explain this to me---**Tweet Text:** "What happened in 1971?" update. HT @MargRev **Chart Title:** Utilization-adjusted total factor productivity **Chart Type:** Line chart **Chart Description:** * **X-axis:** Labeled with years, ranging from approximately 1950 to 2020. * **Y-axis:** Labeled "Total factor productivity (1947q1=100)". The scale ranges from 90 to 600. * **Lines:** * A blue line with circular markers represents "Utilization-adjusted total factor productivity". It starts at 100 around 1947, rises steadily until the late 1960s/early 1970s, then the rate of increase slows down significantly, continuing to rise but at a gentler slope. * A straight black line with square markers represents a "Hypothetical 2-percent trend". It starts at 100 around 1947 and follows a consistent upward trajectory, diverging significantly from the blue line starting in the early 1970s. * **Legend:** * Blue line with circle marker: Utilization-adjusted total factor productivity * Black line with square marker: Hypothetical 2-percent trend **Source Information:** Source: Federal Reserve Bank of San Francisco. Chart by Eli Dourado.

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This chart shows what happened to productivity growth around 1971. The blue line represents utilization-adjusted total factor productivity, which measures how efficiently the economy combines inputs to produce outputs. Before 1971, productivity grew rapidly, following or exceeding a 2 percent annual trend shown by the black line. However, around 1971, there was a significant slowdown in productivity growth. The slope of the blue line becomes much less steep, causing actual productivity to fall increasingly behind the hypothetical trend line. This productivity slowdown has been a major economic puzzle and has had profound implications for economic growth and living standards. After 1971, we can see a dramatic divergence between actual productivity growth and the hypothetical 2 percent trend. This area highlighted in red represents the productivity gap - what the economy could have achieved if the pre-1971 trend had continued. By 2020, actual productivity was less than half of what it would have been if the earlier trend had continued. This slowdown has meant trillions of dollars in lost economic output and significantly slower growth in living standards. If productivity had continued growing at its pre-1971 rate, the average American would be much wealthier today. This divergence represents one of the most significant economic shifts of the past century. What caused this dramatic productivity slowdown around 1971? Economists have proposed several explanations. First, 1971 marked the end of the Bretton Woods system when President Nixon ended the dollar's convertibility to gold. This fundamental change to the monetary system may have affected long-term investment and economic stability. The 1970s also saw major oil price shocks in 1973 and 1979, which dramatically increased energy costs. Another factor was the gradual shift from manufacturing to services in developed economies, as manufacturing typically experiences faster productivity growth. Increased regulation across many sectors may have also played a role by adding compliance costs. Finally, some economists argue that the pace of technological innovation simply slowed down after the post-World War II boom, only picking up again with the digital revolution in the 1990s, though not enough to return to the previous trend. The productivity slowdown after 1971 has had profound economic consequences. First, it led to significantly lower GDP growth. As we can see in this chart, average annual GDP growth fell from 4.2 percent in the 1950-1970 period to 3.3 percent in the following two decades, and has continued declining to just 2.1 percent in the 2010s. This slower growth has directly impacted wage growth. Before 1971, real wages grew at nearly 3 percent annually, allowing living standards to double every 25 years. After 1971, wage growth dropped dramatically to an average of just 1.24 percent. This slower wage growth has contributed to increased income inequality, as productivity gains have increasingly gone to capital rather than labor. The slowdown has also created fiscal challenges for governments, as slower economic growth means less tax revenue to fund public services and address long-term obligations like pension systems and healthcare programs. To summarize what we've learned about the 1971 productivity slowdown: First, around 1971, total factor productivity growth significantly slowed down from its previous trend. This created a large and growing gap between actual productivity and the hypothetical 2 percent trend line. Multiple factors likely contributed to this slowdown, including the end of the Bretton Woods monetary system, oil price shocks, the shift from manufacturing to services, and increased regulation across many sectors. The economic consequences have been profound, including lower GDP growth, slower wage growth, reduced gains in living standards, and increased income inequality. Understanding this productivity slowdown is crucial for addressing current economic challenges and potentially finding ways to restore higher productivity growth in the future. The question 'What happened in 1971?' highlights one of the most significant economic shifts of the past century, with effects that continue to shape our economy today.