The Slowdown in the Growth Rate of the U.S. Economy From 1973 to 1995 - Essay Example

The Slowdown in the Growth Rate of the U.S. Economy From 1973 to 1995. The US economy exhibited a dramatic slowdown between the years 1973-1995 when compared to the two decades before that period and the years since 1995. Volumes have been written to explain the elusive reason of this prolonged downturn, but economists have been unable to reach a consensus on the cause. The reasons have ranged from low levels of education and an untrained workforce to the spike in petroleum prices that began in 1973.

Most economists that have examined this problem have attempted to find a single suspect or a magic bullet. However, the case is much more complex than that. The downturn was caused by a confluence of negative factors that combined to form the perfect economic storm. The most influential factors that caused the downturn during the period of 1973-1995 were the high cost of oil, the low investment of R&D, and a low confidence in fiscal economic policies. No single factor garners more attention as the cause of the drop in productivity beginning in 1973 than the price of oil.

It is a highly visible economic factor and their rising prices coincided in time with the downturn. This coincidence alone is not significant evidence and Olson argues that the cost of energy is too minor to account for the dramatic drop (46). However, Jorgenson points to a second price rise beginning in 1978 and contends that the high price of oil was responsible for a loss of productivity growth in over 80% of the 35 industrial sectors that the study analyzed (34). Economists have questioned this contention by pointing to the collapse of oil prices in 1986 and asking why productivity did not recover (Olson 57).

The high cost of energy was passed along and buffered and Olson contends that oil ".had a significant indirect impact on the productivity slowdown" (44). These indirect influences will tend to aggregate over time and there would not be a direct coincidence with time. The lingering effects of spiking continued to effect productivity long after they had fallen as productivity was being decreased by other factors as well. Technology and the changing face of the automated workplace have also played a part in the downturn.

Technology comes from research and development. Griliches points out that research and development levels had begun to rise as early as 1978 (14). The time lag between research and reward may account for the long lead time between a reduction of R&D and a slowdown in productivity. The research during World War II contributed to the economic boom of the 1950s. Research and development was cut back in the early 1960s, but its effect was not felt until the 1970s. Likewise the increase in R&D spending in the early 1980s did not reflect an increase in productivity until the 1990s.

This is made even more clear by the role that information technology (IT) played in the recovery in the mid 1990s. Stiroh argues that there is a, ".deeper relationship between IT investment and productivity growth" (1574). This IT and its related technologies were developed during the period of the 1970s and 1980s when R&D spending was rising. The decline in R&D spending in the 1960s served as a catalyst for the lower productivity a decade later. As the price of oil and lack of emerging technology was pushing productivity down, the less quantifiable issue of confidence in government economic policy also played a role.

Jermann and Quadrini contend that, ".the mere prospect of high future productivity growth can generate [. . .] an economic expansion as well as sizable gains in current productivity of labor" (414). This is what was absent during the period of 1973-1995. The post Watergate era that began in 1973 was followed by a series of weak presidencies that were unable to build confidence in their economic policies. Ronald Reagan was the only president to be reelected during this era and his policies had been based on the theory of supply side economics, which is a topic of much debate.

Without the belief in a future prospect of increased productivity, there can be little reason to invest in the present. In conclusion, there was no single cause of the downturn in productivity between 1973 and 1995. Most researchers agree that the rising cost of oil played a significant part either directly or indirectly. The reduction of research and development funding in the 1960s left industry with fewer emerging technologies to exploit. While these critical factors drove down productivity, the government was unable to gain the confidence of the market, the consumer, or the business community.

The cause of the downturn during this period was a multi-faceted failure that became the perfect economic storm. Works Cited Griliches, Zvi . "Productivity Puzzles and R&D: Another Nonexplanation." The Journal of Economic Perspectives 2.4 (1988): 9-21. JSTOR. 26 Oct. 2007. Jermann, Urban J., and Vincenzo Quadrini. "Stock Market Boom and the Productivity Gains of the 1990s." Journal of Monetary Economics 54 (2007): 413-32. Elsiver. 26 Oct. 2007. Jorgenson, Dale W. "Productivity and Postwar U.S. Economic Growth.

" Journal of Economic Perspective 2.4 (1988): 23-41. JSTOR. 26 Oct. 2007 Olson, Mancur. "The Productivity Slowdown, The Oil Shocks, and the Real Cycle." The Journal of Economic Perspectives 2.4 (1988): 43-69. JSTOR. 26 Oct. 2007. Stiroh, Kevin . "Information Technology and the U.S. Productivity Revival." The American Economic Review 92.5 (2002): 1559-76. JSTOR. 26 Oct. 2007