In a speech at Princeton on Saturday, Council of Economics Chair Christina Romer had a few words for those curious about the current economic climate:
My first and most fundamental point is that when it comes to the economy we are very far from normal. The unemployment rate is currently 9.7 percent. I find it distressing that some observers talk about unemployment remaining high for an extended period with resignation, rather than with a sense of urgency to find ways to address the problem. Behind this fatalism, there seems to be a view that perhaps the high unemployment reflects structural changes or other factors not easily amenable to correction. High unemployment in this view is simply “the new normal.” I disagree.
Deficient Aggregate Demand Is Key. The high unemployment that the United States is experiencing reflects a severe shortfall of aggregate demand.
In short, in my view the overwhelming weight of the evidence is that the current very high — and very disturbing — levels of overall and long-term unemployment are not a separate, structural problem, but largely a cyclical one. It reflects the fact that we are still feeling the effects of the collapse of demand caused by the crisis. Indeed, at one point I had tentatively titled my talk “It’s Aggregate Demand, Stupid”; but my chief of staff suggested that I find something a tad more dignified.
I find it interesting that Romer is so eager to dispel the idea that structural changes and not aggregate demand has caused the current jobless recovery because I presented that argument in the December-January issue of the Spectator.
Arnold Kling and Tyler Cowen are both unimpressed with Romer’s thesis. For what it’s worth, I do think that there are clearly structural forces at play in the current economy, and that these problems are not “easily amenable to correction” in the sense that Romer means “correction,” i.e. more government spending. But I don’t think that any of the economists I interviewed or read in laying out the structural narrative are resigned to a “new normal” of high unemployment and slow growth.
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