — it’s the goods rotting in our warehouses. The recent GDP dip was saved from staggering free-fall only by a quirk in the way these goods are measured:
The actual decline in the gross domestic product — at a 3.8 percent annual rate — fell short of the 5 to 6 percent that most economists had expected for the fourth quarter. But that was because consumption collapsed so quickly that goods piled up in inventory, unsold but counted as part of the nationís output.
“The drop in spending was so fast, so rapid, that production could not be cut fast enough,” said Nigel Gault, chief domestic economist at HIS Global Insight. “That is happening now, and the contraction in the current quarter, as a result, will probably exceed 5 percent.”
NewsHour last night included a great report by Paul Solman on the Long Beach shipping ports. It’s really a shame that the online link is audio-only, because what was most striking in the report were the visuals: huge parking lots full of unsold, brand-new Hondas and Toyotas; mounds of scrap metal; near-empty import containers; worried, untalkative, longshoremen milling around their job office; and especially the mounds and mounds of waste paper and cardboard, designated for recycling in China.
Since American and global spending are down, so are Chinese exports; therefore, Chinese packaging manufacturers aren’t making cardboard boxes or wrapping paper to box and ship those goods to global markets; and so the tons of paper products we dutifully recycle are rotting in a makeshift landfill in a California shipping yard.
One of my favorite movies, Vittorio De Sica’s Ladri di Bicyclette (Bicycle Thieves), includes two marvelous scenes presenting a similar image: in the first, Antonio pawns his family bedsheets to get his bicycle out of hock. With the job he can get with the bicycle, he can reclaim the sheets with his first check. The camera cranes up to show thousands of bedsheets, pawned and never reclaimed.
In the second, after Antonio’s bicycle is stolen on his first day of work, he goes to one of the markets where stolen goods are sold. He and his son look over hundreds of stolen bicycles. There isn’t a single buyer. The entire economy, even the unofficial black-market economies, are at a standstill. And that’s where we are.