What happened to the “creative” part?

This is a chart of the estimated industrial capacity of the United States since 1948. It is compiled based on data provided by the Federal Reserve.

(The inset shows the most recent data.)

According the authors of the index,

The Federal Reserve’s monthly index of industrial production and the related capacity indexes and capacity utilization rates cover manufacturing, mining, and electric and gas utilities. The industrial sector, together with construction, accounts for the bulk of the variation in national output over the course of the business cycle. The industrial detail provided by these measures helps illuminate structural developments in the economy ... The capacity index, which is an estimate of sustainable potential output, is also expressed as a percentage of actual output in 2002.

Industrial capacity is a measure – an estimate – of an economy’s ability to produce goods. This is not to be confused with the amount of goods an economy actually produces, however, which, in normal circumstances, will be somewhat less than its capacity. Capacity is how much we can produce if we need to; it is not how much we are producing.

As you can see by looking at the chart, in the entire post-war history of the United States, despite nine recessions of varying intensities, there was never a contraction of the American economy’s capacity to produce goods.Year after year, decade after decade, despite recessions, wars, inflation, etc., the ability of the US economy to produce more than it had the previous year always grew. The very suggestion that the United States of America might have less productive capacity than it had the year before would have been seen as a bad joke.

That is, until 2003.

As of November in that year the total industrial capacity of the United States stood .46 points lower on the Federal Reserve’s index of such things than it had in November 2002. This was followed by another, smaller, fall by November 2004 of .18 points.

For some odd reason, this passed without remark by any official government spokesman, nor questions by any media outlet. It was a non-event – in the way the sudden disappearance of a minor moon of Jupiter might be considered a non-event: A piece of data that might only insignificantly affect the memory pool of the communal consciousness – rippling lightly across it, and leaving no permanent trace of having been.

This unremarked event has now been followed this November by a similar YOY fall in US industrial capacity of a larger magnitude – nearly 3 times greater than the combined fall of the two previous years, or 1.72 points on the Federal Reserves index of such things. Something, previously unthinkable, occurs two years in a row, and then happens a third time – this time greater than the combined previous two times.

According to Clusterstock.com – an investor site,

This capacity destruction was likely the result of inefficient and outdated U.S. capacity being rendered uncompetitive as the economic downturn separated the wheat from the chaff.

The writers, Vincent Fernando and Kamelia Angelova, asks the obvious question:

Is it a bad thing? Actually, no. The removal of uncompetitive capacity means that the remaining players face less over-capacity going forward. If there are too many weak players, they all kill each other via price competition. In the long-run this is what we want to happen — weaker players are mothballed during downturns, making room for stronger ones.

The obvious objection to that sanguine view are the previous sixty data points on our chart. During that period of unbroken increases in the expansion of US productive capacity a lot of “weaker players were mothballed.” The writers at Clusterstock are clearly confusing competition with the ability to produce. And, despite decades of rising capacity to produce, the US never experienced deflation.

For decades, uncompetitive, obsolete capacity was mothballed, driven into bankruptcy, ruined,  but, total manufacturing capacity always expanded. Thousands of autoworkers were laid off, but capacity expanded.  Detroit was turned into a ghost town, but capacity expanded. The Rust Belt flowered throughout the Midwest, jobs ran south, and then to Mexico and China – but capacity expanded.

Capacity to produce always expanded.

It is what capitalism does.

There is no cure for it.

You can’t negotiate with capitalism about this, threaten it, cajole it, bribe it, or, shame it into not expanding capacity to produce. The moment capitalism stops expanding manufacturing capacity, is the moment it dies.

So, if Wall Street is destroying manufacturing capacity in the United States, you just might want to know where they are expanding it.