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highest rate of productivity growth in the indusial 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, dema 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 proctivity 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 paramount. thmost 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 cleaning uthe environment and protecting the safety of worke. 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 e miast 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 frompirang eney costs saw all its other costs sing, too. ination seemed like an incurable cancer eating at the economy, creating climate of economic fear and uncertainty scouraging the capital investment at might have improved an increasingly dismal productivi performance. ifany factorshad beenesponsible for the productivity growth, iteemed 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 thingill make an ermous dierence i once was given the task

of trying to finsome 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 oa nail in poey, not economics. just as many factors contributed tohe phenomenal producvityrowth, many factors contributed to itsecline in the 1970s, factors that resist quick and easy solutions. we asked richard gil to comment on the long-range significanceof 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 ge changes inutput per capitaanliving staards over long periods. our historic rate of productivity increase ofetween 1.5% and 2% a year means a vefold increase in real incomes over the past century. producvity gwth is important. any decline in it is necessarily a matter for concern. but was the decline we obserd in the 1970s permanent orerely temporary? many factors were at work during the970s. the oil shocks made energy input much more expeive. pid inflation increased economic uncertainty. e composition ofheabor force with young and inexperienced new entrants was changing, and so on. on t other hand, ceain 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. e experience of the 1970s strongly suggested thatroctivity growth was something we could no longer take for gnted. was ere 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 than our own. for the first time in our history a majority of people lieve the ne five years wille worse than the past five. as americaproductivitydeclined in the 1970s, american self-confidence seemed to decline with it.

the lack oa clear cause only added to the frustration. by 1978, jimmy carter was asking himself how could e governmentimprove 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 efrt to send a man to the moon consumed billions of dollars of americawealth and 10-ps years of single-minded commient. even before john glenn orted e earth, american consumers enjoyed productivity benefits comi from advaes in metallurgy, communications, and computer sciences-- all deveped the scerogram. carter supported nasa's space shuttle program.

he pushed for gornment fundi of efforts to develop new energy sources. he saw the natio nearxciting breakthroughs in robotics, electronics, and genetics. he discovered that his options were limited. techgyxper jordan baruch exai. innovation for a space pgram for defee, for anything wre e federal government isusmer is easy to take care of. the stuff that's difficult isnnovatiowhere you and i are the customer. it requires knowlee of t market and annvironment thawill encourage invation. spite increasing foreign competition, american investment in research and velopmentwas decliningaserceage ofnp. why were businesses so reluctant to invest inesearch and devepment? we asked pductivity expert edwimansel 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 fi can'appropriate all of the benefits it creates it tends to undenvest in that fo of activity. the president saw a report by the national science foundation showing a decline in indusial searchnd development. the fit queson asked by the whiteouse policy office was, why t decli? that question was modified to, what can we do about the decline inndustrial research and velopment?

ase realized research and development was onlyart of the innovation process, we asked, what should the fedegovernment 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 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 search 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, in one way or another,new techlogy is ateart of proctivity grow

much of thisrowt isn the formf w oduc thatidn'exisa ceury ago. anthe way weroduceld 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 a developmentprograms-- are universally aged be critically important to increasing our productivity. the practical question here is how far the government should take the lead in pmoting these facrs. we have examples ofuccessfu government projects-- like thetomic energy pgram or the spacerogram two projec close toresident carter's heart. there are also arguments as to why government should involve itself heavily inesearcand vepmen-

the costs may be too larger private industry 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 atrong case r governme iolme. ere's alsoory that the best thing e 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 instrialla and equient of any industrial nation. 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 backs of the amecan op he aued thatess government gives usreaterroductivity. the keystohis an was a 50 billionax cut.how could we getmoreroductivity with less taxaon? the 1970s d been difficult years for the american people, for the governme even for ecomists. by980, a growing number of people saw the govemes the sourceofconomic miseries. a new grouof economistsbega say let's get the goveme ouofhe marketplace let's give the people an incentive to produce. these economists wereupy-siders. their spokesman was arthur laffer. people work to get what they can after tax.

