annenberg media ♪ annenberg media ♪ throughout most of this century, america enjoyed the highest rate of productivity growth in the industrial world. but by the late 1970s, something was drastically wrong. what was happening to american productivity? in 1978, the carter administration asked, can government encouragement of new technology solve the productivity dilemma? by 1981, the nation was ready to try a new approach.

can less government lead to more productivity? productivity growth is a crucial but almost invisible element in our economic well-being, something we take for granted until it slows down. that happened in the 1970s. we had a blizzard of suggestions for dealing with productivity. how do we get more for less? with the help of analyst richard gill, we'll examine that question on economics usa. i'm david schoumacher.

captioning made possible by the annenberg/cpb project economists see the world in terms of supply and demand. put simply, demand is the appetite to consume. supply is the ability to produce. productivity holds the supply side together. as long as productivity continues to improve, our standard of living continues to improve. this is the classic widget factory. this machine will put the stick in a deodorant tube. it if works, we'll have more deodorant and fewer hours of work putting tubes together. that's productivity. american productivity has been an economic marvel of the industrial age.

but by the late 1970s, our rate of productivity growth had slumped alarmingly. why did productivity grow so fast for so long and then suddenly decline? in the early 19th century, america was predominately a farm economy. buildings were made of brick and wood. by the year 1900, we were a nation of steel. vast deposits of iron and coal fed the furnaces of pittsburgh. immigrants poured in from europe to work in the steel mills, part of an industrial miracle that was creating a better life. rapid productivity growth led to an improving standard of living. the miracle was not confined to the steel industry.

american workers were the most productive in the world. what caused this phenomenal explosion of productivity? economist edward denison singles out one factor as paramount. the most important is advances in knowledge of how to produce at low cost. this includes technological knowledge and what you'd call managerial knowledge, how to run a business and organize it. actually, over a long period like 1929-1982, this accounts for almost 2/3 of the total increase. in agriculture, advances in knowledge led to new seeds, machinery, and chemicals and more crops from fewer workers. displaced farm workers migrated to the cities to more productive jobs in factories and steel mills of industrial america. throughout the 1950s and 1960s, productivity soared.

but by the 1970s, 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 1970s brought a new era of concern about the environment. regulations for cleaning up pollution had immediate and costly impact on industry. bethlehem steel president walter williams. we spent, if i remember correctly, in the equivalent of 1980 dollars, almost a billion dollars in the previous 15 years on environmeal facilities. that meant that money was not availae for modernization projects. government regulations forced industry to spend billions for modernization projects. cleaning up the environment and protecting the safety of workers.

for modernization projects. millions of workers cleawere new, eager to work, but young and untrained. their inexperience led lower output per work hour, less productivity. led to an embargo of oil in 1from the persian gulf. energy prices soared. productivity growth took a plunge. and throughout the 1970s, an economy reeling from spiraling energy costs saw all its other costs rising, too. an economy reeling ination seemed like froman incurable cancerosts eating at the economy, creating climate of economic fear and uncertain scouraging the capital investment at might have improved an increasingly dismal productivi performance. ifany factorshad been respoe for the productivity growth, it seemed a diversity of factors

was conspiring to retard that growth. productivity during the 1970s dropped to less than half the rate of the previous half century. productivity expert edward denison wasn't encouraging about the no one thingilmakean enorme i once was given the task of trying to find some quick fix for the growth rate. my conclusion was, it takes an enormous amount of doing to get even 1/10 point addition. productivity is an elusive concept. you'll find the tale of a kingdom lost for want of a nail in poey, not economics. just as many factors contributed to the phenomenal productivity growth, many factors contributed to its decline in the 1970s, factors that resist quick and easy solutions.

wesked richard gill to comment on the long-range significanceoh and factors possibly causing its decline. 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. these small numbers involve huge changes in output per capita and living standards over long periods. our historic rate of productivity increase ofetween 1.5% and 2% a year means a vefold increase of prin real incomesease over the past century. productivity gwt is important. any decline in it is necessarily a matter for concern. but warmanentecline or merely temporary?0s

many factors were at work during the 1970s. the oil shocks made energy input much more expensive. pid inflation increased economic uncertainty. e compositio ofhe labor force with young and inexperienced new entrants was changing, and so on. on t other hand, certain factors, for example, government regulations to protect the environment, may be with us for some time. we don't know if the 1970s' high inflation will be our last nor what new supply shocks may hit us. the experience of the 1970s strongly suggestedst thatroductivity growth was something we could no longer take for granted. was there anything we could do to improvet? we've always believed in something called progress. we've always had a faith

