A shift towards stimulative fiscal policy could help ease the burden on the Federal Reserve in supporting the US economy, the Fed’s vice president has said.
Speaking in the wake of Donald Trump’s election to the White House, Stanley Fischer said productivity-enhancing government policy such as higher infrastructure spending would help “confront some of our longer-term economic challenges”.
“Macroeconomic policy does not have to be confined to monetary policy”, said Mr Fischer, a former governor of the Bank of Israel.
“Certain fiscal policies, particularly those that increase productivity, can increase the potential of the economy”, he said in a speech in New York on Monday.
Mr Fischer mentioned infrastructure spending, improved education standards and “more effective regulation” as some of measures that could help boost the US’s flagging labour force productivity.
The South African-born economist is the latest US policymaker to comment on a potential shift towards higher spending and tax cuts to come under the regime of president-elect Trump.
Last week, James Bullard of the St Louis Fed said: “A targeted fiscal infrastructure package, changes in the regulatory environment, and some tax reforms could lead to faster productivity growth, more domestic investment and, therefore, faster real GDP growth”.
Despite the US making impressive inroads into reducing unemployment – which is at just 4.9 per cent – Mr Fischer noted the post-financial crisis recovery has not been a “happy” one.
Most worryingly for economists, productivity growth – a measure of workers’ output per hour that is vital to ensure rising living standards, wage growth, and healthy public finances – has been slowing down.
Mr Fischer noted that there was “enormous uncertainty” around any changes to fiscal policy in the US.
Understanding the recent weakness of productivity growth is central to addressing the longer-run challenges confronting the economy. Productivity growth over the past decade has been lackluster by post-World War II standards. Output per hour increased only 1-1/4 percent per year, on average, from 2006 to 2015, compared with its long-run average of 2-1/2 percent from 1949 to 2005. This halving of productivity growth, if it were to persist, would have wide-ranging consequences for living standards, wage growth, and economic policy more broadly.
Amid speculation that Mr Trump could appoint two new members on the governing board of the Fed, raising fears of a more political Fed, Mr Fischer said he had “no idea how [the appointments] would be handled”:
What is absolutely clear is the independence of the central bank.
[It means] there is one system that stays in place and takes responsibility to use its tools as best it can to keep the economy on an even keel.
The Fed is widely expected to pull the trigger on its second interest rate hike in 12 months in December.