This is the second of three blogs that focus on economic issues facing the United States and the global economy that are exacerbated by the Trump administration’s fixation on returning to bad economic practice from the past. The previous blog, MAGA’s Great Economic SNAFU, looked at what economists predict will be “China Shock.” The next blog tries to answer the question why everything is so unaffordable.
In the global capitalist economy, companies and countries compete for market shares and profits. Each company and country expands production to the point where aggregate production far exceeds aggregate demand creating a crisis of overcapacity. This has led to the unrestricted release of greenhouse gases and climate change, environmental degradation and companies and countries seek any possible advantage, nationalist movements that want to close domestic markets and charge everyone else with unfair practices, waves of unemployment in affected industries, rustbelt communities with desperate populations, economic depression, political instability, and war, trade wars and actual military conflagrations.
Economists from Adam Smith and Karl Marx to the present have all seen productive overcapacity as a problem for market economies, Marx thought capitalism was self-destructive, but free market pro-capitalist economists like Smith, Friedrich Hayek and Milton Friedman argued that the system is self-correcting. Nobel prize winning economist Joseph Stiglitz argues that left unregulated, markets, spurred on by speculative investment, tend towards irrationality leading to a cycle of booms and busts. He cites the dot.com bubble of the 1990s and China’s export-based economy today as examples. He wants cryptocurrencies to be outlawed as criminal enterprises before they do irreparable economic damage and believes the AI craze has the potential, if left unregulated, to worsen existing economic inequality, contribute to unbalanced production, destabilize the global economy as some hyper-expensive speculative ventures collapse, and consolidate enormous power in the hands of a few dominant monopolies. None of this looks very hopeful for the immediate future.
A crisis of overcapacity was an underlying cause of the Great Depression of the 1930s. In 1930, in an attempt to protect home markets and industries from foreign competitors, the United States put into effect the Smoot-Hawley Tariff Act. It raised tariffs on imported goods to high levels triggering a trade war with other industrialized nations, exacerbating the global economic downturn, and escalating conditions that led to World War II. Any historian, economist, or government policy maker who pays attention to the past should realize that raising tariffs on imported goods will not resolve a crisis of overcapacity and will probably worsen the situation. Unfortunately the United States government today is controlled by wishful thinking faddists, I am trying to be nice here, influenced by self-serving corporate power brokers seeking short-term advantage at the expense of everyone else.
Overcapacity and the Great Depression were finally resolved by the devastation of World War II that destroyed industries across Europe and East Asia and led to between 70 and 85 million deaths. The United States survived the destruction, giving it a major competitive advantage until the 1960s, when once devastated economies began to produce on a large scale again. In this case, an immediate crisis was averted because of expanded social security networks in industrialize countries, trade agreements and alliances that emerged after World War II, fear of a possible nuclear war, and the use of the air and the oceans as a giant no charge garbage dump.
There are a number of indicators that current economic difficulties, mass migration from impoverished sections of the world, and the rise of destabilizing anti-immigrant rightwing nationalist “me-first” movements in the United States, Western Europe, and Japan are the result of unplanned, competition-driven overcapacity.
According to the Organization for Economic Cooperation and Development, the world has too much steel and no one is willing to cut back on production. They estimate that excess steel production will reach over 700 million tons by 2027. To win voters, Donald Trump promised that tariffs would help rebuild the American steel industry, but there is no market for expanded steel production, either in the United States or overseas. In addition, steel production is a major contributor to global warming. The World Economic Forum estimates that steel Blast furnaces are responsible for almost one-tenth of greenhouse gas emissions.
The automobile industry is another area where global expansion, especially in China, has led to more cars than people need or are willing or able to buy. The over-production of electric vehicles with close to 100 Chinese brands has caused an inventory surplus and triggered a price war between car makers there. By some estimates, China’s overall capacity utilization in its automotive sector is only 50%. The overall U.S. auto capacity utilization rate for the United States is under 70% according to Federal Reserve data, which means 30% of capacity already goes used so there will be no tariff protected productive boom.
China is the world’s largest industrial powerhouse, but the manufacture of plastics and mining for non-metal minerals in China all already far exceed global demand. The production of machinery, textiles, chemicals, and pharmaceuticals is also reaching crisis levels. Without sufficient domestic markets and the political unrest provoked by cuts in production, expect China to flood markets and make the global crisis of overcapacity even worse.
I don’t have an easy solution to resolve the crisis, I just know that a new world war and continued environment degradation are both horribly unacceptable. I fear new technologies and Artificial Intelligence will only make matters worse as they intensify competition and increase overproduction without concern for the consequences. The only possibility of avoiding the worst effects of overcapacity is global cooperation to limit and hopefully reverse climate change, restore the environment, and restrict production so that it corresponds with needs rather than the desire of companies and countries for higher market shares and profit.
Addressing overcapacity will require a completely new mindset, global cooperation rather than competition, expanded democracy in every nation to enlist populations in resolving the production and climate crises, and the regulation of companies and capitalism. This will not be easy, but I don’t see an alternative if humankind is going to survive.