THE ECONOMIC SLOWDOWN
OF THE 70s
The 28 years following World War II were the greatest economic
boom that America has ever known. Around 1973, however, the nation's economic
engine inexplicably slipped into low gear, where it has remained stuck
to this day. More specifically, individual worker productivity -- which
is also how economists measure our standard of living -- grew nearly 3
percent a year in the postwar years. It fell to 1 percent after 1973, and
not even the Reagan years revived it.1
No serious economist claims to know the answer to this mystery.
Indeed, there is a Nobel Prize waiting for the first economist who does.
Anyone who claims to have the secret to restoring growth is someone you
can dismiss with perfect confidence -- especially if the claim comes from
a non-economist, and even more so if it comes from a politician campaigning
Several theories have been forwarded, but all have their problems.
The first and most obvious was that the 1973 Arab Oil Embargo adversely
affected the American economy. But rising oil prices were an even more
severe problem in Japan, whose economy enjoyed explosive growth in the
70s. And the bottom fell out of world oil prices around 1980, with no restoration
of American growth. For these and other reasons, economists eventually
came to reject this theory.
Many conservatives claim that growing taxes were responsible. But a
review of the statistics actually makes the opposite case! In the postwar
years, the top tax rate was a confiscatory 88 percent. The rate started
coming down in the early 70s, and by the end of the 80s it fell to 28 percent.2
And what about average tax rates? They have remained pretty much the same
from the early 50s until today, fluctuating between 17 to 19 percent of
the Gross Domestic Product.3 It would be
difficult to maintain that the same general rate enjoyed by a booming economy
for twenty years could somehow turn around and hobble it. Other conservatives
point to the growing costs of regulation after 1973, but regulations were
slashed along with taxes during the Reagan era, with no increase in individual
Economists consider two theories to be more plausible. Perhaps the
more widely accepted is the technological explanation. World War II saw
the sudden development of thousands of scientific and technological innovations.
But it takes decades for a new technology to spread through and improve
an economy - a good example is the rise of computers and the Internet.
But once a new technology has finished spreading, the accompanying growth
comes to an end. It's much like switching from hand-sewing to a sewing
machine; you may increase the number of shirts you sew from one to five
an hour, but the sewing machine's inherent limitations will never produce
more than five. World War II introduced countless technologies all at once;
one could expect them to play themselves out simultaneously as well.
A second plausible explanation, favored by conservatives, is the sociological
one. According to this theory, the 60s produced social decay that led to
a decline of the American work ethic, and therefore productivity. Not only
did many Americans become more anti-capitalist, but they also increased
their drug use, television viewing, crime rates, divorce rates, single-parenting,
women's participation in the workforce, and more. However, this correlation
does not stand up under closer scrutiny. The height of social turbulence,
riots and anti-capitalist fervor actually occurred in the 60s; by the 70s,
social radicalism had fallen off, and by the 80s, Reagan had returned a
strong pro-capitalist sentiment to America. Yet worker productivity fell,
not increased, over this time. Also, the 60s brought many needed social
reforms, not only granting minorities their civil and human rights, but
also bringing such previously repressed and taboo subjects as rape, incest,
harassment, addiction and other social ills into the national dialogue
for recognition and treatment. And then there are the international examples:
Communist China is experiencing phenomenal growth at the moment, yet
it would be hard to find a society filled with more social decay than this
one. At any rate, sociological explanations for the productivity slowdown
are difficult to measure and open to debate.
Political pressure to restore America's declining standard of living
has given rise to a species called the "policy entrepreneur."
This is an "expert" -- often in an unrelated field -- who has
a simple and popular cure-all to sell to the public. To candidates often
searching for ideas to run on, the bumper sticker slogans of the policy
entrepreneur are a gift from heaven. Both parties indulge in this practice,
but perhaps history's greatest example of pop policy advisorship is the
supply-side economist. He had a brutally simple message: cut taxes. No
complexity, no counter-arguments, no worries about deficits or balanced
budgets. Cutting taxes would restore growth, so much so that America would
outgrow the resulting deficits. The beauty of this message was that it
not only cut taxes -- a popular idea -- but also retained high government
spending -- another popular idea. It would be difficult to imagine a better
campaign theme than this.
Return to Overview
1 Paul Krugman, Peddling Prosperity:
Economic Sense and Nonsense in the Age of Diminished Expectations (New
York: W.W. Norton & Company, 1994), p. 57.
2 Internal Revenue Service.
3 U.S. Office of Management and Budget,
Budget of the United States Government, annual.