Newspaper article THE JOURNAL RECORD

Unchecked Glut Economy a Huge Threat to Nation's Prosperity

Newspaper article THE JOURNAL RECORD

Unchecked Glut Economy a Huge Threat to Nation's Prosperity

Article excerpt

EDITOR'S NOTE: Leonard Silk is on vacation. Substituting for Silk is Louis Uchitelle, an assistant business editor of The New York Times.

NEW YORK - Among the celebrated phrases of 1986, ``glut economy'' made the list as a vivid description of an unsettling situation.

This is an era of overcapacity in which dozens of industries now produce, or seem capable of producing on a moment's notice, far more than the world's consumers can possibly absorb. Food and raw materials are plentiful, and the world is overwhelmed, as everyone knows, with steel, autos, apparel, semiconductors, petrochemicals, shoes, appliances, aircraft, television sets, toys, glass. Name a product and an industry appears - in one country or spread over several - that can turn it out in excess.

Classic economic theory argues that the abundance is temporary and will disappear as prices drop and less efficient producers are forced out of business. The recent years of disinflation have in fact done some of this. But the glut economy persists anyway, and its persistence is beginning to convince a few economists that overcapacity has become built into the world's economic system, a structural problem resistant to much shrinkage and far in excess of demand or current practices to stimulate demand.

``I think it is quite possible that we will be stuck in the doldrums of saturation until some new solutions come along,'' says Robert L. Heilbroner, professor of economics at the New School for Social Research.

The statistical evidence of a worldwide overcapacity crisis is hard to gather. In the United States, the reading is clear. Manufacturing and mining operated at only 79.3 percent of capacity in November, compared with more than 86 percent in the late 1970s. But data on capacity utilization are less exact in other industrial nations and almost non-existent for Brazil, South Korea and the other industrial third world nations.

A better measure, says John Green, senior economist at Wharton Econometrics, is to think of the unemployed as ``unused capacity'' and to assume that relatively high unemployment ``means that factories are there and not being used.''

By this measure, overcapacity is alarming and long-term. For all of Western Europe, the unemployment rate rose from an average 3.4 percent in 1970 to 12 percent this year, and will have declined to only 8 percent by the year 2005, according to Wharton's annual World Economic Outlook study, out this month. The trend is similar for the United States (6.9 percent today and still 6 percent in 2005) and Japan (2.8 percent today and 2.1 percent in 20 years).

The most apparent explanation of this overcapacity crisis is the industrial world's steadily rising productivity rate as technology spreads. Government subsidies for companies that otherwise would go out of business are also a factor, as is weak worldwide aggregate demand. …

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