Benjamin Studebaker

Yet Another Attempt to Make the World a Better Place by Writing Things

Tag: Output Gap

Only 6% of Voters Know Anything

I am often told that I take too negative a view of the average voter, that people do not need to be experts to vote well or to have good political instincts. I am not the least bit troubled by these critiques. Why? Because I continue to stumble uponĀ utterly depressing statistics. These statistics show that contrary to our optimistic inclinations or general idealistic hopefulness, the average voter is well and truly spectacularly ignorant. The one I wish to discuss today certainly blew my mind–perhaps it will blow yours.

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The Mother of All Output Gaps

There’s an interesting assumption going on behind the estimation of the output gaps (the difference between the economy’s current output and the economy’s estimated maximum potential output)–that not only did the economy decline during the recent crisis, but that the economy’s potential declined as well. This assumption leads to governments believing that their economies are less capable than perhaps they are, that the output gaps are not especially large, and that there is little revenue to be raised to offset stimulus spending, but what if it is not true? The idea comes from Capital Economics, a macroeconomics research company, has received attention from the Financial Times and Paul Krugman, and now it will receive attention from me as today’s topic.

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Fed-Bashing Tomfoolery

It has become fashionable on the political right to attack the Federal Reserve and its policy of quantitative easing, the process by which the Federal Reserve increases the money supply by purchasing assets owned by the private sector with cash that it prints. The right argues that quantitative easing encourages inflation and makes it easier for the government to borrow money, that it discourages saving, and that these are bad things. In contrast, these are very good things, and I shall endeavour to argue as to why.

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