As the recession grinds on, more and more of the nation’s means of production ”” its workers, its factories, its retail outlets, its freight lines, its bank lending, even its new inventions ”” are being mothballed.
This idled capacity, like baseball players after a winter off, takes time to bring back into robust use. So even if the recession miraculously ended tomorrow, economists estimate that at least three years would pass before full employment returned and output rose enough for the economy to operate at full throttle.
While stock market investors have embraced tentative signs of improvement in the mortgage market and elsewhere, even a sharp pickup in demand for products and services will take considerable time to play out.
The mathematics are daunting. The shortfall is running at more than $1 trillion in annual sales and other transactions. Only once since the Great Depression has there been such a severe loss of output ”” in the 1981-82 recession ”” and after that downturn, it was seven years before the economy regained the lost production.
“Full throttle” … more drivel. It’s rather bizarre to define full capacity as the potential GDP as projected by a linear extrapolation of the recent past. True, if measured by more traditional evaluations of “capacity utilisation” — the ones real economists use, the economy is operating at about 70% of capacity, not uncommon in a recession.
The big “however,” however, is that inflationary pressure builds rapidly once production is much above 85% capacity, certainly 90%. Things need to come off-line for maintenance, repair, renovation and so on, all of which becomes increasingly difficult as capacity utilisation rises. The sweet spot is about 80-85% capacity, not “full throttle”
Furthermore, GDP has very real limitations. For one thing it does not really measure sales at the wholesale level. I’m over simplifying here, but if a baker buys a truckload of flour in anticipation of his summer bread sales, it isn’t included in the GDP; only his bread sales, later.
Additionally, GDP does not differentiate between productive and destructive expenses; keeners, please refer to Bastiat. Maybe those decreasing billable hours at law firms reflect that fewer people are launching contentious divorce actions … is that a [i]bad[/i] thing?
Anyhow, the article displays a befuddled (at best) understanding of economics. Unsurprising in the NYT.