Here's an older, better post on the same thing:
http://johnbtaylorsblog.blogspot.com/2012/08/its-still-recovery-in-name-only-real.html
And here's some of the reactions, many of which raise some valid points: http://krugman.blogs.nytimes.com/2012/10/17/financial-crisis-denialism/
http://misleadingguidetocurrentaffairs.blogspot.com/2012/10/the-muss-method-and-john-taylor.html
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We currently have unemployment at about 7.8%, or several points above anyone's best guess of the NAIRU. Consensus opinion is that the labor market is still in disequilbirum, with desired quantity demanded less than desired quantity supplied. What is the mechanism that is supposed to bring the market for work into equilibrium? It's the real wage, or the nominal wage / price level. A coherent story about the slump is that the financial crisis caused credit markets to contract and firms to lower expectations of future earnings. This caused a decline in the demand for labor, but because nominal wages are sticky and the price level did not rise, real wages failed to adjust, so more workers are seeking employment than firms want to use as inputs to production. If real wages were perfectly flexible, they would fall in the wake of the crisis, making workers more attractive to employers and causing the remaining jobless to remain so as a result of their leisure/consumption preferences. We had a demand shock. Prices didn't adjust, so we still have a slump. Monetary and fiscal policy (both changes in taxes and targeted spending) can boost aggregate demand. If they haven't, policy makers should be made to answer why.
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Update: John Cochrane weighs in with what I think is the best commentary yet. Here's my favorite excerpt
"If you conclude "recessions are always long and deep after financial crises" then you're saying policy doesn't really matter...so you shouldn't be advocating different policies! If policies matter a lot to the length and severity of recessions, then "recessions are always deep and long after financial crisis" is a meaningless statistic, and a poor fig leaf of an excuse."
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