Reading Paul Krugman this week, I found that a question that has often nagged me is nagging me more than usual. Take a look at these two graphs that Krugman put up:
Now, this is not exactly couched in the careful, formal language of macroeconometricians, but it seems like Something Big happened in the early 1970s.
What was it??
First, there are a few candidate "trend break events" that seem dubious to me. The first is a general technological slowdown, a la Tyler Cowen. It does not seem very likely that the "low hanging fruit" of science would suddenly run out within a two-year period. Also, the "neoliberal"/Reagan policy revolution seems an unlikely candidate, since that happened after 1980. Finally, the entry of women into the workforce was slow and steady.
The decline of unions has been postulated as a cause. And there does look to be an especially steep dropoff in membership in the late 70s:
But this is a bit problematic too, because A) the trend break seems to come a few years later than the earlier ones, and B) it's not clear that union-bashing policies were in place in the early 70s. I guess I wouldn't rule this one out, but my intuition is that it was a result, not a cause, of the Something Big.
This leaves me with two candidate explanations for the possible early-70s trend break. These are the end of Bretton Woods in 1971, and the Oil Crisis in 1973.
The end of Bretton Woods seems like a big deal. It ushered in the era of floating exchange rates and ended the de facto gold standard that had prevailed since WW2. Why would this have held down wages in the U.S.? Well, it might have allowed the start of globalization, which began to add labor-rich, capital-poor countries to the rich-country trading system, thus holding down wages via factor price equalization. The catch-up of Europe and Japan in the 70s and 80s, and then of China et al. in the 2000s, might have held down U.S. wages as these countries' catch-up productivity gains outpaced their wages. Alternatively, exchange rate risk must have spiked after the end of Bretton Woods; this could have reduced investment as a percent of GDP, raising the return on capital relative to labor, while simultaneously decreasing nondurables TFP via endogenous growth effects. I'm not quite sure if either of these mechanisms holds up under close scrutiny, however.
The Oil Crisis of '73 seems like a big deal. It represented the start of an era of highly variable energy prices. Since energy is an input for basically everything, lots of people have speculated that higher (and more variable) energy costs have caused a general productivity stagnation. Peter Thiel puts the argument thus:
[W]e've had basically no progress on energy. And if you think about where oil prices were in 1973, it was $2 or so a barrel, it is now at north of $100 a barrel, and so you've had sort of a catastrophic failure of energy innovation. And it's basically been offset by computer innovation. I think that's sort of the simplified account of what's happened in the last 40 years.This more limited version of the "Great Stagnation" hypothesis seems much more likely to me than the more general "end of science" version.
So there are two possible culprits for the Something Big that happened in the early 70s. Of course, even if one of these is the villain, it's possible that it's only a proximate cause for something more fundamental. The end of Bretton Woods may have been an inevitable, necessary response to increasing globalization that was made possible by falling transport costs, maybe due to the invention of containerized shipping (and, later, the internet). The rise in oil costs may have been due to increasing extraction costs and decreasing discoveries, and floating exchange rates might themselves have played some sort of role. The question of which "shocks" are truly fundamental, or truly "structural", is a bit like the question of whether guns kill people or people kill people.
But the important point is, something happened in the early 70s that seems to have been a trend break in how our macroeconomy works. We should be examining economic theory and econometric evidence, in ways far more careful and thorough than this blog post (or any blog post), for clues as to the processes that caused the trend break. If necessary, we may have to modify our theories...but isn't that always the case?
Update: It looks like Daniel Kuehn did a very similar blog post about a month ago, and came to some of the same conclusions...
This is indeed one of the more puzzling data series out there.ReplyDelete
I posed on this too about a month ago and came to much the same conclusion on Bretton Woods and unions. I had not thought of 1973 as being a permanent energy cost uncertainty shock - that's a good idea.
I thought you might be interested in this point raised by Andrew Bossie in my comments at the time: "Also, from a technical perspective, if wages and productivity are difference stationary, then wages will trend upward alongside productivity until it doesn't. It can make a gradual process look like a sharp break."
I posed on this too about a month agoDelete
Got a link? I should cite.
if wages and productivity are difference stationary, then wages will trend upward alongside productivity until it doesn't. It can make a gradual process look like a sharp break.
Sure. Trend breaks can be illusions, like I said. Which is one of the reasons I always say "time-series econometrics is not very good" (the others being low-power unit root tests and unknown convergence speeds). That obviously goes for "eyeball time-series econometrics" too.
There were some interesting objections to my dismissal of unions as the explanation in the comments.
This comment has been removed by the author.Delete
what do you think about the following hypothesis:Delete
1. oil prices increase and employers use this as an argument to not increase wages according to productivity growth.
2. eventually a more conservative doctrine come in and stabilized the trend which eventually should lead to union bashing etc.
Isn't 1948 chosen to get the best long fit? It's not nearly so strong starting at 1955; perhaps also not if starting at 1940 (WW II screws up all graphs; so does the Depression).Delete
Why would the "Baby Boomer - birth range" stability be the right range to claim some strong economic relation?
Why isn't the 28 year stable range from 1980 to 2008 (2012, 32 years?) the "norm" with the question, why were Boomer years different? ... Maybe because of post-WW II rebuilding and US temporary overwhelming domination plus women at home having babies.
I don't see how one 18 period is more normal than a stable 32 year period; tho it's obviously more desirable.
The graph is better on Daniel's page, which more clearly shows a sharp uptick in 62-63 for wages (after Kennedy's tax cut?), until the big flat 66-71 Vietnam war step.
And why not combined causes? Boomers joining the workforce, plus boomer moms & more women, plus more computers (IBM 360 in 1964). The computer revolution IS one of "more productivity w/o more wage costs", isn't it?
Yes, and also globalization with more Toyotas, Hondas, and Datsuns being sold. And of course clothes, but not tariff restricted sugar.
Finally, what about welfare and the growth of the acceptance of a gov't supported non-(legal)work lifestyle? (Maybe helping poor folks stay more comfy in poverty, rather than do the hard work to get out.)
I like harder money and would like to blame it on Bretton Woods, but I don't, quite. The Oil Shock of 73 shows the drop in wages.
The power of the graph is in the questions it helps us ask.
But I think the most important is: what is normal?
