Below are the first 10 and last 10 pages of uncorrected machine-read text (when available) of this chapter, followed by the top 30 algorithmically extracted key phrases from the chapter as a whole.
Intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text on the opening pages of each chapter.
Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.
Do not use for reproduction, copying, pasting, or reading; exclusively for search engines.
OCR for page 57
Microeconomics arid Productivity
DALE W. JORGENSON
The explarzatzon for the "Great Growth Slowdown" in the U.S.
economy is a decline in the rate of productivity growth. This decline
can be traced to the staggering increases in energy prices since
1973. The prospects for increasing productivity growth and capital
formation by means of talc policy appear to be very remote. Thus,
there seems to be little doubt that one should be pessimistic about
fixture U.S. economic growth.
The purpose of this chapter is to analyze the `'Great Growth Slowdown.',
As will be seen, this is a problem that divides economists in terms of points
of view but unites them in terms of interest in the slowdown and its causes.
I will begin by discussing the relevance of slower economic grown to current
. . . .
Issues In economic pa Icy.
In my view, there are presently three competing schools of thought in the
debate over the govemment's fiscal policy. The moderate school of thought
is put forward by the Congressional Budget Office (CBO), the principal
analytical arm of the U.S. Congress on budgetary matters. CBO has taken
the somewhat pessimistic view that economic growth in the United States
will continue at something like 3 percent per year in real terms.
Three percent growth is relatively low by historical standards. Over the
Tree decades from 1948 to 1979, the growth of value added for the U.S.
economy was about 3.5 percent. For the two decades between 1929 the
beginning of the Great Depression and 194S, Me growth of the U.S. econ-
only was only around 2 percent, according to Christensen and Jorgenson
(19701. It is easy to be a pessimist on the basis of historical experience. The
implications of 3 percent growth are that radical steps will be required to
cut the government deficit. It will be necessary to slow the growth of defense
57
OCR for page 58
58
DALE W. JORGENSON
spending and to cut out cost-of-living adjustments in transfer programs. It
may also be necessary to increase taxes. Certainly, no halfway measure would
be legitimate. That is the moderate point of view.
Proceeding from the moderate to the extreme, we encounter the inter-
mediate point of view of the Office of Management and Budget (OMB), the
agency responsible for the administrations proposals on the budget. The
OMB view is that U.S. economic growth will continue at 4 percent on an
annual basis. Even this view supports the need for fiscal action. According
to OMB, the federal deficit will remain very large in the absence of a
substantial cut in the government budget. It will be possible to achieve the
budget reductions, mainly by cutting nondefense expenditures. It will not be
necessary to have a tax increase.
Retuming to historical experience, a 4 percent growth rate occurred in
two of the seven postwar business cycles. In the immediate postwar period
(1948 to 1953) grown averaged almost exactly ~ percent. During the period
1960 to 1966, growth averaged 4.5 percent. Four percent growth is certainly
conceivable; however, growth at this rate would represent a substantial im-
provement over the postwar average and a large increase over the experience
of the most recent business cycle (1973 to 19791.
We now come to the extreme view on U.S. economic growth, which is
associated with the so-called "supply-siders." The supply-side school pro-
jects U.S. economic growth at 5 percent. Obviously, this is completely
outside the range of historical experience, at least during the postwar penod.
If we could conjure up a vision of the U.S. economy's growing at 5 percent,
then we would not have to worry about the federal deficit at all. We could
continue expanding the defense budget. We would not have to cut back
substantially on transfer programs. Economic growth would generate suff~-
cient revenues to pay for the increase in federal spending.
While economic growth is an important political issue, it does not seem
to be a partisan issue. In my assessment, the Congressional Budget Office
represents moderate opinion and is directed by Rudolph Penner, a well-known
Republican. The Office of Management and Budget reflects the Republican
mainstream and [as of this writing is directed by David Stockman, formerly
a Republican congressman from Michigan. The supply-side view has come
to be the radical opposition on Be right. A prominent supply-sider is Paul
Craig Roberts, assistant secretary of the Treasury in Be first Reagan ad-
minis~aiion. The debate over economic grown, in other words, is taking
place within Be Republican party.
My objective here is to sort out the issues Mat underlie divergent views
on future prospects for U.S. economic growth. For this purpose I analyze
grown trends in decree steps. First, ~ present a macroscopic view of the
economy that begins win the output of Be economy as a whole. I then
decompose the output of Be economy into output levels for individual in-
OCR for page 59
MICROECONOAfICS AND PRODUCTIVITY
59
dustnal sectors, which provides a microscopic view of the economy. Finally,
I provide an explanation for patterns of economic growth in terms of an
econometric model of production at the sectoral level.
The macroscopic view of the economy represents a "top-down" approach.
The sources of growth at the aggregate level present something of a mystery
to economists. It is very difficult to explain the slowdown in U.S. economic
grown at the aggregate level, since the unexplained residual productivity
growth turns out to bear the major burden of explaining the growth slowdown.
The second mode of analysis that I present is a '`bottom-up" approach.
Using this approach I analyze growth at the level of individual industrial
sectors, focusing on the causes of the productivity slowdown at the level of
specific industries. For this purpose I discuss the implications of a sectoral
model of productivity growth. Finally, I conclude with an assessment of
growth prospects for the U.S. economy.
GROWTH AND PRODUCTIVITY
Table 1 presents an analysis of U.S. economic growth at the aggregate
level. ' The first row in this table presents growth rates of the economy over
the postwar period by business cycle. Beginning with the entire postwar
period from 1948 to 1979, we see that growth was about 3.5 percent. As
we trace out the business cycles over the postwar period, we see that economic
growth was at an all-time low from 1957 to 1960, the last of the Eisenhower
years. This was followed by the most rapid growth of the postwar period,
under the Kennedy-Johnson administration. Since 1966, growth has been
below the average, at 3 percent, and there was a decline of about 1.5 percent
between the postwar peak and the period from 1966 to 1979. In other words,
the growth slowdown has been with us for a very long time.
