Dangerous Global Overcapacity?

• Author: BIGGS, BARTON
• Position: Panel Discussion

Are we entering a dangerous period of global overcapacity in which policymakers underestimate deflationary conditions but later become increasingly desperate to boost demand? Estimates are that during periods of steady improvement in technology, productive capacity increases by four times for each two years of improvement. If the world is indeed entering such a

"Schumpeterian" period, will the end result be a round of protectionist initiatives by the industrialized nations? In this regard, to what extent does China, with its virtually limitless cheap labor supply, represent an obstacle to reaching equilibrium in the area of global capacity?

BARTON BIGGS Managing Director, Morgan Stanley & Co., Inc.

I believe we are already in a period of global over-capacity characterized by a widespread loss of pricing power and low inflation. The bubble created a capital investment boom fueled by cheap money. The world is in for an episode of Ice (deflation) rather than Fire (inflation), but because the Authorities will respond with both fiscal and monetary policy, this will be a winter rather than a new and prolonged Ice Age.

I suspect that in a couple of the next four quarters we will see small declines in nominal GDP in major industrial countries besides Japan as the GDP deflator dips below zero. This will result in sales declines for many of the so-called "Old Economy" companies and will wreak havoc on corporate profits generally. However, the massive and continuing rate cuts by the Central Banks eventually including the ECB will keep the world from tipping into the kind of persistent deflation that has plagued Japan and I anticipate "stagdeflation" rather than a true "Schumpeterian" period. Of course there will be some protectionist initiatives by the industrialized nations, but it seems unlikely that protectionism will run amuck because first, the global recession will not be that severe, and second, because too many corporate interests would be wounded by protectionism. Of course there is always the danger of a policy miscalculation or bad luck causing a direr outcome. As for China, my guess is that despite its massive low cost labor supply, it is not a mature enough or a sufficiently organized economy to destabilize the rest of the world.

RICHARD N. COOPER Maurits C. Boas Professor of International Economics, Harvard University.

The world undoubtedly has overcapacity in some sectors. But it is not due mainly to technological change. Rather, it is due to vigorous investment during the past half decade in expectation of growth in demand that did not in fact materialize. Japan has remained sluggish for...