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Measuring and Sustaining the New Economy: Report of a Workshop Panel 5 Roundtable Discussion Moderator: Dale Jorgenson Harvard University Dr. Jorgenson encouraged round table participants to think about the charter for the Board on Science, Technology, and Economic Policy and to suggest questions to pursue in greater detail on the relationship between the New Economy and technology. MEASUREMENT AND SUSTAINABILITY Dr. Raduchel proposed that two issues deserved further discussion: measurement and sustainability. First, he suggested that there is much uncertainty about how to measure the parameters of the New Economy. He said that much of the available data were not reported in useful forms and they were not helpful in understanding trends. For example, when expenses that are investments in new business processes are listed as G&A, the distortion confuses both investors and policy makers. He suggested that some of the major questions raised during the symposium could be answered if the historical record contained appropriate accounting procedures. He also worried about moving from a loosely coupled Internet to a tightly coupled Internet, the latter being rare but desirable. As an example of a tightly coupled system he cited telephony, for which AT&T once set effective standards for the world. Because of its dominant market share, AT&T was also able to influence regulation in a way that is not seen on the Internet. He suggested that a tightly coupled Internet might not be achievable without the proper institutional
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Measuring and Sustaining the New Economy: Report of a Workshop framework. He proposed that countries that develop more tightly coupled relationships would have competitive advantages over countries that do not. Establishing effective standards for a more tightly coupled environment requires some understanding of who the referee is, and one cannot have tight standards without a referee. In closing, he returned to the issue of measurement and how investments in business processes are reported in the accounts of companies. There must be a better understanding of where money is going even if it is clarified only in footnotes. CLARIFYING THE MEASUREMENT ISSUE A questioner asked whether Dr. Raduchel’s point was that some functions are not measured while others are improperly measured. Dr. Raduchel said that creating a new enterprise resource environment system, for example, is accounted for as increases in overhead spending, which is required by the Financial Accounting Standards Board (FASB), and shows up as G&A expenses. In corporate reports $100 million spent on parties for company employees looks the same as $100 million spent inventing new business processes to make the company more efficient. He described this as a major issue in trying to understand how much money a company spends on such projects and what the outcome is. In current reporting there is no way to tell whether a project fails or succeeds. Yet there are very different approaches in ways a company is required to capitalize and write it off if it did not succeed. Companies would not like the revised approach because they would not want to report the failure. Dr. Raduchel said that the technology is the initial driver to create new processes, but design of the new processes matters even more than the driver. Unless we have the right accounting it is difficult to measure productivity and to answer some of the questions posed today. Lawrence Slifman of the Federal Reserve Board supported Dr. Raduchel’s encouragement of the FASB to look closely at capitalizing rather than expensing a variety of information-technology-related, but not physical, investments made by firms. He suggested that the National Academies should play a role in highlighting the importance of this point, perhaps with representatives of the FASB. HOW CAN BUSINESSES ABSORB THE CHANGE INDUCED BY TECHNOLOGY? Dr. Gomory of the Sloan Foundation agreed that the rate of technology advances was “not the name of the game” today. Whether technology continues to progress at the same rate or faster is not as important as the ability to absorb it and the cost of re-doing the business organization to take advantage of it. He pointed out that to a considerable extent nobody knows how a business works. It’s a little bit like a human being; we see them running around and standing and talking without knowing how they digest anything. Yet we don’t sit
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Measuring and Sustaining the New Economy: Report of a Workshop around thinking how we digest; we just digest. To a large extent business functions that way. You might also say that no one knows how to make a disk file, he continued. Making a disk file takes a huge organization. Somebody has to know how to heat the building and to clean the air, and these are all separate people. The interaction of all these abilities in the end produces a disk file. Much of that knowledge is not written down, so when managers start re-doing a business they must deal with many customs and ways of doing things that were never articulated and unexpected problems arise. There is plenty of technology and the transformations that lie ahead will not occur without it. The question is not how can businesses acquire more technology but how can they absorb the change induced by the technology they already have? EDUCATION AND GOVERNMENT LAG BEHIND ELECTRONICALLY He added an additional point: Most of these changes are possible because they occur in the business world, where the desire to be successful and profitable is a powerful driver. However, there are worlds where that driver does not apply, including education and government. The ability to give courses online has been with us for at least seven years, but the educational world is reacting slowly. There is no internal driver, he said; schools are dragged reluctantly toward this new possibility. In regard to the second world, he suggested that people have not thought much about the possibility of changing the interaction of people and government. If a street is not well swept, do we really try to call the department of sanitation of the local government? Most people do not bother because they