I remember the time period as one of inflation, commodity price increases,followed by corporate restructuring,deregulation and labor /union changes. Is it possible that manufacturing adjusted to include the costs of commodity prices rising(oil to name one) to the detriment of real wages? That real wages did not keep pace, more value of products with wages left behind? Restructuring,plant closings ,globalization all took place during this time period,following the oil price spikes. Oil ,energy prices were not as significant a factor before OPEC muscle flexing ,followed by inflation. Looking at these charts, the missing pie seems to fit with all of these changes and the resulting adjustment made by the markets. Did profits fill the difference between real wages and productivity? Other costs of manufacturing must have filled this gap.Delete
Some economists put it sweetly (quote from memory): for 25 years, investment had been made under the assumption that 1 ton of steel or wheat meant a certain number of barrels of oil in value, which was no longer true. That meant that 25 years of investment was strongly deoptimized.Delete
I'm glad someone else has noticed this! I've tried to argue before that there's a link between the spiking oil prices of the 70s and the hard stop in median wage growth, but people just looked at me like I'm crazy. There's an extremely high correlation between the median wage, and oil use per capita.ReplyDelete
Maybe it was the end of the Vietnam war. Maybe it was the rise of recreational drug use. The sharpness of the break suggests an initial "point" cause. It had to be something that had an immediate effect on the whole economy to be able to impact an aggregate in that way. The continuing stagnation of the median wages may have multiple causes.ReplyDelete
And this is a great blog post on an important question. It may help in building an explanation that he trend break isn't seen in corporate profits, but rather in the Gini coefficient for household income, which bottomed out in 1968.
What you're talking about is one of the things that points me toward the globalization/labor dump/factor price equalization story, for which Bretton Woods might have been a triggering event or simply a necessary policy reaction. Wouldn't you agree?
My understanding of Bretton Woods is weak, but here's a bit more.Delete
If this "story" is what is important, we should expect to see the real price of goods tumbling for which we know globalization hit early and hard. My historical knowledge, and the fact that I grew up in New York City, gave me the prior that apparel was perhaps the first sector for which this story unfolded. (NYC's garment manufacturing industry was devastated by foreign competition in 1970s, before which time it was bigger than auto manufacturing was in Detroit at its height.) So I found the apparel components of CPI, and what is obvious is the real price of apparel began plummeting in 1970:
This is a very anecdotal use of statistical evidence, but maybe it's something?
I believe this is spot on. From 1945 through the 60s most of the third world plus USSR voluntarily removed itself from the world trading system and hid behind import substitution trade barriers. This created a unique period when the whole of the west plus a few asian countries (japan, taiwan, HK, singapore, etc) had global labour shortages. Consequently labour was well compensated, and non-frictional unemployment close to zero.Delete
The key collalory to your statement above is why exactly did apparel prices start collapsing in the US in 1970? China didn't open up for another 8 years, Japan, Taiwan, HK and Singapore had been exporting for a decade or more. I don't think Malaysia by itself could be the catalyst. But finding the answer to the collapse in textiles in developed countries is key I think - in my hometown of Bradford UK there were deliberate pro-immigration policies right into the 60's to supply cheap labour to the textile mills; remarkable in hindsight.
Oddly enough, I am naive enough to think that the world is close to returning to this state. China is now in a post-Lewisian state, and is exporting its manufacturing jobs (the ones supplying cheap manufactures to the 1st world). In a very short time, as little as five years, China is going to be importing cheap manufacture itself. And I don't think we have enough cheap labour left in South Asia and Africa to supply the demand. Already Vietnam is suffering from skilled labour problems.
My historical knowledge, and the fact that I grew up in New York City, gave me the prior that apparel was perhaps the first sector for which this story unfolded. (NYC's garment manufacturing industry was devastated by foreign competition in 1970s, before which time it was bigger than auto manufacturing was in Detroit at its height.) So I found the apparel components of CPI, and what is obvious is the real price of apparel began plummeting in 1970Delete
This IS something! I especially like how you didn't "data mine" - you stated a reason for having one particular hypothesis, and then you investigated that hypothesis in isolation. When dealing with time-series data where replication is impossible, this is really crucial, but few people understand that, and they "run a million regressions"...
Anyway, rant aside, yes, this squares with my understanding that the world trade system basically "came back online" in the early 70s. It's interesting that the price of apparel was the first to plummet...textiles are always the first manufacturing industry of a developing country...can you dig up data on who was producing apparel at that point?
This wasn't what you were looking for, but here's something else. Trade as a % of GDP in the US also begins to go from flat to an upward arc in the late 60s/early 70s. See the graphs in this old post of mine: http://esoltas.blogspot.com/2012/05/opening-up.html
I will try on the country breakdowns.
Would you ever want me to write this whole discussion up in a guest post for your blog?
Would you ever want me to write this whole discussion up in a guest post for your blog?Delete
Yes, I have thought about this too!!! In fact it's one of the reasons why I'm trying to get an Econ Phd. I think it's related to the fact that US oil production peaked in 1970. If I can figure out how to show this, I'll write a paper on it and send you a link. :)ReplyDelete
I agree, it has to be the oil.Delete
The causal mechanism seems to be rather subtle. Perhaps it would help to work out exactly who became rich. During the 1970s a lot of the former elite lost their shirts as large companies went bankrupt.... but the people who were invested in big oil did very well and ended up buying up a lot of the other companies. If I know my corporate history. :-) Compensation for *all* workers probably followed the trend of the companies that did poorly, while the oil tycoons would continue to pay themselves as well as they did before, even at their new jobs....
Reagan and both Bushes were known to be in the pocket of the oil companies, so this continues to fit.
Now, what predictions does this theory make which could be falsified? It predicts that wages in the oil industry would have kept up better than in other industries. I think this is actually correct, but you can double-check. It predicts that a significant of people would have gone from being oil tycoons to being general-purpose tycoons. I can think of several examples...
I am not familiar with the details but I understood the mid-70's to be start of the massive proportionate growth of the financial sector, to representing something like 40% of the economy today. That wealth has become increasingly concentrated in this (non-productive?) sector might explain the divergence of wages and productivity...ReplyDelete
As for why the financial sector started to grow at that point I don't know. Perhaps the removal of the gold standard had implications for commercial money, removing previous constraints on lending/money creation enabling?
Nope, actually the financial sector started growing in the 40s, and there was nothing special that happened there in the 70s, it just smoothly grew until 2008.Delete
Worth considering the alternative (Minskian?) view that by the 70s the proportion of the financial sector hit a similar percentage to that found in the late 20s...Delete
I'm one of your layreaders (?). Thanks for this post, hopefully it begins a round of discussion on an issue that I have thought long (and fruitlessly) about...not being an economist and all.