To decompose growth into its sources, I use a simple piece of arithmetic
to allocate growth among three components. The 3.5 percent growth rate of
the U.S. economy is made up of growth in productivity plus the contributions
of capital and labor inputs. It is easy to see from the first column of Table
1 that the most important source of economic grown is the contribution of
capital input. Capital input accounts for about half of the growth that has
taken place. The contribution of labor input is the least important, and the
rate of productivity growth comes out in between.
Growth in capital input reflects increased stocks of capital equipment and
structures that result from investment. Growth in labor input reflects expan-
sion in employment, hours worked per employee, and the upgrading of the
labor force through greater education and experience. Productivity grown
is defined as the residual between the growth of output and the contributions
of capital and labor inputs. In engineering terms, productivity growth is the
increase in the efficiency with which economic resources are utilized.
OCR for page 60
60
~ C~
_ _
C~
~o
_ _
~o
C~
_ _
o
C~ C~
_ _
C~
-
oo
-
1
X
o o
o o
X ~ ~ oo
_ _ _ t_ t_ \O
e' _ o — o
o o o o o o
. . . . . .
o o o o o o
t_ O~ _ _
=\ _ ~ _
— o _ _
o o o o
. . . .
C o o o
oo oo
_
o o o
o o o
X O ~D
o — o
o ~ _
o o o
. . .
o o o
-
-
o
o
o ~ C~ o
U~ ~ Cx oo
~ ~ _ _ _
o C o o o
. . . . .
o o o o o
-
-
o
s~
C)
._
£
V)
o
Ct
£
U'
I o
U~ ~
_ _
- .
C~
_ _
X - .
C~ o~
_ _
X
r~
C~
_ _
C~
~o
o o
. .
o o
o
o
_ o
o o
. .
o o
X
- . o
o o
. .
o o
o
— ~ ~
( - , ', _ o
o o o o
. . . .
o o o o
_
_ o
o o
. .
o o
oo ~ ~
_
_ _ o
o o o
. . .
o o o
oo
o ~
o
o o
o o
X o — ~
~r 0 ~ ~ ~ x
_ o _ o
o o o o o o
. . . . . .
o o o o o o
.
OCR for page 61
61
(,-) u~] ~) ~o ~ ~ x
x ~ ~ ~ ~ - - o
o ~ o - o - o o
o o o o o o o o
o o o o o o o o
1 1 1
o ~ oo ~o ~ x ~ u~
c~ ~ ~ ~ ~ ~ o o
o ~ o - o o o o
o o o o o o o o
o o o o o o o o
1 1
x x ~ ~ ~ - ~ o
lri: t~) ~) — — o —
- - ) o - o o o o
o o o o o o o o
o o o o o o o o
i I
O ~D
o x o ~
o o o o
o o o o
~ oo
~D _
- o
o o
o o
~ x ~
~ - ~
~ o o
o o o
o o o
~ ~ O
oo ~ ~
~ o -
o o o o
o l o o o
~ x
c~ ~
~ o
o o
o o
c~ ~
c~ ~
c~ o
o o
o o
o
-
o
o
r~
-
o
o
-
o
o
i
o o
o o
o o
o o
i
\::' — o
o o o
o o o
o o o
1 1 1
) ~
x ~ o o
Oo o 8 Oo
. . . .
o o o o
1
-
-
_ — ·_ o . U C ~ _
_ _ — _ _, 9 , ' U
~ 2 ~ 2 ~ ~ U , u ~ ~ c , ~ o '
;~ ~ ~ ~ ~ Q: U ~ ~ C~
1 1
._
C~
_
et
o~
o
a
<
_
._
_
X
~ c
— C~
C,:
._
~ _
_ _
O ~
CO _
_ 3
o -3
c: _
C~ ._
.
=_
— ~)
._ _
,_ ~
ce _
C) ~
oo
o
C)
o
C) . -
_ .=
~ Z
~ U.
o ~
U. —
C) ~
~o~
o
. o
3 c,
_ _
~ `,
~ -
~ C¢,
._ _
_ .~
_ .
G
,- _
. ~
,0
D ~
~ _
C) ~
_
_' ~
o _
U: _
OCR for page 62
62
DALE w. JORGENSON
Proceeding to the last period in this analysis, 1973 to 1979, growth has
slowed, relative to the postwar average, by about half a percentage point
However, if we view the growth slowdown relative to the 1960-1966 peak,
the slowdown is almost 1.5 percentage points. This is the Great Growth
Slowdown. The difference in perspective regarding the postwar average and
the 1960-1966 peak accounts for much of the divergence in views among
economists as to the severity of the growth slowdown.
It is important to emphasize that there has been a growth slowdown and
that it began in 1966. However, economists did not begin to focus attention
on the growth slowdown until 7 or 8 years later. The slowdown became a
major topic for professional discussion during, the late 1970s. During the last
period in this analysis, 1973 to 1979, consciousness of the growth slowdown
became most acute.
In order to obtain additional perspective on the interrelationships between
productivity and economic growth, it is useful to look at developments outside
the United States. Rapid economic growth in the industrialized countries
through 1973 has resulted in unprecedented levels of world economic pros-
penty. An extreme example is provided by the growth of the Japanese econ-
omy. During the period 1960 to 1973, the Japanese economy grew at the
astonishing rate of 10.9 percent per year.2 This growth was sufficient to
quadruple the Japanese national product and to move Japan from the ranks
of the developing countries to its current status as a major industrial power.
