"In 2010, of course, we’re not going to go communist. Which is nice. But if you tell people that high unemployment is going to exist for a long long time, and there’s nothing the government can or will do about it, then of course people are going to support policies that make the economy less flexible and less open to imports and foreigners. If laid-off workers can’t find new jobs, then protecting incumbent sites of employment from competition becomes priority number one.
It’s true that if you adopt this view you do need to give up some libertarian purism. If periodic state intervention is required for the purposes of macroeconomic stabilization then you legitimize state intervention to, for example, help poor people. But the battle for that kind of purism is lost anyway. What you gain by embracing stabilization policy and treating the political problems of how to do it effectively as a problem to be solved rather than a reason not to try is an account of why it is that 9.5 percent unemployment doesn’t discredit the underlying principles of a market economy." (emphasis original)
I've pursued a similar line of thinking before, so I'm obviously open to having Matt's arguments reinforce my own.
Elsewhere, Tyler Cowen points out that there are benefits to a period of economic "re-calculation" which need to be recognized as well.
"1) The Industrial Revolution also was a tough slog for quite a few decades. Yet it was both worthwhile and it gave capitalism a bad name for a long time.
2) Alexander Field argues that the Great Depression brought greater productivity improvements than any other decade in U.S. history...."
While I doubt that Tyler is attempting to downplay the pain of the "dislocations" in question, I certainly would not be as cavalier about the consequences. In addition to bringing greater productivity improvements, the turmoil of the Great Depression helped spread political ideologies which were leveraged to support despotic regimes and also gave rise to geopolitical instabilities that dragged the world into an all-consuming war. That is not a fair trade.
But I exaggerate: it's 2010 and we're not going communist.
Nevertheless, it is no longer a (politically) acceptable line of argument to say: "Hey! you've gone down an economic corridor that is no longer promising so you will have to endure a period of recalculation. Good luck with that." Unlike the Industrial Revolution and other recessions of the late 19th and early 20th C, the political systems of the Western world are far more sensitive to this dislocation of workers. We now have universal suffrage and an increasingly educated population with greater opportunities for political voice.
Yes, it's true that the social safet net eases the pain of dislocation (while simultaneously creating its own set of incentives). It's also true that, as Felix Salmon points out, most Americans are now middle class, and most middle class Americans are doing okay. But there is still a significant underclass that is not doing okay and - if the recalculation argument is correct - they may be in for a long haul.
Which brings us back to Matt's point. The plight of the long-term unemployed is fundamentally a political problem, and a messy one at that. But it is only through embracing it as such, and setting about finding ways to mitigate its impact, that we avoid the craziest and nuttiest of outcomes.