PRODUCTIVITY AND CYCLICALITY IN SEMICONDUCTORS

TRENDS, IMPLICATIONS, AND QUESTIONS

Report of a Symposium

Dale W. Jorgenson and Charles W. Wessner, Editors

Committee on Measuring and Sustaining the New Economy

Board on Science, Technology, and Economic Policy

Policy and Global Affairs

NATIONAL RESEARCH COUNCIL OF THE NATIONAL ACADEMIES

THE NATIONAL ACADEMIES PRESS
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Productivity and Cyclicality in Semiconductors: Trends, Implications, and Questions - Report of a Symposium PRODUCTIVITY AND CYCLICALITY IN SEMICONDUCTORS TRENDS, IMPLICATIONS, AND QUESTIONS Report of a Symposium Dale W. Jorgenson and Charles W. Wessner, Editors Committee on Measuring and Sustaining the New Economy Board on Science, Technology, and Economic Policy Policy and Global Affairs NATIONAL RESEARCH COUNCIL OF THE NATIONAL ACADEMIES THE NATIONAL ACADEMIES PRESS Washington, D.C. www.nap.edu

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Productivity and Cyclicality in Semiconductors: Trends, Implications, and Questions - Report of a Symposium NATIONAL ACADEMY PRESS 500 Fifth Street, N.W. Washington, D.C. 20001 NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the committee responsible for the report were chosen for their special competences and with regard for appropriate balance. This study was supported by: Contract/Grant No. NASW-99037, Task Order 103, between the National Academy of Sciences and the National Aeronautics and Space Administration; Contract/Grant No. OFED-13416 between the National Academy of Sciences and Sandia National Laboratories; Contract/Grant No. CMRC-50SBNB9C1080 between the National Academy of Sciences and the U.S. Department of Commerce; Grant No. NSF-EIA-0119063 between the National Academy of Sciences and the National Science Foundation; and Contract/Grant No. DOE-DE-FG02-01ER30315 between the National Academy of Sciences and the U.S. Department of Energy. Additional support was provided by Intel Corporation. Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the views of the organizations or agencies that provided support for the project. International Standard Book Number 0-309-09274-4 (Book) International Standard Book Number 0-309-59481-5 (PDF) Limited copies are available from Board on Science, Technology, and Economic Policy, National Research Council, 500 Fifth Street, N.W., W547, Washington, DC 20001; 202-334-2200. Additional copies of this report are available from the National Academies Press, 500 Fifth Street, N.W., Lockbox 285, Washington, DC 20055; (800) 624-6242 or (202) 334-3313 (in the Washington metropolitan area); Internet, http://www.nap.edu Copyright 2004 by the National Academy of Sciences. All rights reserved. Printed in the United States of America

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Productivity and Cyclicality in Semiconductors: Trends, Implications, and Questions - Report of a Symposium THE NATIONAL ACADEMIES Advisers to the Nation on Science, Engineering, and Medicine The National Academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Bruce M. Alberts is president of the National Academy of Sciences. The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. Wm. A. Wulf is president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initiative, to identify issues of medical care, research, and education. Dr. Harvey V. Fineberg is president of the Institute of Medicine. The National Research Council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy’s purposes of furthering knowledge and advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in providing services to the government, the public, and the scientific and engineering communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Bruce M. Alberts and Dr. Wm. A. Wulf are chair and vice chair, respectively, of the National Research Council. www.national-academies.org

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Productivity and Cyclicality in Semiconductors: Trends, Implications, and Questions - Report of a Symposium Committee on Measuring and Sustaining the New Economy* Dale Jorgenson, Chair Samuel W. Morris University Professor Harvard University M. Kathy Behrens Managing Director of Medical Technology Robertson Stephens Investment Management Kenneth Flamm Dean Rusk Chair in International Affairs Lyndon B. Johnson School of Public Affairs University of Texas at Austin Bronwyn Hall Professor of Economics University of California at Berkeley James Heckman Henry Schultz Distinguished Service Professor of Economics University of Chicago Ralph Landau Senior Fellow Stanford Institute for Economic Policy Research Stanford University William J. Spencer, Vice Chair Chairman Emeritus, retired International SEMATECH Richard Levin President Yale University David T. Morgenthaler Founding Partner Morgenthaler Mark B. Myers Visiting Professor of Management The Wharton School University of Pennsylvania Roger Noll Morris M. Doyle Centennial Professor of Economics Stanford University Edward E. Penhoet Director, Science and Higher Education Programs Gordon and Betty Moore Foundation William Raduchel Alan Wm. Wolff Managing Partner Dewey Ballantine *   As of October 2003.

