“My advice would be that several principles should be taken into account as you make these judgments. First of all, the economy is operating relatively close to full employment at this point, so in contrast to where the economy was after the financial crisis, when a large demand boost was needed to lower unemployment, we’re no longer in that state. CBO’s assessment is that there are longer-term fiscal challenges; that the debt/GDP ratio at this point looks likely to rise as the baby boomers retire and population aging occurs; and that longer-run deficit problem needs to be kept in mind. In addition with the debt/GDP ratio at around 77%, there’s not a lot of fiscal space should a shock to the economy occur; an adverse shock that did require fiscal stimulus.

“I think what’s been very disappointing about the economy’s performance since the financial crisis, or maybe going back before that, is that the pace of productivity growth has been exceptionally slow: the last 5 years, a half percent per year; the last decade, one and a quarter percent per year. The previous two decades before that were about a percentage point higher, and that’s what ultimately determines the pace of improvement in living standards. So my advice would be as you consider fiscal policies, to keep in mind and look carefully at the impact those policies are likely to have on the economy’s productive capacity, on productivity growth, and to the maximum extent possible, choose policies that would improve that long-run growth and productivity outlook.”

Janet Yellen, 11/17/16 testimony to the Joint Economic Committee

I have to say that of all of Janet Yellen’s discussions since taking the position of Fed Chair, last week’s comments to the Joint Economic Committee struck me as the most lucid. Perhaps it’s only because they align with my own economic views on the critical role of productive investment (see last week’s comment Judging Economic Policy), but it also appears that since the Fed is now on a course of slow normalization of monetary policy, Yellen has less need to justify the continuation of a reckless policy on the basis of empirically unsupported arguments. The slow growth in productivity noted by Yellen has been paced by weakness in U.S. real gross domestic investment. We’ve actually observed zero growth in U.S. real gross domestic investment over the past decade, compared with growth of about 4.5% in the half-century prior to 2000. The chart below expands on the one I presented last week, showing U.S. domestic investment (after depreciation) as a share of GDP, compared with the growth in real output per labor hour.

While the markets appear convinced that substantial infrastructure spending is forthcoming, the existing policy discussions remain quite vague, and the focus strikes me as all wrong. As other observers have correctly emphasized, the U.S. lacks enough skilled labor in the heavy construction sector to actually implement large-scale infrastructure spending projects on the scale being discussed, unless foreign firms were recruited to implement them. As for energy-related projects, my impression is that sucking the last vestiges of fossil-stored sunlight out of the ground using more technically-advanced straws is less of an investment than a reflection of stunted vision, given that unlimited amounts of convertible sunlight are, and will be, available as long as humanity exists. Not that a Republican-led Congress that leans to the fiscally conservative side would be likely to approve massive new spending in any of these areas, but even if it did, the first dollar would not likely be spent until well into 2018.