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Prosperity’s Secret
Ingredient
IDEAS Boston 2004
The Boston Globe
Federal Reserve Bank of Boston
Barry Bluestone
Northeastern University
Boston, Massachusetts
June 7, 2004
The Post-War Glory Days
1947-1973
Rapid GDP Growth in the U.S.:
1950s: 3.9%
1960s: 4.4%
1970s: 3.2%
Real Family Income doubles (+104%)
Declining Unemployment
Unemployment Rate declines to 3.8% --
1966-1969
Rising Incomes for Most Families
Long-Term Real GDP Growth in the
A n n u a l G ro w th
United States 1800-1995
6.0%
5.1% WW II
5.0%
4.5% 4.5%
4.4%
4.2%
4.1%
4.0% 3.9%
D
E 3.2%
A v e ra g e
P 3.0%
3.0% 2.9%
R
E
S 2.3%
S
2.0% I
O
N
Glory Days
1.0%
0.1%
0.0%
1800-1840 1870-1890 1913-1929 1939-1949 1959-1969 1979-1989
1840-1870 1890-1913 1929-1939 1949-1959 1969-1979 1989-1995
Sources: David (1800-1840); Gallman (1840-1870); Maddison (1870-1929); CEA 1987 (1929-59); CEA 1997 (1959-1989); "Economic
Indicators" (1989-2000)
How U.S. Family Income Grew
A n n u a l P e rce n t C h a n g e
1947-1973
4%
3.0%
3% 2.7% 2.7%
2.6%
2.4%
2%
1%
0%
Lowest 20% Middle Top 20%
Lower Middle Upper Middle
Why the U.S. Grew So Fast
1947-1973
Y= C+I+G+X-M
Consumer Boom
Pent up Savings & Pent up Demand
Union collective bargaining gains
Investment Boom
Conversion to Civilian Production
Government Spending Boom
State & Local Spending on Urban Renewal,
New Suburbs, New Regions
Cold War
Export Boom - Marshall Plan
Import Implosion - Legacy of WWII
The Post World War II
Virtuous Cycle Pent-up
Demand
Pent-up
Savings
Union Public
Colle ctiv e Se ctor
Bargaining Wage & De mand
Gains Benefit Stimulus
Consumption
Growth
Virtuous
Cycle Investment
Output
Growth
Productivity
Growth
Growth in Te chnological
Labor Supply Innov ation
Federal
R&D
Spending
The End of Affluence …..
An Age of Diminished
Expectations
R
Revised GDP Growth Rates
A n n u a l G r o w th
1959-1995
5%
4.4% Declining Growth Rates
4%
3.2%
3.0%
3%
2.3%
A ve ra g e
2%
1%
0%
1959-1969 1969-1979 1979-1989 1989-1995
A n n u a l U n e m p lo y m e n t R a t e
Average Unemployment Rate
United States 1960-1989
8.0%
7.3%
Rising Unemployment
7.0%
6.2%
6.0%
5.3%
5.0%
4.0%
3.0%
1960s 1970's 1980's
Source: Bureau of Labor Statistics, Handbook of U.S. Labor Statistics
A n n u a l P e rc e n t C h a n g e How Family Income Grew
1973-1995
2%
1.3%
Increasing Income Inequality
1%
0.5%
0.2%
0%
-0.2%
-0.6%
-1%
Lowest 20% Middle Top 20%
Lower Middle Upper Middle
Source: U.S. Department of Labor
So Why Did the U.S. Growth Engine
Sputter in the 1970s?
Oil Crisis in the 1970s
Business forced to focus on energy efficiency,
not new products or new technologies
Corporate Myopia and Arrogance in face of new
competition
Little emphasis on productivity, quality, and
innovation
Global Competitors stepped in
Imports clobbered the economy
Labor Productivity Growth
A n n u a l G ro w th
1949-1995
1949-1973 1973-1995
3.5%
3.4%
3.0% 3.1% 3.1% Plummeting
2.5%
Productivity
2.0%
A v e ra g e
1.5%
1.3%
1.0% 1.2%
1.1%
0.5%
0.0%
1949-1959 1959-1969 1969-1973 1973-1979 1979-1989 1989-1995
Imports as % of GDP
Truman Eisenhower Kennedy Johnson Nixon Ford Carter Reagan Bush Clinton
16%
14%
12%
P e rc e n t
10%
8%
1929 Import/GDP Ratio
6%
4%
2%
47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99
YEAR
Surprise, Surprise!