know it is too difficult and time consuming to interact with government. He maintained there are tremendous possibilities of online interaction between people and their local government on concrete issues that are untouched. At present there is no driver to encourage this, just as there is no driver for online education. He concluded by suggesting that one of the great unrealized possibilities for the New Economy is to find useful drivers for areas where normal business motivations do not apply. EARLY STEPS IN MEASURING THE NEW ECONOMY Dr. Price of the U.S. Department of Commerce praised the format of the symposium, which drew together economists with an appreciation of technology and technologists with an appreciation of economics. This brings the opportunity to raise some truly important issues. From his vantage point as an economist, one of his largest challenges is accurately measuring what is happening in the New Economy. He said that a growing number of U.S. economists believe some fea-
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Measuring and Sustaining the New Economy: Report of a Workshop Box D: The Challenge of Measurement Dr. Lee Price of the Department of Commerce, praised the format of the symposium, which drew together economists with an appreciation of technology and technologists with an appreciation of economics. This, he said, brings the opportunity to raise some truly important issues. From his vantage point as an economist, one of the largest challenges is accurately measuring what is happening in the New Economy. tures of growth have changed, but he needs much better measurements to be able to predict whether it is sustainable and what is causing it. To illustrate the challenge of gathering accurate data, he used the example of how much business spends on software. The Bureau of Economic Analysis (BEA) reported that in 1987 the nominal business investment in software totaled about $28 billion. Last October the agency reported that this figure had grown to $149 billion in 1999, 12 years later. Since then, he said, they had received new data, and last summer they revised that figure upward to $180 billion. The BEA said that it was better to be reasonably accurate than to be precisely wrong and report a figure of zero. Just the notion of having software counted could change the way people viewed the size of information technology and the investment in it. He said that it is important to make these measurements even if they are not precise. THE ECONOMIC EFFECT OF THE INTERNET Dr. Price said that he is often asked about the economic effect of the Internet, and that his usual response is that he doesn’t know, because it is so difficult to separate Internet effects from other effects. The department measures information technology, he said, but the workshop participants had agreed that technology accounts for only a part of the total economic effect. He noted that he would like to measure the change in productivity since 1995, whether it is labor productivity or total factory productivity. However, his department cannot yet quantify the rate of change of new technology. He said he could not yet supply researchers with the specific contributions of individual components of information technology, such as semiconductors, storage, or browsers. He made the point that technology policy did not seem to be a partisan issue. When the administration changed from Republican to Democrat in 1993, better technology was put into various offices. When the U.S. House of Representatives changed from Democrat to Republican in 1995, better technologies to access the
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Measuring and Sustaining the New Economy: Report of a Workshop Internet were installed. He said that the trend to support new technology seems to hold true around the country, as management upgrades technology to the level of its familiarity. SUGGESTIONS FOR FURTHER DISCUSSION Dr. Price proposed several issues for further discussion by symposium participants. One is how to quantify the output of information-technology-producing industries. Another is how to calculate the value of software to businesses, especially the two-thirds of the business investment in software that is not packaged. Packaged software is more easily measured, both in terms of nominal value and price but may not be as important to productivity. He said the department has made advances in measuring real output of semiconductors, computers, and telecommunication equipment, but has had less success in measuring the output of information-technology-intensive activities, such as business services, education, and financial services. He expressed some doubt about properly measuring this output because it is basically a function of activities at the margins, as currently measured. Dr. Price mentioned another important challenge of the new technology on the economy and on the ability to measure its activity—and this is the blurring line between distinct businesses and how they are defined. He said that the department’s knowledge about the economy derives from sample companies in defined industries. The department tries to categorize the entire economy in this way, industry by industry. If the boundaries of industries and the boundaries of companies operating in those industries are blurred, the sampling becomes less accurate. Dr. Price invited the assistance of the participants in helping with these definitions. At the same time, the department can help businesses by using opportunities that arise from new technology, such as the ability to collect more data faster. They are giving businesses the opportunity to contribute for the first time to a major monthly online series on durable goods orders, inventories, and shipments. Only a small number of companies have enrolled, and the statistics will improve if the number of companies grows. Information technology can help the department analyze what does come in more effectively, especially when they get terabits of monthly data on prices or shipments rather than the kilobits they now receive. IS IT DESIRABLE TO DISPLACE SALES WORKERS? In response to a question, Dr. Price said he agreed with Dr. Bresnahan that a quarter to a third of workers are involved in exchanging goods and automating purchasing and selling functions, and that automating these functions represents a large opportunity for productivity. “You don’t get productivity going up without