The largest industrialized economies of Europe participated fully in the
great economic boom of the 1960s and early 1970s. The economies of France
and West Germany expanded at rates of 5.9 and 5.4 percent per year, re-
spectively, during the period 1960 to 1973. Rapid growth in West Germany
followed the "economic miracle" of 1952 to 1960, when Ge~any's econ-
omy expanded at 8.2 percent per year, exceeding Japan's growth of 8.1
percent per year during the same period. From 1960 to 1973 Italy's economy
grew at 4.8 percent per year, and even the United Kingdom's economy
expanded at a respectable 3.S percent per year. The leading industrialized
countries of Europe more than doubled their national products during the
postwar period.
In Norm America, the U.S. economy expanded at the rate of 3.8 percent
per year from 1960 to 1973, and Canada's grew at 5.1 percent per year. In
Europe rapid economic grown tool: place with negligible growth in hours
worked, while in North America hours worked increased at approximately
1.5 percent per year.
The 1960s and 1970s also witnessed rapid growth among developing coun-
tnes. Expansion at rates in excess of 5 percent per year were not uncommon.
To take another extreme example, South Korea's economy grew at 9.7
percent per year during the period 1960 to 1973, achieving rates of economic
expansion almost up to Japanese standards.
OCR for page 63
MICROECONOMICS AND PROD U=IV~
63
The impact of the first oil crisis on economic growth in industrialized
counmes was disastrous. Growth in the Organization for Economic Coop-
eration and Development (OECD) countries as a whole plummeted to 2.6
percent per year from 1973 to 1979. Growth in the United States dropped
less than in most OECD countries and remained slightly above the OECD
average. Growth in Japan fell from the double-digit rates of the 1960s and
early 1970s to 3.9 percent per year—almost the same as the expansion in
the United Kingdom, the growth laggard among industrialized countnes,
from 1960 to 1973. The rate of growth in West Germany fell to 2.4 percent
for the period 1973 to 1979, and growth in France during this period was
only 3. ~ percent per year.
What accounts then for the growth slowdown? Relative to the postwar
average, the contribution of capital input in the United States has hardly
decreased. The contribution of labor input has, if anything, increased. There-
fore, the whole of the explanation for the slowdown is in the decline in
growth of the efficiency with which resources are used. The Great Growth
Slowdown is a slowdown in the rate of productivity growth. Productivity,
again, is output per unit of input and, therefore, corresponds to the engineer's
concept of efficiency. Of course, this concept of efficiency is being applied
to the economy as a whole, what I have referred to as the top-down approach
to growth analysis.
The difficulty with this analysis is fairly obvious. The contribution of
capital input can be associated with investment, and investment can be at-
tributed to changes in tax policy and changes in government budgetary policy.
The contribution of labor input can be associated with basic demographic
forces. The rate of productivity grown is what economists refer to as the
unexplained residual. It is the part of growth that is not accounted for by
the things that we know how to explain. That is an unsatisfactory state of
affairs and requires a more careful look at the rate of productivity grown
itself.
Returning to Table 1, the last section, which is labeled "reallocations,"
provides a decomposition of the rate of productivity growth. Previously,
referred to this as Me bottom-up approach. Concentrating on the period 1948
to 1979, we can see that the aggregate productivity grown of 0.9 percent
per year is made up of four components. First, there is a weighted sum of
productivity grown rates at the sectoral level. Second, there is the reallocation
of value added among sectors, and, finally, there are the reallocations of
capital and labor inputs among industrial sectors.
The first question to ask is: What is the meaning of productivity grown
at We sectoral level and how does it compare with productivity grounds at
We aggregate level? Bow concepts of productivity correspond to We engi-
neering notion of efficiency. At We sectoral level economists analyze growth
of output in terms of the contributions of capital and labor inputs and the
OCR for page 64
64
DALE W. JORGENSON
contributions of inputs produced by other sectors. Capital and labor inputs
are the so-called primary factors of production Hat generate the whole of
economic activity. Inputs produced by over sectors include the raw materials
and the energy that are produced by one set of businesses and supplied to
others.
The concept of output at the sectoral level, versus the aggregate level, is
much closer to the engineering concept of output. For example, steel is not
measured in terms of value added, which is an economist's abstraction, but
in terms of tons of steel. The output of the motor vehicle industry is not
measured in terms of value added in the motor vehicle industry, again an
economist's abstraction, but rather in terms of vehicles produced. The output
of the petroleum industry is measured in terms of barrels of petroleum, and
so on.
The idea of productivity grown at the sectoral level is much closer to the
engineering concept of efficiency and is a much easier concept to appreciate
at an intuitive level. In Table 1 we see that the sectoral rates of productivity
growth account for almost all of the aggregate productivity grown, at least
if we concentrate on the postwar period as a whole. Reallocations reflect the
movement of resources either from less productive to more productive uses,
or the reverse. In fact, a change in the composition of output in the economy
has contributed to the aggregate growth rate of productivity. Regrettably,
this has been offset by reallocations of capital and labor to less productive
uses, so Hat reallocations essentially cancel out.
How can resources be allocated to less productive uses? This appears to
contradict some fundamental economic law. Consider the following example,
however. In the smokestack industry crisis of the 1970s and early 1980s,
many highly paid workers, steelworkers for example, have been displaced.
They have ended up on the unemployment rolls, or perhaps working at
McDonald 's. Their wages are, say, one-third the wages they received as
steelworkers. This is a reallocation of labor from a highly productive use to
a less productive use. If the steel industry is contacting, the reallocation of
workers produces a negative contribution to aggregate productivity growth.
For the postwar period these reallocations cancel out.
Next, consider He growth slowdown again. Sectoral rates of productivity
grown became negative during the period 1973 to 1979. We were losing
efficiency in He production of output at the level of individual industrial
sectors. How could this happen? Massive efforts to conserve energy resulted
from the high energy prices of the early 1970s. In the search for cost re-
duction, engineers were forced to return to technologies that had not been
used for 20 or 30 years. This reduced costs but also produced a decline in
sectoral productivity grown.
