Unemployment Normalization Is A Long Way Off

by: Brad DeLong

Tyler Cowen asks:

New vs. old Keynesian macroeconomics: For how long — in today’s America — can an AD-driven recession last? At what point do even the Keynesians toss in the towel and say “By now it is a growth and structural problem, not mainly AD”?

In the long run, the actual rate of unemployment is the natural rate of unemployment--the rate "that would be ground out by the Walrasian system of general equilibrium equations, provided there is embedded in them the actual characteristics of the labor and commodity markets…"

In the long run, persistent and anticipated increases and decreases in the rate of nominal spending growth show up as increases or decreases in the rate of inflation and not as increases in real GDP growth.

In the long run, rates of job finding, job quitting, and firing return to their normal equilibrium values.

When the quit rate gets back to its standard 2.2% per month, when the hire rate gets back to its standard 4% per month, when positive shocks to the rate of growth of nominal aggregate demand show up overwhelmingly as increases in the rate of inflation and negative shocks as decreases in the rate of inflation--then it will be time to say that it is primarily a structural problem, not aggregate demand.