There’s More To The Weak Recovery Than Unemployment

I hesitate to say this in a way that will invite misquotation, but I almost feel as if on some level the media is talking too much about the jobs crisis in America. Kevin Drum, for example, asks “Why Is Unemployment Still So High?” and I saw a CNN chyron the other evening about a “jobless recovery.” This kind of talk seems to imply that there’s something mysterious happening specifically to the labor market and that concerns about the economic situation should be limited to the minority of Americans who are unemployed. The truth, however, is that the bleak economic situation is much broader than unemployed people. Nothing “funny” is happening in the link between output and employment. What happened is that we were chugging along, then output fell by a lot, and then when output stopped falling it started growing at a slow rate.

If unemployment were at 5 percent and the economy was growing slowly nobody would be surprised to see unemployment continue to be at 5 percent. What else would happen? The unemployment rate normally only falls if the economy is growing rapidly, and right now the economy isn’t growing rapidly.

So the question we should ask is: Why such slow economic growth? This opens you up to a bonanza of possible answers. Probably no country on earth has ever had perfectly optimal economic policy. Which means that there are a lot of things the US could do to increase economic growth, and there’s also a lot of disagreement about what those things are. Consequently, at a time of high unemployment and depressed output it’s possible to go down a rabbit hole of controversies about what “the real problem” and the “real solution” and blah blah blah. And of course arguing about how to make economic policy better is often worth doing. But you also should be constantly asking yourself “could we make real output grow faster by boosting demand, or are we facing some binding supply constraints that mean efforts to boost demand will just lead to inflation?” This is an important question because if we could boost real output by boosting aggregate demand, then our failure to do so means we’re leaving money on the table. It means that unemployment is higher than it needs to be, and also that economy-wide production of goods and services is lower than it needs to be.

Unfortunately, we see more and more evidence that policymakers from the Obama administration on down have decided they don’t have a problem with this.