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Saturday, April 09, 2011

The New Normal Is Not Abnormal

Christina Romer says the unemployment problem is mainly cyclical, not structural, and labor markets could use more help from both monetary and fiscal policy:

Jobless Rate Is Not the New Normal, by Christina Romer, Commentary, NY Times: ...Before the recent recession, in the view of many economists, the lowest sustainable rate of unemployment... — a level known as the normal or natural rate of unemployment — was around 5 percent.
The turmoil of the last few years, however, has shaken up the economy. Is it possible that it has affected the natural rate of unemployment — increasing it to 8 or even 9 percent? ...
This is implicitly the view of some Federal Reserve policy makers, who say that there is nothing more the central bank can do to lower unemployment. And it’s the view of those who say “structural” factors are the main cause of our current high unemployment, which stood at 8.8 percent in March.
Fortunately, there is a more compelling explanation. Strong evidence suggests that the natural rate of unemployment actually hasn’t risen very much. Instead, the elevated unemployment rate appears to reflect mainly cyclical factors,... the consequence of low demand. ...
This diagnosis suggests that the appropriate remedy is to stimulate demand. In February, I suggested a number of steps the Federal Reserve could take. Some additional fiscal measures would also be useful. ... Given the severity of the long-run budget problem, short-run fiscal stimulus should only be undertaken as part of a comprehensive package ... providing reassurance that the United States will remain solvent over the long haul.
Regardless of the cause of extended high unemployment, it is a disaster for families, the economy and government budgets. Thus, if I am wrong, and more unemployment is structural than the current evidence suggests, this is no excuse for washing our hands of the problem. Only the nature of the needed policy response would change. Instead of focusing on increasing demand, we would need policies to help workers and jobs find one another, measures to move workers to where the jobs are (or vice versa), training programs, and better education.
And even though today’s unemployment appears mainly cyclical, it could turn structural. The longer that unemployment remains high for cyclical reasons, the more likely that job prospects for unemployed workers will be permanently damaged. ... Getting cyclical unemployment down quickly is the surest way to prevent that from happening...

I've made similar arguments, so I have no disagreement with this, though I haven't placed as much emphasis on the long-run budget issues. I don't disagree on the long-run budget either, and I have talked about this problem separately, but I've been hesitant to do so because of the worry that focusing on the long-run budget would make it harder to get the short-run stimulus we need. It didn't help, the long-run problems made it impossible to deal with the mostly orthogonal short-run issues (to use a phrase I heard from Brad DeLong just a few minutes ago) much to the detriment of those who remain unemployed. It's not too late to help the unemployed, but given the state of affairs in Washington right now, that's not going to happen. In fact, we'll be lucky if they don't make things worse through ill-advised budget cuts that reduce demand further and make it less likely that firms will hire new workers, but do nothing at all to help with the long-run problem (see the budget agreement to avoid a shutdown).

    Posted by on Saturday, April 9, 2011 at 12:24 PM in Economics, Unemployment | Permalink  Comments (50)


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