The Federal Reserve can’t do it alone.
For eight years it’s pressed the gas pedal — lowering rates, buying bonds and declaring their absolute resolve to revive moribund growth. This has helped heal scars from the Great Recession, namely reducing unemployment to below 5 percent from a 10 percent peak.
But the jobs recovery is probably approaching its end. The U.S. is unlikely to continue adding 200,000 jobs a month, as it did over the past five years, and growth remains mired at barely above 2 percent. It may even decline as leftover slack in the labor market evaporates and the Fed is forced to tighten policy to prevent a surge in inflation.
That’s prompting officials to draw more attention to what’s smothering the outlook for growth in the U.S. It’s not simply a hangover from the financial crisis and the recession that followed. It’s much deeper than that, stemming from negative trends in demographics, productivity and other long-term factors. And when it comes to turning those forces around, monetary policy has very little to offer.
“There’s been a lot of talk over the last few years about stimulus,” James Bullard, president of the Federal Reserve Bank of St. Louis, told reporters July 12. “Stimulus is something you’re doing to try to smooth things out over a couple of quarters, and that isn’t how we need to be thinking about the U.S. economy,” he said. “We badly need a growth agenda.”
Bullard isn’t alone. More officials are making it clear with more frequency and with greater urgency that they need help from elected lawmakers. In June, Fed Chair Janet Yellen told the Senate Banking Committee that fiscal policy had “not played a supportive role.”
Nor are such appeals confined to the U.S. They’ve been a common refrain from officials at the European Central Bank.
“Monetary policy cannot be the only remedy to our current economic challenges,” Peter Praet, an ECB executive board member, said July 1. “Instead, a broader set of actors needs to step into the breach.”
So what is it that monetary policy can’t fix?
• Demographics. Americans, like the rest of the developed world, are getting older. That means there are fewer workers as a percentage of the overall population. Aside from the strain that puts on social welfare budgets, it also lowers the potential growth rate of the economy. In the U.S., the proportion of citizens 65 or older reached 15 percent in 2014, up from 9.5 percent in 1964, according to data from the Organization for Economic Cooperation and Development. The 2014 figures were even worse in the euro area at 19 percent and Japan’s 25 percent.
Spurring higher birth rates might require incentives, like paid maternity leave or child-care benefits. Increasing legal immigration is another answer, though it would run headlong into anti-immigrant sentiment that is evident in the U.S. presidential election and in the U.K.’s vote to leave the European Union.
“More could be done to examine policies that could ensure an inflow of workers to strengthen and grow the U.S. workforce,” Dallas Fed President Robert Kaplan said in a June 23 speech. “Appropriate immigration policy is a key element of this effort.”
• Productivity. Aside from adding more workers, the only way to raise GDP growth rates is to produce more for every hour worked. Yellen has called productivity growth “the key determinant of improvements in living standards.” Since 2010, it’s averaged a paltry 0.6 percent in the U.S., compared with 2.3 percent from 1948 to 2009, according to the Bureau of Labor Statistics. Similar erosion shows up in Europe and Japan.
Some economists believe productivity growth is fine, we’re simply failing to measure accurately the impact of new technologies. Most, however, see a real problem that calls for greater improvements in education and training to develop a workforce with higher skills, as well as for public and private spending on research and development to create technologies that improve productivity in the workplace.
Demographics may also be a factor. Older workers heading into retirement tend to be on a productive down-slope, yet are still more productive, and more numerous, than younger people entering the labor market.
• Corporate investment. Despite historically low interest rates and historically large piles of cash, corporations haven’t picked up the pace at which they plow money into new facilities and equipment. Business fixed investment has risen at an average rate of 6.3 percent over the past six calendar years of this recover, compared with 8.6 percent in the nine high growth years through 2000.
Businesses cite the low expected rate of return on investments and uncertainty over regulation and taxation. Others suspect tighter credit standards in the wake of the financial crisis caused by lenders wishing to be more cautious, or forced to be so by new financial regulations.
• Infrastructure. Former Treasury Secretary Lawrence Summers has made perhaps the loudest argument for the U.S. government to renew the country’s aging infrastructure. The investment would provide an immediate boost to demand and could raise productivity if, for example, it also leads to greater efficiency through better transport and other public services. Summers even claims that because of low current borrowing costs, money spent wisely on infrastructure can end up lowering debt-to-GDP.
• Debt. One thread connecting all the above: Each requires action by legislators that would be deeply unpopular to at least one major political party. Democrats would resist lightening up on financial regulation while the country is still shaking off the devastation of the last financial crisis. Republicans would surely fight an increase in spending and point out the U.S. already faces a long-term debt-to-GDP problem that may only worsen as the population ages.
General government debt reached 123 percent of GDP in the U.S. in 2014, up from 62 percent in 2000, according to the OECD. In the euro area, excluding Malta, Lithuania and Cyprus where data wasn’t available, it averaged 98 percent, including 179 percent in Greece and 156 percent in Italy. Japan beat them all at 247 percent.
“The answers are not simple,” the St. Louis Fed’s Bullard said. “There’s no magic wand.”