During the period 1973 to 1979, the reallocation of output away from
energy-intensive sectors toward less-energy-intensive sectors produced a tre-
OCR for page 65
MICROECONOMICS AND PROD UCTIV~
65
mendous boon for aggregate productivity grown. Offsetting the loss in pro-
duct~vity growth of 1.5 percent was a gain from the reallocation of value
added of 1.0 percent. The reallocations of capital and labor input were not
very significant. The decline in sectoral productivity growth that actually
took place accounts for three times the reduction in aggregate growth and is
itself more than sufficient to explain the Great Grown Slowdown.
If we look at sectoral productivity growth rates going back to 1966, which
is the high-water mark of growth in the United States, we find that sectoral
productivity growth for the average industry has been essentially zero. The
positive growth of the 1960s and early 1970s has been completely offset by
the decline in productivity growth that occurred during the middle and late
1970s.
The bottom-up approach to growth analysis is as unsatisfying from the
intellectual point of view as the top-down approach. Using this approach,
one residual, the rate of productivity growth at the aggregate level, is fumed
into residuals at the level of individual industries, which also require furler
explanation. If aggregate productivity growth is a mystery, then sectoral
productivity growth is a deeper mystery. Resolving this mystery requires an
econometric model that explains variations in the rate of productivity growth
at the sectoral level.
ENDOGENOUS PRODUCTIVITY GROWTH
The task that remains is to explain productivity grown at the level of
individual industnes. For that purpose I will employ an econometric model
in which the rate of productivity grown is itself a function of Me relative
prices of all the inputs that are used at the level of individual industrial
sectors. The list of those inputs includes capital and labor inputs (~e only
inputs that appear at the aggregate level), electricity, nonelectrical energy,
and the materials that are used in producing output.
For each industry the model of production is based on a sectoral price
function that summarizes both possibilities for substitution among inputs and
patterns of productivity grown. Each price function gives the price of output
of the corresponding industrial sector as a function of the prices of capital,
labor, electricity, nonelectrical energy, and materials inputs and time, where
time represents the level of productivity in the sector.3 Obviously, an increase
in the price of one of the inputs, holding the prices of the other inputs and
He level of productivity constant, necessitates an increase in the price of
output. Similarly, if the productivity of a sector improves and the prices of
all inputs into the sector remain the same, the price of output must fall. Price
functions summarize these and other relationships among He prices of output;
capital, labor, electricity, nonelectrical energy, and materials inputs; and the
level of productivity.
OCR for page 66
66
DALE W. JORGENSON
The sectoral price functions provide a complete model of production pat-
terns for each sector, incorporating both substitution among inputs in response
to changes in relative prices and productivity growth in the use of inputs to
produce output. To characterize both substitution and productivity growth,
it is useful to express the model in an alternative and equivalent form. First,
the shares of each of the five inputs—capital, labor, electricity, nonelectrical
energy, and materials in the value of output can be expressed as functions
of the prices of those inputs and time, again representing the level of pro-
ductivity.4 Second, to these five equations for the value shares can be added
an equation that determines productivity growth as a function of the prices
of all five inputs and time. The resulting equation is an econometric model
of sectoral productivity growth.5
Like any econometric model, the relationships determining the value shares
of capital, labor, electricity, nonelectrical energy, and materials inputs and
the rate of productivity growth involve unknown parameters that must be
estimated from data for the individual industries. Included among these un-
known parameters are biases of productivity growth that indicate the effect
of change in the level of productivity on the value shares of each of the five
inputs. For example, the bias of productivity growth for capital gives the
change in the share of capital in the value of output in response to changes
in the level of productivity, represented by time. Productivity growth is said
to be capital using if the bias of productivity grown for capital is positive.
Similarly, productivity growth is said to be capital saving if Me bias of
productivity growth for capital is negative.
The econometric model for each industrial sector of the U.S. economy
includes an equation giving the rate of productivity growth as a function of
the prices of the five inputs and time. The biases of productivity growth with
respect to each of the five inputs appear as the coefficients of time, repre-
senting Me level of productivity, in the five equations for the value shares
of all five inputs. The biases also appear as coefficients of the prices in Me
equation for the negative of sectoral productivity growth.
The dual role of the bias of productivity growth—expressing the impact
of a change in productivity in Me value share of an input and the impact of
a change in the price of that input on Me rate of productivity growth is Me
key to an assessment of the dete~inants of productivity grown. A classi-
fication of industries by patterns of the biases of productivity grown is given
in Table 2. The pattern Mat occurs win the greatest frequency is capital-
using, labor-using, electricity-using, nonelectrical-energy-using, and mate-
rials-saving productivity grown. This pattern occurs for 8 of the 35 industries
included in Me table. For this pattern the rate of productivity grown decreases
with Me prices of capital, labor, electncity, and nonelectrical energy inputs
and increases win the price of materials input. The pattern Mat occurs next
most frequently is capital-saving, labor-using, electricity-using, nonelec~i-
OCR for page 67
MICROECONOMICS AND PROD UCTIV17Y
TAME 2 Classification of Tousles by Bides of ~~Uchvi~ Grow
Pattern of Biases
Capital-using
Labor-using
Electncity-using
Non-electncal-energy-using
Materials-saving
Capital-using
Labor-saving
El ectoc ity - us ing
Non-electrical-energy-using
M aten al s -us ing
67
Industries
Tobacco, textiles, apparel, lumber and wood, printing and
publishing, fabricated metal, motor vehicles, transporta-
tion
Capital-using
Labor-using
Electncity-using
Non -electucal-energy-saving
Materials-saving
Capital-using
Labor-using
Electricity-saving
Non -electrical -energy- using
Matenals-saving
Capital-using
Labor-saving
Electncity-using
Non-electucal -energy - saving
Materials-using
Capital-using
Labor-using
Electncity-saving
Non-electnc al -energy- saviD g
Matenals-saving
Capital-using
Labor-saving
Electucity-saving
Non-electucal-energy-using
Matenals-saving
Capital-saving
I=bor-using
Elecmcity-using
Non~lectrical~energy-using
Materials-using
Capital-saving
Labor-using
Electncity-using
Non-electacal-energy-using
Matenals-saving
Electrical machinery
Metal mining, services
Nonmetallic mining, miscellaneous rnanufactunng, gov-
e~nment enterprises
Construction
Coal niining, trade
Agnculture, crude petroleum and natural gas, petroleum
refining
Food, paper
Rubber; leather, instruments; gas utilides; finance, insur-
ance, and real estate
Continued on next page
OCR for page 68
68
TABLE 2 (Continued)
DALE W. JORGENSON
Pattern of Biases
Industries
Capital-saving
Labor-using
Electucity-saving
Non -e lee tri cal -e nergy -using
Materials-using
Capital-saving
Labor-saving
Electricity-using
Non-electncal -e nergy -using
Materials-using
Capital-saving
Labor-using
Electricity-saving
Non-electrical-energy-using
Materials-saving
Capital-sav~g
Labor-using
Electricity-using
Non- electrical-energy- saving
Materials-saving
Capital-saving
Labor-saving
Electricity-using
Non-elec~ical-energy-using
Matenals-savung
Capital-saving
Labor-saving
Electncity-saving
Non-electrical~nergy-saving
Matenals-using
Chemicals
Transportation equipment and ordnance, communications
Stone, clay, and glass; machinery
Primary metals
Electric utilities
Furniture
SOURCE: Dale W. Jorgenson, The role of energy in productivity grown, in J.W. Kendrick, ea.,
International Comparisons of Productivity and Causes of the Slowdown (Cambndge, Mass.: Bal-
linger, 1984), Table 7-3, pp. 303-304. Repnuted win permission.
