The Empty Corona Chairs and the Spare Capacity Fallacy

The Empty Corona Chairs and the Spare Capacity Fallacy by Joakim Book for American Institute for Economic Research

If we have ventured outside our homes in these corona times, we might have seen that cafés and restaurants that remain open keep some seats and tables empty. Some have put up signs asking patrons not to use every table, while others ask its guests to keep an adjacent seat unoccupied or have altogether removed tables to create additional space. Even restrooms at airports or other public areas do this, closing every other stall or urinal. Some stores keep a strict limit on the number of people browsing for goods at any given time.

We can disagree with those decisions, object to them or even ridicule them, but many establishments across the world have still implemented them under various degrees of governmental duress. They raise a contentious economic point: are our economies suddenly inundated with spare capacity?

Spare capacity is this economic idea that gets lots of purchase on the left and among fringeeconomic schools of thought. It usually gets dusted off during recessions, propping up calls for government spending for this or that (emergency) project. When an economy is in recession, the story goes, lots of labor and capital goes unused – that’s almost by definition what a recession means. If a government can get those unused resources back to producing stuff, that’s a gain for everyone at essentially no economic (i.e. opportunity) cost, as those resources were previously taken out of use. On the other hand, overheating the economy with monetary or fiscal stimulus at the top of the business cycle usually just causes prices to skyrocket, meaning that additional spending ends up taking from Peter to pay Paul, with no aggregate benefit.

That’s not the case during recessions, according to the spare capacity argument. This seemingly harmless theoretical (and empirically pretty accurate) idea solves a major problem for left-leaning economists. For if our economy is below capacity – and all production of goods and services is merely some undifferentiated blub of “output” – any increase in spending through fiscal or monetary stimulus is a free lunch. We can, without downsides, increase economic activity, have higher employment, and higher incomes for the aggregate economy. We can have nice things.

This sounds too good to be true – mostly because it is.

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