Robert Hall says we need to institute monetary policies that make current purchases cheap relative to future purchases (as with inflation):
Inability to Cut Rates Fuels Joblessness, by Timothy Aeppel: American consumers borrowed and spent their way into today’s slow recovery, and the jobless rate is being held near 10% because the Federal Reserve is unable to cut interest rates below zero, says Stanford University economist Robert E. Hall.
In a paper presented Thursday at a Federal Reserve Bank of Atlanta conference, Mr. Hall calculates that loose credit earlier in this decade resulted in consumers buying 14% more long-lasting items — from cars and dishwashers to houses — than they would have if credit conditions had remained as they were in the previous decade.
The recession was marked by those overextended households cutting spending and saving more in the face of hard times. The problem now is that the normal tool used to revive consumer spending and hiring — cutting interest rates well below the inflation rate — isn’t available because rates are nearly at zero. So unemployment has remained stuck at a high level, currently 9.6%.
Mr. Hall ... concludes that the only way to get the job market growing is to institute monetary policies “that emulate the effect of low real rates — making current purchasing cheaper than future.” That should be music to the ears of many at the Fed...
That is not the only way to get the job market growing, there's also fiscal policy. It's not politically viable right now, but it is an alternative tool. Fiscal policy can mimic the incentive effect of changes in real interest rates and expected inflation through changes in taxes, and it can stimulate the economy directly by purchasing goods and services from the private sector.