car-energy-using, and matenals-saving productivity grown. This pattern oc-
curs for 5 industries. For this pattern Me rate of productivity grown decreases
win We prices of labor, electncity, and nonelectrical energy inputs and
increases win the prices of capital and materials inputs. These two patterns
Of productivity grown differ only in the role of Me price of capital input.
Productivity grown is capital-using for 20 of the 35 industries included
in Me table. The first and most important conclusion to be drawn is Mat the
price of capital input plays a very significant role in the determination of
productivity growth. A decline in Me price of capital input stunulates pro-
OCR for page 69
MlCROECONOMICS AND PROD Ugly
69
ductivity growth in 20 of the 35 industries and dampens productivity growth
in only 15. Alternatively and equivalently, productivity growth results in an
increase in Me share of capital input in the value of output, holding the
relative prices of all inputs constant, in 20 of Me 35 industries. Productivity
growth results in a decrease in the share of capital input in only 15 of the
. .
nc ustnes.
Next, we can examine the role of prices of labor, electricity, nonelectrical
energy, and materials inputs in the determination of tile rate of productivity
grown. Productivity growth is labor-using for 26 of the 35 industries included
in the table and labor-saving for 9 of the industries. Productivity growth is
elecmcity-using for 23 of the 35 industries and elecmcity-saving for 12
industries. Similarly, productivity growth is nonelec~ical-energy-using for
28 of the 35 industries and nonelecmcal-energy-saving for 7 industries.
Finally, productivity growth is materials-using in only ~ of the 35 industries
and materials-saving for the remaining 27 industnes.
To clarify Me analysis furler, let me analyze Me mechanism of produc-
tivit~r grown that underlies this econometric model. The basic idea is very
simple; when Mere are radical changes in the price of an input, the engineers
and businessmen who are running the economy have an incentive to econ-
omize on the use of that input. Substitution away from an expensive input
results in a new path for the development of technology. This path is as-
sociated with higher or lower productivity grown rates. It happens that if
capital and labor prices increase, then the associated technical developments
result in lower productivity growth rates. When taxes on capital go up, the
rate of productivity grown in the average industry falls. Similarly, when
wage rates rise in the average industry, the rate of productivity grown falls.
If energy prices increase, again, We rate of productivity growth declines;
only an increase in the price of raw materials stimulates productivity grown.
That is characteristic of Me wide range of U.S. industries that are included
In this rnicroeconomic analysis.
GROWTH PROSPECTS
The sharp decline in economic grown In industrialized countries presents
a problem comparable in scientific interest and social importance to Me
problem of mass unemployment in the Great Depression of Me 1930s. Con-
ventional methods of economic analysis have been tried and found to be
inadequate. Clearly, a new framework will be required for economic un-
derstanding. The analysis in this section contains some of the elements that
will be required for an analysis of the prospects for Me U.S. economy in
the last half of the 1980s.
My analysis of the sources of variations in rates of productivity growth
for Me U.S. economy begins with the evolution of U.S. tax policy over Me
OCR for page 70
70
DALE w. JORGENSON
period 1948 to 1979. Under current tax law, taxpayers are permitted to deduct
depreciation as an expense in amving at their taxable income. Taxpayers are
also allowed to reduce their tax liability by means of an investment tax credit
based on purchases of equipment. As tax rates at corporate and personal
levels have increased, provisions for capital recovery under the tax code have
become increasingly significant for economic policy. These provisions also
have an important impact on stimulating or retarding changes in the level of
. .
proc activity.
The effective tax rates for all corporate investment for each year of the
period 1948 to 1979 are listed in Table 3, along with effective tax rates for
structures and for equipment separately. If capital-consumption allowances
were precisely equal to economic depreciation and the investment tax credit
were equal to zero for all assets, the effective tax rate would be the same
for all assets and equal to the statutory tax rate. The statutory tax rate is
included in Table 3 as a basis for comparison with the effective tax rates
under U.S. tax law. As seen in the table, the effective tax rate was below
the statutory rate in every year. The ratio of the effective tax rate to the
statutory rate is given in the final column of Table 3.