that the days of our children would be better we'vthan our own.a faith for the first time in our history, a majority of people lieve the ne five years will be worse than the past five. as americaproductivity declined in the 1970s, american self-confidence seemthe lack oa clear cause only added to the frustration. 1978, jimmy carte was asking himself, how could e government improve producvi? long before jimmy carter was a politician, how could e government he was a nuclear engineer. as an engineer, he understood the historic relationship between productivity, technology, and research and development. the effort to send a man to the moon

consumed billions of dollars of american wealth and 10-plus years of single-minded commient. even before johnlenn orbid e earth, american consumers enjoyed productivity benefits coming from advaes in metallurgy, communications, and computer sciences-- all deveped by the scerogram. carter supported nasa's space shuttle program. he pushed for government funding ohe saw the nationlop nearxciting breakthroughs in robotics, electronics, and genetics. he discovered that his options were limited. technogyxper jordan baruch exai. innovation for a spacerogram, for dense, for anything wre e federal government is customer is easy to take care of. the stuff that's difficult isnnovation where you and i are the customer. it requires knowlee of tarket

and an environment that will encourage invation. spite increasing foreign competition, american investment in research and velopment was declining aserceage of gn. why were businesses in rso reluctant to invest inesearch and devepment? we asked productivity expert edwin mansfield. one of the most important factors is that the firm cannot aropriate all of the social benefits. if a firm comes forth with a new product, a new process, many of the benefits from the process or product accrue to spill out to the firm's customers, the firm's suppliers-- others besides that firm. and so consequently, because the firm can't appropriate all of the benefits it creates, it tends to underinvest in that form of activity.

the president saw a report by the national science foundation showing a decline in industrial search and development. was, why the decli?asked by the whiteouse policy office thatto, what can we dofied about the decline inndustrial research and development? awas only partsearch at of the innovation process, we asto encourageould industrial innovation? do in 1978, carter pooled the s of two dozen major government departments to find ways to help industries to innovate. the domestic policy review eventually presented the president ñ wiñh a menu of over 30 policy optio taeted at restoring flagging productivity growth. the actions i'm announcing today meet this goal.

first, they will loosen some of the stifling restraints that have been placed upon innovation by government. secondly, they represent a major step toward forging a public and private partnership which will rally cooperative efforts to spur industrial growth. we seemed to face a new awareness of government's role in helping industries to be more productive. twhatwindustry should be investing money in. it's not to decide what innovations were important to society. gornment can make that decision when it involves defense or some government function. this was to help industry decide to respond to the needs of the public. most technology research in this country always has been financed by private industry.

the government lent a helping hand by encouraging businesses to innovate and permitting society to reap the productivity benefits of innovation. we asked richard gill why economists put emphasis on new tecology. mode expertsgree that, new techlogy is at teart in oof proctivity growth. much of thisrowth is in the form of w produc thatidn't exist a century ago. and the way weroduceldroducts, like wheat or poultry, this means the intangiblezed human factors in growth-- adnces in knowledge, increased education, research a developme programs-- are universay agreed be critically important to increasing the practical question here is how far the government should take the lead

in pmoting theseacrs we have examples ofuccessfu government projects-- like thetomic energy pgram or the spacerogram, otwo projec close there are also argumentsart. as to why government should involve itself heavily inesearch and lopmen- the costs may be too larger pri, payoffs may be tooarff. also there is e danger of rival firms imitating, pirating, or benefiting om one's own r&d eorts. all this adds up a strong case r gornmentnvolveme. there's alsooryds up that the best thing r gothe government can do is provide incentives to private industry or, better yet, back off from the economy. this theory was being heard from

in the late 1970s and early 1980s. we have the highest percentage ofutmoded instrial plant and equien ofny industrial tion. i stood in an empty ilng that wasnce a steel plant, closed because they couldn't afford to modernize. punitive taxes and excessive regulations mandating additional costs on them had been responsible. ronald reagan promised to get the government ofthe cks gives us greater productivity.dt the keystohis anwas a 50 billio. ofthe cks how the 1970sgetmorerod? gived been difficult yearsity.dt r the american people, even for ecomists., by980, a growing number of people

saw the goveme as e source ofc. let's give the peoplees be, anncentive to produce. these economists were supy-sirs. their spokesman was arthur laffer. let's give the peoplees be, anncentive to produce. people work to get what they can after tax. people don't increase the productivity of their capital, labor, or production process to give the money to the government. they do it to make personal profits. when you cut the taxes, you increase their incentives for doing that activity. you'll increase productivity output. when you increase the amount people get after tax, they will be more productive. laffer believed that tax cuts cause people to work harder. economist norman ture argued that the result

would be increased savings. every dollar of additional saving represen an adtional dollar of capital. it is a fundamental law of economics, which has not been repealed, that t most effective way of increasing the productivity of labor is by increasing the quantity and the quality of the capital with whicht is employed. we move to the individual. my proposal is for a 10% cut in the income tax across the board, not a special cut for someone while someone else-- you know, rob peter and pay paul. we're all named peter today. 10%. but 10% in 1982 and anotr 10% in 1983. a 30% cu over a three-year period.

