The Productivity Slowdown, The Oil Shocks, and the Real Cycle

Abstract

Five facts stand out about economic performance in the United States since World War II. The first is that, for most of the postwar period, the U.S. has had a slower rate of economic growth than the other major developed democracies except Great Britain, and much lower rates of growth than Germany, Japan, and Italy. The second is that the United States has fallen far behind in many mass production industries in which it used to lead the world, whereas it is ahead of other nations in many new and especially high-technology industries. The third is that most of the older heartland of American industry -- roughly the area north and east of an arc drawn from Baltimore to St. Louis to Milwaukee -- has declined dramatically in comparison with the South and the West. The fourth is the near cessation of the growth of productivity since the early 1970s in the United States as well as in other developed countries. The fifth is the shift from the unexpectedly good macroeconomic performance of the 1950s and 1960s to the simultaneous and theoretically anomalous increases in unemployment and inflation rates in the 1970s. This article attempts to show, with distinctive quantitative estimates, that the familiar attempts to trace the productivity slowdown to higher energy prices cannot be right, but that the oil shocks had a significant indirect impact on the productivity slowdown. I argue that this roundabout impact becomes evident only when we introduce a fresh perspective on macroeconomics that also helps to explain the anomalous emergence of stagflation in the 1970s. Auspiciously, all five prominent facts are explained within the same parsimonious framework.