d as quickly as possible. this adjustment may occur as start - ups introduce innovation to the market, as existing innovative firms expand, or as competing firms imitate the innovators. recent research suggests that all three of these channels, which reflect the economic dynamism of businesses, have been operating sluggishly of late : new firms are not created as often as in the past, innovative firms are not hiring or investing as aggressively as they once did, and the diffusion of innovations is weak from frontier firms to trailing firms. 7 it is difficult to pinpoint specific policy actions that would address this decline in dynamism. broadly speaking, however, government policymakers should carefully consider the effects of regulations and tax policy on the free flow of workers, capital, and ideas. investment in recent years, the contribution to labor productivity growth from investment has declined. business fixed investment rose roughly 2 - 1 / 2 percent per year, on average, from 2004 to 2016, compared with about 5 percent from 1996 to 2003. 8 some bright spots do exist : capital expenditure by leading it companies — google, amazon, and the like — has soared since 2010, and investment in the energy sector has returned to life. nevertheless, firms as a whole seem reluctant to invest. this cautious approach to investment may in part reflect uncertainty about the policy environment. by one measure, u. s. policy uncertainty was elevated for much of the recovery, subsided in 2013, and then rose again late last year, underpinned by uncertainty about policies associated with health care, regulation, taxes, and trade. 9 reasonable people can disagree about the right way forward on each of those issues, but mitigating the damping effect of uncertainty by providing more clarity on the future direction of government policy is highly desirable — particularly if the direction of policy itself is desirable. government investment can be an important source of productivity growth as well. for example, the interstate highway system is credited with boosting productivity in the 1950s and 4 / 8 bis central bankers'speeches 1960s. 10 that highway system and many other federally supported roadways, waterways, and structures have been neglected in recent years. indeed, real infrastructure spending ( that is, adjusting for inflation ) has fallen nearly 1 percent per year since 2005. 11 this area of government investment deserves more attention. labor quality also important to raising labor productivity is investment in human capital — workers ’ knowledge and skills. such investment is a particular issue because most forecasts anticipate that the long

investors to become more uncertain about valuations of a range of complex or opaque structured credit products, not just those backed by subprime mortgages. they also reacted to market developments by increasing their assessment of the risks associated with a number of assets and, to some degree, by reducing their willingness to take on risk more generally. to be sure, these developments may well lead to a healthier financial system in the medium to long term : increased investor scrutiny of structured credit products is likely to lead to greater transparency in these products and more rigor in the credit - rating process. and greater caution on the part of investors seems appropriate given the very narrow spreads and the loosening in some underwriting standards seen before the recent episode began. in the shorter term, however, these developments do imply a greater measure of financial restraint on economic growth as credit becomes more expensive and difficult to obtain. the federal reserve's response to the financial turmoil fortunately, the financial system entered the episode of the past few months with strong capital positions and a robust infrastructure. the banking system is healthy. despite a few notable failures, hedge funds overall seem to have held up well, and their counterparties have not sustained material losses. the clearing and settlement infrastructure generally worked well despite trading volumes that were extremely high in some cases. nevertheless, the market strains were serious, as i have discussed, and they posed risks to the broader economy. the federal reserve accordingly took a number of steps to help markets return to more orderly functioning. the federal reserve's initial action was to increase liquidity in short - term money markets through larger open market operations – the standard means by which it seeks to ensure that the federal funds rate stays at or near the target rate set by the federal open market committee ( fomc ). a number of other central banks took similar steps. one source of pressure in the overnight market was the demand for dollar funding by european banks to which i alluded earlier. as europe is in the latter part of its trading day when u. s. markets open, this extra demand for dollars at times led the federal funds rate to open well above the target. the extra provision of liquidity by the fed helped counter the resulting pressure on the funds rate early in the day ; it also eased banks'concerns about the availability of funding and thus assisted the functioning of the interbank market. to be clear, an open market operation can provide market participants with increased liquidity ; but the intervention does not directly increase participants