The So-Called Output Gap Is Not The Problem

What does it mean when people say that the economy is running $2 trillion or $3 trillion behind its full potential?

The NYT sheds some light on that question today, examining the economy’s output gap — the gap between what is being produces, and what our workers and factories could produce if they were operating at full capacity. It’s pretty ugly, as you might imagine.

Only 68% of the country’s manufacturing capacity is in use. Unemployment (unused labour) is running at frightening highs. There are 10 million more “underutilized” workers than there were last year.

But the output gap isn’t actually the problem. It’s a symptom. The problem is: how did we come to have so much capacity (industrial, labour or otherwise) that’s unsuited for our current needs?

After all, we could spend a lot of money to get workers to start building houses, granite countertops and Sub-Zero refrigerators again, but that wouldn’t get us anywhere. We don’t need that stuff. And to some extent, technological changes — which have diminished the need for physical real estate and some natural resources — is a sure sign of economic progress.

The problem is, the economy’s not a lawnmower. We can’t just get our economy going by pulling a string a few times, pouring in some gasoline and letting it whirr. But as long as we think the output gap is the problem, and that the key is that we need to get back to “full potential”, the right solutions won’t be found.


NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at