Romer starts with what is either a mischaracterization, or a misinterpretation of the views of others:
The turmoil of the last few years, however, has shaken up the economy. Is it possible that it has affected the natural rate of unemployment — increasing it to 8 or even 9 percent? Such a climb would imply that the prospects for a rebound in output and employment have been greatly reduced — and that high unemployment would be our new normal.First, Romer seems to be saying that other people are saying that 8 or 9 percent unemployment is the "new normal," i.e. permanent. I may have missed something, but I don't think anyone is saying that. People who take sectoral reallocation seriously look at the current state of the labor market and argue that sectoral reallocation could be important. In this view, secular sectoral reallocation in labor markets - across industries and geographical areas - combined with the peculiar features of the financial crisis and its implications for the mortgage market and the housing market, have something to say about why the decrease in employment during the recession was so large relative to GDP, why employment is so slow to recover (again, relative to GDP), and why the unemployment rate is currently so high. No one, as far as I know, is suggesting that this is a new normal.
This is implicitly the view of some Federal Reserve policy makers, who say that there is nothing more the central bank can do to lower unemployment. And it’s the view of those who say “structural” factors are the main cause of our current high unemployment, which stood at 8.8 percent in March.
Second, the "new normal" view, which no one apparently has, is apparently "implicitly" the view of some nameless Fed policymakers. Actually, even a hard-core Keynesian could have the view now that "there is nothing the central bank can do to lower unemployment." If one thinks that monetary policy works by moving the short-term interest rate (as Keynesians - old and new - do), if we are at the zero lower bound (as we are, effectively), and if one thinks that swapping short-term interest-bearing consolidated-government debt for long-term consolidated-government debt is irrelevant (more contentious, but not inconsistent with Keynesian thinking), then there is nothing the central bank can do currently to lower the unemployment rate.
Romer does not think that sectoral reallocation is important. Housing is a sector, but the fact that the recession was led by a collapse in that sector does not matter, according to her. She thinks the labor force in the United States is highly mobile across regions and sectors and, by gum, the Survey of Professional Forecasters thinks so too.
What is going on then?
Instead, the elevated unemployment rate appears to reflect mainly cyclical factors, particularly a lingering shortfall in consumer spending and business investment.And what is the solution to the "shortfall?"
This diagnosis suggests that the appropriate remedy is to stimulate demand.So, how can Romer state with any confidence that consumer spending and business investment have fallen short of what they should be? She does not say. Where is the empirical evidence? What is this demand that we are trying to stimulate?
Of course we're all well aware of what is going on here. Romer is very much an Old Keynesian. She has a theory, and it seems to be basic IS/LM. Prices and/or wages are sticky, and monetary policy and fiscal policy can be used to get us to "full employment." If we take that position, we have to go back to the source of the friction and ask whether, in the current circumstances, we can find solid evidence that this is what is going on. Given what we know about wage and price stickiness, is it plausible to argue that this stickiness could persist for a period of three or four years? Given the geographical areas and industries where we see and have seen high unemployment, do we see particular evidence of wage and/or price stickiness? Were particular firms who were or are laying off workers, or going out of business, particularly subject to some type of price or wage stickiness problem that we could document? I don't see anyone talking about these things.