Manufacturing Capacity | Hysteresis | Wherein Krugman and the WSJ Find Common Ground

Manufacturing capacity — how much the nation’s factories can put out at full tilt — is way down since the recession began. The only other time on record the U.S. cut manufacturing capacity was after the 2001 recession, when it edged down 0.6%. Some areas with the steepest capacity losses, like furniture making and textile production, may never return to their old levels. Others, like machinery and motor vehicle production, might stand a better chance.                 via WSJ 

+ Paul Krugman | Conscience of a Liberal

But there is a real concern that if the slump goes on long enough, it can turn into a supply-side problem, because investment will be depressed, reducing future capacity, and because workers who have been unemployed for a long time become unemployable. This is the issue of hysteria “hysteresis”.

Hysteresis can mean that the costs of failing to pursue expansionary policies are much greater than even the direct effects on employment. And it can also mean, especially in the face of very low interest rates, that austerity policies are actually self-destructive even in purely fiscal terms: by reducing the economy’s future potential, they reduce future revenues, and can make the debt position worse in the long run. 

J N O M I C S