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 1970 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 proctivity? 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 environmental facilities. that meant that money was not available for modernization projects. government regulations forced industry to spend billions cleaning up the environment

and protecting the safety of workers. millions of workers were new, eager to work, but young and untrained. their inexperience led to lower output per work hour, less productivity. in 1973, war in the mideast led to an embargo of oil from 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. inflation seemed like an incurable cancer eating at the economy, creating a climate of economic fear and uncertainty, discouraging the capital investment that might have improved an increasingly dismal productivity performance. if many factors had been responsible 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 prospects for an easy cure. no one thing will make an enormous difference. 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 poetry, 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. we asked richard gill to comment on the long-range significance of productivity growth 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 of between 1.5% and 2% a year means a fivefold increase in real incomes over the past century. productivity growth is important. any decline in it is necessarily a matter for concern. but was the decline we observed in the 1970s

permanent or merely temporary? many factors were at work during the 1970s. the oil shocks made energy input much more expensive. rapid inflation increased economic uncertainty. the composition of the labor force with young and inexperienced new entrants was changing, and so on. on the 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 suggested that productivity growth was something we could no longer take for granted. was there anything we could do to improve it? we've always believed in something called progress.

we've always had a faith that the days of our children would be better than our own. for the first time in our history, a majority of people believe the next five years will be worse than the past five. as american productivity declined in the 1970s, american self-confidence seemed to decline with it. the lack of a clear cause only added to the frustration. by 1978, jimmy carter was asking himself, how could the government improve productivity? long before jimmy carter was a politician, 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 commitment. even before john glenn orbited the earth, american consumers enjoyed productivity benefits coming from advances in metallurgy, communications, and computer sciences-- all developed by the space program. carter supported nasa's space shuttle program. he pushed for government funding of efforts to develop new energy sources. he saw the nation near exciting breakthroughs in robotics, electronics, and genetics. he discovered that his options were limited. technology expert jordan baruch explains. innovation for a space program, for defense, for anything where the federal government is the customer is easy to take care of. the stuff that's difficult is innovation where you and i are the customer.

it requires knowledge of the market and an environment that will encourage innovation. despite increasing foreign competition, american investment in research and development was declining as a percentage of gnp. why were businesses so reluctant to invest in research and development? we asked productivity expert edwin mansfield. one of the most important factors is that the firm cannot appropriate 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 research and development. the first question asked by the white house policy office was, why the decline? that question was modified to, what can we do about the decline in industrial research and development? as we realized research and development was only part of the innovation process, we asked, what should the federal government do to encourage industrial innovation? in 1978, carter pooled the resources 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 options targeted 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. this wasn't an effort to decide what industry should be investing money in. it's not to decide what innovations were important to society. government 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 technology. modern experts agree that, in one way or another, new technology is at the heart of productivity growth. much of this growth is in the form of new products that didn't exist a century ago. and the way we produce old products, like wheat or poultry, has also been revolutionized by new technology. this means the intangible human factors in growth-- advances in knowledge, increased education, research and development programs-- are universally agreed to be critically important to increasing our productivity.

the practical question here is how far the government should take the lead in promoting these factors. we have examples of successful government projects-- like the atomic energy program or the space program, two projects close to president carter's heart. there are also arguments as to why government should involve itself heavily in research and development-- the costs may be too large for private industry, payoffs may be too far off. also there is the danger of rival firms imitating, pirating, or benefiting from one's own r&d efforts. all this adds up to a strong case for government involvement. there's also a theory that the best thing the 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 of outmoded industrial plant and equipment of any industrial nation. i stood in an empty building that was once 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 off the backs of the american people. he argued that less government gives us greater productivity. the keystone of his plan was a $750 billion tax cut. how could we get more productivity with less taxation? the 1970s had been difficult years for the american people, for the government, even for economists.

by 1980, a growing number of people saw the government as the source of economic miseries. a new group of economists began to say, let's get the government out of the marketplace. let's give the people an incentive to produce. these economists were supply-siders. their spokesman was arthur laffer. 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 represents an additional dollar of capital. it is a fundamental law of economics, which has not been repealed, that the most effective way of increasing the productivity of labor is by increasing the quantity and the quality of the capital with which it 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 another 10% in 1983. a 30% cut over a three-year period.

but mainstream economists like nariman behravesh remain sharply critical of reagan's supply-side tax proposal. most people believed there was some impact of reducing marginal tax rates on work effort and savings, but most analysis suggested that that impact was very small, in fact, so small that it would not have the kind of supply-side effects that was being talked about by art laffer. the american people were ready for a change. ronald reagan swept to victory. his battles had only begun. democrats in the house were determined to block reagan's tax plan. but, as reagan prepared his program, he found some new friends and some new ideas for his tax package. congressman barber conable added a carrot for business

in the form of faster depreciation of capital investment. the basic reagan idea was to have a simple proposal 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 growth, 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 some incentive to savings, too. for months, republicans hammered away at democrats in congress,

trying to pry loose enough votes to pass the tax package, but the opposition held. reagan's program was going nowhere. 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're to provide incentives and make capital available for the increased productivity required to provide real, permanent jobs. when the votes were counted, the president d a greapolitical victory. buwas it an economic victory? did the tax cut increase productivity? yes. clearly. it led to better productivity and an increase in employment. there are two ways to increase output and employment production. one is productivity. you get more for each worker. the other one is to increase the number of workers.

what happened was, both went up. we got more employment and more productivity per employee, which is the perfect combination. i think by all estimates it did not succeed terribly well. the supply effects were really swamped out by the demand effects-- the boost in consumption that occurred and the boost in investment spending. the one supply-side effect that did come through was that the '81 tax cut did provide generous benefits to businesses for investment purposes. this did boost investment, which in a keynesian way led to higher capital stock, led to increased productivity in the long run. you ca!call it anything you want. the question is, it works. you can say, was it a demand shift

or was it a supply shift? who cares? production, output, employment increased enormously. i think it was a supply shift. 1981 was a bad year for the economy. 1982 was even worse. but 1983 was a boom year, a year that saw many of president reagan's economic predictions come true. to many, it seemed we had improved productivity by cutting taxes. workers and businesses were investing more. but the relationship was not that simple. we asked richard gill to summarize. how does a tax cut stimulate productivity? the ways in which lowered taxes can improve productivity are fairly obvious. higher take-home pay may encourage workers to work harder. lower taxes may provide businesses

with more funds for investment and greater incentives to take risks. the real issue is, how large are these effects? take the reagan tax cuts x of the early 1980s. the supply-side enthusiasts argued that lower tax rates lead to higher productivity, which would lead to a greatly increased gnp. this greater gnp would actually result in higher government tax revenues. we'd get such increases in productivity and growth, we wouldn't even have to think about government deficits. the less enthusiastic view was that lower tax rates would cause big budget deficits, that government borrowing would cause high interest rates, and this would result in lower business investment and growth.

the effects of the reagan tax cuts are very complicated. many of these effects are still with us. if we compare 1981 and 1984, we can say, yes, productivity did increase. yes, there was growth. total federal tax revenues did increase slightly. but yes, there were huge budget deficits, and real interest rates stayed at damagingly high levels. perhaps 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 to keep the government spending side of the equation in check. during the 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 optimistic predictions of supply-siders. some economists praised the reagan policies 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 demand-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

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