How the 1970s Changed the U.S. Economy
The U.S. economy underwent a fundamental shift in the early 1970s. The cause of that shift is still elusive. But it’s a good bet changes in energy technology probably had something to do with it — with lessons for our economic future.
A new website called “WTF Happened In 1971?” is getting an increasing amount of attention. The site is incredibly simple — just a huge series of charts showing how economic statistics seemed to dramatically change in the early 1970s. For example, real wages rose steadily throughout the 60s, but plummeted after 1973:
Part of this was probably because productivity growth, one driver of wage increases, slowed down around the same time. But productivity and pay also began to diverge, even when worker benefits such as health care are included:
A series of other changes followed around 1980 — rising inequality, soaring budget deficits, ballooning trade deficits, falling savings rates, and so on. These are often attributed to the laissez-faire economic policies of President Ronald Reagan. But some of them, including trade and budget deficits, show hints of beginning a decade earlier.
So what did happen in the early ‘70s to cause such a large and enduring structural shift in the U.S. economy? One obvious candidate is the oil shock of 1973. A coalition of Arab nations, angry at Western support for Israel during a recent war, organized an oil embargo, sending what had been very stable oil prices suddenly skyrocketing:
The oil crisis is one of the chief suspects in the productivity slowdown that began in the early ‘70s and ended in the mid-1990s. Nobel prize-winning economist William Nordhaus, writing in 2004, found oil-intensive industries accounted for two-thirds of the slowdown.