Krugman’s Output Gap

Paul Krugman posts a graph which well articulates the outlandishness of ECB President Trichet’s call in today’s FT for global fiscal and monetary tightening.  The graph starts with 2007 as the base year, projects a 2% gdp growth rate from that point and then compares it to today’s actual gdp.  The result is an 8% output gap.  The problem is that Krugman claims 2007 was an “ok” year, therefore implying it is a reasonable base for measuring the ‘output gap’.

Officially measured Euro area unemployment was 7.2% in December 2007 with the true level of course being much higher.  We must reject any analysis that assumes the reasonableness of  7% unemployment and demand instead a political movement for guaranteed full employment.  Keynes had the guts to propose policies that would bring this about – his meek followers live in a gutless half way world where 7% unemployment is ok, financial markets ‘tell us’ when to stop spending, and the key question is when, not if, austerity should begin.