Afternoon Must-Read: Mark Thoma: The Output Gap

…the difference between actual output and the economy’s potential, or the full employment level…. Data on potential GDP… must be estimated from economic models…. John Fernald took on this task, and it found that the growth in potential output has slowed recently… the ‘slowdown is located in industries that produce information technology (IT) or that use IT intensively, consistent with a return to normal productivity growth after nearly a decade of exceptional IT-fueled gains.’… Given… that the costs of overshooting the Fed’s inflation target are much smaller than the costs of unemployment, many economists believe the Fed should wait until there are clear signs that we’re running up against capacity constraints before taking action to reverse course. So far those signs–wage and price inflation, for example–aren’t yet in evidence… ‘watchful waiting’ rather than decisive action…