Chapter 10: The macroeconomic effects of environmental regulation: aggregate output and productivity
One of the frequently examined economic phenomena in the US economy of the post-war period is the sharp decline in the rate of economic growth in the 1970s and 1980s. During the period 1947–73, real GDP grew at an annual rate of 3.7 per cent, but between 1973 and 1985 the growth rate averaged 2.5 per cent, 1.2 percentage points lower than it had been in the previous period. The slowdown of GDP growth was accompanied by a slowdown in productivity growth. As far as productivity is concerned, the growth rate of US labour productivity gradually accelerated from about 0.5 per cent a year in the first half of the nineteenth century to a maximum average annual rate of 3.5 per cent in the period 1948–66, but during the period 1973–78 it declined to about 1 per cent and then fell absolutely (negative growth rate) in 1979 (Kendrick, 1980). Similar observations can be made of other major industrial countries where stagflation and productivity slowdown prevailed. Two events coincided with the slowdown of growth in the 1970s: the huge jump in oil prices in 1973–74 and again in 1979, and the advent of environmental regulation. One big difference between the incidence of the two events is that, while the oil price shock hit all countries at the same time, the advent of environmental regulation was not uniform, time-wise, across all countries.
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