Fed's Fischer Says Govt Spending Can Boost Productivity

WASHINGTON, (APP - UrduPoint / Pakistan Point News - 21st Nov, 2016 ) : Properly directed government spending -- including infrastructure spending as President-elect Donald Trump has promised -- can boost the economy's productive capacity, Federal Reserve Vice Chair Stanley Fischer said Monday.

Fischer said there is disagreement about what spending policies are most effective but "some combination of improved public infrastructure, better education, more encouragement for private investment, and more effective regulation all likely have a role to play in promoting faster growth of productivity and living standards." Although details remain unclear, Trump's economic plan includes the pledge for a massive infrastructure spending program, which he has said will create jobs.

Like Fed Chair Janet Yellen in her testimony in Congress last week, Fischer said fiscal policies that improve productivity can help address some of the disappointing aspects of the current recovery.

For too long, the Fed "has been the only game in town" addressing macroeconomic policy, and "along some dimensions this has not been a happy recovery," he said in a speech to the Council on Foreign Relations in New York.

Productivity growth in the past decade has been half the rate of the long-run trend of 2.5 percent, and if this slow pace continues it "would have wide-ranging consequences for living standards, wage growth, and economic policy more broadly," Fischer said.

Weak demand and slow investment, including in the oil sector, may be factors in the slow productivity growth, he said, which in turn is keeping interest rates low. However, Fischer cautioned that there is a "justified concern" about plans to increase spending in an economy that is very close to full employment.

Many economists have warned that the spending Trump proposes would expand the deficit, requiring increased debt, and fuel inflation. "There's obviously enormous uncertainty about what's going to happen," Fischer said in response to questions.

"Fiscal measures which increase growth over a sustained period would be terrific. Others would have short-term benefit and would then require further action down the road as the economy really hits full employment." The Fed is widely expected to raise the key policy interest rate in December, for the first time in a year and only the second time since the end of the financial crisis.

But many worry interest rates will have to increase faster if inflation accelerates. The Fed official, who is the former chief of Israel's central bank and former No. 2 at the International Monetary Fund during the Asian financial crisis, also defended the Fed's independence from political interference.