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Idle Capacity

June 14th, 2010 · No Comments

بِسْمِ اللهِ الرَّحْمنِ الرَّحِيمِ

I’ve  been fortunate to travel quite a bit in the last few years, visiting places in Europe, the Middle East and the South Pacific.  One thing I’ve always looked for is the how the “capacity” of said place is, referring specifically to things that drive some type of economic benefit for the location.  Things such as labor usage (vs idle labor). building usage (residential and commercial), infrastructure capacity (roads, sanitation, etc.), among other things.  This interests me for two reasons:

  • The signs of idle capacity can indicate over indulgence during booms or forced stagnation by some internal or external force
  • The signs of over use of some type of capacity can be a sign of a forced means that will come crashing down at some point given inflation and CPI/COL increases.

During my undergraduate years, I was fascinated  by my intro to economics classes and this led me to pursue a degree in economics (along with a degree in accounting).  Webster defines economics as:

a social science concerned chiefly with description and analysis of the production, distribution, and consumption of goods and service

In the advanced undergraduate classes, the student is introduced to the specific components of an economy (labor, transportation, etc.) and how these components work.  One concept that riled my interest was capacity and how different driving forces will dictate what the  “normal” capacity is.

Example:  Dubai saw unreal growth during the credit boom, namely in real estate.  While in the past, there was demand for additional hotels, residential, office, resort living, etc., during the credit boom many buildings were put up simply due to the speculation of the anticipated demand.  The growth is demand did continue, but not at the rate of new construction.  After the commodity market/stock crash and the credit crisis, there are a significant number of empty buildings in Dubai.  Many of these buildings have intentionally left unoccupied as the credit crisis caused a significant price drop in real estate, and any additional excess supply will cause prices to drop even more.

Example: China has experienced a significant boom in its economy, with cheap labor, decent access to raw materials and cheap transportation as its key contributing factors (cheap labor being the key factor).  The wages in China have been kept arbitraily low, using means such as factory housing w/meals among other things to keep these costs down.  With the booming economy in China, the cost of living has spiked dramatically over the last 15-20 years.  This has caused much unrest as people’s income has not matched the increase in cost of living.  This unrest has led to strikes, suicides at plants, etc..  Many companies have responded with aggressive wage increases in short periods of time to make up for the shortcomings in wage increases.  Soon, China will lose one of its major contributing factors to its  booming economy.

Example: The “normal” unemployment rate in Spain is typically above 10%.  The recent downturns in the economy has pushed this above 20%, but typically well above 10% is normal in Spain.  Spain is described as having the “highest quality of life in Europe” (read: very expensive social services provided by the gov, expenses borne by the taxpayer) and this drives the cost of labor up (due to above average cost of living and above average taxes).  Thus there is a significant under utalization of labor resources in the county given the cost.

The first two are examples of an item being forced to operate above a ideal or normal capacity, which forces more accelerated changes in other aspects of an economy and may cause a future impact to strike sooner and to strike harder.   The third is an example of a government forcing certain things to exist regardless of the cost, and this forces more idle capacity as employers are unable to operate at an ideal capacity given the conditions in the economy in question (cost).

Many of these things are due to short sightedness.  Many governments are unwilling to operate on a “big picture” mindset and are focused to demonstrate short term returns even at the cost of more substantial negative long term ramifications.

In any case, I’m sure I’ll touch on this later.

Tags: Random · Thoughts

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