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CBO Analysis Highlights Staggering “Output Gap” Absent Fiscal Stimulus

Part of the idea behind fiscal stimulus is that an economy in recession is suffering from an “output gap.” Over the long run, a society increases its material standard of living by increasing its capacity to produce goods and services. But sometimes it comes to be the case that a society is producing much less than it could. That’s a recession. Able bodied people want jobs but nobody will hire them. Assembly lines aren’t running. Retail spaces are going empty. The Congressional Budget Office has numbers on the scale of the gap we’re facing absent a substantial recovery plan and Ben Furnas has a nice writeup of the findings:

A surprisingly common conservative argument has been that it’s impossible for the government to stimulate the economy since “the money has to come from somewhere” and thus must crowd-out private activity on a one-to-one basis. This ignores the output gap. With productive capacity standing idle, an increase in public sector activity doesn’t need to purely displace private activity, it can also mobilize idle resources. And by doing so, it can lay the groundwork for a return to private growth that’s sufficiently robust to close the gap.

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