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Fed Governor Says Productivity Fosters Growth

Ben S. Bernanke

Almost certainly the most important economic development in the United States in the past decade has been the sustained increase in the growth rate of labor productivity, or output per hour of work, according to Ben S. Bernanke, a member of the Federal Reserve System’s Board of Governors. In a speech to the Council on Foreign Relations in January, Bernanke noted that between 1995 and 2001 the rate of productivity growth picked up significantly, to about 2.5 percent per year—a figure that contributed to a growing perception among economists that the United States might be entering a new economic era. The rate of productivity is so important, said Bernanke, because economists agree that productivity growth is the principal long-term source of improvements in living standards. It influences the economy in important ways, even in the short run, affecting key variables such as output growth, employment growth, and the rate of inflation.

Technology raises U.S. productivity
Rapid technological progress and increased investment in new information and communication technologies were behind the rise in productivity since 1995, Bernanke said.

Gov. Bernanke’s speech
The productivity growth that the United States experienced from 1995 to 2001 was not duplicated in other countries, particularly in Europe, despite those countries’ own rapid technological progress, according to Bernanke. He added that Fed Chairman Alan Greenspan and economist Martin Feldstein have hypothesized that countries with greater regulatory burdens and thus inhibited flexibility saw slowed productivity growth.

Policymakers pay heed
Whatever the cause, noted the Fed governor, the implications for monetary policy are significant. Slower growth of consumption and investment spending in 2001–03, coupled with impressive gains in productivity, helped to generate both slow job growth (the “jobless recovery”) and 2003’s decline in inflation, which Bernanke termed “worrisome.” He believes that productivity merits close attention from monetary policymakers as its fluctuations permeate the economy.