First quarter labor productivity growth, published by the Bureau of Labor Statistics Wednesday, was unexpectedly positive, with non-farm labor productivity rising 2.2% over the previous quarter. Wall Street mostly rejoiced at this number (the stock market was down, but irrationality is the middle name of most short term trading moves.) However to the impartial observer it was a very odd statistic indeed, for two reasons. First, productivity generally declines going into a recession, as unexpected cuts in output surprise companies which do not have time to lay people off (or don’t want to, in case output blips back.) Second, the oil price is now substantially above its real level after the 1973 oil crisis. Since that episode ushered in a decade of exceptionally poor productivity growth in the United States, why aren’t we seeing the same effect now?

Currently there is little evidence for a productivity slowdown, although the Bureau of Labor Statistics figures can be revised substantially several years after they first appear. Multifactor productivity, the best measure of productivity (since it takes account differences in labor’s skill levels and the capital intensity of the economy) rose by 1.3% in 2000-07, just slightly above the long term average of 1948-2007 (1.2%) but well below the rate in the halcyon years of 1948-73 (1.9%). To show the extent of the 1970s slowdown, multifactor productivity DECREASED by 0.3% in 1973-82, then increased by a fairly steady 1.0% annually from 1982-2000 – there was no significant acceleration in the 1990s.

Multifactor productivity growth has in the last 40 years been considerably lower than labor productivity growth because of the steady decline in the efficiency of capital utilization. This capital productivity increased by 0.6% per annum in 1948-66, but has declined by a fairly steady 0.9% per annum since then, with a modest reversal in the 1980s. One can imagine why: the period since 1966, with the exception of about a decade 1979-89, has been one of very low or even negative real interest rates. In such an environment, when capital is so cheap, it simply gets wasted.

Academics are not entirely agreed on the reasons for the productivity slowdown of the 1970s, to put it mildly. Some such as William Nordhaus blame the oil price spike, and the need to reorient the economy to an environment of permanently higher oil prices—Nordhaus points out that the productivity slowdown was most severe in oil-related industries. Others have noticed that service employment grew rapidly during the decade, and that productivity growth in services was much less than in manufacturing. Others attributed some of the decline to the entry of the idle and self-absorbed baby boomers into the workforce. Finally there is the environmental cleanup mandated at the beginning of the decade, with endless resources being devoted to cleaning up healthily cooling sulfur emissions, downsizing Detroit’s finest products and finding new and previously unheard-of species of newt to protect.

Similar productivity slowdowns occurred in other countries, suggesting that the oil price rise, the only constant global factor, must have had something to do with it, although in France and Germany socialist governments with sloppy public spending policies, transferring resources to the public sector, certainly bore some of the responsibility.

We can rule out immediately some of the possible causes of the 1970s productivity slowdown as potential repeaters. The baby boomers are coming towards the end of their careers, while today’s kids entering the workforce are a bunch of hard-working conformists with much better grades than their parents and no significant drug or even alcohol habits. The generational explanation for the 70s slowdown is even more attractive than it at first appears, since you could also credit the productivity speedup of the late 90s (to the extent it wasn’t entirely a statistical fiction) on baby boomers reaching their 40s and deciding it was time to straighten up, fly right, and work on funding their pensions. Their disappearance from the workforce into penurious retirement might be thought likely to increase productivity further. However, generational effects are too easy an explanation; the equivalent generation in other countries appears to have had a significantly different upbringing and character, and yet productivity slowdowns happened globally in the 1970s as well as domestically.

Service employment is more difficult to dismiss as a potentially recurring factor. While services have become overwhelmingly the dominant feature of the US economy, much of that growth has been in the financial services sector, with such fields as mortgage origination and securitization taking a surprisingly chunky slice of GDP. Since the only way to measure output of such financial services is to calculate the fees charged for them, the significant increase in the overall cost of mortgages since the 1970s has produced a substantial nominal increase in output and a corresponding increase in reported productivity (with the collapse of the savings and loan industry in 1989-92 and the housing boom thereafter it represents a significant portion of the apparent productivity speed-up of the 1990s.)

This should now go into reverse for two reasons. First, volumes of home sales and home mortgages should be depressed for at least a decade. Second, securitization has become a thoroughly suspect technique, suggesting that many home mortgage originators will revert to direct lending, producing less measured economic output but significant savings for the homeowner. At least some slowdown of recorded productivity in this service sector is thus likely.

