Non-farm business productivity fell by 3.2% in the first quarter of 2014, according to the Bureau of Labor Statistics’ revised data. Most commentators have rather ignored this number. You expect productivity figures to be bad when GDP drops unexpectedly, as it did in the first quarter —after all the last such bad number was in the first quarter of 2008, at the outset of the Great Recession, and the one before that was in 1990, when that recession hit unexpectedly. Still in this expansion, output numbers have been much weaker than employment numbers as productivity has stagnated. But then, in a period of such massive malinvestment, to use the Austrian economists’ term, that’s what you’d expect.

Productivity growth is the fundamental underpinning of our prosperity. Thomas Malthus forecast in 1798 that human population would always outrun the capacity to feed it. Productivity growth, the ability to produce more with the same amount of labor, is the only reason why he has so far been wrong. If the Industrial Revolution’s effects prove temporary, and productivity growth slows to zero, then in the long run Malthus will be right after all and we will be destined for progressive impoverishment as population grows.

Productivity growth in Britain was already ticking along at about 0.5% or so per annum when Malthus wrote, and his Britain was already close to the most prosperous society the world had ever known, exceeded only by Song Dynasty China and far ahead of the supposed marvels of Greece and Rome. Productivity growth accelerated during the nineteenth and early twentieth century, peaking, at least in the United States, at 2.8 % annually in the quarter century after World War II.

As far as we can tell, productivity continued growing rapidly during the U.S. Great Depression. It thus survived unscathed that decade of exceptionally bad economic policy, although naturally the disruption caused by the worst years of the depression had a temporary effect. In Britain, where policy was much better, the 1930s were years of exceptional productivity growth and business creativity, with radar, penicillin, the Spitfire and artificial fabrics being just the high points of the period’s British innovations.

Mysteriously, a trend that the 1930s hadn’t dented was severely affected after 1973, with average annual U.S. productivity growth in 1974-2007 of 1.9% down by a third from its 1948-73 level of 2.8%. That’s far too long to be a mere statistical blip; it also includes both Republican and Democrat presidencies, together with a supposed rebirth of American capitalism in the 1980s and a supposed “productivity miracle” after 1997.

The mystery becomes clear when you remember that the early 1970s saw the establishment of most of the big U.S. regulatory agencies, notably the Environmental Protection Agency and the Occupational Safety and Health Administration. In addition, it was around this time that the approval process for major new projects of all kinds became immensely complexified by the trial lawyers’ activities and those of various environmental and other groups. Add to this legislation such as the Endangered Species Act of 1973 and you have a recipe for the lurch to lower productivity seen in the mid-1970s. (The 1973 Arab oil embargo didn’t help either, but that effect was reversed in the mid-1980s.) A further burst of regulatory legislation under the fatuous George H.W. Bush in the early 1990s prevented the productivity slump from reversing. (Alan Greenspan’s late 1990s “productivity miracle” was a modest uptick, stopping short of the 1948-73 growth rate, caused by a Republican Congress and a moderate President omitting to pass yet more economy-sapping legislation.) Its wealth-draining effect has lasted to this day.

Since 2007 productivity growth has taken a further downward lurch, averaging only 1.4% annually compared to 1.9% before 2007. There are a number of causes of this further malaise, which I will come to below. Suffice it to say that the combined effect of the 1974-2007 slowdown and the further 2008-14 malaise has been to reduce GDP by no less than 32% over the last 41 years. In other words, without the 1970s regulatory agencies and the other more recent effects, we would today be 47% richer than we are.

Those gains would mostly not have gone to the rich, so the decline in blue-collar and middle class living standards since 1973 would have instead been a very healthy uplift. Truly the earnest leftists who in the early 1970s claimed that their regulatory schemes could be imposed at only modest cost have been proved dramatically, catastrophically wrong. While they have benefited both psychologically and financially through cushy jobs with the EPA and various non-profits, the rest of us have been ripped off. For most of us, a few Cuyahoga River fires would have been well worth enduring, given the wealth we would today be enjoying.

Regulation is not however the principal cause of the further decline in productivity since 2007. The Obamacare health regulations only came into force at the beginning of this year, the emissions standards effectively ruling out new coal-fired power stations have not yet come into force, and the immense power of the banking sector lobbyists has emasculated most of the provisions of the 2010 Dodd-Frank Act that had teeth. Even the tsunami of malinvestment caused by the 2007-08 “global warming” foolishness in the last years of the Bush administration was halted before Solyndra and Fisker could be joined by more than a few other boondoggles. Undoubtedly there is damage to come from the Obama administration’s efforts, but so far that damage appears to have been minor.

The true cause of the 2008-2014 productivity slowdown can be seen when you look at multifactor productivity. Whereas labor productivity has steadily increased over the years, capital productivity, output per unit of capital services, is far below its peak in the middle 1960s and declined sharply in 2006-09. Multifactor productivity growth was negative in 2008-09 before rebounding nicely in 2010 and falling away thereafter (we do not yet have figures for 2013.)

This trend can thus be related to Fed policy. Interest rates have been generally loose since the middle 1990s, so while capital inputs to the economy have increased, capital productivity has declined, falling especially rapidly in 2008-09 with the destruction of value of much of the housing investment of the middle 2000s. Since 2009, capital inputs to the economy have increased at a moderate pace. Initially the burst of cheap capital benefited labor productivity, which increasing at satisfactory rates of over 3% in 2009-10. However, as the economy has become more distorted labor productivity growth has fallen away badly, averaging only 0.5% growth annually since the beginning of 2011.

The current trend is thus clear. Capital inputs to the economy are increasing, as capital is so cheap. But their productivity is declining steadily, as investment is concentrated in unproductive activity. In the current context, you can see the record levels of corporate profits being recycled into merger activity, only occasionally productive, and share repurchases at today’s high prices, almost certainly unproductive as they will in many cases be followed by share issues at lower prices in the next slump, as in 2009. Productive uses of capital, for new investment in productive capacity and dividends to shareholders who can reinvest them elsewhere (or fund their retirements with them) have not increased and are running at levels far below those of comparable past economic and stock market booms.

Without productivity growth, Americans cannot grow richer. Should current trends continue, they will see an ever declining standard of living for the middle classes and below, with concentration of wealth among speculators at the top, while production continues to exit to emerging markets where labor is cheaper and savings better rewarded.

This Pikettyesque future is not however inevitable. With two changes of policy, the trends can be reversed and U.S. productivity growth returned to its historic healthy levels. First, a massive deregulation must take place, focusing on those hidden regulations and costs that have made infrastructure and fixed investment so much more expensive than its historic level. Following such a change, we will see a surge in genuine investment in infrastructure, capital equipment and energy projects which will pour wealth into American middle class pockets.

Just imagine, for example, the wealth effect on Binghamton, N.Y., if the state government in Albany were to reverse its current damaging policy, allowing fracking in the New York sector of the Marcellus shale, but banning the construction of new casinos, temples of destruction that suck wealth from an already impoverished public and terminally damage the social fabric of the communities they “serve.”

The second change needed, as recommended in these columns many times, is a reversal of the Fed’s insane policies that have kept real interest rates negative for half a decade, penalizing savers and diverting investment into unproductive uses. There would be a few years of creative destruction as the last several years’ malinvestment fell into bankruptcy, but thereafter, if regulatory barriers had been removed, living standards, productive investment and productivity would all enter into a strong rebound.

The evidence for the damage from current policies is staring us in the face. It’s up to us, through our elected representatives and through our own efforts, to end them.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)