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 for office.

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 worker productivity.

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.

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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.