Chair Yellen's press conference
BINYAMIN APPELBAUM. Binya Appelbaum, New York Times. You’ve spoken about\ the sense that the recession has done permanent damage to the economic output and you’ve reduced gradually over time your forecast of long-term growth. I am curious to know to what extent you think stronger monetary and/or fiscal policy could reverse those trends. Are we stuck with slower growth? Is there something that you can do about it? If so, what? If not, why?
CHAIR YELLEN. Well, I think part of the reason that we are seeing slower growth in potential output may reflect the fact that capital investment has been very weak during the downturn in the long recovery that we’re experiencing. So, a diminished contribution from capital formation to growth does make a negative contribution to growth. And as the economy picks up, I certainly would hope to see that contribution restored. So, I think that’s one of the factors that’s been operative. Of course, we’ve had unusually long duration unemployment. A very large fraction of those unemployed have been unemployed for more than six months. And there is the fear that those individuals find it harder to gain employment, that their attachment to the labor force may diminish over time and the networks of contacts that are—they have that are helpful in gaining employment can begin to erode over time. We could see what’s known as hysteresis, where individuals, because they haven’t had jobs for a long time, find themselves permanently outside the labor force. My hope would be that as—and my expectation is that as the economy recovers, we will see some repair of that, that many of those individuals who were long-term unemployed or those who are now counted as out of the labor force would take jobs if the economy is stronger and would be drawn back in again, but it is conceivable that there is some permanent damage there to them, to their own well-being, their family’s well-being, and the economy’s potential.
CHAIR YELLEN. Well, I think part of the reason that we are seeing slower growth in potential output may reflect the fact that capital investment has been very weak during the downturn in the long recovery that we’re experiencing. So, a diminished contribution from capital formation to growth does make a negative contribution to growth. And as the economy picks up, I certainly would hope to see that contribution restored. So, I think that’s one of the factors that’s been operative. Of course, we’ve had unusually long duration unemployment. A very large fraction of those unemployed have been unemployed for more than six months. And there is the fear that those individuals find it harder to gain employment, that their attachment to the labor force may diminish over time and the networks of contacts that are—they have that are helpful in gaining employment can begin to erode over time. We could see what’s known as hysteresis, where individuals, because they haven’t had jobs for a long time, find themselves permanently outside the labor force. My hope would be that as—and my expectation is that as the economy recovers, we will see some repair of that, that many of those individuals who were long-term unemployed or those who are now counted as out of the labor force would take jobs if the economy is stronger and would be drawn back in again, but it is conceivable that there is some permanent damage there to them, to their own well-being, their family’s well-being, and the economy’s potential.
Me: Strong monterary and/or fiscal policy can do a reverese hysteresis.
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