For release: April 25, 2002
Contact: Joe Elstner, (314) 444-8902; Charles B. Henderson, (314) 444-8311

Productivity, Innovation, Education Key to Better Living Standards: Says St. Louis Fed's Poole

Link to speech

ST. LOUIS -- Keeping U.S. living standards high depends mainly on continuing three trends: an improving productivity rate, an entrepreneur-friendly climate that fosters innovation, and strong, widely available higher education. And accompanying all that should be sound economic policies leading to low, stable inflation.

That was the theme of remarks by William Poole, president of the Federal Reserve Bank of St. Louis, to a dinner audience at the University of Missouri System's 2002 Technology Transfer Showcase.

"There's now little doubt that the pace of U.S. productivity growth rose during the last decade," Poole said. "From 1995 to 2001, nonfarm labor productivity grew at nearly 2.5 percent annually, more than a percentage point faster than the disappointing performance of 1973-1995." Behind the '90s productivity growth spurt were innovations in the production of microprocessors and semiconductors, he said. "That allowed sharp decreases in telecommunications and computer prices. In turn, businesses aggressively reorganized their management information systems," said Poole.

The St. Louis Fed president emphasized that these productivity improvements required innovations in hardware, software and in business processes. "Any two of these without the third would have yielded disappointing results."

Concerning innovation, can governments do anything to spur it along? Definitely, Poole said. "First government should 'do no harm.' Excessive regulation and rigidity can stifle the transformation of innovations into applicable technology. Many analysts have noted that few other countries enjoyed the productivity growth the U.S. experienced in the 1990s. The answer lies partly in the relatively less-regulated, more flexible and more competitive nature of U.S. markets and businesses."

Poole noted that encouraging entrepreneurs seems simple "until we consider that new technology creates 'losers' along with winners. The transfer of new technologies changes the relative fortunes of various firms and, in turn, the demand for various types of labor. Government leaders must resist the urge to 'save' those industries lest, by so doing, they foreclose gains for the overall economy. While no one likes to see layoffs and business closings, these may signal the future direction of the economy."

Poole said government also must provide a secure system of private property rights, including protection for intellectual capital. Secure property rights, including clear ownership of intellectual property via patents and copyrights, encourage entrepreneurship and technology transfer, he said.

Government must also sponsor a strong, widely available higher education system, Poole said. "Within a decade after passage of the Morrill Act of 1862 created land grant universities, the number of engineering schools went from 6 to 70 and later to 126 by 1917. As late as 1914 the U.S. was well behind Europe in scientific agriculture. A generation later, we were the world leader. Today, our higher education system is called upon to provide new talent to maintain our technology leadership."

Poole said that underlying the other developments must be Federal Reserve economic policies consistent with low and stable inflation. "The strength and duration of the current economic expansion will ultimately depend on the performance of the inflation rate," he said. "Low and stable inflation reduces uncertainty regarding the future health of the economy and, in turn, encourages entrepreneurship and risk-taking."

Poole said that if one accepts many analysts' projected productivity growth rate of 2 to 2 -1/2 percent, and assuming the labor force increases about one percent each year, then the economy's long-run growth track is approximately 3 to 3-1/2 percent. "Maintaining the higher track will raise the living standards of future generations of Americans as well as those in countries with whom we trade. But this outcome can only happen as long as inflation remains low and stable."

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