Full employment and the output gap

I’ve never accepted the standard story about “being at full employment” vs. “having unemployed resources” around, though often I write in that framework for reasons of intelligibility.  That said, I do not reject this story in ways that make current debate participants very happy, or would create the potential for a policy free lunch.

I take a finance perspective on the output gap.  If you are at what others call “full employment,” you can indeed do better, or at least try to do better.  Start 300 companies that aim to be the next Stripe, Facebook, SpaceX — whatever.  In the short run, you will create jobs, people at jobs will work harder, and so on.  Employment, output, and also tax revenue will rise.  You can pat yourself on the back and say you were not at full employment.

The thing is, you have accepted a higher level of risk.  Many of those companies are likely to fail.  And since they were started by humans consuming a broadly common set of cultural and media inputs, those risks will to some extent be correlated as well.  Of course it might pay off big time as well.

You can always move “beyond full employment” by accepting more risk.  Alternatively, you could deploy some common sense and suggest that no single point on the risk-return frontier corresponds to “full employment.”

And should you be happy about moving beyond full employment?  Was the ex ante level of risk too low, too high, or just right?  Depends!  Even if you think ordinary Americans are too complacent, it does not follow the same is true for the marginal entrepreneurs.

In this setting, failure does not have to mean the gambles were bad ex ante, nor does success validate the initial fervor, as maybe everyone just got lucky.

Addendum: Don’t get too encouraged by what I am saying.  The Lucas Supply curve is still pretty weak, as we have known for decades (only on Twitter is this not known).  Bad nominal shocks do destroy jobs, but as time passes there is still no reason to think that “mere inflation” does more than a small amount to bring them back.  No matter where you are on this risk-return curve.


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