Jobless Recoveries and Manic Policies

America's fiscal and monetary policies are so accommodating in large part because the nature of US economic recoveries has changed since 1991, with output and employment taking much longer to return to their pre-recession levels. But such policies do not stimulate faster recovery, and US politicians should focus instead on modifying America's outdated social safety net.

CHICAGO – Monetary and fiscal policies in the United States, both in this recession and the recession of 2001, have been among the most accommodating in the industrial world.  As I write, Congress is working on yet another “jobs” bill.  Indeed, John Taylor of Stanford University attributes the recent financial crisis to excessively stimulatory monetary policy towards the end of Alan Greenspan’s tenure as head of the US Federal Reserve.

Why is US policy so accommodating? A central reason is that the nature of US economic recoveries has changed. From 1960 until 1991, US recoveries were typically rapid. From the trough of recessions, recovery to pre-recession output levels took less than two quarters on average, and employment recovered within eight months.

But the recoveries from the recessions of 1991 and 2001 were different. For example, in 2001, it took just one quarter for output to recover, but 38 months for jobs to come back. The current recovery appears to be similarly slow in creating jobs.