Friday, August 1, 2014

(Physical) Capital Is Basically Working at Capacity

There’s an unemployment rate for labor. Round it to 6%. That implies there’s also an employment rate for labor that must be 94%.

We measure the same thing for physical capital. But here, the primary measure is called “capacity utilization”, and it’s roughly comparable to the employment rate. Except for one thing: machines don’t starve if they’re not used, so typically the economy gets away with a much lower capacity utilization rate than employment rate.

And right now, capacity utilization is certainly about where it should be in mid-expansion, and approaching the level that we only see near a business cycle peak:

14-07-21, New York Times, Capture of Capacity Utilization Chart

This is from The New York Times. The columnist takes a pro-Democratic position that this suggests that it’s time for firms to start investing in more capital because we’re using everything we’ve got. I can’t disagree with that, although I will note that Democrats in D.C. have been crowing for years about firms needing to invest more, without addressing the question of whether or not they just don’t want to invest because they don’t trust the Democrats to not screw things up. At least that’s what owners and managers say, and I don’t see any reason to disrespect them on this.

Whatever. The chart does show that this expansion is pretty much as good as it gets, and we should stop complaining about it.

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