but mainstream economists like nariman behravesh remain sharply critical of reagan's suly-side taoposal ofeducing mainalax rateswas somc on work efrt and savings, bumost ain fact,o smalas mall at it would e kindf su-side effects ofeducing mainalax rateswas somc on work efrt and savings, that was being talkeabou aaf e american people wereeaor ange. ronald reagan swept to victory. his battles had only begun. democrats in the house we determined to block reagan's tax plan. but, as reagan preparedis program, he found some new friends and some new ideas for his tax ckage. congressman barber conable added a carrot for business

in the form of faster depreciation of capital investment. the basic reagan idea of capital investment. was to have a simple prosal of two parts-- rate cuts and cuts for business that would be given in a way to encourage investment and therefore improve productivity. the acrs 10-5-3 jones-conable bill was the second half of the proposal. i felt it was very necessary, in short, to encourage productivity growt to encourage savings. i am not a keynesian. i don't believe that you can handle economic policy solely by taking those steps that will stimulate consumption. i think you've got to give somencentive to savings, too. for months, republicans hammered away at democrats in congress tryingo pry loose enoughotes pass the x package,

e opposion held. tryiagan'srograme enoughotes was going nowhere.e, the tax bill was amended to attract more votes. then the president took his case directly to the people. this is absolutely essential if we'reo provide incentives and make capital available for the increased productivity required to provide real, rmanent jo. when the votes were counted, the president had a greapolitical victory. buwas it an economic victory? dithe cut increasectivity? yes. clearly. dithe cut it led to betterroctivity and an irease in employment. increasectivity? there are o ways to increase output and employment production. there are o ways one is productivity. you get more for each worker. the other one is to increase the number of workers.

we got more employment both went up and more productivityper em, which is the perfect combination. i think by all estimates itid notsucceed terri. the supply effects wereeally swamped out by the demand effects-- the supply effects wereeally swamped out the boand the boostption in investment spendi. the one supply-side effect at did come through was that the '81 tax cut did provide generous benefits to businesses for investment purposes. this did boost iestment, which in a keynesian way led to higher capil stock, led to increased productivity in the long run. you ca!call it anything you want. e question is, it works. you can say, was it a demand shift or was it a supply shift?

who cares? oduction, output, employment increased enormously. i think it was a supply shift. 1981 was a bad year for the economy. 1982 wasn worse. 1981 was a bad year t 1983 wasoom year, a yearhat saw many of president reagan's economic predictions come true. to many, it seemed we had improved productivity by cutting taxes but the relationshipes was not that simple. we asked richard gill to summaze. how does a tax cut stimulate productity? e ways in which lowered taxes caimprove productivity are irly oious higherake-meay may encourage workers toork rder. lower xesmay provide sisseswie

xngreateinceives of the early 1980s.the al issues the supply-side enthusiasts xngreateinceives argued that lowetax rates issues lead to higher productivity, which would lead a greatly increased gnp. this greaternp a greatly increased gnp. would acal result in higher government tax revenues. we'd get such increases in productivity and growth,nues. we wouldn't even have to think about government deficits. the less enthusiastic view was that lower tax rates would cause big budget deficits, would cause high interest rates, and thisould result in lower business investment and growth. the effects of the reagan tax cuts

are veryomplicated. many of these effects are still with us. weanay, yes, productivie if we compare 1981 and 1984, yes, there was gwth. tol feratax revees did increaselightly. but yes, thereanalnterest rateseficits, sperhaps on one point both sides might agree. if you're going in for massive tax cuts to spur productivity growth, it would be prudent to do something of the equation e governin check.ng sirowth, during t 1970s, productivity growth declined. we still don't know all the reasons why. by the late 1980s, growth rate had increased far less than the opmistic predictions of supply-siders.

some economistspraised the res for improving productivity growth. others call the policies a failure for not improving it enough. but one thing was clear-- the poor productivity of the 1970s and the somewhat disappointing recovery of the 1980s caused all economists, supply-siders and mand-siders alike, to take a much closer look at the ability of the economy to produce as well as its appetite to consume. for economics usa, i'm david schoumacher. captioning performed by the national captioning institute, inc. captions copyright 1989 educational film center