Editors’ Summary

The Brookings Panel on Economic Activity held its ninety-first conference in Washington, D.C., on March 17 and 18, 2011, as high unemployment continued amid a sluggish recovery. The research in this volume is directly relevant to the economy’s troubles. The first two papers study how people have fared in the recession and its aftermath. The first examines job search and the well-being of the unemployed, and the second studies the financial vulnerability of households and how they cope with emergency spending needs. The remaining four papers contribute to ongoing macroeconomic debates. The third paper analyzes a historical episode of quantitative easing, to better understand how the recent unconventional monetary policy might influence the economy. The fourth paper reexamines the fundamental question of how a government ought to use monetary and fiscal policy to respond to recessions. The fifth paper asks why unemployment rose so much less in Germany during the recession than it did in the United States and elsewhere, and the sixth paper analyzes the behavior of inflation over the past few years in light of competing views of the relationship between inflation and unemployment.

In the first paper, Alan Krueger and Andreas Mueller study the behavior of unemployed Americans during and after the recession through a unique weekly survey of several thousand unemployed workers in New Jersey, matching the survey responses to administrative data from the state unemployment insurance offices. This extraordinary data collection effort yields several new insights on unemployment.

Many theories predict that the unemployed will search more intensely as their unemployment drags on, because they do not want to risk exhausting their unemployment insurance benefits. Krueger and Mueller’s findings, however, point to exactly the opposite conclusion. Workers in their survey report that over the course of an unemployment spell, they average about 100 minutes per day searching for a job. But over the first 3 months of unemployment, reported time spent searching each day falls by almost 30 minutes. Perhaps as a result, the probabilities of receiving a job offer and of exiting unemployment fall as unemployment continues. The exhaustion of unemployment insurance benefits appears to have no impact on search activity: respondents do not report searching more intensely either just before or just after their benefits run out.

The authors also provide new evidence about the costs of unemployment. The traditional economic view of involuntary unemployment is that although the unemployed would prefer to work, they nonetheless enjoy the extra leisure time available to them. The authors examine this hypothesis by asking their respondents a series of questions about emotional well-being and life satisfaction; the findings indicate that unemployment is emotionally costly indeed. Whereas 45 percent of employed Americans in a 2006 national survey reported that they were very satisfied with their lives, the comparable number among the unemployed in the authors’ New Jersey sample is 6 percent. Things only get worse as unemployment continues: workers become progressively more likely to be in a bad mood and less likely to be in a mildly pleasant or very good mood. Thus, Krueger and Mueller’s results paint a grim picture of the effects of continuing unemployment: the unemployed search less, their prospects of finding a job decline, and they become increasingly morose.

In the second paper, Annamaria Lusardi, Daniel Schneider, and Peter Tufano study the financial vulnerability of Americans during the Great Recession. They assess financial vulnerability by asking individuals, “How confident are you that you could come up with $2,000 if an unexpected need arose within the next month?” The authors’ focus on short-run needs rather than long-run financial goals, and on methods of coping broadly rather than on savings alone, yields some new and alarming insights.

Americans, they find, are financially vulnerable indeed. Fully a quarter of respondents say that they are certain they could not come up with $2,000 in a month, and almost half say that they are not confident they could do so. Moreover, many of those who could raise the money would do so by using unconventional and possibly very expensive means: nearly one-fifth of all respondents say they would sell...