Stepping back a bit, I also want to thank you for trying to break things down for readers like me. A few years back, Felix Salmon noted that it was a failure of business/finance journalism that so many articles were impenetrable for a wider audience. Unfortunately, so much is still written in a way that excludes those of us who aren't as sophisticated*. Therefore, I just want to say gracias for the posts and the (unremunerated) effort.
I can't be alone in thanking you for trying to keeping it real...uh, I mean really readable.
* For example, I get the feeling the SR Waldman tries so hard to do this...but it's so easy to get lost in the weeds over interfluidity.
Thanks! Yeah, we grad students can be a dense bunch...I try to keep it as down-to-earth as possible.Delete
The end of Bretton Woods plus the '73 oil crisis , back-to-back , would have been disorienting , to say the least. Combine that with the strategic philosophy of a certain influential economist , and you have all the explanation you need for what transpired afterwards :ReplyDelete
"There is enormous inertia—a tyranny of the status quo — in private and especially governmental arrangements. Only a crisis — actual or perceived — produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable."
- Milton Friedman
This probably explains it. Like the Bolsheviks seizing the opportunity created by the Russian Revolution; or like the extremists taking over during the French Revolution.Delete
Big, chaotic changes provide an opportunity for an organized group to seize power and implement their desired scheme.
Regarding the oil shock,tis shock caused Japan GDP to overnight contract from an economy that grew as much as 16% per year kind of like China does today-or did till very recently, lately they've been donw to "only" 7.5%-to only about 3%.ReplyDelete
This doesn't directly touch on US median income but it's interesting.
I remember reading Galbraith's "Created Equal" and he seems to think that what really changed around1970 is Fed policy begun to turn around from Keynesian Full Employment policy to inflation fighting.
Politcally, this was facilitated by the election of Nixon who had Milton Friedman on his staff preaching the fallacy of the Phillips Curve.
Krugman recently made the point that you really can't compare this recession to the one in 1981-82, though unemployment got to 11.3% at one time, higher than 2009, that was a Fed induced recession.
That all our recessions starting in the early 70s to the early 80s were Fed induced.
The first "real recession" we had in the post Depression era was actually 1990-91.
Galbraith's theory is definitely worth further exploration. It's a more convincing explanation than "Unions!" because it can match up to the rapid change. And once you prioritise inflation over employment, then you will get reduced bargaining power. And indeed, surely the whole point (since the political bias injected into economics has made "inflation" almost completely about "Wage inflation" for 30 years) of fighting inflation is to keep wages down...Delete
I've seen these charts a lot recently and I don't know if I've seen anyone mention that wages were probably inflated above competitive levels pre 1970(i.e. union wage bargaining provided profit sharing with workers so while wages grew with productivity as we saw pre 1970 they were at a higher level than competitive levels). So, post 1970, as productivity grew wages would stay stagnant until in line with actual productivity because of weaker wage bargaining(Not saying this is a good thing at all).ReplyDelete
Please let me know if I'm missing something very obvious here, having written my undergrad thesis on the decline of unions I've probably had a one track mind while reading these posts.
Which would suggest, wouldn't it, that 40 years later, wages have still not fully adjusted to productivity? That sems highly unlikely. Not impossible, but highly unlikely.Delete
Also, even keeping your productivity chart in mind, productivity when into a long slide beginning in 1973 till 1995.ReplyDelete
After that, it had a 10 year rally from the Internet boom. However, evidently it is been much slower since 2005.
The influx of baby boomers into the workforce rapidly increased labor supply and decreased the returns to it. While productivity rose, the returns were diverted to capital. The influx of women mostly occurred later but extended this trend but this tapered off after the mid 90s. By then globalization intensified labor competition continuing it.ReplyDelete
Oil is a good start for this but declined considerably after 83.
Noah, do the series include non-wage benefits (e.g., health insurance contributions)? In the 1970s you also have the entrance of the baby-boomers in the labor market and an increase in the labor force participation of women. These increases in supply may have put downward pressure on labor compensation.ReplyDelete
Noah, do the series include non-wage benefits (e.g., health insurance contributions)?Delete
The first one does, the second does not.
Re: women, see what I wrote in this post.
Ah yes, sorry I missed that sentence. But entry was not that steady. It accelerates between 1970 and 1988. Perhaps a graph in growth rates would have been interesting. I saw Jorgenson present a paper on this at the ASSA meetings a few years back. If I remember correctly changes in supply and productivity growth explain much of the trend. I tried to find the paper on-line for hours but couldn't.Delete
i am not really buying the energy shock notion - cars are way more fuel efficient now than in the 70s, plus we have shale gas. we have all sorts of ways to economize on fuel (the energy intensity of the economy has generally gone down over time).ReplyDelete
the Bretton Woods idea though has a lot of merits. Since the 70s it's been steady diet of adding new cheap labor to the global labor pool. and floating exchange rates really means we have to be competitive in input costs. Also: I think that globalization is the cause of declining unionization not vice versa. For example, we manufacture lots of steel and galvanized products in the US, but a lot of nonunion operations have replaced the big lumbering US Steel (google Steel Dynamics).
Go to it, young economist, but keep in mind Simon Wren-Lewis's comment from his post "Modelling What You Can See":-ReplyDelete
"One of the most depressing conversations I have is with bright young macroeconomists who say they would love to explore some interesting real world phenomenon, but will not do so because its microfoundations are unclear."
IOW: if you do find out you won't be able to publish, so the rest of us will never know.
FWIW, I think the knee in the TFP curve in the late 1960s is ultimately due to US households moving up Maslow's hierarchy of needs. The needs that could be satisfied by physical stuff mostly were so, so people moved on to things like entertainment (tourism), self-actualisation (education), and thinking about the future (healthcare, FIRE). All low productivity industries.
Looking at my last paragraph, it strikes me that this could be put into a representative-agent microfounded model with a sufficiently sophisticated utility function.Delete
But the problem then becomes "why should the model's parameters have exactly the values that they do have?" Moving further into psychology and away from mainstream economics.
Well, it worked for Thaler and Ariely.
Here's a pretty deep model you are looking for (Hall and Jones 2007 QJE)Delete
The key reason is that a health technology, which allows to extend life for another few periods, is worth paying for. This makes the aggregate utility non-homothetic and leads to a shift from manufacturing to services at later stages of development.
