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Economics U$A: 21st Century Edition
Productivity (Macroeconomics)
In the 1970s, businesses struggled with rising energy costs, newly imposed environmental regulations, and inflation that contributed to the slowing of productivity. By 1980, a new group of economists called “supply-siders” were calling for government deregulation to spur productivity, amidst great objections from Democrats and some economic experts. Some thought that productivity was at an end, but government-supported technological innovation spurred productivity to new heights. These stories highlight the factors that affect productivity and how government programs have both helped and hindered growth.
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Unit Overview
Purpose:
To explain the factors that affect productivity growth and the various ways in which the government has helped or hindered the growth in productivity.
Objectives:
- Labor productivity is defined as output per man-hour of employed labor. Factors that are important in determining productivity include education, training, the amount of capital (machinery, factories, etc.) per worker and technological innovation.
- During the 1970s productivity growth in the U.S. slowed. A variety of explanations has been offered for this. They include: a decline in R&D; a decline in investment relative to GNP; the relative inexperience of the baby-boom generation; the oil shocks; increased government regulation; and uncertainty due to inflation and the changeability of economic policy. In the 1990s and the 2000s, productivity growth accelerated. Debates about the causes of this acceleration have been heated.
- Technological innovation has been a major factor in the growth in productivity in the U.S. The benefits of innovation accrue not only to the person or firm that financed the research, but also to society as a whole. Therefore, there is a justification for some government support of research and innovation.
- The government may have retarded productivity growth because of tax and regulatory policies. Taxes can hurt productivity growth by distorting economic decisions and by encouraging people to invest their time and money in ways that reduce their taxes rather than in ways that are good for economic growth.
Meet the Series Experts
Arthur Laffer
Economist known as “The Father of Supply-Side Economics” because of his influence in shaping public policy during the 1980s, especially in the realm of tax cuts. He is Founder and Chairman of Laffer Associates, an economic research firm that provides global investment services, and was also Founder of the Congressional Policy Advisory Board that helped shape legislative policies for the 105th–107th U.S. Congresses. He served as consultant to Secretary of the Treasury William Simon, Secretary of Defense Donald Rumsfeld, and Secretary of the Treasury George Shultz, and was Chief Economist at the Office of Management and Budget and a member of President Reagan’s Economic Policy Advisory Board, 1981–1989. He is famous for inventing the “Laffer Curve,” deemed by Time magazine “one of the few advances that powered this extraordinary century.” He has taught at Pepperdine University, the University of Southern California, and the University of Chicago. Dr. Laffer received his B.A. from Yale University and M.B.A. and Ph.D. in Economics from Stanford University.
Edward F. Denison
Pioneer in the development of the U.S. National Income and Product Accounts, with an international reputation as the originator of “growth accounting,” the identification and quantification of the sources of growth in real national income/product. He held many public and private sector posts, including Acting Chief of the National Income Division of the Bureau of Foreign and Domestic Commerce, Assistant Director and Chief Economist of the Office of Business Economics, and Member of the Committee for Economic Development (CED). At CED, he produced studies of the sources of economic growth and policies to promote growth, published in the landmark 1962 CED report The Sources of Economic Growth in the United States and the Alternatives Before Us. At the Brookings Institution, he applied his growth-accounting methodology in Why Growth Rates Differ and How Japan’s Economy Grew So Fast. Dr. Denison received his B.A. from Oberlin College and Ph.D. in Economics from Brown University.
Mark Doms
Chief Economist for the U.S. Department of Commerce, since 2010, and former Senior Economist at the Federal Reserve Bank of San Francisco. He has wide experience with economic and policy analysis on a range of topics, including the effects of technology adoption and innovation on firm productivity and on housing market changes. He also spent time at the Organization for Economic Co-operation and Development, and in the early 1990s worked at the Center for Economic Studies at the U.S. Census Bureau. Dr. Doms received his B.A. from the University of Maryland and Ph.D. in Economics from the University of Wisconsin.
What's your Economics IQ?
Take the Economics USA: Productivity Quiz.
Quiz Addendum
4. Answer explanation:
accurate, since capital formation through investment has been a major contributor to economic growth in the U.S. One of the reasons for our continued economic growth has been a 10% investment of GNP/GDP in new plant and equipment. As a result, American workers have modern facilities and equipment to support their efforts, thus making them more productive.
Glossary
- benefits of innovative activity
The natural consequences of purposeful changes that improve economic performance such as growth and the external benefits that derive from growth human capital. - human capital
The education, training, and experience of a person that are productive in an economic context. - innovation
The first commercial application of a new technology. - productivity
A measure of output from a production process, per unit of input. - supply-side economics
A set of propositions concerned with influencing the aggregate supply curve through the use of financial incentives such as tax cuts. - technological change
New methods of producing existing products, new designs that make it possible to produce new products, and new techniques of organization, marketing, and management. - uncertainty
A situation in which, given the best information available, multiple outcomes are possible.
