The Campaign Against "Nonsense Output Gaps"

Mish

Robin Brooks has launched a Campaign against Nonsense Output Gaps.

CANOO

These days everyone has an output gap, but a cross-country look still raises questions. How can Italy (IT) have the same output gap as New Zealand (NZ), when Italian real GDP is down 22% since end-2007, while New Zealand is up 19%?

Definition

The output gap is an economic measure of the difference between the actual output of an economy and its potential output. 

Nonsense by Design

Believieving "output gaps" can be accurately measured or one should even try is the real problem.  Potential output vs real output? Please!

By definition, output gaps are "nonsense"

Like the Phillips Curve, output gaps are another economic idea that belongs in the ashcan.

Regarding the Phillips Curve

  1. Fed Study Shows Phillips Curve Is Useless: Admitting the Obvious
  2. Yet Another Fed Study Concludes Phillips Curve is Nonsense

Despite being proven useless, economists, even the Fed (despite their own studies) still cling to to the idea.

Brooks' Observation

Brooks' observation is enough to prove the silliness of output gap measurement, but that will not stop any economists from trying to measure them.

Nonsensical output gap measurements will cease the moment economists stop attempting to measure them, not before.

Mish

Comments (6)
No. 1-5
Eddie_T
Eddie_T

"How can Italy (IT) have the same output gap as New Zealand (NZ), when Italian real GDP is down 22% since end-2007, while New Zealand is up 19%?"

Because Italian economists are Feckless Analysts Requiring Training, aka FARTS.

Siliconguy
Siliconguy

Output gap vs what baseline? Running at steady baseline name plate rates, what the plant can really do, which is usually more, because the designers get hit with a penalty if the plant does not meet its design rate, or the 'prices are up so flog the plant, defer maintenance and pile on the overtime' rates. I've seen all three.

Anda
Anda

So New Zealand and everyone outside euro and Japan has been cooking their books... don't complain and keep rowing ?

Anyway, most of us aren't that interested in other people's output gaps or the brown lipstick brigade and all that.

Webej
Webej

Interesting comment on same thread:

BlackRock is eating the world.
ETF company has now $7.8tn in assets under management, a +12% YoY

Webej
Webej

Those cumulative growth rates are including the episodic Covid crisis, a variable that outweighs just about everything in the data.

Mish, do you happen to know if the growth rates are in terms of dollars or national currency? Often such comparisons are made in dollars, which means changes in exchange rates can outweigh the data trend indicated.


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