The expansion of health services is in fact the main source of the expansion of the low-productivity service sector at the expense of a shrinking manufacturing sector. It started right around the time of the break - 1970.
The microprocessor was invented around 1970. Automation of simple blue collar jobs will be a factor in the long term trend after 1970 but not an explanation of the discontinuity.ReplyDelete
How about a couple of sociological/acceptable financial behavior factors? Reagan's firing all the Air Traffic Controllers in 1981 certainly fired up anti-union sentiments, and keep in mind that the era of flat salaries overlaps the rise of acceptable greed, Boesky and the leverage buyout Milken extremism leading to the current private capital "add debt/cut personnel costs/offshore/extract massive fees then flip the remains business plan"ReplyDelete
Check out this presentation at the 20th Annual Hyman P. Minsky Conference on the State of the US and World Economies New York City, April 13–15, 2011,especially the relationship between rising wages and rising gdp, and also the slide 27, which shows that Germany, Japan and the UK all emulated the graphs shown in your post.
If you want to see an even more powerful relationship, check out this graph of the rise of financial sector profits. http://tinyurl.com/8xcao92
Now, if you compare that with the rise in consumer debt http://tinyurl.com/craljpf it seems to be something that as Wren-Lewis said, allows you to model what you can see.
Simply put, the financial sector took way more out of the economy than the value provided by the simple expedient of hogging all the improvements in productivity: the middle class, aided and abetted by lax banking regulation, and the perception of stability borrowed to maintain its lifestyle until the greed caught up with us via the collapse of the sub-prime market. Oil prices are a second order effect in this morality play.
By the way, congrats on the thesis...will you publish a link here?
I don't understand the oil hypothesis. I can imagine rising oil prices would lower real wages, but wouldn't it have a similar effect on productivity? And how would highly variable prices even explain flat real wages (except insofar as the average price is higher)?ReplyDelete
Obviously, you don't own a car that you have to drive to work every day.Delete
I can imagine rising oil prices would lower real wages, but wouldn't it have a similar effect on productivity?Delete
Actually, as I show in this post, productivity in the nondurables sector slowed substantially at that same point in time...
One response to the oil shock was industry investing in energy conservation and fuel switching (ability to use the cheapest fuel of oil, coal, natural gas, electric). If investment dollars are limited, investment in worker productivity may take a back seat to energy investment.Delete
Plus in many areas, productivity is increased by replacing labor with energy. If energy costs are skyrocketing, why replace labor which is increasing less rapidly?
Not certain how much was spent on energy conservation and retooling in this period, but it was not trivial.
Watson and someone (Brookings March 2012) say that it is Oil and Demographics---not enough people.
My two cents is that, if you want the answer, you better sock the data away before Romney is sworn in, because the .1% are going to erase their traces thereafter.
Demographics didn't have an abrupt change in the early 70s, and anyway it takes time for demographic changes to show up in the workforce!Delete
Actually it did since the first boomers graduated high school only a few years before that and the first group was graduating college. The first years were not that large but ramped up each year for a decade and the trend is the cumulative result. Not only did this put downward pressure on wages but upward pressure on living costs, first on cars and gas, then apartments, and later homes. Then as later boomers moved into and out of high school, their mothers moved into the workforce further increasing demand for cars and gas. The shift may be abrupt but the trend is cumulative and long lasting.Delete
There is a notable discontinuity in workforce growth rates in the late 60s. Also, slower wage growth drove higher participation rates to make up for that, compounding the slowing. Some argue this was the influx of inexperienced workers but it would be strange for this to have persisted so far beyond this. That the creation of work for them would have needed more capital and that the their work would have increased demand for it is natural, as is the effect that lower growth in wages also lowers investment in labor saving technology.Delete
Here, and earlier, you dismiss a putative explanation of the form "parameter x changed, thus causing the observed result" by saying that parameter x did not change abruptly, but the thing to be explained did. There are many examples of dynamical systems where a continuous change in a parameter can result in a discontinuity in the system, as the parameter crosses a critical point. Phase transitions, for instance.
As long as the details of the dynamical system underlying this particular time series are unknown, explanations can at best be more or less plausible.
It would be worth going though Winner-Take-All Politics as well. While it might not find the exact economic reason for the early 70's break, it provides more than enough rationale for why this was never corrected.ReplyDelete
I think you are onto something with regard to Bretton Woods ending. Maybe it would be helpful to bring up some granular historical context of the early 70s. I think the oil shock was a big deal in 1973, but I wonder if the oil shock had a lot to do with the 1971 monetary changes and of course those changes needed to be made...ReplyDelete
..."A second issue was also now at the fore -- the dollar. The price of gold had been fixed at $35 an ounce since the Roosevelt administration. But the growing U.S. balance-of-payments deficit meant that foreign governments were accumulating large amounts of dollars -- in aggregate volume far exceeding the U.S. government's stock of gold. These governments, or their central banks, could show up at any time at the "gold window" of the U.S. Treasury and insist on trading in their dollars for gold, which would precipitate a run. The issue was not theoretical. In the second week of August 1971, the British ambassador turned up at the Treasury Department to request that $3 billion be converted into gold..."
As for my opinion on the Bretton Woods System...Noah Smith, are you aware of the compromise between J.M. Keynes and Harry Dexter White in 1944, which caused the International Monetary Fund to resemble more of Harry Dexter White's plan rather than J.M. Keynes's plan.ReplyDelete
The financial disputes between Great Britain and the rising United States is covered in the third volume of Skidelsky's biographical trilogy of John Maynard Keynes. Have you read Skidelsky's three-volume biography of Keynes, Noah Smith?
I do agree with you that the breakdown of the Bretton Woods System and the oil shock probably had something to do with wages and total factor productivity. But do you think that a reform of the international monetary system is going to "fix" this problem of TFP and wages?
I don't think anyone is advocating an imminent return to the Bretton Woods system.Delete
We can say that excessive debt acquisition during the boom years has had a negative effect on the present Euro crisis, and that austerity during the boom years might have prevented some of the problems we say today, but pushing austerity in the Eurozone today after the fact is unambiguously damaging.
The same is probably true with Bretton Woods. While I would hold that the end of Bretton Woods has had some fairly significant negative effects, trying to return to Bretton Woods today would probably make the situation worse.