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Measuring and Sustaining the New Economy: Report of a Workshop labor being displaced somewhere,” he said, “and that’s clearly a place where it gets displaced.” He suggested that the policy implications of that displacement are probably positive. Thirty years ago there was resistance to technological change on the grounds that people might be displaced and unable to find other jobs. In many cases, however, those people have sufficient skills to find jobs elsewhere. A TECHNOLOGIST’S PLEA FOR STANDARDS Dr. Jorgenson asked for a technologist’s view of these questions, and Mr. Ganek suggested that the issue of technical standards was crucial in sustaining the economy. He suggested that Internet growth has soared because of the advancement of very simple standards, none of which individually was a technical revolution. The convergence of HTML, HTTP, and TCP/IP created an infrastructure that “allowed interesting things to happen.” Looking ahead, certain infrastructure issues in the United States are worrisome, especially in regard to the wireless infrastructure. He said that the projects at the leading edge of wireless mobile technology are being done in places like Helsinki, Tokyo, and Tel Aviv. “The United States has standards that don’t allow convergence,” he said, “and we need standards that drive better access.” The United States has abundant wireless companies but they utilize a variety of incompatible standards. He said we should be looking for some proactive way to adopt common standards to simplify and thereby extend our infrastructure. He agreed with Dr. Greenstein that access technology as a whole needs to be on the same solid footing as the backbone technologies, or the country could find itself at a competitive disadvantage. Dr. Raduchel concurred that wireless is highly important, and observed that the United States is five years behind Europe and Japan. THE RISING IMPORTANCE OF WIRELESS Dr. Aho of Lucent Technologies reinforced the opinion that the United States hasn’t paid enough attention to wireless standards. He raised an additional aspect of the wireless issue: There are at least an order of magnitude more cell phones in the world than personal computers, and personal digital assistant numbers are relatively small but growing rapidly. If wireless access becomes the dominant mode of accessing the information infrastructure, the intellectual leadership driving the Internet may move offshore. This is a major concern if we want to keep this country competitive in this arena. RELIABILITY AND THE ROLE OF GOVERNMENT Dr. Aho raised two other points. One was the need to ensure the reliability of the Internet infrastructure. Like the nation’s highway system, the information
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Measuring and Sustaining the New Economy: Report of a Workshop technology infrastructure will have to be refurbished periodically, and it will never be completed. Therefore, deciding when to upgrade the infrastructure becomes an important question. It will become more difficult as the embedded user base rises. The nation must adopt policies that allow technological rejuvenation of the infrastructure, like continuing education for the people who maintain it and use it; “lifelong education is going to be a watchword for the information age.” The second point, little discussed at the workshop, was that the Internet came out of a government research program. As the nation moves into a world of e-commerce, it needs to consider what roles the government should play in facilitating the transition to new ways of doing business and arbitrating issues such as taxation that set the parameters for that business. In addition, there are sound arguments for keeping the government out of certain areas. A CONSOLIDATION OF DOT-COMS Mr. Morgenthaler emphasized the changes that are going to occur as this New Economy evolves. He called attention to the dot-com-financing crisis currently underway, which he predicted would get worse. He suggested that weakness in business-to-consumer and business-to-business could be equally bad. Perhaps this is part of a normal capitalistic evolution of consolidation and weeding out of most of the suppliers. He reminded his audience that a century ago the country had 2,000 automobile companies. He predicted that many new Internet companies would also wash away but noted that the symposium had not discussed what would emerge from this tumultuous stage. Dr. Spencer suggested that to some degree the current dot-com turmoil was a function of financing behavior. He said that two types of venture capitalists had supported the dot-com companies: those that caught the wave early and “unloaded their holdings on bigger fools” and those that mistrusted the business model of the dot-coms from the beginning and focused their attention on the Internet infrastructure. He agreed that many people would be hurt during the period unless the business models were sounder than they appeared. A VIEW ON THE U.S. POSITION ON WIRELESS Dr. Flamm of the University of Texas at Austin returned to the topic of wireless devices. He said that the United States’ slower progress in wireless is the flipside of a lead in broadband technology that is fundamentally driven by economic forces. That is, the U.S. fixed-rate access model for local landlines means that phone service—and Internet connections—are essentially free. In Europe and Japan, landlines are metered. There was no economic incentive to use wireless links for Internet access or routine telephony in the United States, where the marginal cost of such usage is essentially free. At the margins such use is not free in Europe, so wireless has less of an economic hurdle to jump. He said this eco-
