Knowing and Making

It's been accepted by most analysts for years that the global car industry has substantial overcapacity and that factory closures, or even closures of whole companies, are needed. Now BMW is cutting 850 jobs at its Mini plant - even though Mini sales are up this year. So is this a good thing? Probably not - at least not right now - because it causes a reduction in aggregate demand, and that means reduced GDP growth, or a deeper recession. But that's true of capacity reductions at any time. So why would it have been good before and not good now? What is the difference? The first thing to understand is why a cut would have been desirable. Let's imagine that, in more normal times, a car company (Chrysler for example) shuts down. The immediate beneficiaries of a company closing would be the other car companies. With less competition they could sustain higher prices; some people who would have bought Chryslers will now buy other cars, boosting both revenue and profits at the re...

Synthesising the whole stimulus debate into a few lines, there seem to be a small number of messages: Stimulus is good because it gets idle resources producing something Stimulus is bad because it moves productive resources into less productive use Stimulus is bad because its cost has to be paid back, reducing future efficiency Stimulus won't work because rational consumers will save as much as the government spends Stimulus is good/bad because government spending is efficient/inefficient These messages are not necessarily contradictory - some of them are orthogonal. The truth of each assertion all depends on your model of how the economy works - and especially on one big factor: how much friction is there? In an economy without friction, much of the argument would disappear. Idle resources would be immediately reallocated to some other use, since there is always somebody with savings that they could switch to consumption. Prices would adjust. Resources would always go to the most ...