Case Studies
Decreasing Productivity
 Throughout the 1950’s and 60’s, productivity soared. But by the 1970’s, something was drastically wrong. Throughout the economy, productivity growth was slowing down. The reasons were not immediately clear, but, in retrospect, several factors stand out.
The beginning of the 1970’s brought a new era of concern about the environment. Regulations aimed at cleaning up pollution had an immediate and costly impact on American industry.
Government regulations forced industry to spend billions cleaning up the environment and protecting the safety of its workers…and millions of these workers were new to the jobs…baby boomers eager to work, but still young and untrained. Their inexperience led to lower output per hour of work…less productivity.
In 1973, war in the Mid-East led to an embargo of oil from the Persian Gulf. Energy prices soared…Productivity growth took a nose-dive. And throughout the 1970’s, an economy reeling from spiraling energy costs saw all its other costs rising too. Inflation seemed to be an incurable cancer eating away at the American economy…creating a climate of economic fear and uncertainty…discouraging the capital investment that might have improved an increasingly dismal productivity performance.
Comment & Analysis by Richard Gill Many people fail to understand the true significance of productivity growth because the numbers used to express it…1 or 2% a year…seem very small. But "small" numbers involve really huge changes in output per capita and living standards over long periods of time. So productivity growth is important and any decline cause for alarm.
No matter what the future, the experience of the 1970’s strongly suggested that productivity growth could no longer be taken for granted. |
Carter’s Quest for Productivity
 By 1978, President Jimmy Carter was asking himself, what could the government do to improve productivity. Carter understood the historic relationship between productivity, technology and research and development. American consumers were starting to enjoy the productivity benefits that came from advances in metallurgy, communications and computer sciences…all developed by the Space Program. When Carter became president, he supported NASA’s Space Shuttle Program…he pushed hard for government funding of efforts to develop new energy sources.
Despite increasing foreign competition, American investment in research and development was declining as a percentage of GNP. Often businesses are reluctant to invest in research and development because the firm can’t appropriate all of the benefits that it creates, so it tends to under-invest in that form of activity.
To encourage industrial innovation, the Carter Administration pooled the resources of two dozen major government departments to find ways to help industries to innovate.
Most technology research in the United States is and always has been financed by private industry. What the government tried to do in this case was lend a helping hand by encouraging businesses to innovate…and permitting society to reap the benefits of that innovation.
| Comment & Analysis by Richard Gill Economists put so much emphasis on new technology because new technology is at the heart of productivity growth. The question is how far the government should go in promoting these factors. There are also several general arguments as to why the government should involve itself heavily in research and development work. The costs of certain projects may be too large for private industry; the pay-offs may be too far in the future. On the other hand, there is also a theory that the best thing the government can do is to provide incentives to private industry.
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Reagan’s Quest for Productivity.
 By the 1980’s a new group of economists began to say…"let’s unshackle private enterprise…let’s get the government out of the marketplace…let’s give the people an incentive to produce." These economists were called "supply-siders" and they believe that people don’t work to pay taxes. People work to get what they can after taxes. And when you cut the taxes, you increase their incentives for doing that activity. Reagans proposal was for a 10% cut in the income tax across the board. But mainstream economists remained sharply critical of Reagan’s "supply-side" tax proposal. Most people believed that there was some impact of reducing marginal tax-rates on work effort and savings…but most analyses suggest that that impact was very small.
While Democrats in the House of Representatives were determined to block the new President’s tax plan Reagan added some new ideas for his tax package. Congressman Barber Conable added a carrot for business in the form of faster depreciation of capital investment. When the votes were counted, the President had prevailed. Economic experts disagreed about the benefits of this supply side economics despite the apparent increase in productivity.
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