The impact of excess capacity over the investment falloff
Rodrigo Pérez Artica
Instituto de Investigaciones Económicas y Sociales del Sur (IIESS-CONICET/UNS) Departamento de Economía, Universidad Nacional del Sur (UNS)
Please cite the paper as:
Rodrigo Pérez Artica, (2018), The impact of excess capacity over the investment falloff, World Economics Association (WEA) Conferences, No. 2 2018, The 2008 Economic Crisis Ten Years On, 15th October to 30th November, 2018
A widespread decline in the rate of capacity utilization in the US manufacturing industry during the last decades is documented, which parallels a worsening trend of gross capital formation. Several exploratory exercises are conducted to investigate whether utilization rates were actually related to the investment performance during 1952-2014. Vector auto-regressive estimates imply a non-trivial quantitative relationship between utilization rates and investment, which accounts for a decline equivalent to more than 30% of average investment decline over the whole period considered. Finally, firm-level data is used to control for other investment determinants. The relationship remains statistically and economically relevant. In addition, a relationship between past accumulated utilization variation and current investment is found, suggesting that excess capacity might be a relevant force behind current investment weakness.
You have an interesting fact, but no theory to explain why it might be interesting. The theory you mention–the Post Keynesian view that firms may have a desired capital stock and if they have too much capacity this would adversely impact capital formation and the multiplier accelerator–would serve to explain a short-term imbalance between investment and capacity utilization. The question then is: why would there be a long-term relationship between declining capacity utilization and declining capital formation? After all, if firms experience excess capacity they should reduce their investment spending until excess capacity is eliminated. So, if your fact is correct, why does it exist over the long term? I have been scratching my head trying to come up a possible scenario. First, I thought of Harrod’s famous knife edge. In his growth model, he said that if the desired growth rate is less than the actual growth rate, then a vicious cycle of decline would set in. Capitalists would lower investment spending, sending output lower, leading to another decline in desired investment. However, the theory behind this is weak. Second, I thought of the possibility it had to do with increasing globalization and convergence. Suppose a new technique is developed in the US, capitalist invest in new capacity and, after a lag, the industry migrates abroad to a developing country and the good is imported into the US, leaving excess capacity and declining investment spending in the US.
That is what I came up with.