John Cochrane says that unemployment today is not high because something went very wrong in financial markets but because of the "real, microeconomic, tax, and regulatory barriers to growth":
Sense and nonsense in the quantitative easing debate: Unemployment is not high because the maturity structure of government debt is too long, thank you, nor from any lack of “liquidity” in a banking system that is sitting on a trillion dollars of cash. It’s time to focus on the real, microeconomic, tax, and regulatory barriers to growth, not a policy that creates a lot of noise but no real effect...
When asked why unemployment was so much lower back in 2007--when we had the same real, microeconomic, tax, and regulatory barriers to growth that we do now--he has no answer.
But he does double down:
[A] slow, steady, and widely expected deflation... [is] much better [than even 2% inflation] in the long run. The financial system is much healthier with bundles of cash lying around, at no interest cost (as happens under deflation), than if everyone is engineering clever, but ultimately fragile, cash management schemes...
The utility-of-liquidity theoretical argument that underlies claims that the optimal rate of price change is deflation fast enough to drive the nominal interest rate on Treasury bills to zero is very incomplete, because money is not just a medium of exchange but also a store of safe value and a unit of account. The worth of the theoretical argument is such that it will get you a decaf Americano at Strada--if you also chip in $1.75.
We need to go to the data.
The major economy currently attempting a "slow, steady, and widely expected deflation" is called "Japan." The last major economy before that to attempt one was the United Kingdom between 1924 and 1931, a time that its central bank head Montagu Norman described as time "under the harrow."
The era of "slow, steady, and widely expected deflation" before that was 1865-1896 under the classical gold standard--an era that appears to have been marked by relatively large and long-lasting business-cycle downturns and that was definitely marked by higher real interest rates than normal that one presumes discouraged at least some socially-valuable investment.