The curve, a long view

Street Talk Live does a good job.

There is some interesting context when discussing Pre- and Post-WWII economies.   Prior to WWII the U.S. economy was primarily agricultural and primarily domestic with few exports.  This led to much more frequent recessions due to weather, lack of transport and infrastructure, etc.  However, after WWII ended, the U.S. became a massive power house of industrial production and manufacturing as domestic demand flourished and the U.S. engaged in rebuilding Western Europe and Japan. 

The steady climb in interest rates through the late 70's coincided with steadily increasing rates of economic growth.  The Federal Reserve began to become much more proactive in the management of monetary policy during this period and the steadily increasing strength of the economy, incomes and savings rates suggested that Keynesian economic theories were functioning properly.  Normal economic recessions, which began to occur at a slower rate, were softened by Fed policy.  However, it is important to notice that drops in interest rates to spur economic activity never dropped below the rate that existed prior to the last recession.

As the economic makeup shifted from one of production and manufacturing to a service, credit and finance based economy beginning in 1980, the economic cycle changed from one of steadily increasing to decreasing rates of growth.  This change in economic makeup potentially exposed the flaws in previous economic theories as each manipulation of interest rates has continued fall to lower levels.  This continued drive to lower rates has kept a weakening economy running from boom to bust and now, with rates near the zero line, there is no room left to soften the next eventual recession.

But why did growth drop after the 70s? The Great Stagnation?