The ratio of the effective tax rate on corporate investment to the statutory
rate fluctuated between 70 and 80 percent over the period from 1948 to 1961.
When the investment tax credit was first adopted in 1962, the ratio of the
effective tax rate to the statutory rate dropped to 55 percent in that year from
76 percent in 1961. When the investment tax credit was repealed in 1969
and 1970, the effective tax rate climbed to 78 percent of the statutory rate
in 1969 and to 87 percent of the statutory rate in 1970. Reinstitution of the
investment tax credit in 1971 reduced the effective tax rate to 60 percent of
the statutory rate in that year and to 48 percent in the following year. Lib-
eralization of the investment tax credit in 1975 reduced the effective tax rate
to 43 percent of the statutory rate. The effective tax rate fell to 12.S percent
in 1977 as the rate of inflation decreased, and rose to 19.2 percent in 1979
as the rate of inflation increased.
The main conclusion to be drawn from Table 3 is that the effective tax
rate under U.S. tax law has been below the statutory tax rate throughout the
period 1948 to 1979. The effect of inflation under any given set of tax
provisions for capital recovery is to increase the effective tax rate. This
occurs Trough an increase in We discount rates applied to future capital-
consumption allowances. However, tax provisions have been revised at fre-
quent intervals, and major revisions occurred in 1954, 1962, 1970, and 1975.
The impact of those revisions has been to reduce effective tax rates very
dramatically, especially in 1962 win the adoption of We investment tax
credit and more generous capital-consumption allowances and, in 197S, win
We liberalization of the investment tax credit.
Since Me effective tax rate increases win rate of inflation, a decrease in
OCR for page 71
MICROECONOMICS AND PRODUCTIVITY
TABLE 3 Effective Corporate Tax Rates, 1948-1979
71
Effective Corporate Tax Rate Statutory
Year Total Equipment Structures Tax Rate Ratio (1)/(4)
.
1948 0 264 0.302 0.200 0.380 0.696
1949 0.266 0.307 0.200 0.380 0.699
1950 0.303 0.346 0.226 0.420 0.720
1951 0.389 0.436 0.310 0.510 0.762
1952 0.398 0.445 0.322 0.520 0.766
1953 0.418 0.460 0.348 0.520 0.803
1954 0.366 0.400 0.312 0.520 0.704
1955 0.370 0.405 0.311 0.520 0.712
1956 0.379 0.411 0.325 0.520 0.728
1957 0.394 O.429 0.335 0.520 0.758
1958 0.377 0.408 0.330 0.520 0.725
1959 0.412 0.111 0.355 0.520 0.792
1960 0.411 0.442 0.356 0.520 0.790
1961 0.397 0.428 0.346 0.520 0.764
1962 0.285 0.250 0.345 0.520 0.548
1963 0.265 0.219 0.344 0.520 0.509
1964 0.237 0.189 0.324 0.500 0.474
1965 0.213 0.160 0.309 0.480 0.444
1966 0.274 0.247 0.324 0.480 0.570
1967 0.269 0.240 0.323 0.480 0.560
1968 0.259 0.221 0.330 0.480 0.539
1969 0.372 0.378 0.361 0.480 0.716
1970 0.416 0.429 0.394 0.480 0.867
1971 0.289 0.244 0.367 0.480 0.603
1972 0.229 0.157 0.357 0.480 0.478
1973 0.251 0.188 0.383 0.480 0.536
1974 0.281 0.221 0.394 0.480 0.586
1975 0.206 0.131 0.345 0.480 0.430
1976 0.161 0.081 0.320 0.480 0.336
1977 0.128 0.041 0.308 0.480 0.266
1978 0.180 0.099 0.335 0.480 0.376
1979 0.192 0.121 0.397 0.460 0.418
1980 0.243 0.185 0.352 0.460 0.528
SOURCE: Dale W. Jorgenson and Martin A. Sullivan, Inflation and corporate capital recovery, in
C. Hulten, ea., Depreciation, Inflation anal the Taxation of Income from Capital (Washington, D.C.:
The Urban Instinlte, 1981), Table 11, p. 196. Repnnted with permission.
the rate of inflation to levels below those prevailing since 1973 would reduce
the effective tar; rate substantially. The decrease in Me rates of inflation in
the prices of assets from 12.8 percent in 1975 to 5.6 percent in 1976 and
7.7 percent in 1977 brought the effective tax rate down to 16.1 percent in
1976 and 12.8 percent in 1977. These tax rates can be compared with the
statutory rate of 48 percent in both years. The increases in the rate of inflation
OCR for page 72
72
DALE W. JORGENSON
in 1978 and 1979 brought effective tax rates up to 18.0 percent in 1978, and
to 19.2 percent in 1979.
The effective tax rates on corporate income are inversely correlated with
rates of productivity grown for the U.S. economy as a whole. Effective tax
rates declined sharply between 1960 and 1966; Me rate Productivity growth
attained its postwar peak of 1.80 percent during this penod. Effective tax
rates rose dramatically from 1966 to 1969; the rate of productivity grown
declined to 0.08 percent per year dming this period. Effective tax rates
declined from 1969 to 1973; the rate of productivity growth revived to 0.78
percent per yea}.
The most striking change in the relative prices of capital, labor, electricity,
nonelectrical energy, and materials inputs that has taken place since 1973 is
the staggering increase in the price of energy. At first blush the finding that
higher energy prices are an important determinant of We slowdown in eco-
nom~c grown after 1973 seems paradoxical. In studies of sources of aggregate
economic growth, energy appears as both an output and an input for individual
industries but cancels out for We economy as a whole.6 It is necessary to
disaggregate the sources of economic growth to the sectoral level in order
to define an appropriate role for energy.
Within a disaggregated framework for analyzing economic growth, it is
not sufficient to decompose the grown of sectoral output among the contn-
buttons of inputs and We grown of productivity. It is essential to explain
the growth of sectoral productivity. In the absence of such an explanation,
the growth of sectoral productivity is simply an unexplained residual between
the growth of output and the growth of capital, labor, electncity, nonelectrical
energy, and materials inputs.
