Sunday, October 19, 2003

Excess Capacity

For some reasons many conservative deep economic thinkers tend to confuse microeconomic incentives and macroeconomic outcomes. Case in point - the notion that providing tax reductions to businesses and tax cuts for rich people would lead to "greater investment," which would lead to new jobs, which would lead to more paychecks, which would...finally...lead to more demand for the crap the firms were trying to sell in the first place.

It's sort of putting the cart before the horse - arguing that firms will invest in greater capacity anticipating that if every other firm in the economy does the same, the increased incomes for workers will lead to greater demand.

But, the problem is that we have serious excess capacity in this country. Why build more factories when the existing ones aren't operating?