Daniel Tarullo delivered a speech on “Longer-Term challenges for the American economy” at the Hyman Minsky conference on the state of U.S. and Global economies held in Washington, DC, on April 9. The first longer-term challenge he mentioned was the drop in the pace of U.S. productivity growth.
Daniel Tarullo is a member of the Board of Governors of the Federal Reserve. Other members include Janet Yellen (Chairwoman), Jeremy Stein, and Jerome Powell. The Federal Reserve uses monetary policy as its tool to achieve its dual mandate of maximum employment and price stability. The Fed has kept the Fed Funds rate near zero to boost the recovery. As the economy recovers, inflationary pressures rise, prompting the Fed to increase interest rates. An increase in interest rates would hamper the bond market (BND) and bond ETFs such as the 20+ Year Treasury Bond ETF (TLT), iShares Barclays 1-3 Year Treasury Bond Fund (SHY), iShares Barclays 7-10 Year Treasury Bond Fund (IEF), and iShares Barclays 3–7 Year Treasury Bond Fund (IEI).
A country’s GDP growth is determined by two factors: growth in its labour force and improvement in labour productivity.
Tarullo argued that productivity growth in recent years has been disappointing. He supported his argument with statistics, saying, “Although output per hour in the nonfarm business sector rose about 2-3/4 percent per year from the end of World War II through 1971, productivity has risen just 1-1/2 percent per year since then, excluding a brief burst of rapid growth that occurred roughly between 1996 and 2004.”
Some economists argue that the rapid productivity growth period that started in 1996 was an anomaly and the subdued pace of productivity growth over the past decade is merely a return to the norm. Tarullo extended the argument, saying that technological innovation during the first and second industrial revolutions resulted in productivity growth until the 1970s, but continued technological developments such as the emergence of computers, the development of the Internet, and improvements in telecommunications have failed to propel productivity growth in recent decades.
While productivity growth was slower in recent decades than what analysts observed until the 1970s, per-capita income has grown more rapidly in recent years than it did up to the 1970s.
One reason for the slow productivity growth, Tarullo argued, is the decline in the dynamism of the U.S. labor markets. Since the 1980s, internal migration in the United States over both long and short distances has declined, meaning that people aren’t relocating as much as they did. Geographical mobility helped the United States achieve productivity gains in the past, as people generally travel for better jobs, replacing low-productivity jobs.
Tarullo discussed a few possible reasons quoted by economists for the diminished geographical mobility. As the population ages, people are less likely to travel in search of a job. Another possible reason could be that firms are finding better matches for positions, as the Internet has reduced the cost of posting a job ad and finding a job. The better matches have in turn resulted in less job churning. Tarullo argued that the reduction in job churning could be a function of slower productivity growth, as people are less likely to relocate if the new job doesn’t add much value over their existing job.
Another concern that Tarullo highlighted was the flat rate of the formation of new firms since the 2000s. New firms are important for the economy, as they focus on innovation. Some successful new firms formed in the 1990s, such as Google (GOOG), have proven that new firms are important for job creation.
To find out why workers’ share in the economy is lagging, read on to the next part of this series.