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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: yard_man who wrote (38830)	12/9/1998 7:30:00 PM
From: Michael Bakunin	Read Replies (2) \| Respond to of 132070

I don't think he's nuts. He just disagrees with you. I believe his phrase "capacity" refers to the economy's capacity, not to any individual project's. I have some sympathy with this view: most macroeconomics is needless fluff, since, in the end, macro is about people doing work. Everything else is plumbing. However, even in this sympathetic light, I agree that he's oversimplifying. Take people doing work; now insert drought. Watch production fall as people starve. Cash problem? I think not. Nevertheless, I like the basic technique of getting a whole lot of distance; I think it's served him well in the past. After all, for all Krugman's faults, he 'called' Asia in 1994: web.mit.edu Maybe he's not entirely full of it, eh? mb

To: yard_man who wrote (38830)	12/9/1998 9:41:00 PM
From: Knighty Tin	Respond to of 132070

Tip, I have read guys who are just too deep for me to follow. But Krugman is just too discomboobulated for me to follow him. <G> MB

To: yard_man who wrote (38830)	12/10/1998 10:29:00 AM
From: HB	Read Replies (1) \| Respond to of 132070

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