Imagine my disappointment on reading a post titled How big is the output gap? from economist Mike Bryan of th Atlanta Fed that his answer is “Not as low as zero and not as high as $1 trillion” (the straight line projection of GDP growth from 2005 through 2007 illustrated here).
He’s right. It is an important question and I wish at the very least he had offered an opinion as to whether it’s closer to zero or $1 trillion. I guess that’s what a PhD in economics is good for.
As I have suggested I think the output gap is much closer to zero than it is to $1 trillion, that Keynesian polices intended to close the gap between present output and the non-existent additional $1 trillion are in vain, and the real problem we should be trying to solve is to make GDP grow faster. As I have also suggested I think the path to faster GDP growth lies through producing a lot more energy, reducing spending on healthcare and education without reducing the actual amounts of healthcare and education produced, sharply reducing the size of the financial sector, and rationalizing our immigration and trade policies. Just to name a few impossible dreams.
However, he does ask an interesting question. If the output gap is small, why hasn’t a restructuring of the economy occurred? I have two answers to that question. First, the problems we’re experiencing did not start in 2007 but go back much farther. This isn’t the dream (or nightmare, I guess). 1996 through 2006 were the dream. This is the reality. The reason we had so much employment during that period was bubbles. Imaginary production.
My second answer is that policy since 2007 has almost entirely been devoted to preventing the restructuring that should have taken place. With trillions spent on behalf of maintaining an impossible status quo it would be surprising if restructuring had taken place. Financial sector bailouts. Auto industry bailouts. Block grants to states to allow them to keep their impossible compensation schemes for public employees intact. Maintaining unemployment benefits which nearly everyone agrees reduces employment by something between 1% and 5%. Just where in that range is a subject of bitter argument.