From Olivier Coibion, Yuriy Gorodnichenko, Dmitri Koustas:
The persistence of U.S. unemployment has risen with each of the last three recessions, raising the specter that future U.S. recessions might look more like the Eurosclerosis experience of the 1980s than traditional V-shaped recoveries of the past. In this paper, we revisit possible explanations for this rising persistence. First, we argue that financial shocks do not systematically lead to more persistent unemployment than monetary policy shocks, so these cannot explain the rising persistence of unemployment. Second, monetary and fiscal policies can account for only part of the evolving unemployment persistence. Therefore, we turn to a third class of explanations: propagation mechanisms. We focus on factors consistent with four other cyclical patterns which have evolved since the early 1980s: a rising cyclicality in long-term unemployment, lower regional convergence after downturns, rising cyclicality in disability claims, and missing disinflation. These factors include declining labor mobility, changing age structures, and the decline in trust among Americans. To determine how these factors affect unemployment persistence, this paper exploits regional variation in labor market outcomes across Western Europe and North America during 1970- 1990, in contrast to most previous work focusing either on cross-country variation or regional variation within countries. The results suggest that only cultural factors can account for the rising persistence of unemployment in the U.S., but the evolution in mobility and demographics over time should have more than offset the effects of culture.
If future U.S. downturns are to be more long-lived than pre-1990 recessions, then the nature of fiscal policy responses should likely be revisited. In the pre-1990 environment in which recessions were short-lived events, there was little need to implement discretionary countercyclical fiscal policies, other than perhaps highly transitory ones such as the rebate checks of 2001, because the long-decision lags involved in the legislative process meant that any positive effects of stimulus would likely occur too late. But if business cycles have become systematically more protracted affairs, as seems to be the case, then discretionary fiscal policy responses should target longer-lived projects rather than transitory transfer payments. Investment projects can be especially desirable because these a) tend to have larger stimulative effects per dollar , b) tend to have long-run social returns that significantly exceed those of transfer payments, and c) do not require legislators to vote on multiple ‘stimulus’ packages. If ‘timely, targeted and temporary’ remains the mantra of future stimulus measures, then Amerisclerosis may not be so far away.