Janet Yellen is calling for investment in public infrastructure.
Yellen has no mandate to dictate fiscal policy, but in recent Congressional hearings, the President of the Federal Reserve and at least four more members of the board are signaling that monetary policy tools have reached their limit. Asset-buying and a close to zero interest rate policy will not suffice to boost investment and productivity.
That is also largely expected to be the main message of the Fed’s annual conference in Jackson Hole, Wyoming, on Friday, Bloomberg reports.
Last weekend, the Federal Reserve’s Vice President Stanley Fisher was explicit in saying that “monetary policy is not well equipped to address long-term issues like the slowdown in productivity growth.” The kind of public investment proposed by Yellen – in a typical 1960s fashion – should in part “pay for itself” by multiplier effects and productivity gains, or so the theory goes.
The key issue is that low interest rates have thus far made little if any difference in the rate of investment or consumption. That is the case in Europe and Japan as well, bringing to the fore discussions about “helicopter money,” that is, finding ways of boosting income directly.
Investment nearing 15% of the GDP is nowhere near the kind of spending required to take the US out of low growth and low inflation. Reuters recently calculated that investment as a share of the US GDP has dropped by 1% since 2008, a shortfall of one trillion dollars a year. Business investment has been sliding since the last quarter of 2015.
The liquidity pumped into the economy by the central bank is failing to improve productivity. Instead, the added liquidity is inflating stock market bubbles.
That is no longer a partisan opinion reflecting the neo-Keynesian perspective of the Obama Administration. Amongst the proponents of public investment in infrastructure is Jerome Powell, a Bush Administration official.
In many respects, Yellen is preaching to the converted. Hillary Clinton is proposing a $275 bn public investment package and Donald Trump is calling for double that. There are still some orthodox economists around, not least Kevin Warsh of the Hoover Institute and former Fed governor. But, that is the exception.