The oil and commodities price spikes are much more likely to cause downturns in productivity, particularly if they persist for a while, even if reducing somewhat from their peak. The United States uses less oil than in 1973, and foodstuffs form a less important part of its budget, which has led commentators to claim that oil and commodities prices cannot have the effect on the US economy that they had in the 1970s. However, there are two reasons to think that this is wrong. First, the oil price rises of the 1970s occurred in two distinct episodes, in late 1973 and 1979-80, with a substantial period of quiet inflation for the US economy to adapt to the first price-spike before the second hit. Second, oil prices at $120 plus per barrel are now significantly higher than their 1980 peak, which equates to about $103 in today’s money and was in any case short-lived (the highest oil price that persisted for more than a few weeks was equivalent to about $80 in today’s dollars.)

While oil prices will probably descend from their heights as they did after 1981, there are a number of factors propping them up. Most important, the West has now definitively lost control of the oil market. In the early 2000s, it appeared that the emergence of major new production from Russia would finally break the grip of the OPEC oil cartel. However Russia has instead inserted a sinister new factor into the oil market, a player whose interests are not congruent with those of consumers, but which derives a perverse pleasure from making Western economies totter. In addition, the percentage has risen of the world’s oil reserves controlled by state oil companies, with at best 1970s technology for complex exploration and exploitation and often under control of megalomaniacs like Vladimir Putin, kleptomaniacs like the rulers of Nigeria or Angola or simple maniacs like Venezuela’s Hugo Chavez. To counterbalance this, tar sands and even (at $120 per barrel) oil shale have come within the realm of practical extraction, but environmentalism and Chavez’s perverted ideology have prevented these sources from being ramped up to the extent necessary.

This brings us to the final factor believed to be partly responsible for the productivity slowdown after 1973: increased regulation. Detroit, which had manufactured automobiles of great beauty with remarkable efficiency in the 1960s, found itself compelled to put ever increasing amounts of expensive environmental fiddle-faddle in its products, and to redesign them around Congress’s bizarre idea of how an automobile should perform (resulting in the regulatory-loophole-driven SUV.) Steel plants and utilities were forced to retrofit expensive pollution control equipment. Given the passage of the Clean Air Act in 1970, it is quite clear that these regulations were a major factor contributing to the 1970s productivity decline.

This factor is however still with us, and indeed about to be intensified. Global warming may or not be real, but the economic effect of a “cap and trade” carbon emissions control system certainly will be. The Corporate Average Fuel Economy standards, which had been allowed to remain static since they produced the SUV and halved Detroit’s US market share in the 1980s, have recently been intensified, again to the advantage of Asian producers of mini fuel-sippers and against the interests of the US industry. If we get a Democrat President and a large Democrat majority in both houses of Congress this November, we can expect an intensification of regulation as the bureaucracy’s wish-lists, thwarted by Presidential indifference since 2000 or even 1980, all get enacted at once.

There is another factor which will further depress productivity growth this time around, which is trade protectionism. It is now clear that trade liberalization agreements are impossible to pass either in the current Congress or its likely successor. That will suppress globalization, which, aided by modern telecommunications, has been the main factor increasing worldwide productivity and lowering costs. Moreover, other countries, seeing the United States turn to protectionism, will match it. Already the EU is attempting to extend the Common Agricultural Policy beyond 2013, in spite of world food shortages and a price environment that renders it entirely unnecessary for its original stated purpose. Without forward progress on new trade agreements, existing arrangements may well fall apart in an orgy of special favors and “anti-dumping” lawsuits.

Finally, capital will probably become more expensive in the years ahead, as the US works its way out of the current mess and savings rates are at least partially restored. That will make capital productivity once more rise, as it did in 1948-66. The reversal will probably have little effect on multifactor productivity, but will lower reported labor productivity growth, as more of the gradual improvement in multifactor productivity will come from more effective usage of capital and less from labor efficiencies.

With at least two of the four factors thought responsible for the 1970s productivity slowdown in place, an additional factor in protectionism that wasn’t present in the 1970s and a reversal in capital costs tending to lower reported labor productivity growth figures, reported labor productivity increases will in the coming years fall far below what we are used to. Just as president Bill Clinton bore little responsibility for the apparent (and largely spurious) increase in productivity growth in the 1990s, but nevertheless took the credit, so whoever is in power after 2009 will be blamed for the decline in apparent productivity growth, even though he or she will bear at most a modest portion of the responsibility for it.

The upcoming Presidential election isn’t one I’d want to win!

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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.)