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The idea that the US economy can reach full employment in a short period of time and generate inflation runs contrary to what we have seen in any previous cycle. After a recession, unemployment takes many years to return to a low level. 1/8
An interesting overlooked fact is that the US economy spends very little time at full employment. Once unemployment is low, it typically bounces back up because of a new recession. In every single cycle. 2/8
During the last expansion it took more than 10 years for unemployment to go down below 4%. And the global pandemic of 2020 made the potential benefits of a “high pressure” economy short lived. 3/8
Maybe it is time for new thinking about economic policies after a recession. We need to do a lot more than what our traditional models imply to ensure a quick return to full employment so that we can enjoy for longer the benefits that come with it. 4/8
And do not forget the possibility of hysteresis. It might be that going faster towards full employment has positive effects on the supply side as well (recent survey on hysteresis: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14531) 5/8
If you need more than a thread of tweets, I just updated a note I wrote about this a couple of years ago (work in progress): https://faculty.insead.edu/fatas/Mature_recessions_and_unemployment.pdf
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This post from @mattyglesias on how we measure the output gap highlights some related issues https://www.slowboring.com/p/full-employment 7/8
And the recent analysis of @WendyEdelberg and @lsheiner
also helps frame the debate about how fast we will approach potential output. But there is room to be more optimistic than the CBO estimates of potential output. https://www.hamiltonproject.org/blog/a_macroeconomic_analysis_of_a_senate_republican_covid_relief_package 8/8
also helps frame the debate about how fast we will approach potential output. But there is room to be more optimistic than the CBO estimates of potential output. https://www.hamiltonproject.org/blog/a_macroeconomic_analysis_of_a_senate_republican_covid_relief_package 8/8
