There are multiple answers to this question – when demand is too low, lots of resources are left unused. But the biggest and most disturbing answer is our fellow Americans. There are many productive people in the United States available to work more hours, and our society is deprived of their production. This key point is generally underappreciated.
I’ve said that the FOMC is undershooting its price stability objective and is expected to continue to do so. But we should all keep in mind that this outcome – and especially the forecast for continued undershooting – typically means that the FOMC is also underperforming on its other objective of promoting maximum employment.