Is this a capital goods depression?

My intellectual mentor, the late Professor Seymour Melman of Columbia University, was very enamored of a small booklet written in 1935 called “The Chief Cause Of This And Other Depressions.” The author was Leonard P. Ayres, Vice President of the Cleveland Trust Company. This is the gist of what Ayres said, at least the way I interpret it:

A recession, or a long one, would benefit from a short-term stimulus, or if you consider two years to be medium-term, a medium-term stimulus. However, if this is a depression, you have a different animal.

The Melman/Ayres view of depressions is that they are partly or significantly caused by a collapse in the capital goods industries. That is, the machinery and such that is used to make other stuff loses their markets. When these industries start to collapse, the unemployment there causes a greater lack of demand among the consumer goods industries, starting a snowballing effect in the wider economy.

The implication, at least for Melman and I, was that in a depression, you should try to revive, not just the consumer goods industries, but the producer, or capital goods industries as well. That means saving the Big 3, for instance, because they use a lot of capital goods. But it could also mean building lots of trains, because trains use lots of capital goods. In addition, according to WTO rules, the only way you can demand "domestic content", that is, demand that what the government subsidizes is actually produced in this country, is if the government is buying "basic infrastructure", which again, means trains.

So therefore the horizon for a stimulus should be, not two years as has been bandied about, but at least five years, and that opens the door to many more long-term projects, perhaps even including the national electric grid and things like wind farms, that would help lift the capital goods industries out of the muck, and then the rest of the economy.

What do you think?



I'm not sure we're quite there yet

But based on the falling PMI, we're definitely heading that direction.

Due to the fact we're heading that direction, I'd personally like to see 25-50 year commitments to stimulus- including replacing the national electric grid with local ambient energy sources (leaving the grid as a mere backup- a huge battery to which local generators feed when they can and take from when they must), major broadband installation nationwide (rural FiOS act!), a true universal health care system (rural hospitalization act, maybe based on WalMart's ideal plan of always a store within walking distance), and of course, high speed rail to get the goods to where they need to be.

I consider ALL of that to be basic infrastructure of the type we need if we're ever going to re-enter the global marketplace as an equal player.

Maximum jobs, not maximum profits.

Might need the grid for baseload

Seebert, you might want to have a look-see at this Stanford study which proposes that a national system of wind farms, integrated through a high voltage dc grid, could provide that allusive goal, renewable baseload, that is, there's always enough electricity to power most of what we need all of the time. And your list sounds good to me -- and come to think of the it, the American Society of Civil Engineer's report card is basically a plan for a 1.6 trillion dollar rebuild of the infrastructure is a five year plan.

JR on Grist

Interesting idea

Yeah, mine is close. Only difference is instead of dedicated windfarms- I'd like to see generators on every floor of every high rise, some wind, some solar, some geothermal, a few (on coastlines, mainly) Deep Water & Wave generators. Plug that all into a North American grid, with everybody selling their surplus, and we'll never actually exceed baseload.

Yeah, for shorter term, though, the ASCE list is pretty darn good- for a list of stuff we need to do NOW anyway and should have done 5 years ago.

Maximum jobs, not maximum profits.

Thoughts on "Not there yet"

First of all, most of the statistics that I relied on 20 years ago are no longer available - either not being tracked, or have been privatized and thus far too costly for news sources, let alone brave, iconoclastic bloggers. Google "Statistical Abstract" and compare the chapter on Manufacturing in the 2007 edition, with what that chapter used to have 20 or 30 years ago. It's really shameful.

Even the trade associations have changed. I used to get the American Iron & Steel Institute's annual report, which included all the industry's statistics, for free, but now they want nearly $300 for it. Damn, there's some weeks I don't even sell that much in books!

Second, that leaves the Purchasing Managers Index, and both of those indeed show that the bottom has dropped out of the industrial economy. I'm not sure we're there yet, either, but I am dead on certain that another six weeks of Bush and his merry band of asswipes will get us there.

Third, I very strongly believe that U.S. manufacturing has never really recovered from the oil and Volcker interest rate shocks of the 1970s-80s. Some specific industries have almost entirely disappeared, such as printing equipment, foundries and foundry equipment, mining equipment, consumer electronics, shoe making, commercial shipbuilding, power generation and distribution equipment, pressure vessels, and so on. The fact that U.S. manufacturing never really recovered is especially clear when industry statistics are presented on a per capita basis, which of course shows the inter-generational disinvestment that has occurred for nearly three full decades now.

Mining equipment?!

foundry equipment?! Yowch!

Speaking of Seymour Melman, when I first met him in the early 1980s, he was livid that the dollar was being "strengthened", a word he hated, which was killing the American exporters. I agree that the "tipping point" was around 1982. That may also be the point at which a majority of the American public had not experienced the conventional wisdom that manufacturing was important, which I think started to die in the 1970s. People who grew up in the 1920s and 1930s certainly intuitively understood the connection between a strong manufacturing base and national wealth, but by the 1980s people thought that we should be "post-industrial".

JR on Grist

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'When you see a rattlesnake poised to strike, you do not wait until he has struck to crush him.'

Not until they get the price below

that magic $.10/kwh

Maximum jobs, not maximum profits.