The decades following the end of World War II were remarkable for their industrial innovation and creativity. From 1948 to 1973， output per hour of work grew by nearly 3 percent per year， on average. But then， for the next 20 years or so， productivity growth averaged only about 1~1/2 percent per year， barely half its previous rate. Predictably， the rate of increase in the standard of living slowed as well， and to about the same extent. The difference between 3 percent and 1~1/2 percent may sound small. But at 3 percent per year， the standard of living would double about every 23 years， or once every generation； by contrast， at 1~1/2 percent， a doubling would occur only roughly every 47 years， or once every other generation.
Among the many consequences of the productivity slowdown was a further complication for the monetary policy makers of the 1970s. Detecting shifts in economic trends is difficult in real time， and most economists and policymakers did not fully appreciate the extent of the productivity slowdown until the late 1970s. This further influenced the policymakers of the time toward running a monetary policy that was too accommodative. The resulting overheating of the economy probably exacerbated the inflation problem of thatdecade.
Productivity growth revived in the mid-1990s， as I mentioned， illustrating once again the resilience of the American economy. Since 1995， productivity has increased at about a 2~1/2 percent annual rate. A great deal of intellectual effort has been expended in trying to explain the recent performance and to forecast the future evolution of productivity. Much very good work has been conducted here at Harvard by Dale Jorgenson （my senior thesis adviser in 1975， by the way） and his colleagues， and other important research in the area has been done at the Federal Reserve Board. One key finding of that research is that， to have an economic impact， technological innovations must be translated into successful commercial applications. This country’s competitive， market-based system， its flexible capital and labor markets， its tradition of entrepreneurship， and its technological strengths- to which Harvard and other universities make a critical contribution-help ensure that that happens on an ongoing basis.
While private-sector initiative was the key ingredient in generating the pickup in productivity growth， government policy was constructive， in part through support of basic research but also to a substantial degree by promoting economic competition. Beginning in the late 1970s， the federal government deregulated a number of key industries， including air travel， trucking， telecommunications， and energy. The resulting increase in competition promoted cost reductions and innovation， leading in turn to new products and industries. It is difficult to imagine that we would have online retailing today if the transportation and telecommunications industries had not been deregulated. In addition， the lowering of trade barriers promoted productivity gains by increasing competition， expanding markets， and increasing the pace of technology transfer.
Finally， as a central banker， I would be remiss if I failed to mention thecontribution of monetary policy to the improved productivity performance. By damping business cycles and by keeping inflation under control， a sound monetary policy improves the ability of households and firms to plan and increases their willingness to undertake the investments in skills， research， and physical capital needed to support continuing gains in productivity.
Just as the productivity slowdown was associated with a slower growth of real per capita income， the productivity resurgence since the mid-1990s has been accompanied by a pickup in real income growth. One measure of average living standards， real consumption per capita， is nearly 35 percent higher today than in 1995. In addition， the flood of innovation that helped spur the productivity resurgence has created many new job opportunities， and more than a few fortunes. But changing technology has also reduced job opportunities for some others-bank tellers and assembly-line workers， for example. And that is the crux of a whole new set of challenges.
Even though average economic well-being has increased considerably over time， the degree of inequality in economic outcomes over the past three decades has increased as well. Economists continue to grapple with the reasons for this trend. But as best we can tell， the increase in inequality probably is due to a number of factors， notably including technological change that seems to have favored higher-skilled workers more than lower-skilled ones. In addition， some economists point to increased international trade and the declining role of labor unions as other， probably lesser contributing factors.
What should we do about rising economic inequality？ Answering this question inevitably involves difficult value judgments and tradeoffs. But approaches that inhibit the dynamism of our economy would clearly be a step in the wrong direction. To be sure， new technologies and increased international trade can lead to painful dislocations as some workers lose their jobs or see the demand for their particular skills decline. However， hinderingthe adoption of new technologies or inhibiting trade flows would do far more harm than good over the longer haul. In the short term， the better approach is to adopt policies that help those who are displaced by economic change. By doing so， we not only provide assistance to those who need it but help to secure public support for the economic flexibility that is essential for prosperity.
