Responses to the Productivity $1ow~~wn

Much has been written by economists about the sources of the productivity slowdown; and self-serving policy recommendations by interest groups abound. Strangely, the two are seldom connected. It is as if, upon seeing a neighbor jog his rounds more slowly than usual, we give him our expert advice without finding out why. But, surely, our advice to our neighbor must depend on the source of his lagging pace. Perhaps his shoes are old and pinch his feet, in which case we would recommend a program of modernizing his jogging equipment. Or, instead, has he grown somewhat fat, in which case a period of dietary austerity is in order? On the other hand, if his strength is depleted, it might be suicidal for him to run faster. My theme here is similar. The possible reasons for the U.S. productivity slowdown are numerous. How we should respond depends on what has happened. A less fanciful example of the dilemma can be seen in the area of drilling for oil. Figure I shows the finding rate for oil over the last 15 years. As can be seen, there was a sharp break in the trend in 1973: whereas finding rates had been falling at about 1 percent per year up to 1974, from 1974 to 1978 they fell at 12 percent per year. What was the source of the productivity break in oil drilling in 19747 There are two classes of reasons -manmade obstacles and natural depletion. In the former category we would place.the results of the regulatory apparatus set up in 1973 to control oil prices. In the depletion category we might guess that the dramatic upturn in drilling rates since 1973 has led to severe short-run diminishing returns. Although the oil drilling story is fascinating in itself, I tell it here only to illustrate the more general point. How we should respond to the productivity drop in oil drilling depends crucially on which of the two explanations in the last paragraph we believe. If we think manmade impediments (price controls, high or distorted taxes, confusing regulations) are to blame, then we should work overtime to rationalize or dismantle these obstacles. If, on the other hand, we feel that we have simply been dealt a poor hand by nature (depletion of resources or new ideas, low marginal productivity of capital), then the appropriate response is much less clear. Upon seeing that the yield per well drops sharply, do we want special tax incentives for investment or saving to induce us to drill more wells? Or should we drill less and use the freed resources to develop synthetic fuels or to enjoy solar intensive beach