Steven Pearlstein has a long and well-argued column making the case for a primarily “structural” view of the downturn and pessimism about the prospects for rapid recovery. His bottom line:
The structural problems, however, go well beyond these mismatches. The reason there were 8 million additional jobs back in 2007 is that demand for goods and services was artificially — and unsustainably — inflated by cheap, plentiful credit. Between 2002 and 2007, household debt was increasing at the torrid pace of more than 10 percent annually, while business debt and the debt of state and local governments was growing at an average of 9 percent. Much of that money was used to finance present consumption. […]
All that deleveraging and living within our means is obviously a good thing in the long run. But what it means for the economy in the short run is that neither the excess consumption nor the jobs it supported are coming back. During the past two years, the federal government has been actively trying to take up some of the slack by going on a borrowing-and-spending binge of its own. But continuing on that path is also unsustainable — certainly politically, and probably economically as well. And once federal deficits begin to decline next year, we’ll have yet another drag on economic growth and employment.
Which is to say that Pearlstein actually agrees that high unemployment is being caused by a shortfall in aggregate demand. But he thinks we need prolonged structural adjustment because the only place extra demand can come from (he thinks) is abroad, and it takes time restructure industrial capacity around import-substitution and exports. What’s missing here, however, is the money supply. More money means more demand. If you sent ten freshly printed $100 bills to every American, some fraction of that money would be spent (more demand) and some fraction would be saved (faster deleveraging) and either way the situation would be improved.
It’s true that at some point the money-printing would spark high inflation. That’s why you can’t get unemployment down to 1.5%. And I’m prepared to accept the proposition that the pre-crisis 4.5% unemployment rate would be impossible to achieve under present structural conditions. But could we do 6.5% or 7.5% or even 8.5%? Any of those would be much better than the current situation. And we won’t know how much better we could be doing unless we try.