Aziz, perhaps I ought to make myself a little clearer. The Bretton Woods System was flawed because it made a national currency a world reserve currency. I would argue that if Keynes's "Clearing Union" plan were followed, Total Factor Productivity and wages might not have been disconnected.Delete
Well Bretton Woods worked remarkably well while it lasted, even though it did not address Keynes' principal objective of avoiding the trade surpluses and deficits of mercantilism. I do think that a gradual evolution of Bretton Woods toward something closer to what Keynes envisaged — rather than the sudden and panicked ending of Bretton Woods that we got in reality — probably would have left us with a vastly superior international financial system.Delete
If I recall correctly Keynes believed that excessive trade surpluses and deficits were the principal problem of his era, and I basically think that we have something like the same problem today. Shame we did not really learn much from Keynes.
So we converge on this issue. I'm glad to hear that. I wonder if Noah Smith would agree with Keynes's Clearing Union Plan...Delete
The book A Great Leap Forward, which is basically a history of 20th century total factor productivity, suggests the slowing growth of productivity had to do with the final build out of the interstate highway system. The great American road building era started with the bicycle lobbies in the late 19th century and accelerated with the automobile in the early 20th. The book is narrowly focused, and I can't say I agree with this hypothesis, at least not on every point, but it is suggestive.ReplyDelete
Interestingly, the great leap forward of the title was the 1930s, an era of major industrial restructuring. That's when management turned into a science and power and control were distributed by electric motors and simple control circuitry. For example, a simple thermostat could allow the continuous operation of a coking oven, rather than requiring regular cool-offs, clean-ups, and warm-ups. Electrical motors totally restructured factories, replacing the older multistory layout with the more modern two dimensional, flow oriented design. Reading contemporary issues of Fortune, you could really get a sense of the changes.
Since the great road build out, we haven't had a major government infrastructure project. There's been no high speed rail or high speed data transmission project to match or augment the creation of our road system (or electric power transmission system). Sure, there's been R&D since then, but we've been relying on the private sector, and if the railroads taught us anything, it is that the private sector does a lousy job at building infrastructure.
Congratulations...I remember completing my defense like it was, well, not yesterday, but only 33 years ago...Have a great career and a great life.ReplyDelete
Thanks for focusing attention on what may be the biggest of the Big Stories. Economics is just a subset of history, after all: one damn thing after another. Historical trend breaks are what it’s all about.ReplyDelete
As one who lived through the period in question in a state of quasi-consciousness, I think two items should be thrown into the mix. First, the trend break is about the end of the “golden age of capitalism”, and I would recommend reading the literature on this, starting with the book by that name. In retrospect, this was a period of largely closed economic systems engaged in either postwar recovery (returning to where they would have been if WWII hadn’t happened), as in Europe and Japan, or thriving off postwar dominance, like the US. Also, we now know that these economies benefitted from the immense technological wave emanating from WWII-era military research. The end of Bretton Woods was important, but it was more effect than cause. Already the eurodollar market had undermined the financial basis for relative autarchy, and convergence of the major industrial regions replaced growth management with competition: mercantilism began to reappear. Economic sociologists discuss this stuff a lot, or at least used to. (I haven’t seen recent econ-soc analysis on these hugely important questions; they seem to have gone all cultural, but maybe I’m not keeping up.)
The second main point is that restructuring happens in recession. There was a hint of this in the Nixon downturn, but the early-mid 70s slump was where restructuring really took off. I won’t go into the process now (why should I be writing so much in a comment?), but the classic case of restructuring-through-recession is the US steel industry in the double dip under Carter/Reagan. This role of recessions makes trend breaks look more angular than they really are.
Incidentally, no one has commented on the difference between TFP in durables and nondurables. My one hint here would be that composition effects are crucial, even if they are invisible in a chart like this. One of your readers pointed out the (near) demise of textiles, an example of a nondurable swallowed up by trade (despite the rearguard efforts of the Multi-Fiber Agreement). Where textiles have survived in developed countries (e.g. Italy), it has been through intense innovation and lots of value-added in design, etc.
Enough for now.
Although textiles are nondurables, we'd expect most tradable items to be durable, especially before the rise of tradable services. And we'd expect to see productivity rise the most in the globalized sectors (which may be simple mismeasurement, a la Michael Mandel).Delete
As for the wave of innovations from WW2, I agree with that, but do you think the end of that wave could have happened abruptly?
If you go to Krugman's post, from the second graph it follows that the difference between the mean and the median wage accounts for more than half of this gap. So a huge part is played by inequality. Also, the workers in the sample are not all workers, but just a subset, which does not take into account management. So the inequality between workers and managers might easily account for the rest of this gap.ReplyDelete
Of course. The GDP has to go somewhere, right? The rest of the extra GDP went to owners of capital, which certainly also increased inequality.Delete
what is the puzzle then?Delete
"Why did inequality increase?"?
Oil? Bretton Woods? Seriously?
what is the puzzle then?Delete
"Why did inequality increase?"?
Not just that, but why did TFP (or, more precisely, nondurables TFP) stagnate following the early 70s?
Oil? Bretton Woods? Seriously?
Consider this hypothesis: TFP stagnation was caused by inequality.Delete
Roughly speaking, when the bosses are able to oppress the workers, they can.... but oppressed workers will not give you the best total factor productivity! They'll waste materials, steal them, etc., if they can, in order to "get back at the boss".
So let's get back to figuring out what caused the inequality. There is strong macroeconomic evidence that fixing the inequality will fix the economy as a whole, anyway.
This is the really big thing that happened in 1971:ReplyDelete
""President Nixon Imposes Wage and Price Controls"
August 15, 1971. In a move widely applauded by the public and a fair number of (but by no means all) economists, President Nixon imposed wage and price controls. ..." http://www.econreview.com/events/wageprice1971b.htm
How was that done? Every company had access to this government sanctioned data on wages: "National Compensation Survey - Wages" http://www.bls.gov/ocs/
They used it very well...and they never stopped using it. Every job description and merit review of those it defined were put on a bell curve. The amount of the "merit review" was frozen by Nixon for 90 days but forever after the review amount was massaged to narrow the wages paid spread and even return it to the center value on new hires. Not exactly a conspiracy to fix wages, but when everyone uses the same document the same way, one gets the same wage fixing results.
Got it. So the government data was used in a coordinated fashion to suppress wages.Delete
I believe this. This fits with known businessman behavior. The lack of the data prior to Nixon would mean that they were unable to do this.
