The productivity of capital in a period of slower growth

THE UNITED STATES has invested a smaller fraction of its gross national product in capital goods than almost any of its major international competitors in the 40 years since 1948. Over this same period, average labor productivity growth in the United States has also been among the slowest. For the first 25 years of the period there was little cause for dissatisfaction. U.S. productivity growth was higher than it was in the prewar years, and the still higher rates in Europe could easily be ex-plained as a catch-up phenomenon. But after 1973 U.S. labor produc-tivity growth fell to only a little more than 1 percent a year, and in the past five years net investment has dropped substantially. Many people have argued that increasing the level of physical in-vestment in the U.S. economy would have a large payout in higher productivity growth. We agree that investment should be increased, but we suspect that the potential productivity improvements are being ex-aggerated. The issue is important both for economic analysis and for economic policy. If the growth payoff from increasing the capital stock is large, economic policy can concentrate on raising national saving and investment. If the payoff is small, the nation would be wise to bend some of its efforts toward other means of improving productivity growth. From the perspective of economic analysis, we want to know how t