Our Capacity Remains Undiminished

President Barack Obama’s Inaugural Address

That sounds nice I believe however, it is fairly irrelevant. Economic demand is what is down, not production capacity. We are “no less productive than when this crisis began.” Ok, that is probably true. So what. That implies that the crisis has something to do with productivity. If we say the color of our eyes is the same as when the crisis began it is obvious that is a non-sequitur. Well so is the quote by the new President, though that is less obvious.

Our demand was definitely over stimulated using massive federal government budget deficits, massive trade deficits, massive amounts of consumer debt, massive amounts of unjustified mortgage debt and massive amounts of leverage. None of those things has anything to do with capacity in the implied sense - capacity to produce. They have to do with the capacity to consume. And while our capacity to consume has not declined. The funding that allows that consumption (foreign lending, high leverage, junk mortgages…) has decreased.

We can consume much more than we can afford to consume. So as long as we either sell off assets we earned previously or borrow from someone else we can consume beyond our ability to produce. But if we actually have to fund our consumption with production we might not be able to afford McMansions for everyone. I am not sure I see what chance there is of ending the practice of putting off “unpleasant decisions” has if we just pretend the current economic crisis is somehow related to productive capacity instead of a massive binge of consumption that could not be paid for and rested on the foundation nothing more than huge debt and financial gimmicks.

Economies that are distorted by bubbles collapse. That is the state we are in now. If people actually think we are able to produce less today than we could a year ago I suppose telling them that our capacity has not declined might be useful. But what I would like to see is actual talk about how we need to live within our means to produce and stop financing our consumption by selling off assets and taking on debt.

“our goods and services no less needed” - another example of this very traditional view (not at all a new “remaking America” idea. So is it that McMansions are needed? And Junk mortgages? There are many things people desire. Desire is not need.

Related: The Budget Deficit, the Current Account Deficit and the Saving Deficit - Families Shouldn’t Finance Everyday Purchases on Credit - The Economy is in Serious Trouble - Expectations - Obama disagrees with me