Some of it is just that employer-provided health insurance is not included in income, but has gotten much more expensive, no?ReplyDelete
The first graph includes health insurance in "compensation".Delete
Noah, maybe here we are dealing with the so called zombie ideas dispelled by research but still alive? (1) Please check a paper by João Paulo Pessoa and John Van Reenen "Decoupling of Wage Growth and Productivity Growth? Myth and Reality" (Resolution Foundation). They separate gross decoupling of wages from productivity and net decoupling. By their measure, net decoupling is just 13 percent. (2) Maybe US productivity growth is also mismeasured to the upside? Please check an article by Michael Mandel "The Myth of American Productivity" in January/February 2012 issue of The Washington Monthly.ReplyDelete
I've read Mandel. Sure, it's possible productivity is mismeasured, and what happened in the early 70s was a simultaneous wage and productivity stagnation instead of a "decoupling". It's also possible that the mismeasurement accounts for the difference between durables and nondurables TFP.Delete
Noah, it may be durables/nondurables, whatever. A point I was trying to make is not simply that upon a UFO sighting, we should not rush to speculate what planet it came from, but, first, would need to verify that at the very least it’s not a mirage. More importantly, I hoped to emphasize that mirages in economics have mathematical properties. And that makes economics really vulnerable as it defeats its not so secret urge to become part of exact sciences – if my mathematics is right and even elegant so my models must be too.Delete
Thank you, sir!Delete
Yo, congratulations on your dissertation. Read MK's post and part 3 sounded most interesting. Look forward to reading some of it.ReplyDelete
I also produced a post out of this discussion, and come down mostly to the Bretton Woods side of the argument.
Then — even if we say a big "meh" to the oil shock hypothesis — there is a whole huge chicken and egg argument to be had over whether ending Bretton Woods spurred globalisation, or whether globalisation was the spur that ended Bretton Woods. I'd tend to say both, and see both globalisation and the change in the monetary system as an interlinked development.
Yo, congratulations on your dissertation.Delete
Then — even if we say a big "meh" to the oil shock hypothesis — there is a whole huge chicken and egg argument to be had over whether ending Bretton Woods spurred globalisation, or whether globalisation was the spur that ended Bretton Woods.
If you're going to look at the oil shock in 1973, you have to explain why the wage trend didn't recover during the long period of stable oil prices in 1985 to 2002. Instead, you might consider that US crude oil production hit a sharp peak in 1970, producing a similar inflection point in oil imports. A steadily increasing portion of worker productivity leaving the country to pay for that imported oil?ReplyDelete
Yes, I'm not sure how that works exactly, but it sounds interesting...Delete
I don't understand why someone hasn't done some solid economic analysis of this topic. The peak oil people have been ranting about this for years, but every time I have seen an economist address it they basically same the same thing as Noah.Delete
Or is there research out there that I am not aware of?
This would explain why we had flatlining under Carter (when aggressive efforts were made to replace the imported oil with renewables and efficiency), but actual drops thereafter (when Reagan and his successors said "Why not just import oil?")Delete
My first impulse was sympathy to the comment suggesting a change in Fed policies away from full employment, which itself could be triggered by Bretton and/or stagflation trauma.ReplyDelete
But shouldn't we also look at such charts for other developed countries? Divergences also in 1970, or divergences later, or a lack of any corresponding divergence would tell us different things about the causes.
Take a look at this: http://www.csls.ca/reports/csls2008-8.pdf ("THE RELATIONSHIP BETWEEN LABOUR PRODUCTIVITY AND REAL WAGE GROWTH IN CANADA AND OECD COUNTRIES"). I haven't had time to look at in detil, but it at least looks at a similar set of questions.Delete
Have you considered the following, Did Wages Reflect Growth in Productivity? by Martin Feldstein, http://www.nber.org/papers/w13953
Essentially, if you use the PPI instead of the CPI and total compensation, then real wages perfectly track productivity.
Here is a graph, http://macromarketmusings.blogspot.com/2008/04/more-real-wages-and-productivity.html
Um...how does deflating compensation by an index of producer prices tell us what we want to know? Recipients of labor income typically don't pay producer prices for what they buy. It anything, this simply tells us that there was a divergence between the PPI and indexes of consumer prices.Delete
If something that only consumers and no producers buy gets a lot more expensive (e.g. healthcare), you would expect a divergence between productivity and real wages. Even if there is no change at all in the labor market.Delete
The change would also be permanent, as long as the difference in the price indexes persists.
Here is feldstein,Delete
"The second measurement problem is the way in which nominal output and nominal compensation are converted to real values before making the comparison. Although any consistent deflation of the two series of nominal values will show similar movements of productivity and compensation, it is misleading in this context to use two different deflators, one for measuring productivity and the other for measuring real compensation.
However, it makes sense to use the output deflator or PPI for real wages instead of the CPI because the economic theory is that wages are a cost to firms and that therefore we should use an index representing such costs
Forgot this one. Here is Feldstein explaining why it is better to use the producer price level than CPI...Delete
"... we say that the competitive firm pays a nominal wage equal to the marginal revenue product of labor, i.e., to the marginal product of labor multiplied by the price of the firm’s product. The key real relation must therefore be between changes in productivity in the nonfarm business sector and changes in the nominal compensation paid in that sector deflated by the product price and not by some consumer price that also reflects goods and services produced outside the domestic nonfarm business sector...... As I noted, this implies that the real marginal product of labor should be compared to the wage deflated by the product price and not by some consumer price index. The CPI differs from the nonfarm
product price in several ways. The inclusion in the CPI, but not in the nonfarm output price index, of the prices of imports and of the services provided by owner
occupied homes is particularly important.
Also, Noah, wonderful blog. Your posts are always insightful.
I think there's a theoretical difficulty in creating an analysis of the labor market in which suppliers of labor respond to changes in the real wage defined as nominal compensation divided by consumer goods prices and in which demanders of labor respond to changes in the real wage defined as nominal compensation divided by the prices paid to producers. (This side-steps the fact that for some producers the relevant prices are, in fact, final goods prices, but let's ignore that for now.) For one thing, this opens the possibility that real wages from the point of view of employers and real wages from the point of view of workers can move in opposite directions (and, some fraction of the time, almost certainly will move in opposite directions). In this situation, even defining equilibrium in labor markets will become very, very difficult.Delete
Feldstein's whole paper is excellent. It shows how easy it is to get stung by using "real" numbers instead of "nominal" ones - it can hide things like different deflators being used in different series. Another compelling number from that paper: "Total employee compensation as a share of national income was 66 percent of national income in 1970 and 64 percent in 2006. This measure of the labor compensation share has been remarkably stable since the 1970s."Delete
Still you might wonder why this divergence becomes visible only after 1970 or so. An answer to that can be seen by looking at a chart of historical cumulative CPI - there's an inflection point right around the same time, when the trend rate of inflation suddenly increases. This is also right around the time when Nixon closed the gold window. So the divergence is most likely related to the end of Bretton Woods, but not for the reasons you'd think. Instead, the end of gold convertibility led to inflation taking off, which led to the divergence between PPI and CPI, which made possible the type of numerical confusion captured in the chart above.Delete
OK, this is a very good explanation.Delete
I believe that Feldstein elsewhere explained that around 1980 the Bureau of Labor changed the way they calculated the CPI, something about housing/rent, and/or exports/imports that caused the divergence between the CPI and PPI.
