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 moneyars was not available5 years for modernization projects. government regulations forced industry to spend billions for modernization projects. cleaning uthe 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. 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 frompiraling 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 scouraging the capital investment at might have improved ifany factorshad been respoe productivity performance. for the productivity growth, it swas conspiringy to retard that growth. productivity during the 1970s dropped to lessingy than half the ratewth.

of the previous half century. productivity expert edward denison wasn't encouraging about the prospects for an easy cure. no o thingill makean 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 significance of productivity growth

and factors possibly causing its decline. many people fail to understand the true significance of proctivity growth because the numbers used to, 1% or 2% a year, seem very small. these small numbers involve huge changes in output per capitaanlivins 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. oductivity gwth is important. any decline in it isecessarily a matter for concern. but wapermanentline or merely temporary?970s many factors were at work during the 1970s. the oil shocks made energy input much more expensive.

pid inflation increased economic uncertainty. e composition ofhe labor force with young and inexperienced new entrants was changing, and so on. on t other hand,ceain facto, for example, govement 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 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 opeople lieve the ne five years will be worse than the past five. as american productivity declined in the 1970s, american self-confidence seemthe lack oa clear cause only added tohe frustration. by 1978, jimmy carte was asking himself, w coule government improve producvi? 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

even before jolenn of sorbited the earth,tment. american consumers enjoyed productivity benefits coming from advaes inetallurgy, communications, and computer sciences-- coming from advaes all deveped inetby the sce program.ions, carter supported nasa's space shuttle program. he pushed for government funding ohe saw the nationlop ar exciting breakthroughs in robotics, electronics, and genetics. he discovered that his options were limited. technogyxpert jordan baruch exai. invation for a space pgram, for defense, for anything wre e federal government isusmer is easy to take care of. the stuff that's difficult isnnovation where you ani are the customer. it requires knowlee of t market and annvironment that will encourage invation.

spite increasing foreign competition, american investment in research and development was declining asercea. why were businesses in rso reluctant to investt inesearch and depment? we asked proctivity expert edwimansfield. 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 fi can'appropriate all of the benefits it creates, it tends to underinvest in that form of actity. the president saw a report by the national science undation showing a decline in industrial searchnd development.

the first question asked by the whiteouse policy office thatto, what can we dofied about the cline inndustrial research and development? awas only part of the innovatioprocess,ment we asto encourageould industrial innovation?o in 1978, carter pooled e 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 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. 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 richa gill why economists put emphasis on new tecology. new techlogy is at theeart in oof proctivity growth. much of thisrowth is in the form of new produc thatidn'exisa ceury ago. and the way weroduceld pducts, like wheat or poultry, this means the intangiblezed human factors in growth-- adnces in knowledge, increased education, research a development programs-- are universally aged be critically important to increasing our productivity. the actical question here is how far the government should take the lead in promoting these facrs. we have examples

ofuccessfu government projects-- like thetomic energy pgram or the spacerogram, otwo projec close to president carter's heart. there are also arguments as to why governmente should invol itself heavilyeart. inesearcand lopmen- the costs may be too large r private industry payoffs may be too far off also there is e danger of rival firms imitating, pirating, or benefiting from one's own r&d eorts all this adds up atrong case r governme iolme. ere's also toryds 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 equient of any industrial nation. i stood in an empty builng 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 greaterroductivity.d te the keystof his an was a 50 billionax cut. how could we getmoreroductivity givewith less taxaon?tivity.d te for the american people, even for ecomists.,ars by980, a growing number of people saw the goveme as the source o.

let's give the peoplees be, anncentive to produce.e these economists wereupy-sirs. their spokesman was arthur laffer. let's give the peoplees be, anncentive to produce.e 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 taxuts cause people to work harder. economist norman ture argued that the result would be increased savings. every dollar of aitional saving

represen an adtional dollar of capital. it is a fundamenl 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. we're all named peter today. 10%. but 10% in 1982 and anotr 10% in 1983. a 30% cu over a three-yeaperiod. bremain sharply criticals like nariman behravesh and anotr 10% in 1983. of reagas suly-side taoposal

ofeducing mainalax rateswas somc onork effortnd savings, bumosat iwould e kindf supp-sids thatasei talkeabou a laf e american people wereeaor ange. ronald reagan swept to victory. his battles had on begun. democrats in the house we determined to block reagan's tax plan. but, as reagan eparedis program, he found some new friends congressman barber conable added a carrot for business and some new ideas for his tax package. of capital investment. of faster preciation the sic reagan idea

was to have a simple prosal of two parts-- rate cuts ancuts 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 consumptio i think you've got to give somencentive to savings, too. for months, republicans hammered away tryingo pry loose enough votes pass the tax package, e opposition held. tryiagan's programenough votes was going where.ckage,

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 inceives and make capital available for the increased productivity required to provide real, rmanenjo. when the votes were counted, the president had a greapolitical victory. buwas it an economic victory? the cut increaseroctivity? yes. clear. the cut it led to beerroctivity and an irease in employmen increaseroctivity? there are o ways to increase output and employment production. one is productivity. you get mo 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 boost in consumption that occurred and the boost in investment spending. the one supply-side effect at did come through was that the '81 tax cut did provide gerous benefits to businesses for investment purposes. this did boost investment, which in keynesian way led to higher capil stock, led to increased productivity in t 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? oduction, output, employment increased enormously.

i think it was a supply shift. 1981 was a bad year for the economy. 1982asworse. of president reagan's economic predictions come ue. to many, it seemed we had improved productivity of president reagan's ecoby cutting taxes. come ue. workers anbusinesses were investing more. but the relationship was not that simple. we asked richard gill to summarize. how does a tax cut stimulate productivity? e ways in which lowered taxes caimprove productivity are ir obvious higherake-meay may encourage workers ork rder. lowexesmay ovide sisseswiore e

xngreateinceives of t early 198.ks. the al issues the supply-side enthusiasts xngreateinceives argued that lower tax ratesssues lead to higherroductivity, which would lead to a greatly increased gnp. this greaternp to awould acally result in. higher governmentax revenues. we'd get such increases in productivity and growth,es. we wouldn't even have to think about government deficits. the less enthusiasc view was that lower tax rates would cause big budget deficits, that government borrowing would cause high interest rates, and thisould result in lower business investment and grow. the effects of the reagan tax cuts are veryomplicated.

many of these effectsare still . if we compare 1981nd 1984, we canay, yes, productie did increase slightly.total feds but yes, thereand real interest ratess, sperhaps on one point bothides might agree. if you're going in for massive tax cuts to spur productivity growth, it would be prudent to do something to keep of the equation e governin check.ng sirowth, during t 1970s, oductivity growth declined. we still don't know all the reasons why. by the late 1980s, growth rate had increased far less than the optimistic edicons 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

annenberg media ♪ annenberg media ♪ will cost $56 billion. schoumacher: 1945 -- by the war's end, the price tag will pass $200 billion. how will we pay for world war ii? 1960. as president eisenhower talks of paying off the national debt, the economy stumbles into a recession. how can a budget surplus hurt the economy? 1999. huge deficits turn to surplus. what would the government do with the money? almost every year the federal government spends more money than it takes in. year after year, the tide of red ink rolls on.