Finally, the direction and significance of the influence of energy prices
on productivity growth at the sectoral level must be determined empirically.
From a conceptual point of view, energy prices can have positive, negative,
or zero impacts on sectoral productivity grown. From an empirical point of
view, the influence of higher energy prices is negative and highly significant.
There is no way to substantiate this empirical finding without an econometric
model of productivity growth.
The analytic steps outlined here—disaggregation of the sources of eco-
nomic growth to the sectoral level; decomposition of the rate of growth of
sectoral output into productivity growth and the contnbunons of capital,
labor, electricity, nonelectrical energy, and materials inputs; and modeling
the growth of productivity have been taken only recently. Although much
additional research will be required to provide an exhaustive explanation of
We slowdown of economic growth in industrialized counmes within the new
framework, it is nonetheless useful to employ this framework in assessing
future grown prospects for indusmal~zed countries.
The Arab oil embargo of late 1973 and early 1974 resulted In a dramatic
increase in world oil pnces. Between 1973 and 1975 crude oil import prices
OCR for page 73
MlCROECONOMICS AND PRODUCT7Vm
73
increased by two and a half times in real terms for the seven major OECD
counwies—Canada, France, West Germany, Italy, Japan, the United King-
dom, and the United States.7 Japan was the country most affected by the oil
price increases and experienced a tripling of crude oil import prices in real
terms. Among European countries France was not far behind Japan in the
increase in the real price of crude oil imports.
Real energy prices to final users increased considerably less than real oil
prices in all major OECD countries. The average increase for the seven countries
from 1973 to 1975 was 23.9 percent. Japan and Italy were at the high end of
the range with increases in excess of 50 percent. Meanwhile, Canada experi-
enced only a 3.9 percent increase under a regime of price controls on domestic
petroleum and natural gas. Similar controls in the United States did not prevent
an increase of energy prices to final users of 23 percent in real terms.
In late 1978 We hanian revolution sent a second wave of oil price increases
through world markets. Between 1978 and 1980 crude on import prices almost
doubled in real terms for the seven major OECD counmes. Real energy prices
to final users climbed by 33.5 percent for those counmes. Again, Japan was
hard hit win an 80.3 percent increase, and Canada experienced an increase of
only 8.7 percent. For We United States the price increase was 34 percent, and
major European counties had increases below the average.
Slow grown In productivity at We sectoral level is associated with higher
prices of capital input for 20 of We 35 industries Cat make up the producing
sector of We U.S. economy. This helps to account for We high productivity
growth of the period 1960 to 1966, the slow grown of the following penod,
1966 to 1969, and the revival of productivity grown during the period preceding
the first oil crisis, 1969 to 1973. From 1960 to 1966 tax policy stimulated
productivity grown; from 1966 to 1969 tax policy retarded productivity grown;
and from 1969 to 1973 tax policy again acted as a stimulus to productivity
grown.
The slower grown of productivity is also associated with higher prices of
electricity for 23 of the 35 industries listed in Table 2; similarly, slower growth
of productivity is associated win higher prices of nonelectrical energy for 28
of We 35 industries. Real energy prices began to rise in the early 1970s and
increased dramatically after We fast oil shock in 1973 and again after die second
oil shock in late 1978. These price trends resulted in the substitution of capital,
labor, and materials inputs for inputs of electricity and nonelectrical energy,
Hereby reducing He energy intensity of production. At He same time He energy
price trends contributed to a marked slowdown in productivity growth.
CONCLUSION
The overall conclusion of this chapter is that it is no longer necessary for
analyses of productivity growth to focus on the "unexplained residual." The
econometric model presented here makes the rate of productivity growth
OCR for page 74
74
DALE W. JORGENSON
itself endogenous. Given that variations in the rate of productivity growth
are associated with changes in the growth rate of the a:,~regate economy,
the mode} provides a full explanation of the slowdown at the aggregate level.
Let us return now to He dispute I perceive among the three contending
schools of thought in Washington He Congressional Budget Office, which is
associated win future growth prospects in the range of 3 percent a year; the
people at OMB, associated with a 4 percent grown rate; and, finally, He radical
supply-side view, associated win a grown rate of approximately ~ percent.
What underlies these different views? Frankly, it is very hard to understand
the views of the supply-siders. The OMB view is that changes in tax policy,
which began with the incoming Reagan administration in 1981, will stimulate
growth by increasing, capital formation. However, those talc cuts were fol-
lowed by the deepest recession in investment that has occulted in the postwar
period. In the last two years, the United States has had the strongest recovery
in the postwar period.
Dunng the whole of the Reagan administration the United States has had
a growth of capital stock that is just about comparable to what prevailed
during the period 1973 to 1979, He period during which the growth slowdown
was most severe. The OMB view, therefore, does not bear very much weight.
We come back to He Congressional Budget Office view, which suggests
that real growth in the United States is permanently lodged at a relatively
low level, around 3 percent a year. This is a consequence of the permanent
increase In energy pnces.
The difficulties associated with large deficits and the associated high, real
interest rates are still with us. Moreover, the prospects for increasing pro-
ductivity grown and capital formation by means of tax policy appear to be
very remote. I come down on the side of the Congressional Budget Office
There seems to be little doubt Hat one should be pessimistic about future
U.S. economic growth.
NOWS
1. The methodology employed by Fraumeni and Jorgenson (1985) is based on that of Jorgenson
(1980). Data sources are described by Fraurneni and Jorgenson (1980, 1985) and by Gollop
and Jorgenson (1980, 1983).
Comparisons among patterns of economic growth in industrialized countries are given by Chris-
tensen et al. (1980. 1981).
The price function was introduced by Sasnuelson (1953).
