Natural Level of Output: A less-than-sober argument

Yesterday afternoon a few members of the econ club had our usual unofficial meeting at McMenamins on Monroe, something of a tradition every Friday at 4 (you're all welcome to join, of course). Our guest of honor was Professor Stone, who entertained us with stories about academia, the person he lives with (his wife), and the Broncos. We hope he comes back to us soon.

Fellow economics major Ben Price and I got in an argument about medium-run macroeconomics. I've heard macroeconomics called a moon science by other econ majors around the country, but I still accept that these are the best models we have at describing the macroeconomy. At the very least, they're worthwhile classes that I enjoy occasionally being awake in.

Ben, my esteemed interlocutor, disagrees more intensely about the assumptions of macroeconomics. Today, after a few beers and Cuba Libres, Ben challenged the idea of a natural level of output, which Oliver Blanchard identifies as that level of output economies return to after a change in fiscal or monetary policy. Ben demanded proof of such a natural rate, asking for real world data that I usually find distracting and unimportant to economics.

For me, the intuition behind a natural level of output is solid. Imagine a simplified economy where all people did was pick bananas all day. There is a limit to how many bananas can be picked, and that limit is hard to change. We can only be so efficient at banana picking. A government can come in and try to tinker with our output, telling us there's more hours in a day, or inflating the value of a banana to encourage us to work harder, but these are short run solutions. In the end, our bodies are only so good at picking bananas.

A macroeconomic natural level of output figures in the same way. Economies can only be so productive before artificial means of accelerating an economy such as expansionary monetary or fiscal policies only provide short run gains. In the medium run, when people can adjust price expectations and therefore reevaluate the values of goods, economies return to their natural levels.

Makes sense, right? Of course, I don't feel the need to prove any of this with data. It's a moon science!