Government should reform immigration and tax laws, boost research spending, Fed´s Kashkari says

The best way forward on economic policy in the US was through immigration and tax reform, together with higher spending on education and research, a top central bank official said.

In an essay published overnight, the president of the Federal Reserve bank of Minneapolis, Neel Kashkari, also said the US jobs market was "closer to normal", although inflation continued to lag the central bank´s target and growth was running below its normal pre-crisis levels.

To explain current subdued growth, Kashkari pointed to demographic factors, such as an ageing population, psychological scarring from the crisis and "lackluster technological innovation" as the three most likely culprits.

In his opinion, the best policy alternatives to confront those challenges were increased government funding of basic research, promoting high-skilled immigration and tax reform.

"Another promising policy is immigration reform, especially for high-skilled workers," Kashkari said.

The central banker also sounded a warning on proposals such as raising the Fed´s inflation target - because of the risks to the Fed´s credibility and the time-lags involved before the economy benefited - or for the government to pursue massive increases in fiscal spending on its own.

"Given today’s low borrowing costs, there is a strong case for increased government spending on deferred maintenance of infrastructure that will be necessary to sustain our economy.

"However, I am skeptical that a large-scale expansion of government spending by itself is the best way forward, since larger fiscal deficits will lead to higher expected future taxes, which could further undermine private sector confidence.

"Chronically weak demand might have been an important part of the diagnosis for the U.S. economy in the depths of the recession, when many workers and factories were idled. By 2016, however, the labor market appears closer to normal, which limits how much can be achieved by boosting demand to increase employment further," he said.