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Wouldn't a simpler hypothesis be that output trends before a recession are artificially high? We know fairly well that economic trends tend to feed back on them

Wouldn't a simpler hypothesis be that output trends before a recession are artificially high? We know fairly well that economic trends tend to feed back on themselves; the idea that growth leads to an acceleration of growth which overreaches and ends in a crash isn't particularly far-fetched.

JamesBarney 11y ago
The problem is its very hard to tell a plausible sounding about what over artificially high production looks like. If you lived in an island economy and went from producing 100 widgets to producing 95. What exactly is artificial about the extra 5 widgets you supplied? You could argue that people were incentivized to work harder than they actually wanted to work but then you find a wage increase as we entered the recession. You could argue that technology got worse. But that's really strange because it doesn't seem like in 2008 we forgot how to efficiently make things. So that leaves the story Larry Summers is talking about.
- AngrySkillzz 11y ago
  I'm talking about what you might call "artificial demand," not capability. Example: our corporate customers decided to buy 5 more widgets in 2007 than in 2008 because they saw the economy improving, mostly due to the growth of household on-paper wealth and the associated increase in consumer spending, and were forecasting a growth in their own business. When the housing market collapsed and consumer spending fell off a cliff, those customers no longer had any reason to buy the extra widgets. In that way, you can say output is artificial. A large mass of people spending above their means because of a perceived increase in wealth, along with other psychological factors, leads to an economy with rising demand. When it turns out that wealth increase was a phantom and those psychological factors disappear, there is less demand for widgets and thus output decreases. Output isn't "how much we can make," it's "how much we DO make." The amount we produce is proportional to the demand for that product.
  - ddingus 11y ago
    >>>... Additionally, the pain of correction can lead to a dampening in overall demand compared to what it was before. I went through a scenario much like this. Company had a single customer that is dominant, and that customer was over optimistic about the level of demand it was seeing from it's marketplace. Orders grew to large levels, company expands, etc... Then reality hits. That customer has a ton of inventory and wants relief! Worse, they could just order nothing and do a sell off for a time to recover, but that may destroy a valued partner, who didn't really do anything wrong, other than supply what they could have seen as too much. Long term, that is expensive for them as they would lose a valuable part of their product line. The solution ended up being sharing the problem with both parties running very lean while inventory levels drop. Now, coming out the other side, both parties are far more conservative. Risks are seen as bigger than they really are, and overall run rate business just isn't what it should be based on the data from before. Inventory, sales, and some other data is more closely tracked to answer the questions of "what DO we make?", and "Will it sell?" by both parties, who share the impacts of those answers. Hysteresis, in the sense being talked about here, could arise from artifacts of an event like this. When things were running high, expansion came either at the expense of capital held by the company, or debt, and both of those have impacts on the risk appetite of the business. It's all moderated now. That moderation is both real, in terms of hard data, cash, etc... and human, in that raw fear of another instability causing everyone to lose gains had since that last one... It's been an interesting journey. The reality is a took a very considerable time to reach a point where meaningful risks make sense again. About two years. This, despite the problem itself resolved within 6 - 8 months. Turns out, the motivation to take some new risks and make reasonable investments is being driven by a slight downward trend in sales. It's not much, but it's not growth. The additional "hysteresis" impact appears to be felt through the marketplace. That big event seemed to dampen way more than one would expect at first glance. I believe that slight trend is the change in risk / value perception as well as the market seeing the brand fluctuate and that resulting in a loss of confidence, or a crack where competing brands gained some ground. This is hard to resolve though. There isn't enough data. I've made some changes in marketing in an attempt to get it, and or just correct for the trend in an obvious, measured way. Jury is still out on that. Having production satisfy demand is very important in the vast majority of cases. Overproduction either tends to create instability, or a reduction in value as too much is out there, or high inventory costs that tend to marginalize the value of an overproduction event. Exceptions can be, say an overproduction to insure supply during a planned downtime, or expansion, but that can be expensive money and resource availability...
skylan_q 11y ago
It blows my mind that Keynesians can't identify busts that were caused by bubbles. When the US real estate market started tanking, how was the boom supposed to continue? More construction in an over-supplied housing market? Re-train workers overnight and give them jobs in other industries? Transmute wood, concrete, shingles, tractors, bulldozers, and excavators into other materials and tools for other industries?
- jstalin 11y ago
  They seem to deny that there is anything called malinvestment. All that matters is aggregate demand.
  - JamesBarney 11y ago
    Keynesians believe that there is malinvestment. They just believe that malinvestment has a direct impact on per capita efficiency but doesn't have an impact on labor utilization except through aggregate demand. Basically there is a difference between 1. 10 people growing bananas when the economy would be better off with 7 people growing bananas and 3 people growing apples. 2. 9 people growing bananas and 1 person sitting on his butt doing nothing because he can't find a banana growing job. Even though the economy would be better off with 10 banana growers then none. The problem with recessions is that per person productivity usually goes up but less people are employed. This phenomenon is hard to explain without referencing aggregate demand.
  - marcosdumay 11y ago
    If you read Keynes, you'll see that capital ROI is the inverse (1/x) of the share of their income that the population invests. Yep, that simple. That's called investment multiplier, and economists were discussing at the late 00's how it could vary from one company to the other given the Keynes' identities.
- james1071 11y ago
  You are talking as if construction were a large part of the economy.

