Tippet, your post and Mike's will take some more thought to
fully respond to,
but here's one point: you ask,
"How do you junk the bad investments (extra capacity) and
still make use of the "perfectly good productive capacity"."
Here's how:
Much of the bad investment may be bad in the sense that it's not
going to earn what those who made the investment anticipated. So,
you revalue-- downwards-- the bonds and equity that financed these
investments. But you don't necessarily have to idle the facilities
that they financed, if they can still make a profit over what it
costs to run them (what economists like to call variable cost). Now, some facilities may not be making a profit
over variable cost, conditional on lots of other facilities being
idle, but if more facilities *were* running, it is possible that
they all (or many of them) would be profitable on a variable-cost
basis, since the workers employed in them (and the capitalists
"exploiting" those workers!) would then provide
demand for the stuff they produce. Thus, there may be room--- in
recessionary conditions--- for stimulation of aggregate demand
to get this potentially productive capacity running, EVEN IF it
was a bad investment when the fixed costs are considered, and in
fact EVEN IF it can't even recoup variable costs under conditions
of depressed aggregate demand. Now, there may in fact be investments
so bad that they won't recoup variable costs even if all the other
factories are up and running. You are right, that stuff is not
"perfectly productive capacity", and if it can't be moved to
other uses, it's going to stay idle. It's an empirical matter
whether most of the idle capital observed in major recessions is
of that character, but I suspect not. Some DRAM fab capacity in Asia
may be an exception, though... <G>... and speaking of capital
reallocation, I hear the world's largest---and cleanest--- country-music dance club is about to open in Boise...
If I get a chance to think about your other points over the next
few days, I'll post. But the above is at least one example of how
Krugman may not be as nuts as y'all think.
His articles tend to implicitly use simplified models (closed
economies, one good, neglect of various classes of financial asset)
to get across the basic mechanism he thinks is important. These
"toy models" are bound to look inaccurate applied to some
real world cases. Doesn't mean they don't capture something
important. Case in point may be, Krugman's cartoon version of
what he thinks is the Austrian theory of recession probably uses
a closed-economy model; understanding US and Japanese spending
vs. income requires an open-economy model. But probably neither
the Austrians nor Krugman believe recessions require an open
economy, so Krugman is just getting rid of this complication
for ease of discussion. You can bet he puts it back in when
he feels it necessary.
Cheers,
HB |
