Page 532 - The Principle of Economics

546 PART NINE
THE REAL ECONOMY IN THE LONG RUN
Because it has accumulated over so many years, this fall in productivity growth of 1.9 percentage points has had a large effect on incomes. If this slowdown had not occurred, the income of the average American would today be about 60 per- cent higher.
The slowdown in economic growth has been one of the most important problems facing economic policymakers. Economists are often asked what caused the slowdown and what can be done to reverse it. Unfortunately, despite much research on these questions, the answers remain elusive.
Two facts are well established. First, the slowdown in productivity growth is a worldwide phenomenon. Sometime in the mid-1970s, economic growth slowed not only in the United States but also in other industrial countries, including Canada, France, Germany, Italy, Japan, and the United Kingdom. Although some of these countries have had more rapid growth than the United States, all of them have had slow growth compared to their own past experi- ence. To explain the slowdown in U.S. growth, therefore, it seems necessary to look beyond our borders.
Second, the slowdown cannot be traced to those factors of production that are most easily measured. Economists can measure directly the quantity of physical capital that workers have available. They can also measure human cap- ital in the form of years of schooling. It appears that the slowdown in produc- tivity is not primarily attributable to reduced growth in these inputs.
Technology appears to be one of the few remaining culprits. That is, having ruled out most other explanations, many economists attribute the slowdown in economic growth to a slowdown in the creation of new ideas about how to pro- duce goods and services. Because the quantity of “ideas” is hard to measure, this explanation is difficult to confirm or refute.
In some ways, it is odd to say that the last 25 years have been a period of slow technological progress. This period has witnessed the spread of computers across the economy—an historic technological revolution that has affected almost every industry and almost every firm. Yet, for some reason, this change has not yet been reflected in more rapid economic growth. As economist Robert Solow put it, “You can see the computer age everywhere but in the productivity statistics.”
What does the future of economic growth hold? An optimistic scenario is that the computer revolution will rejuvenate economic growth once these new machines are integrated into the economy and their potential is fully under- stood. Economic historians note that the discovery of electricity took many decades to have a large impact on productivity and living standards because people had to figure out the best ways to use the new resource. Perhaps the computer revolution will have a similar delayed effect. Some observers believe this may be starting to happen already, for productivity growth did pick up a bit in the late 1990s. It is still too early to say, however, whether this change will persist.
A more pessimistic scenario is that, after a period of rapid scientific and technological advance, we have entered a new phase of slower growth in knowledge, productivity, and incomes. Data from a longer span of history seem to support this conclusion. Figure 24-2 shows the average growth of real GDP per person in the developed world going back to 1870. The productivity slow- down is apparent in the last two entries: Around 1970, the growth rate slowed from 3.7 to 2.2 percent. But compared to earlier periods of history, the anomaly