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TheStreet Open House

Why Fed's Fischer Is Right About Slowing Growth Being a Long-Term Issue

NEW YORK (TheStreet) -- Stanley Fischer, vice chairman of the Federal Reserve, gave a speech in Sweden on Monday that should interest anyone concerned about the state of the U.S. economy.

Fischer -- who comes from a different school of economic thought than me but is pragmatic and open to discussion -- talked about the "Challenges Arising from the Growth Slowdown" including the unusual weakness of the housing sector, the significant drag from fiscal policy and the slowdown in growth of the rest of the world, especially in Europe.

Read More: 4 Stocks Warren Buffett Is Selling in 2014

But then Fischer does what few government officials or economists have done -- he looks at some "supply-side factors" that might be causing a longer-term slowdown in economic growth. Most policymakers seem focused only on the short run and thus only come up with short-run solutions.

Here Fischer considers the reduced growth of the labor supply, the absence of much capital investment and the slowdown in the rate of productivity.

According to Fischer, this slowdown in the longer-term growth of the labor supply, capital investment and productivity "represent the real norm for the U. S. economy."

Fischer cites Robert Gordon of Northwestern University and Tyler Cowan of George Mason University as prominent economists who support this view. These economists argue that although information technology (IT) contributed to a brief burst in productivity in the mid-1990s, this development was an anomaly and is unlikely to generate the productivity gains that came from earlier innovative periods.

Read More: Does Bill Gross Treasury Cuts Mean the Fed Soon Will Raise Rates?

"I, for one, continue to be amazed at the potential for improving the quality of the lives of most people in the world that the IT explosion has already revealed," Fischer said, but he doesn't think this will be the longer-term result.

So, where does that leave us?

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