Prosperity Regained …
1995-2000
R
Revised GDP Growth Rates
A n n u a l G r o w th 1959-1999:III
5%
4.4% 4.5%
4%
3.2%
3.0%
3%
2.3%
A ve ra g e
2%
1%
0%
1959-1969 1969-1979 1979-1989 1989-1995 1995-1999
A n n u a l U n e m p lo y m e n t R a t e
Average Unemployment Rate
United States 1960-1998(II)
8.0%
7.3%
7.0%
6.4%
6.2%
6.0%
5.3%
5.0% 4.9%
4.0%
3.0%
2.0%
1960s 1970's 1980's 1990-95 1996-98
Source: Bureau of Labor Statistics, Handbook of U.S. Labor Statistics
So Why did the U.S. Grow
Again?
The New Conventional
Wisdom:
The Wall Street Model
Wall Street Model
Weak Trade Unions kept wages and prices down
Welfare Reform increased labor supply, keeping wages
and prices low
Tight monetary policy kept inflation under control and
interest rates low
Deficit Reduction/Surplus Generation raised aggregate
savings rate, lowering interest rates
Free Trade depressed wages, forced prices down, and
kept inflation under control
>>>>>>
All leading to a stock market boom and new
investment
Subdued Increased
Inflation Savings
Wall Street
Virtuous Cycle
Falling
Increased Interest
Rates
Corporate
Profit Rising
Stock
Prices
Improved
Productivity
Virtuous
Technological
Innovation
Cycle Increased
Wealth
Increased
Capital
Investment
Increased
Spending
Output
Growth
Falling
Interest
Rates
Subdued Incre ase d
Inflation Sav ings
So Who’s responsible for the new
economic boom?
Was it Bill Clinton … who got the deficit under control?
Was it Alan Greenspan … who got inflation under
control?
Was it Ronald Reagan … who got government under
control?
Answer:
None of the above ....
Despite all the ballyhoo, the Wall Street Model does
NOT explain the U.S. boom in the late 1990s
It takes a little bit of history to
understand America’s
new prosperity...
Long Lags in
Technology/Productivity Cycle
R a te
Revised Productivity Growth Statistics
A n n u a l G ro w th
1949-1999:III
4% 3.4%
3.1% 3.1%
3%
Productivity Rebound
3% began in the 1980s
2.1%
2%
1.7%
1.6%
A v e ra g e
1.5%
2%
1%
0.8%
1%
0%
1949-1959 1959-1969 1969-1973 1973-1977 1977-1981 1981-1989 1989-1993 1993-1999
"Learning Curves"
Introduction of New Technologies
4.5
Technology
Release 3.0
4 Technology
P r o d u c t iv it y
Release 2.0
3.5
3
2.5
Technology
Release 1.0
2
Actual Productivity Trend
1.5 -----------
1 1 8 15 22 29 36 43 50 57 64 71 78
Time
Figure 3.4 Productivity Growth during the
British Industrial Revolution
%
in
1.2
L a b o r P r o d u c tiv it y G r o w th
1.1 1.1%
1
"Mature"
0.9 Phase
0.8
0.7
0.6
0.5
"Pre-Revolution" Phase 0.5%
0.4 0.4%
"Diffusion/Learning"
0.3 Phase
0.2 0.2%
0.1 "Initial" Phase
0
1660 1680 1700 1720 1740 1760 1780 1800 1820 1840 1860 1880
Source: Adapted from Jeremy Greenwood, 'The Third Industrial Revolution"
Productivity Growth
%
in
during the U.S. Antebellum Period
1.6
G r o w th
1.40%
1.4
L a b o r P r o d u c tiv it y
1.2
1
0.8
0.63%
0.6
0.4 "Diffusion/Learning"
0.30%
0.2
1800 1805 1810 1815 1820 1825 1830 1835 1840 1845 1850 1855 1860 1865 1870
Source: Adapted from Jeremy Greenwood, "The Third Industrial Revolution"
New Technologies that spurred
Economic Growth
Steam Engine …. 19th C.
Electrification …. Early 20th C.
Integrated Circuit …. Late 20th C.
– Computer Hardware
– Computer Software
– Internet
– e-commerce
But each takes decades to impact
productivity and growth
Where did the new technology come
from for the 1990s Boom?
The Missile Race following Sputnik (‘50s/’60s)
The Space Race with Russia (‘60s/’70s)
From Government Spending on Defense to the
Private Sector in a Quarter Century
It was hideously expensive, terribly wasteful, but
in a peculiar way it paid off decades later
So who’s most responsible for U.S. Economic Boom?
