Fed's Fischer Says Better Fiscal and Regulatory Policies Could Improve Productivity

Federal Reserve Vice Chairman Stanley Fischer, shown in a photo from May, sounded upbeat about the short-term prospects for the U.S. economy. ENLARGE
Federal Reserve Vice Chairman Stanley Fischer, shown in a photo from May, sounded upbeat about the short-term prospects for the U.S. economy. Photo: Bloomberg News

Federal Reserve Vice Chairman Stanley Fischer raised concerns Sunday about the U.S. economy’s longer-term prospects and said more public investment, along with regulatory changes, could help boost flagging productivity numbers. But he was more optimistic about the economy’s short-term outlook.

In a Sunday morning speech in Aspen, Colo., the Fed’s second highest-ranking official called for more spending on infrastructure and education and adjustments to regulations to encourage private investment.

“The key to boosting productivity growth, and the long-run potential of the economy, is more likely to be found in effective fiscal and regulatory policies,” he said.

Productivity improvements are necessary for better long-term economic growth and increases in wages and living standards. After rising rapidly during the internet boom of the late 1990s, productivity, defined as the output per hour worked, has slumped recently for reasons that aren’t well understood.

The U.S. recorded productivity decreases for the past three quarters, the longest such stretch since 1979.

Mr. Fischer said productivity grew an average 1.25% annually between 2006 and 2015, well below the 2.5% annual growth rate between 1949 and 2005.

“A 1.25 percentage point slowdown in productivity growth is a massive change, one that, if it were to persist, would have wide-ranging consequences for employment, wage growth and economic policy more broadly,” he said.

Economic growth has been tepid even though employers have been adding jobs at a rapid clip. The U.S. economy posted a 1.2% annualized growth rate in the second quarter, but the unemployment rate remains low.

Productivity has become a top preoccupation for Fed officials. Fed Chairwoman Janet Yellen has said lower productivity growth could be curbing the economy’s long-term growth potential and the central bank’s ability to raise interest rates.

Economists are divided over the causes of the productivity slowdown. It is also unclear when, or whether, productivity will pick up again.

In his speech, Mr. Fischer echoed the remarks of other policy makers, including Ms. Yellen, who say more public investment is needed to spur productivity and economic growth. But a sharply divided Congress and a bitter presidential election make such investment unlikely, at least for now.

Despite his worries about the economy’s long-term prospects, Mr. Fischer was more upbeat when describing its short-term performance.

The U.S. has weathered potential shocks such as the U.K’s vote in June to leave the European Union, a Greek debt crisis and the slowdown in China without seeing a major hiring slowdown. And inflation is within “hailing distance” of the Fed’s 2% target, he said.

“We are close to our targets,” he said.

He also said he expected economic growth to “pick up” in the coming quarters.

Mr. Fischer’s speech fits with other recent statements by Fed officials, many of whom have been encouraged by the economy’s recent performance even though they express increasing concern about its long-term prospects. Those longer term worries are likely to be a major topic of conversation this week at the Fed’s annual symposium in Jackson Hole, Wyo.

Last week, San Francisco Fed President John Williams suggested redrawing the central bank’s targets to deal with a long-term growth slowdown while simultaneously saying the economy is ready for another increase in interest rates.

Mr. Fischer didn’t comment on the prospects of a rate increase.

Write to David Harrison at [email protected]


WSJ.com: US Business

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