virtuous capital investment cycle at play here. a whole new set of profitable investments raises productivity, which for a time raises profits - spurring further investment and consumption. at the same time, faster productivity growth keeps a lid on unit costs and prices. firms hesitate to raise prices for fear that their competitors will be able, with lower costs from new investments, to wrest market share from them. indeed, the increasing availability of labor - displacing equipment and software, at declining prices and improving delivery lead times, is arguably at the root of the loss of business pricing power in recent years. to be sure, other inflation - suppressing forces have been at work as well. marked increases in available global capacity were engendered as a number of countries that were previously members of the autarchic soviet bloc opened to the west, and as many emerging - market economies blossomed. reductions in cold war spending in the united states and around the world also released resources to more productive private purposes. in addition, deregulation that removed bottlenecks and hence increased supply response in many economies, especially ours, has been a formidable force suppressing price increases as well. finally, the global economic crisis of 1997 and 1998 reduced the prices of energy and other key inputs into production and consumption, helping to hold down inflation for several years. of course, europe and japan have participated in this recent wave of invention and innovation and have full access to the newer technologies. however, they arguably have been slower to apply them. the relatively inflexible and, hence, more costly labor markets of these economies appear to be an important factor. the high rates of return offered by the newer technologies are largely the result of labor cost displacement, and because it is more costly to dismiss workers in europe and japan, the rate of return on the same equipment is correspondingly less there than in the united states. here, labor displacement is more readily countenanced both by law and by culture, facilitating the adoption of technology that raises standards of living over time. there, of course, has been a substantial amount of labor - displacing investment in europe to obviate expensive increased employment as their economies grow. but it is not clear to what extent such investment has been directed at reducing existing levels of employment. it should always be remembered that in economies where dismissing a worker is expensive, hiring one will also be perceived to be expensive. an ability to reorganize production and distribution

interest rates so low? 2 in a speech last month, i identified a number of factors that have worked to boost saving, depress investment, or both. among the factors holding down interest rates is the sluggishness of foreign economic growth. another is demographics, with saving being higher as a result of an increase in the average age of the u. s. population. also, investment recently has been weaker than might otherwise be expected, perhaps reflecting uncertainty about longer - run growth prospects, as well as the decline in investment in the energy sector as a result of the fall in the price of oil. finally, and most important, weak productivity growth has likely pushed down interest rates both by lowering investment, as firms lower their expectations for the marginal return on investment, and by increasing saving, as consumers lower their expectations for income growth and borrow less and / or save more as a consequence. understanding the recent weakness of productivity growth is central to addressing the longer - run challenges confronting the economy. productivity growth over the past decade has been lackluster by post - world war ii standards. output per hour increased only 1 - 1 / 4 percent per year, on average, from 2006 to 2015, compared with its long - run average of 2 - 1 / 2 percent from 1949 to 2005. this halving of productivity growth, if it were to persist, would have wide - ranging consequences for living standards, wage growth, and economic policy more broadly. a number 1 / 2 bis central bankers'speeches of explanations have been offered for the decline in productivity growth, including mismeasurement in the official statistics, depressed capital investment, and a falloff in business dynamism, with reality likely reflecting some combination of all of these factors and more. we should also consider the possibility that weak demand has played a role in holding back productivity growth, although standard economic textbooks generally trace a path from productivity growth to demand rather than vice versa. chair yellen recently spoke on the influence of demand on aggregate supply. 3 in her speech, she reviewed a body of literature that suggests that demand conditions can have persistent effects on supply. 4 in most of the literature, these effects are thought to occur through hysteresis in labor markets. but there are likely also some channels through which low aggregate demand could affect productivity, perhaps by lowering research - and - development spending or decreasing the pace of firm formation and innovation. i believe that the relationship between productivity growth and the strength of aggregate demand is an area