Trends in American Economic Growth: 1929-1982.

Trends In America Economic Growth: 1929-82

ONE OF THE major problems - some would say the major problem - facing the U.S. economy is the falloff in the rate of productivity growth after 1973. This decline resulted in a slowing in the growth of national income in spite of historically

In this volume, Denison, one of the foremost scholars in growth accounting, extends his earlier study of the falloff of output and productivity growth during the 1970s into the early 1980s. He analyzes both nonresidential business and the economy as a whole; this review is limited to nonresidential business mainly because these estimates are on firmer ground and can be compared readily with other studies. In any case, the patterns are essentially the same for the economy as a whole.

Denison reports that the secular rate of growth (i.e., corrected for cyclical changes) of labor productivity in nonresidential business fell from 3 percent per year during 1948-73 to less than 1 percent in 1973-79 and fell again to near zero in 1979-82. Other researchers also show no restoration to the higher, 1948-73 secular rate after 1979, but they do not find a further slowing.

The Bureau of Labor Statistics (BLS) sectoral measures of actual labor productivity also indicate that the business sector as a whole did not experience a restoration to the higher rate during 1979-86. However, they do show a revival to the higher 1948-73 rate in manufacturing after 1979. The lower rate in the aggregate measure after 1979 reflects developments in nonfarm, nonmanufacturing business sectors.

Economists, working in the neoclassical tradition, have generally limited the determinants of labor productivity to physical capital per hour and labor quality. Denison, in what one writer has described as a tour de force, goes much beyond this and numerically estimates the contribution of economies of scale, worker safety and health, dishonesty and crime, and other factors. He attributes the remaining "residual productivity" to "advances in knowledge" and miscellaneous factors. The final chapter reviews alternative explanations for the secular falloff in residual productivity - 1.5 percentage points from 1948-73 to 1973-82.

Readers of this journal may be surprised to learn that Denison finds "it plausible if not demonstrable that, one way or the other, much [italics added] of the decline in the growth of residual productivity is traceable to management." This conclusion is based on three "perspectives." One is that the attention of top management has been concentrated less on efficient production and distribution of goods and services and more on responding to such things as rapid changes in tax laws, government regulation, inflation and the profitability of business takeovers. His second perspective is largely based on a much-quoted article by Robert H. Hayes and William J. of the Harvard School of Business Administration, in which they attribute the productivity slowing to misguided doctrines and to state-of-the-art techniques adopted by executives. The third perspective is that "American management has of its own volition taken the wrong road, while the right road leads to Japan," especially with respect to quality control.

The quotes underline the fact that Denison recognizes the evidence as impressionistic, which does not, of course, make his conclusions implausible. However, several considerations weaken the case. One would expect the impact of a deterioration in management on productivity to be gradual, not abrupt as was the case in the 1973-74 falloff. In addition, the third perspective might help to explain why U.S. productivity growth has been slower than Japan's, but it cannot explain the coincident falloff in both countries. I would add that the BLS evidence on the revival of productivity in manufacturing after 1979 - which only became apparent after the book went to press - also tends to weaken the case that the deterioration of management was a significant factor in the productivity slowdown in that sector.

Denison reviews a number of other explanations. However, because of the limitations of space, I will note only he convincingly argues that two frequently offered explanations - a slowdown in the growth rate of real R&D expenditures and higher energy prices after 1973 - could have contributed only minimally to the productivity slowdown.

In the concluding section of the book, Denison reviews the American response to the productivity slowing. As we know, government's response has been largely concentrated on increasing investment even though studies by Denison, other private scholars and by the BLS show that very little of the falloff in labor productivity is attributable to a slowdown in capital per hour. Most economists would agree that increasing capital intensity could raise the growth rate of labor productivity. However, as Denison shows, the increase in the saving rate required to offset the large falloff in the secular growth rate makes increased investment an unlikely candidate. Interestingly, the BLS annual multifactor productivity measures indicate that increases in capital intensity accounted for only a small fraction of the post-1979 resurgence in labor productivity growth in manufacturing. To Denison, the hope for the restoration of the higher trend rate of productivity depends mainly on the actions of business.

This book is a must for anyone seriously interested in understanding the productivity slowdown. It is admittedly not easy going; the text is closely reasoned and burdened with numbers, but the payoff is high.