Saturday, June 26, 2010

The "New Normal" Isn't Normal At All

The elite conversation about the recession has featured a great deal of hemming and hawing about what can and can't be done about the unemployment situation. In particular, there has been a tremendous rush to describe the unemployment as "structural", to point out that the bubble in housing led to a construction boom that ought not to be repeated, and to in general dissuade policymakers from doing too many things that might lead to inflation, even though inflation indicators suggest that in the short and medium term there's no real threat of inflation. But via Brad DeLong, we see that the American employment situation is unique among G7 countries.
This may help partially explain why some of the major European powers seem to be even more in the grips of deficit mania than the America. Germany, the most deficit-wary country, is almost all the way back to it's pre-recession employment figure. The rest of the countries are hovering between a 1% and 2% drop in employment. But across the pond, we're sitting on almost a 6% decline and no one seems to care very much. To cite DeLong again, "If we had 10% inflation and 1.2% unemployment, Ben Bernanke's Hair Would Be on Fire". But we have 10% unemployment and 1.2% inflation, so it's treated as a mild nuisance, the way you might treat a problem of having too many feral cats in your neighborhood, rather than mountain lions mauling your children.

The proper response to this sort of chart ought to be "Damn the inflation, full speed ahead!" But somehow the public conversation isn't obsessed with solving this drastic an unique unemployment problem.
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