JamesBarney 11y ago

The problem is its very hard to tell a plausible sounding about what over artificially high production looks like. If you lived in an island economy and went from producing 100 widgets to producing 95. What exactly is artificial about the extra 5 widgets you supplied? You could argue that people were incentivized to work harder than they actually wanted to work but then you find a wage increase as we entered the recession. You could argue that technology got worse. But that's really strange because it doesn't seem like in 2008 we forgot how to efficiently make things. So that leaves the story Larry Summers is talking about.

AngrySkillzz 11y ago
I'm talking about what you might call "artificial demand," not capability. Example: our corporate customers decided to buy 5 more widgets in 2007 than in 2008 because they saw the economy improving, mostly due to the growth of household on-paper wealth and the associated increase in consumer spending, and were forecasting a growth in their own business. When the housing market collapsed and consumer spending fell off a cliff, those customers no longer had any reason to buy the extra widgets. In that way, you can say output is artificial. A large mass of people spending above their means because of a perceived increase in wealth, along with other psychological factors, leads to an economy with rising demand. When it turns out that wealth increase was a phantom and those psychological factors disappear, there is less demand for widgets and thus output decreases. Output isn't "how much we can make," it's "how much we DO make." The amount we produce is proportional to the demand for that product.
- ddingus 11y ago
  >>>... Additionally, the pain of correction can lead to a dampening in overall demand compared to what it was before. I went through a scenario much like this. Company had a single customer that is dominant, and that customer was over optimistic about the level of demand it was seeing from it's marketplace. Orders grew to large levels, company expands, etc... Then reality hits. That customer has a ton of inventory and wants relief! Worse, they could just order nothing and do a sell off for a time to recover, but that may destroy a valued partner, who didn't really do anything wrong, other than supply what they could have seen as too much. Long term, that is expensive for them as they would lose a valuable part of their product line. The solution ended up being sharing the problem with both parties running very lean while inventory levels drop. Now, coming out the other side, both parties are far more conservative. Risks are seen as bigger than they really are, and overall run rate business just isn't what it should be based on the data from before. Inventory, sales, and some other data is more closely tracked to answer the questions of "what DO we make?", and "Will it sell?" by both parties, who share the impacts of those answers. Hysteresis, in the sense being talked about here, could arise from artifacts of an event like this. When things were running high, expansion came either at the expense of capital held by the company, or debt, and both of those have impacts on the risk appetite of the business. It's all moderated now. That moderation is both real, in terms of hard data, cash, etc... and human, in that raw fear of another instability causing everyone to lose gains had since that last one... It's been an interesting journey. The reality is a took a very considerable time to reach a point where meaningful risks make sense again. About two years. This, despite the problem itself resolved within 6 - 8 months. Turns out, the motivation to take some new risks and make reasonable investments is being driven by a slight downward trend in sales. It's not much, but it's not growth. The additional "hysteresis" impact appears to be felt through the marketplace. That big event seemed to dampen way more than one would expect at first glance. I believe that slight trend is the change in risk / value perception as well as the market seeing the brand fluctuate and that resulting in a loss of confidence, or a crack where competing brands gained some ground. This is hard to resolve though. There isn't enough data. I've made some changes in marketing in an attempt to get it, and or just correct for the trend in an obvious, measured way. Jury is still out on that. Having production satisfy demand is very important in the vast majority of cases. Overproduction either tends to create instability, or a reduction in value as too much is out there, or high inventory costs that tend to marginalize the value of an overproduction event. Exceptions can be, say an overproduction to insure supply during a planned downtime, or expansion, but that can be expensive money and resource availability...

skylan_q 11y ago

It blows my mind that Keynesians can't identify busts that were caused by bubbles. When the US real estate market started tanking, how was the boom supposed to continue? More construction in an over-supplied housing market? Re-train workers overnight and give them jobs in other industries? Transmute wood, concrete, shingles, tractors, bulldozers, and excavators into other materials and tools for other industries?

jstalin 11y ago
They seem to deny that there is anything called malinvestment. All that matters is aggregate demand.
- JamesBarney 11y ago
  Keynesians believe that there is malinvestment. They just believe that malinvestment has a direct impact on per capita efficiency but doesn't have an impact on labor utilization except through aggregate demand. Basically there is a difference between 1. 10 people growing bananas when the economy would be better off with 7 people growing bananas and 3 people growing apples. 2. 9 people growing bananas and 1 person sitting on his butt doing nothing because he can't find a banana growing job. Even though the economy would be better off with 10 banana growers then none. The problem with recessions is that per person productivity usually goes up but less people are employed. This phenomenon is hard to explain without referencing aggregate demand.
- marcosdumay 11y ago
  If you read Keynes, you'll see that capital ROI is the inverse (1/x) of the share of their income that the population invests. Yep, that simple. That's called investment multiplier, and economists were discussing at the late 00's how it could vary from one company to the other given the Keynes' identities.
james1071 11y ago
You are talking as if construction were a large part of the economy.