That's interesting. I can't seem to find what changed in PPI in 1980, but that is when you see CPI and PPI clearly diverge. In any case, I think the deflator used in the Productivity series is the GDP deflator, which is similar to PPI, though slightly different.Delete
By the way, a more careful analysis of labor's share of national income, using BLS data, does show a fall in labor's share, but the fall starts around the late '80s not in the early '70s. So perhaps a different set of historical explanations is in order?
Here's an interesting discussion of the issue from 2006: http://knzn.blogspot.com/2006/08/profit-margin-puzzle.html
There is a huge economic anomaly in the early '70's and it's taken the economics profession 35 years to begin thinking about it? Sheesh.ReplyDelete
Now what are the odds of this being true? Economists have talked about this for a long time. The conventional explanation is that it's "skill-biased technological change".Delete
Correct, economists haven't seriously tried to think about it.Delete
Yes, Anonymous, they've talked about it a lot, but spouting bullshit platitudes is not the same as "thinking about it".
Time is supposed to be nature's way of keeping everything from happening at once. If so, it isn't an adequate solution to the problem as the great number of bad things that happened in the early 70s attests. Along with other critical things that took place around the early 70s were a series of structural changes in American and world politics.ReplyDelete
Just as much or perhaps more than purely economic changes, political changes explain the jump in the inequality of power and money between labor and capital reflected in your charts. In the United States, for example, Nixon's Southern strategy was a key stage in the grand reorganization of parties that eventually saw the Republicans and Democrats changing places, with the result that the most reactionary and authoritarian factions of the political nation are now concentrated on one side. Meanwhile, the International left was visibly collapsing. The USSR remained militarily powerful for a while, but it's ideological appeal was spent. In the absence of a credible threat from below, individuals of great wealth had much less reason to mollify the plebs as they had in the 30s and continued to do during the first half of the Cold War. It didn't help that the other circumstance that supported democracy was in decline: as the world moved from the long period when international power required mass armies, there really wasn't much reason for the oligarchs to listen to the population. Everybody who lived through the period recalls how rapidly the air went out of antiwar movement when Nixon ended the draft, but the effects of switching over to a mercenary army are being felt to this day.
Fundamentally, the distribution of incomes is the consequence of a political and cultural struggle. Economists always want to explain what happens as the result of some faceless economic mechanism, and nobody doubts that purely economic factors operate at the margins; but the fundamental explanation of why capital keeps taking a bigger share is because they can.
I think this sums it up. The political change which put the Southern neo-Confederates on the same side as the party of Industrial Tycoons is what led to the rise of a crushingly disastrous situation.Delete
The effects of switching over to a mercenary army are interesting but also obsolete.
There are three strategic equilibria in military matters; which one you are in depends on the current military technology, and also on your terrain.
(1) Small highly-trained elite army is dominant. Middle Ages age of knights, Roman period, or the period of "air power dominance".
(2) Mass conscription field armies are dominant. WWI, WWII, several periods in Chinese history.
(3) Guerrilla warfare is dominant, with the home-turf advantage being crucial and practically unstoppable. This was actually starting already during the Vietnam War, but has now proved utterly decisive outside of deserts where air power is still useable. Even so, guerilla warfare proved powerful in Libya.
I'm not sure whether the Mongolian hordes of Genghis Khan fall into category 1 or 2, mind you; this theory isn't fully fleshed out.
We are in a guerrilla-war-dominant period, and it's going to be interesting to see what happens in the next war where *both* sides use guerrilla tactics and both sides are in the same location (if they're homed in different locations it'll just drag on until they agree to secession).
Brilliant, and yes, I agree that we economists need to dig into the proximate cause of the "change" that occurred during the early 1970's...ReplyDelete
End of the gold standard meant unlimited credit creation by private banks and the ability of the USA to run a current account deficit. The only constraint now was inflation - most importantly inflation in the wages of ordinary workers.Delete
Hence the Volker disinflationary policy, the Union bashing, and taxes falling mainly on wages but not capital gains. Before you know it, we had huge stock market and real estate bubbles in the USA, lots of investment and jobs created in Japan, Taiwan and China, and a huge current account deficit.
Leaving the last vestiges of the gold standard was the leaving of the last constraints to monopoly money printers benefiting themselves and their friends at the expense of everyone else (Cantillon Effect). Real wages cannot keep up with the devaluation through inflation (no, you cannot use CPI to estimate the loss through inflation).ReplyDelete
Agreed. See this graph:Delete
This is wrong. The constraint to monopoly money printers benefitting their buddies was the income tax and estate tax laws, which were worsened by Nixon and then Reagan.Delete
Wouldn't extended Bretton Woods run into the problems of the gold standard eurozone, whether or not it was based on dollars or a clearing zone? Monetary, free capital, fixed exchanged rates, pick two. Or do I misunderstand and BW featured capital controls?ReplyDelete
Noah, I found the Jorgenson paper I mentioned above. It can be found here.ReplyDelete
Jorgenson presented it at the 2008 ASSA meetings in a session titled: "Growth, Productivity, and Wages in the U.S. Economy". In the same session Feldstein suggested several reasons for the divergence between productivity and wages. His speech can be found here: http://www.aeaweb.org/annual_mtg_papers/2008/2008_111.pdf
Among them, differences in deflating (wages are deflated by the CPI, productivity by the GDP deglator) explain most of the gap. This is confirmed by more recent research. See for example this post by Pesoa and Van Reenen:
The US went from a net exporter of goods and services to a net importer in 1971.ReplyDelete
Prior to 1971, the US imported services and exported goods. After 1971, we export services and import goods.
The US imports about 350,000,000 barrels of oil per month. At $100 per barrel, that adds about $400 Billion per year to the trade deficit.
