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Measuring and Sustaining the New Economy: Report of a Workshop I EXECUTIVE SUMMARY

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Measuring and Sustaining the New Economy: Report of a Workshop This page in the original is blank.

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Measuring and Sustaining the New Economy: Report of a Workshop Executive Summary Throughout the 1970s and 1980s, Americans and American businesses regularly invested in ever more powerful and cheaper computers. In doing so, they assumed that advances in information technology would yield higher productivity and lead to better business decisions. These expected benefits did not materialize—at least in ways that were readily measured. This phenomenon was called the “computer paradox,” after Robert Solow’s remark in 1987 that “we see the computer age everywhere except in the productivity statistics.” By the mid-1990s, however, new data began to reveal an acceleration of growth accompanying a transformation of economic activity. This shift in the rate of growth coincided with a sudden, substantial, and rapid decline in the prices of semiconductors and computers. After 1995 it appears there was a point of inflection; price declines abruptly accelerated from 15 to 28 percent annually. In the same period, investments in computers exploded. The contribution to growth attributed to computers rose more than five-fold to 0.46 percent per year in the late 1990s. Software and communications equipment contributed an additional 0.30 percent per year for 1995 to 1998. Preliminary estimates through 1999 suggest further increases for all three categories. This period also coincides with the widespread adoption of the Internet, the emergence of the “dot-com” e-companies, a surge in venture capital investment and, in some quarters, predictions that the concept of business cycles no longer applied. The symposium reviewed in this volume does not focus on the transitory phenomena once identified with the New Economy. Indeed, the decline of the dot-com companies and the re-emergence of the business cycle were already apparent when the symposium was convened. The New Economy referred to here addresses changes in the U.S. economy

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Measuring and Sustaining the New Economy: Report of a Workshop as it capitalizes on new technologies, new opportunities and—in particular—on national investments in computing, information, and communication technologies. Use of this term reflects a growing conviction among economists that substantial change is underway in the U.S. economy—a change driven by continued gains in productivity in large part due to the production and deployment of information technology.1 From 1973 to 1995 U.S. productivity growth was at the rate of 1.4 percent a year. Between 1996 and 2000, however, labor productivity grew at an annual rate of 2.5 percent a year. Although a macroeconomic phenomenon, the processes underlying the New Economy appear to combine elements of technological innovation, structural change, and public policy. The rapid rate of technological innovation in information technology— most evident in the observance of Moore’s Law—seems to underpin the New Economy’s productivity gains. Structural changes have arisen from a reconfiguration of knowledge networks and new patterns of business activity made possible by innovations in information technology. Business-to-business e-commerce and Internet retailing, among other new methods, enable firms and individuals to communicate, manage inventory, handle production processes, and make purchases more efficiently. Public policy can sustain the New Economy in important ways. Government policies such as those on taxation, regulation, and intellectual property protection provide the underpinnings for economic growth. Public procurement and cooperative activities, such as cost-shared partnerships and general support for education and scientific and engineering research, directly affect processes of innovation, often decisively. Rules of the game, including antitrust and other regulations that set the bounds of competition, form an additional element of the broader public policy framework. THE CHALLENGE OF MEASUREMENT Change is often slow to become apparent in ways that can be readily measured, especially when it occurs in ways not previously measured. For example, recent measures reflect soaring labor productivity growth in the computer manufacturing industry. Productivity growth has also been generally higher for indus- 1   Not all economists, however, are ready to proclaim a technologically driven New Economy, if only because they have been unable to discern a measurable economy-wide benefit from the substantial investments that U.S. business has made in these new technologies. See, notably, R. Gordon. 2000. “Does the New Economy Measure up to the Great Inventions of the Past?” Journal of Economic Perspectives 14(4) Fall.

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Measuring and Sustaining the New Economy: Report of a Workshop tries that manufacture durable goods. Similar changes are less apparent outside these sectors although many, including the service sector, have invested heavily in information technologies.2 Measurement problems at present preclude a clear resolution to this puzzle. Understanding the New Economy phenomenon through better data is key to the task of developing policies that sustain it. SUSTAINING THE NEW ECONOMY Innovations, particularly in information technologies, are believed to be fueling this boost in productivity.3 In addition to the analysis presented here by Jorgenson and Stiroh,4 recent studies by Oliner and Sichel5 show that rapid adoptions of information technologies, made possible by a concomitant fall in price, have been an essential factor propelling U.S. productivity gains. Maintaining this pace, in turn, depends on maintaining the rate of technological innovation in the information technology sector. Sustaining the New Economy over the longer run thus may depend to a considerable extent on continued technological innovations and the supporting policies needed to preserve the pace of technological advance envisaged in Moore’s Law. EXPANDING THE NEW ECONOMY Developments in the semiconductor industry have enabled a swift decline in the price of information technologies. This, in turn, has provided economic incentives for firms to substitute information-technology-based equipment for other forms of capital and labor services. This injection of new capital is understood to underpin the rise in productivity.6 Widening use of the Internet has also 2   Robert Gordon, op. cit., notes, for example, that since service industries stand in the middle of the supply chain, their contributions are finally embodied in the final goods sold to consumers. If so, they would be measured as a part of the Gross Domestic Product. Others, such as Brynjolfsson and Hitt argue that the benefits of new information technologies rarely show up in official macroeconomic data since these do not pick up changes in product quality, time savings, convenience, etc. See, Erik Brynjolfsson and Lorin M. Hitt. 2000. “Beyond Computation: Information Technology, Organizational Transformation and Business Performance,” Journal of Economic Perspectives 4(4), pp. 23-48, Fall. 3   Innovations in biotechnology, such as genomic-based drug development, and in energy supply, such as solid-state lighting and fuel-cell technologies, promise to add further to the high-tech base of the New Economy. 4   See Dale W. Jorgenson and Kevin J. Stiroh, “Raising the Speed Limit: U.S. Economic Growth in the Information Age,” in this volume. 5   Stephen Oliner and Daniel Sichel. 2000. “The Resurgence of Growth in the Late 1990s: Is Information Technology the Story?” Journal of Economic Perspectives 14(4) Fall. 6   See Dale Jorgenson, “Information Technology and the U.S. Economy.” Presidential Address to the American Economic Association, New Orleans, LA, January 6, 2001.

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Measuring and Sustaining the New Economy: Report of a Workshop created significant potential for increasing productivity.7 Expanding and deepening the adoption of information technologies across the economy is also seen as an essential component to sustaining the productivity growth characteristics of the New Economy. To address these issues the Board on Science, Technology, and Economic Policy convened a symposium on “Measuring and Sustaining the New Economy” on October 6, 2000. As the STEP Board’s Vice-Chair, Bill Spencer noted, the symposium was convened out of both a sense of opportunity and a sense of uncertainty. While sustaining the New Economy is crucial for sustaining U.S. prosperity, a lack of data leaves unresolved many related policy questions. The symposium brought together a group of national experts to examine where additional information and research is needed on growth in the Information Age. The participants focused their deliberations on defining and measuring the New Economy, examining its technological drivers, and expanding applications of advanced technologies across the economy. 7   See Robert E. Litan and Alice M. Rivlin. 2000. “The Economy and the Internet: What Lies Ahead?” Internet Policy Institute: <http://www.internetpolicy.org/briefing/litan_rivlin.html>, November.