Productivity growth slowdown.

• Author: Marxsen, Craig S.
• Position: ECONOMIC OBSERVER

THE EARLY 1970s marked a turning point for the American economy, especially for productivity measured as "multifactor." Economist Mancur Olson summarized why some nations are poor: they do not make property rights secure over the long run; fail to enforce contracts impartially; tolerate public and private predation; and impose various counterproductive and misguided policies. Olson emphasizes that poor nations lose the big gains that efficient cooperation among many millions of specialized workers and owners of other inputs brings, while they harvest the more limited gains that self-enforcing contracts can sustain.

The U.S. is not a poor country, but her material progress is leveling off or slowing and, perhaps to some extent, for reasons similar to those that stagnate economic advancement in poor countries. Olson elaborates the role of rent-seeking activities (defined as nonproductive activities pursued by economic agents in the effort to obtain above-average profits, aka economic rents, for themselves) by numerous coalitions of people--activities that inevitably bring maline democratic nations into decline--in The Rise and Decline of Nations, in which he focuses on the predatory efforts of special interest groups or "distributional coalitions."

The early 1970s marked an abrupt halt to the post-World War II trend of sharply rising real earnings in the U.S. Stagnation characterized real wage growth from the early 1970s through much of the 1990s. The "new economy" period of the late 1990s brought only modest growth of real earnings: 6.9% for the 1989-99 period. American wage stagnation derived largely from an abrupt slowing of multifactor productivity growth that had averaged 2.1% per year for the private business economy from 1948-73, before dropping to an average below 0.6% from 1973-95. From 1995-2003, growth jumped to 1.3%, but then fell below zero. Virtually the entire upward movement in the manufacturing part of the 1995-2000 rise in multifactor productivity growth occurred in the high-tech manufacturing sector with the rest of manufacturing exhibiting almost no increase at all. Indeed, just six sectors of the entire economy caused this upward trend: computer manufacturing, semiconductors, telecommunications, retail, wholesale, and securities, while the other 53 sectors, as a group, remained stagnant.

Because the effort to increase efficiency is pervasive and relentless throughout virtually all industries, this no-growth factor must...