Jobless Recoveries and Manic Policies

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.

Some economists argue that, unlike past recoveries, when workers who were temporarily laid off were rehired, job losses starting in 1991 were more permanent. Unemployed workers had to find jobs in new industries, which took more time and training.