[lbo-talk] revisiting the FROP and the Brenner hypothesis

Philip Pilkington pilkingtonphil at gmail.com
Mon Apr 6 18:23:43 PDT 2009


This is an empirical, historical study of the steel industry in which the hypothesis of 'persistent overcapacity' is found wanting.

A question: would overcapacity in the steel industry not have been absorbed by the commodities boom a while back? And could this in turn not be interpreted partly as a demand for materials for use in overproduction and partly as demand for material in order to expand into the erstwhile periphery (China etc.) which would in turn lead to more overcapacity due to competitive pressures?


>
> But the persistent overcapacity in manufacturing thesis is really
> problematic, and as SA and Doug keep saying, the reluctance to believe
> in a turning point in the 1990s - while defensible in the first
> publication in 1998 - now looks pretty stretched. And they're right
> that the postwar boom is the anomaly, taking the long view, rather
> than the period since.
>
>

I don't think he was reluctant to believe in the turning point in the mid-90s. He wrote an afterward for the 2006 copy of the book where he argued that although this did occur it was unsustainable. I'll quote here the last paragraph in full, but before I do so I have to say that not only does it prove prescient in light of the credit crunch, but it also helps explain why every day something highly pessimistic comes out in the news about some overproduction/underconsumption problem. The most striking was the fall off in demand for Chinese products which was huge, but even today the media are reporting an "unexpectedly severe" contraction in European demand ( http://news.bbc.co.uk/2/hi/business/7985526.stm). Often I get the feeling that the writings on the wall here...

Anyway, here's the summary of Brenner's most recent account of his argument (to my knowledge) - remember, this is written in 2006:

"There is... reason to doubt that the downward pressures on the world economy that have ultimately derived from the persistence of chronic overcapacity in the international manufacturing sector have been sufficiently lifted - and/or that non-manufacturing productivity and profitability have risen sufficiently spectacularly - so that the world economy can generate sufficient dynamism to transcend or integrate its imbalances and cushion the effects of deflating bubbles. This is especially because the result of the US Fed's continuing dependence on cheap credit and asset-price bubbles to provide the subsidy to demand to keep the economy turning over appears to have only delayed, but not really avoided, the economy's obligatory responses to the overcapacity, fall in profitability and asset-price crash of 2000-01. Producers, as expected, moved to restore profits via cutting employment, wages and capital costs, and this issued, unavoidably, in a powerful and extended hit to aggregate demand. But, thanks to the Fed's huge subvention to consumer demand - by way of record household borrowing dependent in turn on runaway home values (PP: hmmmm.....) - they avoided the large-scale bankruptcies and scrapping of means of production that tends to be imposed upon business as a result of the fall in aggregate purchasing power that tends to result from its own cost-cutting to restore profitability. They have managed, instead, to maintain already existing plant and equipment in operation and in that way to render less necessary stepped-up investment. Instead of purchasing additional capital stock or adding more jobs, they have tended to turn their surpluses over to shareholders, thereby making additional funds available to the wealthy and in that way for speculation on financial assets (PP: hmmm...). Private business has thus continued to generate little in the way of aggregate demand, but the stimulus provided by access to cheap credit, fiscal deficits (PP: the China-overproduction I mentioned above...), and the declining dollar is evaporating. The odds therefore favour a still further opening up of the already enormous chasm between the income and profits actually produced by the world economy and the paper-claims generated by it - the build-up of external surpluses and credit in the hands of East Asia and of external deficits and household debt in the US being one highly symptomatic manifestation of the broader syndrome. The reversal might come directly through the petering out of demand growth - as a result of a slowdown of investment and/or job-creation by corporations dubious about business prospects - or it might come through a fall-off of consumption by households hit by the deflation of the housing bubble, central banks' rising short-term interest rates, themselves the result of a failure to cover the current account deficit. But, whether the reversal takes place with a whimper or with a bang, economic slowdown and new turbulence still seem much more likely than a leap into a new long upturn".



More information about the lbo-talk mailing list