US economy needs more public spending
While markets wait for Janet Yellen’s latest message about the direction of monetary policy, the Federal Reserve chief and her colleagues already have one for politicians: the US economy needs more public spending to shift into higher gear.
In the past few weeks, Yellen and three of the Fed’s other four Washington-based governors have called in speeches and Congressional hearings for government infrastructure spending and other efforts to counter weak growth, sagging productivity improvements and lagging business investment.
The fifth member has supported the idea in the past.
The Fed has no direct influence over fiscal policy and its officials traditionally refrain from discussing it in detail. Having its top officials - from Yellen to former investment banker and Bush administration official Jerome Powell – speak in one voice sends a strong signal to the next president and Congress about the limits they face in setting monetary policy and what is needed to improve the economy’s prospects.
The Fed’s annual conference in Jackson Hole, Wyoming, where Yellen speaks on Friday, is due to focus on how to improve central banks’ “toolkit,” but the unanimous message from the Fed’s top policymakers is that those tools are not enough.
“Monetary policy is not well equipped to address long-term issues like the slowdown in productivity growth,” Fed vice chair Stanley Fischer said on Sunday. He said it was up to the administration to invest more in infrastructure and education.
Behind Fischer’s statement lies a troubling feature of the recovery - business investment has fallen below levels in prior years and companies seem to have stopped responding to low borrowing costs.
As a share of gross domestic product, US annual business investment since 2008 has averaged nearly a full percentage point below the previous decade’s average, government data shows.
Reuters calculations indicate the investment shortfall has blown a hole in annual GDP that has grown to as much as $1 trillion a year compared with what it would have been if the previous trend continued.