Nikita Khrushchev
Public Sector + Private Sector
Working Together
Federal Government provided Basic
Research funds
Local, State, and Federal Government
educated and trained a labor force to
effectively use the new technology
Private sector converted basic research to
applied development
.... and productivity soared
Public Investment in the 1960s,
1970s, and early 1980s ...
Basic Research
Education (after Sputnik)
Public Infrastructure (Interstate
highways, airports, internet)
.......................PAID OFF IN THE 1990s
But We will Sabotage Prosperity
if we stick with the Wall Street
model ...
The Wall Street Model says ...
• Give tax breaks to the rich so that they will invest
... and drive up stock prices
• Cut government spending to spur aggregate
savings
• Expand Free Trade with no conditions
• Weaken Trade Unions
• Weaken the Social Safety Net
RESULT: NO MONEY FOR INVESTMENT
NO INSTITUTIONS FOR EQUITY
Trends in Public Investment
Federal Outlays for Physical Capital, Research and Developm ent, and
Education and Training: As a % of GDP
2.75
2.7%
2.5
2.25
% of GDP
1.75%
2
1.75
1.5
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Year
% of GDP
0.5
0.75
1.25
1.5
1.75
2.25
1
2
1962
1964
1966
1968
2%
1970
1972
1974
1976
1978
1980
1982
As a % of GDP
Year
1984
1986
1988
1990
1992
Federal Outlays For Research and Developm ent
1994
1996
1998
2000
2002
2004
1%
Federal Outlays for Non-Defense R&D
As a % of GDP
1.20%
1%
1.00%
0.80%
% of GDP
0.60%
0.4%
0.40%
0.20%
62
65
68
71
74
77
80
83
86
89
92
95
98
01
04
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
Year
Federal Outlays for Research and Developm ent in National Defense
As a % of GDP
1.40%
1.20%
1.00%
% of GDP
Reagan “Boomlet”
0.80%
0.60%
0.40%
62
65
68
71
74
77
80
83
86
89
92
95
98
01
04
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
Year
Federal Outlays For General Science R&D
As a % of GDP
.75%
0.80%
0.70%
0.60%
0.50%
% of GDP
0.40%
0.30%
.10%
0.20%
0.10%
0.00%
62
65
68
71
74
77
80
83
86
89
92
95
98
01
04
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
Year
Federal Outlays for Energy R&D
As a % of GDP
0.14%
Energy Crisis
.12%
0.12%
0.10%
% of GDP
0.08%
0.06%
0.04%
.015%
0.02%
0.00%
62
65
68
71
74
77
80
83
86
89
92
95
98
01
04
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
Year
Federal Outlays for Transportation R&D
As a % of GDP
0.06%
0.05%
.04%
0.04%
% of GDP
0.03%
.02%
0.02%
0.01%
62
65
68
71
74
77
80
83
86
89
92
95
98
01
04
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
Year
Federal Outlays for Natural Resources and Environm ent R&D
As a % of GDP
0.06%
.05%
0.05%
0.04%
% of GDP
0.03%
.02%
0.02%
0.01%
62
65
68
71
74
77
80
83
86
89
92
95
98
01
04
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
Year
Federal Outlays for Health R&D
As a % of GDP
0.25%
.25%
0.20%
% of GDP
0.15%
.10%
0.10%
0.05%
62
65
68
71
74
77
80
83
86
89
92
95
98
01
04
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
Year
A Model of Growth for the
21st Century
Regaining and Sustaining
Prosperity
Quick stimulus in short run
Public investment in basic research,
education, homeland security, and
infrastructure in the long run
Restoring Social Equity
Higher Minimum Wage
Labor Law Reform to Foster Unionization
Fair Trade
Invest in Public Schools
Universal Health Care Coverage
Expand Public Goods (e.g. Transportation,
Day Care, Elder Care)
21st Century
Main Street Model
Virtuous Cycle
Union
Fe de ral
Colle ctiv e
Re se rv e
Bar gaining
Policy
Gains
Wage &
Benefit Consumption
Growth
Incre ase d
M inimum
Wage
Virtuous
Cycle Investment
Output
Growth
Productivity
Growth
Grow th in
Enhanced Labor Technological
Supply Innovation
Public
Public Public
Investment in
Investment in Investment in
Education &
Infrastructure R&D
Training
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