people don't increase the productivity of their capital bor, or production process to give the money to the government. they do it to make personal profits. when you cut t taxes you increase their incentives fodoing 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 t resul would be increased savings. every dollar of aitional saving represen an adtionalollarof capital. it is a fundamenl law of economics which has not been repealed, that t most effective way of increasing the oductivity 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 10% cut in the income tax across theoard 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-yeaperiod. but mainstream economists like nariman behravesh main sharplyritical of reagas suly-side taoposal. most peoe beevedere was some impac ofeducing mainalax rates on work efrtnd savings bumost anasis suggested that thaimctwas ma in fact,o smal at it would e kindf

supp-side effects thataseing talkeabou aaf e american people wereeaor ange. ronald reagan swept to victory. his battles had on begun. democrats in the house were determined block reagan'sax plan. but, as reagan preparedis program he found some new friends and some new ideasfor his tax ckage. congressman barber conable added a carrotor business in t form of faster depreciation of capital iestment. the sic reagan idea was to have a simple prosal of two parts-- rateuts 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 encouge savings. i am not a keynesian. i don't believe that you can handle economic policy solely by taking those stepsthat will stimulate consumptio i think you've got to give somencentive to savings, too. for months republicans hammered away at democra in congress tryingo pry loose enoughotes pass the tax package, e opposion held. agan's program was going where. 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 inceives and make capital availab for the increased productity

required to provide real, rmanent jo when the votes were counted, the president d a great political victory. buwas it aeconomic vtory? the tacutincreaseroctivity? yes. clearly. it led to beerroctivity and an irease in employment. there are o ways to irease outputand employment productio one is productivity. you get mo for eacworker. the other one is to increase the number of workers. what happed was, both went up we got more employment and more productivityper employee which is the perfeccombination. i think by all estimates itid notsucceeterrib well. the supply effects wereeally swamped out by the demand effects-- the boost in consumption that occurre

and the boost in iestment spendi. the one supp-side effect at did come through was that the '81 tax cut did provide gerousenefits to businesses for investment purposes. this did boost iestment, which ineynesian way led to higr capil stock, led to increasedroductivity in t long n. you cacall it anything you wan e question is,t works. you can say, was it a demand shift oras it a supp shift? who cares? production, output, employment increased enormously. i ink it was a supply shift. 1981 was a bad year for the economy. 1982asn worse. bu1983 wasoom year a year that saw many of president reagan's economic predictions come true.

to many, it seemed we had improved productivity byutting taxes workers and businesses were investing more. but the relaonship was not that simple. we asked richard gill to summaze. how does a tax cut stimulate productivity? e ways in which lowered taxes caimove productivityare irious gherake-homeay may encourage workers work rder. lowexesmay ovide sisses wiore funds for investme angreateinceives ake risks.the al issues, how rge are ese efcts? ke the reagan x cuts x of the early 1980s. the supply-side enthusiasts argued that lowetax rates lead to higher productivity, which would lead to a greatly increased gnp.

this greaternp would actual result in higher governmentax revenues. we'det 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 thisould result inower business investment and growth. the effects of the reagan x cutsare ry complicated. ma of these effectsare still with us. ife compare 1981nd 1984, wean sayyes, productivity did increaseyes,here was gwth.total ferataes did increase slightly. but yes, there were huge buet deficits, analerest rates

stayed at damagily high levels. rhaps on one point bothides might agree. if you're going inr massive tax cuts to spur productivity gwth, it would be prudent to do somethingto kee e government speing si of the equation in check. ring t970s productivity growth declined. we sll don't know all the reasons why. by theate 1980s, growth rate had increase far less than the optimistic predicons of supply-siders some economistsaisethe reaganolicies for imoving 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

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