reserve system. innovation and human capital i started out by saying that innovation is an elusive concept. so what do i mean by innovation? there is a consensus among economists that long - run growth in economic standards of living depends critically on the rate of technological change. growth occurs not only because we have more people working or more machines ( or, in economic terms, more labor and more capital ) but also because technological advances make existing workers more productive. such advances might be entirely new types of machines, such as the steam engine or the transistor, or they might be new techniques for making existing products. in the 1980s, for example, the steel industry was transformed by the introduction of mini - bis central bankers ’ speeches mills, which used scrap instead of iron ore and dramatically lowered the time and cost of producing steel. ( as an aside, the first mini - mill was developed by nucor, whose headquarters are just a few hours south in charlotte. ) the million - dollar question, of course, is how and why do such innovations occur? there are a variety of economic forces and incentives at work, but a large body of research suggests that human capital is an important determinant of long - run growth in productivity. countries with more initial human capital appear to have a greater capacity to develop new technologies and to copy or adapt technologies developed in other countries. but innovation and human capital also are linked by the fact that new technologies sometimes increase the demand for skilled workers who can operate those technologies, a phenomenon known as “ skill - biased technical change. ” because it takes time for people to learn new skills, this increase in demand initially leads to higher wages for skilled workers relative to less - skilled workers. but as the higher wages spur more people to obtain the necessary education, the supply of skilled workers tends to respond to the demand, and the wage differential tends to narrow. economists claudia goldin and lawrence katz have documented this dynamic – the “ race between education and technology ” – throughout the 20th century in the united states. 1 in the early 1900s, new technologies such as typewriters and adding machines created a new class of white - collar clerical jobs that required a high school education. because few people had a degree, these jobs paid about twice as much as jobs that did not require a high school degree. 2 the response was a dramatic increase in high school graduation rates. between 1910 and 1940, the number of 19 - year - olds in the united states with a diploma increased from 9

and confidence. the improvement we ’ ve seen in consumer finances in recent years should also bolster growth. the value of household assets has increased by 38 percent since early 2009, while household liabilities have fallen slightly over the same time period. while the process of balance sheet repair may not yet be complete, substantial progress clearly has been made. recent advances in consumer sentiment and financial wherewithal have not invigorated the housing market, however. over the last 12 months, new home sales have fallen by 1. 6 percent and new housing starts have fallen by 7 percent. much of this sluggishness, i believe, is due to factors that are unlikely to change quickly. the fall in home prices during the recession has given households a greater appreciation of the risks of leveraged investments in housing. this is contributing to what appears to be a relatively persistent shift in preferences away from ownership of single - family detached homes. so while i expect some gains in housing activity in 2015, i don ’ t think we should look for housing to make major contributions to overall growth. in contrast, business investment in plant, equipment and intellectual property has been a solid contributor to this expansion. coming out of the recession, this measure of investment grew rapidly for a couple of years, then more moderately, but it picked up steam in the second quarter last year. business investment seemed to be carrying good momentum into the year - end, and in my view is likely to continue to contribute to growth in overall activity in 2015. net exports are likely to be more of a challenge this year. over the last year, the value of the dollar in foreign exchange markets has risen by 8 percent. that makes imports more attractive here and domestic producers less competitive globally, which can be expected to increase our trade deficit and slow the growth of overall economic production. finally, federal government spending on goods and services is likely to continue to restrain growth. over the last three years, we ’ ve seen such spending fall at a 2. 5 percent annual rate. that may sound surprising, but note that this is only spending for goods and services, and it excludes transfer payments, such as medicare or food stamps. these transfer payments do not add directly to gdp ; their only effect is through household incomes. most forecasters are projecting federal spending to contract further in 2015 and beyond. you are probably well aware of the importance of federal spending on goods and services for virginia ; for example, close to 13 percent of all federal contract spending