The latest nonfarm payrolls report indicate the economy rebounded in the second quarter, although productivity growth seems to have stagnated for some time now, said Ed Lazear, professor of economics at Stanford University.
Creating more jobs without adding to productivity means more people are carving up pieces from the same GDP pie. One of the good things that happened during the recession was that productivity had continued to grow despite a shrinking economy. Unfortunately, the economy failed to sustain that growth rate when recovery took hold, which could largely be attributed to weak investment, particularly weak capital expenditure by both the public and the private sector.
So, the factors of production are not growing in a way they should be growing in order to have high productivity growth. There are some policy explanations for the weak investment cycle, but the bottom line is that because productivity growth stalled in the labor market, there has been no wage growth. The job growth being witnessed is a good thing, but it’s not symptomatic of the state of the labor market; it overstates the strength of the labor market, he observed.
There have been debates in recent times whether the Fed’s policy rate (federal funds rate) is too low and whether the natural unemployment rate should be 5.4 percent or 6.5 percent. But the fact remains that more than 93 million people have exited the labor market, which is a new record, versus new data that suggests the economy has weakened a bit.
Asked if the Fed would have been easing if, hypothetically speaking, FFR were at 1.5 percent now, Ed answered in negative. There are a couple of reasons why the Fed would not be easing monetary policy further; firstly investors need to distinguish between level of rates and change in rates. Both of them provide different information and different signals to the markets.
The reason the Fed is concerned about raising rates now is because they have been near zero for such a long time. The Fed could have raised rates when the recovery picked up before losing steam again since mid 2014. One of the problems with keeping rates low is that the central bank is left with no tools to use in the future, i.e. when they want to lower rates.
The primary reason for not lowering rates is that monetary policy is not particularly effective in always stimulating the economy. The US economy enjoyed very low interest rates and there should have been a strong investment cycle in such an environment, he argued.
The recent spate of share buybacks show the Fed’s monetary policy has created a situation where a part of the economy is growing, but it fails to add anything to productivity. Asked to comment, Ed said when policymakers talk about productivity, they have to think long-term. In the long run things that work are low and efficient taxes, a strong budgetary situation (i.e. a balanced budget), higher trade and moderate/low regulations.
Unfortunately, that’s not the path that the US economy followed for the past few years.
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