It is important to understand why the 1970s had stagflation.
A heterodox view is that the initial response to oil price shock was a wage-price spiral. The CAFE standards started under Ford and Expanded into a larger "energy policy" by Jimmy Carter was a better response to the oil shock. As a result of Carter energy policy, oil consumption in the US dropped by over 20 percent between 1978 and 1983. It would be the year 2000 before US oil consumption climbed back to its 1978 peak.
This period post Carter Energy Policy coincides with "The Great Moderation".
The Gulf War 1 triggered an oil shock that triggered a recession.
BigAuto suffers during run ups in gasoline prices. The run up in gasoline to $4 triggered a drop in Auto sales in early 2008 and auto was in recession (and trouble), laying off workers before the financial crisis was full blown. The oil shock - auto recession is well known in the Midwest. UMich (almost Detroit) seems like a good place to look into it.
Another factor that enters "productivity" is the investment by companies in energy conservation and the ability to use multiple energy sources. Investments in energy conservation can improve the bottom line, but not affect worker productivity. If investment dollars are limited, then industry may choose to add the ability to switch from oil to natural gas rather than equipment, worker training that will boost productivity.Delete
When Truck speeds drop from 70 mph to 55 mph, truck driver worker productivity drops unless truck capacity increases. The oil shocks drove plenty of changes in standard business practices.
also violence went down:ReplyDelete
I attribute that to the laws removing lead from gasoline, paint, and piping.Delete
Lead poisoning is known to lead to violence. The violence curve correlates frighteningly well with the use of leaded gasoline.
Congratulations on the dissertation. Hope you are using TeX.ReplyDelete
Thanks! And of course I am... ;)Delete
There should be a dissertation formatting package for your university available in TeX already; there is for must universities.Delete
If there isn't, I suggest making one. :-)
The rise of corporate lobbying that began in the 1970s?ReplyDelete
See, for example, http://www.thirdworldtraveler.com/Democracy_America/Rise_K_Street_POAD.html.
I think that it makes more sense to think of the end of Bretton Woods as a consequence of the Something Big, not the cause--Nixon wouldn't have unilaterally ended it if he had not felt the enormous pressure to do so, which was largely a matter of high inflation putting pressure on the fixed exchange rate regime.ReplyDelete
I have two comments on the Oil Crisis of 1973: first, there is a great article by Lutz Kilian in the JEL (I think it was 2008?) on energy price shocks. What I got out of it was that price shocks are not (empirically speaking) nearly as important as anyone thinks, and that for the most part price shocks are driven by demand, not supply. Second, the 1973 crisis was a pretty natural reaction to the Nixon price-fixing regime that was in place from 1971 to 1973. Nixon put a ceiling on the price of oil, and oil producers responded by cutting output. That's just what supply and demand tells us would happen. Yeah, OPEC cited politics as their reason for the embargo, but cartels aren't that easy to enforce--someone would have sold the oil if it had been profitable to do so. So the real question is why did Nixon impose the price ceiling, and the answer, as above, was to deal with high inflation.
So all in all, the only big change I see in the early 1970s is the rise of persistent inflation. So I'm inclined to think that the "Something Big" was a shift in how firms design their labor contracts--the same thing that broke the Phillips curve that AW Phillips first observed also led to the stagnation of median workers income, as well as the collapse of Breton Woods and the oil crisis.
I don't really buy the technological slowdown argument, but if that really is whats driving this then I'd like to just throw this out there: one change in the early 1970s was the end of the space race. It is well established that the space programs from the 1950s until the end of the apollo missions in the early 1970s contributed massively to technological development across the economy.ReplyDelete
"It is well established that the space programs from the 1950s until the end of the apollo missions in the early 1970s contributed massively to technological development across the economy."Delete
That's widely believed by space cadets. I don't know of it being established. Usually people wax about "spin-offs" which turn out to pre-date the space program or have little to do with it.
I suspect if you graphed the median wages of college educated men you would see a lot more growth.ReplyDelete
Graphs of non-college educated men of a specific age, like 30, 40, 50, would also be very interesting.
Taking a lesson from history can help prevent the things that happened in the past happen again. We should learn from previous mistakes so that it would not be repeated.ReplyDelete
Hi Noah, just a quick thought....ReplyDelete
From what I understand, policies that would result in downward pressure on wages (or reduced upward pressure) such as union busting, were being instigated long before neoliberalism/Reagan.
This side of the equation has a long and complex history and neoliberalism/Reagan was just a more extreme version of what had gone on before.
I suppose the problem is how does one measure aggregate labour bargaining power in order to see if a downward trend coincides with the tail off in worker compensation.
In 2010 dollars, $50k/year is about what you need to not have any major financial worries. Employers want to pay employees as little as they can get away with, and once employees don't have any major financial worries they won't complain as much. Above that threshold it's easy to get away with not paying more.ReplyDelete
I wonder how this transition relates to the one where we no longer need everyone working to get everything done.
Perhaps the big thing is demographics. If you date the beginning of the baby boom from about 1946, the early members were very much welcomed into the job market in the late 60's because of the baby dearth during the war. By the early 70's as the boomers continued to hit the labor market in force, it might have put downward pressure on wages.ReplyDelete
Exports. Japan started exporting autos to us in the late sixties.ReplyDelete
Wasn't the sudden rise in Oil prices a response to the decision to terminate Bretton Woods as some commodities (in particular gold) shot up in value and the dollar fell, so it started to make sense for oil countries to boost the price of oil too?ReplyDelete
Then with increasing energy cost and wages still moving up (the notorious wage-price spiral), industry started to deploy more energy efficient and labor saving equipment.
This first boosted productivity, but with the power of unions broken from the late 1970s and market liberalisations kicking in (Carter's move to open up air traffic) the prospects to shift income to owning capital goods became very attractive.
And as a result we went into a reinforcing cycle. More liberalisation, more labor and energy saving capital deepening by industry due to increased electronics/computer automation, more efficient (global) transport, more outsourcing opportunity, even lesser power of labor unions, less resistance against liberalisation demands ...
Ha! I just spotted this. Look at those graphs more carefully. There's a second, more decisive trend break.... at the SECOND oil shock in 1978.ReplyDelete
It's the oil shocks. Very definitely. I mean, I suspect that there's a complex series of consequences triggered by them. And I suspect that this could have been avoided if, for instance, the US had started a crash program, the "moral equivalent of war", to get the US economy off of oil. But the primary cause here is definitely the oil shocks.