4. The sectoral price functions are based on the translog price function introduced by Christensen
et al. (1971, 1973). The tsanslog price function was first employed at the sectoral level by
Bemdt and Jorgenson (1973) and by Berndt and Wood (1975). References to sectoral production
studies incorporating energy and materials inputs are given by Be~dt and Wood (1979).
5. This model of sectoral productivity growth is based on that of Jorgenson (1983). Estimates of
the unknown parameters of this model, including biases of technical change, are presented by
OCR for page 75
MICItOECONOMICS AND PROD UCTIVIn'
75
Jorgenson (1984). A useful survey of studies of energy prices and productivity growth is given
by Berndt (1982).
6. A leading proponent of this view is Denison (1984).
7. Compansons of energy prices and energy demand patterns in industrialized countries are given
by Fujime (1983). Projections of U.S. energy demand are given by Hogan (1984).
REFERENCES
Berndt, Emst R. 1982. Energy price increases and the productivity slowdown in linited States
manufacturing. Pp. 60-89 in Federal Reserve Bank of Boston, The Decline in Productivity Growth.
Boston.
Berndt, Ernst R., and Dale W. Jorgenson. 1973. Production structures. Ch. 3 in Dale W. Jorgenson
and Hendrik S. Houthakker, eds., U.S. Energy Resources and Economic Growth, Washington
D.C.: Energy Policy Project.
Be~dt, Ernst R.. and David 0. Wood. 1915. Technology, pnces. and the derived demand for
energy. Review of Economics and Statistics 56(3):259-268.
Belt, Ernst R., and David 0. Wood. 1979. Engineering and econometric interpretations of energy-
capital complementanty. American Economic Review 69(3):342-354.
Christensen, Laurits R.. and Dale W. Jorgenson. 1970. U.S. real product and real factor input,
1929-1967. Review of Income and Wealth 16(1):19-50.
Christensen, Launts R., Diane Cummings, and Dale W. Jorgenson. 1980. Economic growth, 1947-
1973: An international companson. Pp. 595-698 in J. W. Kendrick and B. Vaccara, eds., New
Developments in Productivity Measurement and Analysis. Studies in Income and Wealth,
vol. 41. Chicago: University of Chicago Press.
Christensen, Laurits R., Diane Cummings, and Dale W. Jorgenson. 1981. Relative productivity
levels, 1947-1973. European Economic Review 16(1~:61-94.
Christensen, Launts R., Dale W. Jorgenson, and Lawrence J. Lau. 1971. Coniugate duality and
the transcendental logarithmic production function. Econometrica 39(3):255-256.
Christensen, Laurits R., Dale W. Jorgenson, and Lawrence J. Lau. 1973. Transcendental logarithmic
production frontiers. Review of Economics and Statistics 55(1):28-45.
Denison, E. F. 1984. Accounting for slower economic growth: An update. Pp. 1~5 in J. W.
Kendriclc, ea.. International Comparisons of Productiviry and Causes of the Slowdown. Cam-
bndge, Mass.: Ballinger.
Fraumeni, Barbara M., and Dale W. Jorgenson. 1980. The role of capital in U.S. economic growth,
1948-19~76. Pp. 9-250 in (I. von Furstenberg. ea., Capital Efficiency and Growth. Cambridge,
Mass.: Ballinger.
Fraumeni, Barbara M., and Dale W. Jorgenson. 1985. The role of capital in U.S. economic growth,
1948-1979. In A. Dogramaci, ea., Behavior And lnterpretanon of Productiviry Measures. Boston:
Mariinus Nijhoff.
Fujime, Kazuya. 1983. Structural changes in energy demand in the OECD nations with emphasis
on the U.S. and Japan, and a cyclical behavior in oil markets. Energy Laboratory Working Paper
No. MIT-EL 83-015WP. Cambridge: Massachusetts Instinlte of Technology.
Gallop. Frank, and Dale W. Jorgenson. 1980. L'.S. productivity growth by industry, 1947-1973.
Pp. 17-136 in J. W. Kendrick and B. Vaccara, eds.. New Developments in Productivirv Mea-
surement and Analysis. Studies in Income and Wealth, vol. 41. Chicago: University of Chicago
Press.
Gallop, Frank, and Dale W. Jorgenson. 1983. Sectoral measures of labor cost for the United States.
1948-1978. Pp. 185-235, 503-520 in J. E. Tnplett. ea., The Measurement of Labor Cost.
Studies in Income and Wealth, vol. 44. Chicago: University of Chicago Press.
Hogan, William W. 1984. Patterns of Energy Use. Harvard University. Energy and Environmental
Policy Center. Carnbndge, Mass.
OCR for page 76
76
DALE W. JORGENSON
Jorgenson, Dale W. 1980. Accounting for capital. Pp. 251-319 in G. von Furstenberg, ea., Capital
Efficiency and Growth. Cambridge, Mass.: Ballinger.
Jorgenson, Dale W. 1983. Modeling production for general equilibrium analysis. Scandinavian
Journal of Economics 85(2):101-112.
Jorgenson, Dale W. 1984. The role of energy in productivity grown. Pp. 270-323 in J. W. Kendrick,
ea., Iruern~nonal Comparisons of Productivity and Causes of the Slowdown. Cambridge, Mass.:
Ballinger. Earlier, less detailed versions of this material appeared in American Economic Review
74(2), May 1978: 2~30; and in The Energy Journal 5(3), July 1984: 11-25.
Jorgenson, Dale W.' and Mamn A. Sullivan. 1981. Inflation and corporate capital recovery.
Pp. 171-238, 311-313 in C. Hulten, ea., Depreciation, Inflation and the Taxation of Income
from Capital. Washington, D.C.: The Urban Institute.
Samuelson, Paul A. 1953. Prices of factors and goods in general equilibnum. Review of Economic
Studies 21(1):1-20.
Representative terms from entire chapter:
productivity grown
