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.

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.

"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?

I believe that something else is going on. I believe that we are in a transition phase going from one structural construction of the economy to the next structural construction. Whereas the former was based on heavy industry that included electrification and mass production, the foundation for the structure we are moving into is IT-based. How it will work out and look at this stage is anybody's guess.

The crucial thing is the transition is taking place and will take place whether people like it or not. My belief is the last major transition came somewhere around the 1930s. The movement then was from a more agricultural-based economy to a more industrial-based economy.

This is important and that is why I feel so good that someone like Stanley Fischer is discussing the possibility.

If we just consider our problems to be short-run, cyclical problems then economic policies are devised to put people back to work in the jobs from which they had been laid off, and investment is made in goods that are associated with the existing capital stock.

In a world going through a transition, economic policies have to be constructed considering the longer term, which means investment will need to go into the emerging technology and efforts must be made to develop human capital so it can be productive in using the next-generation technology.

But going through such a transition is not easy and it cannot be done overnight. Governmental policies cannot be aimed to please the existing political base or power structure. Progress cannot be achieved by denigrating the opposition party.

Fischer's speech raises this issue to a higher level. We need to talk about these things and not just focus on short-run solutions, which, if this analysis is true, are only going to extend the problems and not solve them.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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