The problem that folks like Paul Krugman don’t acknowledge is that this spare capacity doesn’t match demand. If there were an insatiable thirst for, say, new houses and new office parks, we’d be all set! But that’s not the case.
In reality, demand is popping up in new areas, like iPhone apps and sadly, all those laid off construction workers aren’t (nor will they ever be) capable of matching that demand.
In areas where there’s actually growing demand, there’s no output gap at all. In fact, we’re at a shortage — which explains Rex’s tweet and the need for our guide.
The problem with the Keynesian version of macroeconomics is that it treats all production as uniform glop. You have these vague concepts like supply, demand, growth, production, etc. and ideally you have more and more of it.
But in the real world, there are specific needs, and not all supply and demand are equal. Thus while it may appear we have a gigantic output gap — under the old measure — in reality we may have a shortage in the things we really need.