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Overcapacity Stifling Economy, American Economists Conclude

By Steven Pearlstein
THE WASHINGTON POST -- washington

To understand why the U.S. economy can’t seem to muster a stronger recovery, it helps to look for clues in Victorville, Calif., where 500 unused and unwanted passenger jets -- some of them brand new -- sit wingtip to wingtip in the desert.

But perhaps the best explanation can be found in those falling prices shoppers find for clothing, televisions, hotel rooms and cellular phone service. While the bargains are great for American consumers, they are being paid in the form of continued corporate layoffs, lackluster stock prices, and a sky-high trade deficit -- in short, an economy that’s having trouble building up a head of steam.

Economists refer to this phenomenon as overcapacity, which is really nothing more than too much supply chasing too little demand. In most every case, it is accompanied by prices that are flat or falling.

To be sure, overcapacity is a feature of every recession. A slowdown in consumer spending and a decline in business investment suddenly leave too many companies with too many workers, underutilized plants and underperforming stores. In most cases, it is only after most of that excess is cut back, and supply and demand get back into some rough balance, that businesses begin hiring and investing again, laying the foundation for another period of economic expansion.

This time, however, that process is turning out to be longer and more drawn out than in the past, making for a slower and weaker recovery than forecasters, executives and policymakers had expected.

The big culprit in the supply-demand mismatch was the investment boom of the late 1990s, arguably the longest and most exuberant since the 1920s. Flush with cheap money made available by Wall Street, businesses of all sorts rushed out and expanded their capacity -- not simply to satisfy the increased demand of the moment, but in anticipation of continued high economic growth rates well into the future. When the growth failed to materialize, they suddenly found themselves with more capacity than they could profitably employ.

Ironically, another reason why this recovery may be so weak is that Washington policymakers moved so quickly to prop up the economy when it became clear a recession was in the offing. By all accounts, those policies helped to make the recent recession one of the shortest and mildest in recent memory. But according to economist Stephen Roach of Morgan Stanley & Co., it also meant that the necessary task of working off all that excess capacity has been only partially completed.

“Like it or not, the post-bubble excesses of the U.S. economy remain largely intact,” Roach said. “That’s the unfortunate outcome of a mild recession -- it doesn’t result in a major purging of long-standing imbalances of the economy.”