Here’s a letter to a new correspondent:
Mr. N__:
Thanks for your email.
About my letter in Thursday’s Washington Post, you correctly infer that I do not believe that the U.S. economy is “threatened by a foreign government creating excess capacity in its industries.”
First, it’s impossible for any government to create excess capacity in all industries. Resources cannot be diverted into, say, the steel industry without being diverted away from other industries – say, the aluminum and electronics industries – thus causing capacity in those other industries to be inadequate.
Second, excess capacity exists if the value of the output produced by that capacity is less than is the cost of the resources that are used to create and operate that capacity. This situation implies that, were these resources not tied up in that excess capacity, they would instead produce outputs of higher value in other industries in that country.
Third, therefore, whenever a government diverts resources into, say, the steel industry to create excess capacity there, it harms its economy by arranging to produce steel that’s worth less than the outputs that would instead have been produced had that diversion of resources not occurred. That country winds up suffering losses on the additional steel that it produces, as it also foregoes the economic gains that it would have reaped on the outputs that it fails to produce because its government foolishly diverted resources into excess steelmaking capacity.
So, no, if other governments are undermining the productiveness of their economies by creating excess capacity in some of their industries, we should not much fret about their stupidity threatening our economy.
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