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Measuring and Sustaining the New Economy: Report of a Workshop nomic explanation was not entirely popular, however. Some in the technical community prefer to view this as a failure in U.S. policy, rather than a natural and perhaps inevitable consequence of economic forces. A PLEA FOR “DO NO HARM” REGULATION Alan Wolff of Dewey Ballantine offered the news that seven states have adopted or are considering legislation to ban the reading of X-ray results outside the state. This is a response to an X-ray machine developed by General Electric that puts out a digital signal that can be read anywhere. This kind of limitation, he warned, would slow the expected growth of e-commerce. He called on industry and government to jointly plan a “do no harm” regulatory approach to forestall such proscriptions of commerce. A CALL FOR MORE IMAGINATIVE MEASUREMENT Dr. Brynjolfsson of MIT underscored the need to measure the dark matter that Ralph Gomory and other speakers referred to. He said that some of it might be difficult or even impossible to measure, but not all of it. The good news is that the Internet itself is producing new, large data sources, such as those he demonstrated in his talk, which may provide avenues for understanding the dark matter. He encouraged participants not to restrict themselves to measuring only activities for which good data are already available. He also remarked on economists’ difficulty in reaching a level of precision that would allow distinction between successful and unsuccessful projects. He noted that Dr. Jorgenson did pathbreaking work on human capital without waiting for accounting data to appear. He suggested that if economists could find useful things to say about the value of human capital, they might be able to use the same model to describe the value of organizational capital. Dr. Mowery agreed that measurement should have a high priority and repeated a question that arose during his talk: How does new technology influence R&D processes? He referred to the prediction that information technology promises dramatic improvement in drug discovery for the pharmaceutical industry. “What does the realization of this potential require within the industry?” he asked. Finally, he suggested that a panel of the National Academies could be an appropriate body to articulate the characteristics and effects of e-commerce applications. Those effects would be seen in industry structure, intermediation, disintermediation, employment issues, and other areas. He said many studies have demonstrated that 80 percent of the investments needed to realize the returns from these technologies are non-technological investments. This conclusion, he stressed, “cannot be repeated frequently enough, because it is not widely appreciated. I think an Academy panel could do a very effective job of making that case.”
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Measuring and Sustaining the New Economy: Report of a Workshop Jeffrey Macher of Georgetown University echoed Dr. Mowery’s comments on measurement and commented on how often speakers referred to learning curves. He referred to the earlier discussion of semiconductors and the learning curve for density, optics, transmission capacity, magnetic storage, and other features. He suggested a closer look at movement along the learning curve to see whether shifts of the learning curve are caused by new science, new technology, or some government policy. It would be interesting to measure performance and productivity and to try to attribute features of each industry to changes in productivity, such as market structure, industry standards, and government policy. POOR POLICIES COULD BECOME OBSTACLES Dr. Ling of Microsoft addressed the issue of sustaining the economy and suggested looking more closely into some of the points the economists brought up, such as intellectual property, privacy, and taxation. These were important because they could become major obstacles to economic growth if they start to fragment the market. Margaret Polski of AT Kearney brought up the need for additional research on Internet technologies and the lag time between original research and implementation. Dr. Spencer agreed that we are living off the results of research done 25 and 30 years ago. FINAL REMARKS Dr. Wessner of the National Research Council raised several points, “not as summaries but to test the group’s reaction.” First he noted a disjunction between the predictions of continued technological progress and the difficulties faced by CEOs in capitalizing on new technologies. If CEOs do not find new applications useful, he asked, would they continue to make these information technology investments at the same level? Ideally there is some alignment between the trajectory of R&D investments and their usefulness in business applications. He emphasized a point raised earlier by Dr. Spencer by asking if we were making the right investments in lithography and whether those investments would continue to push this curve upward. He wondered if the investments were being made at the necessary level in the United States. Finally, he underlined the importance of Mr. Maxwell’s series of questions about taxation and other policy roadblocks and their potential effects on commerce. He also called attention to Mr. Maxwell’s discussion of the international dimensions of the Internet and the type of applications envisioned. He noted the skill of the European community in positioning itself on questions of standards, as it has done in subscribing to GSM standards for wireless devices, and noted the importance of these questions for U.S. policy. He said that this country sometimes seems to have a tradition of not turning to the government until “the hole is
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Measuring and Sustaining the New Economy: Report of a Workshop very deep,” particularly with regard to international issues affecting high-tech sectors. He closed by calling attention to the disconnect between such international roadblocks and the great potential offered by new technologies. CLOSING THANKS Dr. Spencer closed the symposium by thanking the participants for their contributions. He said that he had personally found the meeting highly informative in both the areas of technology and economics. He reiterated the importance of better understanding the concept of the New Economy and of devising improved ways to measure its activities. “It is an important topic,” he concluded, “and I look forward to additional workshops where we can explore in greater depth some of the major themes we discussed today.”
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