Sunday, June 5, 2016

Reuters — U.S. Treasury Secretary Lew Says Excess Capacity "Corrosive" for China Growth

Being able to produce "to excess" is corrosive for growth? In what universe is that?

What to do with that "excess" steel. Make armaments for defense and export?

But where will China get the munnie? Uh, they issue the munnie.

Hopefully, the people running policy in China did not go to school in the West and are still able to realize that excess capacity" just means deficient demand.
“Excess capacity ultimately is corrosive of an economy’s efficiency,” Lew said. “It means you have misallocation of resources, it means that ultimately, the only way to clear the market is to sell things at a price that is below what the world market price would otherwise be.”
Uh, I thought they called that competitiveness.

The US seems to have two different economic textbooks. One for use in the US and another for abroad.

This is like the US complaining that other countries are arming as the US military approaches their borders.

Are these people for real? Or are they putting us on?

U.S. Treasury Secretary Lew Says Excess Capacity "Corrosive" for China Growth


Ignacio said...

Excessive capacity can only mean two things: insufficient demand or the sector being so productive that it has excessive capacity even at full demand.

In an ideal economy every sector has 'excessive capacity' while demand is fully supplied, and because there is huge surplus whenever a new product or market is created it reaches capacity quite fast. This would be a society of surplus where everything is widely available, when that starts to happen new organization forms may make more sense instead than the typical for profit corporation with shareholders, as new incentives may start to make sense. The current choice appears to be subsidizing the industry in question so it remains "profitable" instead (take for example certain agro-business).

In a economist head the world is upside down, I can't understand what's going in their head to get it so wrong.

Bob said...

Private businesses are usually not in the habit of producing commodities so they can keep it in storage. Commodities are produced to be sold, hopefully to yield a profit.

Steel is a primary resource, so this shouldn't be a waste over the long term. However, when we read articles about excess capacity in automobile production, that is a better example of resource mis-allocation.

Ryan Harris said...
This comment has been removed by the author.
Ryan Harris said...

China's steel production capacity has grown from 812 million tons to 1.13 billion tons in the last two years. The next largest producers are Japan at around 110 million tons and US at 85 million. China is a giant in steel.

Ignacio said...

Bob that makes sense from the point of view of an individual corporation, maybe a sector (if there is shortages of capacity in other sectors then there would be a mis-allocation) but when we are talking about the whole economy there is no such thing as 'excessive capacity'.

I think this is what Lew here is referring to (didn't read the original news) and Tom mention of steel is an example.

Tom Hickey said...

What's happening in China is that the government attempting to shift an investment-export led economy to an domestic demand based consumer economy more in line with developed countries.

This means that the "supply-side needs to be restructured" in economese. In a capitalist country, workers would just be laid off and they would have to wait on jobs being created for them, maybe. Socialist systems don't work that way, since they are run for the people.

China can stand building up inventory to keep workers employed until jobs are ready for them. The rest of the world is fortunate that China is willing to sell overstock at cut-rate prices. They should STFU and take a bargain when they see it.

Of course, now that the arms race is on again, China will have domestic use for steel, for example. Chinese military strategy tends to be based on swarming anyway. The US Navy can carry only so much ordinance and address so many targets simultaneously. The Chinese can easily swarm those sitting duck targets without the US being able to resupply in a timely way.

The US has no problem putting developing countries agriculture under with subsidized agriculture. Calling foul on China is hypocritical.

Bob said...

Excess steel will ultimately be consumed, while an excess in automobile manufacturing capacity is resolved through retooling. I would cite the latter example as a mis-allocation to the extent that those factories cannot be recycled.

If steel were a perishable good like strawberries, then that would be another consideration.

Random said...

Real buffer stocks beat export led growth.

Ryan Harris said...
This comment has been removed by the author.
GLH said...

Tom Hickey,
I am interested in what you think about what Steve Keen says about China having a private debt problem. Do you think that he is correct? Also, it doesn't seem that you follow Keen very closely, what do you think of his theory about private debt rising by twenty percent over five years as being an indicator of an economic problem?

Ignacio said...

Keen is right, the issue now is how that is dealt with (how 'accommodative' is the state to transfer wealth to households and pvte sector in order to reduce the debt bubble, what policies are taken to stabilize labour market and social tensions, etc.). Pettis has written about this too, very much in-line of what Keen has said.

Tom Hickey said...

I am skeptical about news and analysis about China. I've more or less given up on Pettis and Keen is probably right about private debt but that's largely RE. Nothing that the China government can't handle if they know how to use the tools they have have. They have a very different POV than the neoliberal West and didn't get caught up in the crisis of 2008 the way the West did. The West is still digging out.

I'd be more sanguine if China floated, but if they perceive they need to, they will. Right now, they are milking the peg.

mmcosker said...

Excess capacity is especially great if you have retirees that don't produce but need/want to consume that excess capacity.