It's the Aggregate Demand, Stupid

David Wessel talks to Christy Romer:

It's Agregate Demand, Stupid Christina Romer... says the reason unemployment remains so painfully high is clear: It's not the inadequacy or laziness of the workers or the long-standing mismatch between workers' skills and employers' needs. It's the old-fashioned Keynesian diagnosis: Too little demand in the economy. "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," Ms. Romer said.... it doesn't have to be this way, she argued, essentially making the case for more government stimulus to help the economy. "We have the tools and the knowledge to counteract a shortfall in aggregate demand. We should be continuing to use them aggressively."... More private demand is essential, she said, but government can do more.... "One targeted measure that is likely to be very effective is additional fiscal relief to the states," she said...

The view gaining strength is that additional stimulative policies won't do much good because much of our current employment i "structural." This is,best as I can see, simply not true: there is no evidence for it. But that if we let unemployment linger above 9 percent for several years, it is highly likely to become structural--and then we will have even more huge problems than we have now.

And at the moment it looks like getting unemployment below 9 percent will take some luck. Certainly fiscal policy and monetary policy are unlikely to provide much additional stimulative force going forward.