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Productivity and Cyclicality in Semiconductors: Trends, Implications, and Questions - Report of a Symposium Project Staff* Charles W. Wessner Study Director Sujai J. Shivakumar Program Officer Alan H. Anderson Consultant Christopher S. Hayter Program Associate McAlister T. Clabaugh Program Associate David E. Dierksheide Program Associate *   As of October 2003.

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Productivity and Cyclicality in Semiconductors: Trends, Implications, and Questions - Report of a Symposium For the National Research Council (NRC), this project was overseen by the Board on Science, Technology and Economic Policy (STEP), a standing board of the NRC established by the National Academies of Sciences and Engineering and the Institute of Medicine in 1991. The mandate of the STEP Board is to integrate understanding of scientific, technological, and economic elements in the formulation of national policies to promote the economic well-being of the United States. A distinctive characteristic of STEP’s approach is its frequent interactions with public and private-sector decision makers. STEP bridges the disciplines of business management, engineering, economics, and the social sciences to bring diverse expertise to bear on pressing public policy questions. The members of the STEP Board* and the NRC staff are listed below: Dale Jorgenson, Chair Samuel W. Morris University Professor Harvard University M. Kathy Behrens Managing Director of Medical Technology Robertson Stephens Investment Management Bronwyn Hall Professor of Economics University of California at Berkeley James Heckman Henry Schultz Distinguished Service Professor of Economics University of Chicago Ralph Landau Senior Fellow Stanford Institute for Economic Policy Research Stanford University Richard Levin President Yale University William J. Spencer, Vice Chair Chairman Emeritus, retired International SEMATECH David T. Morgenthaler Founding Partner Morgenthaler Mark B. Myers Visiting Professor of Management The Wharton School University of Pennsylvania Roger Noll Morris M. Doyle Centennial Professor of Economics Stanford University Edward E. Penhoet Director, Science and Higher Education Programs Gordon and Betty Moore Foundation William Raduchel Alan Wm. Wolff Managing Partner Dewey Ballantine *   As of October 2003.

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Productivity and Cyclicality in Semiconductors: Trends, Implications, and Questions - Report of a Symposium STEP Staff* Stephen A. Merrill Executive Director Russell Moy Senior Program Officer Craig M. Schultz Research Associate McAlister T. Clabaugh Program Associate Charles W. Wessner Program Director Sujai J. Shivakumar Program Officer Christopher S. Hayter Program Associate David E. Dierksheide Program Associate *   As of October 2003.

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Productivity and Cyclicality in Semiconductors: Trends, Implications, and Questions - Report of a Symposium Contents PREFACE   xiii I.   PROCEEDINGS         Welcome Ira A. Jackson, Harvard University   3     Introduction Dale W. Jorgenson, Harvard University   4 Panel I:   Productivity Trends in the Semiconductor Industry Moderator: W. Clark McFadden, Dewey Ballantine   6      Physical Limits of Silicon CMOS and Semiconductor Roadmap Predictions Robert R. Doering, Texas Instruments   6      Discussants: George M. Scalise, Semiconductor Industry Association Charles W. Wessner, National Research Council   14

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Productivity and Cyclicality in Semiconductors: Trends, Implications, and Questions - Report of a Symposium Panel II:   Cyclicality: Comparisons by Industry Moderator: Dale W. Jorgenson, Harvard University   21      A Modeling Strategy for Industry Ariel Pakes, Harvard University   21      The Case of the Aircraft Industry C. Lanier Benkard, Stanford University   26      Semiconductor Industry Minjae Song, Harvard University   30     Luncheon Address: The Industry Perspective on Semiconductors George M. Scalise, Semiconductor Industry Association   35 Panel III:   Economic Growth and Semiconductor Productivity Moderator: Kenneth Flamm, University of Texas at Austin   43      Semiconductor Productivity and Communications Mark Pinto, Agere   45      Semiconductor Productivity and Computers Randall D. Isaac, International Business Machines   49      Productivity and Growth: Alternative Scenarios Dale W. Jorgenson, Harvard University   55 Panel IV:   Roundtable on Models for Cyclical Industries Moderator: David C. Mowery, University of California at Berkeley Panelists: Kenneth Flamm, University of Texas at Austin C. Lanier Benkard, Stanford University Ariel Pakes, Harvard University   60     Closing Remarks Dale W. Jorgenson, Harvard University   73

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Productivity and Cyclicality in Semiconductors: Trends, Implications, and Questions - Report of a Symposium II.   RESEARCH PAPERS         Accounting for Growth in the Information Age Dale W. Jorgenson, Harvard University   77     International Technology Roadmaps: The U.S. Semiconductor Experience W. J. Spencer and T. E. Seidel, International SEMATECH   135     Moore’s Law and the Economics of Semiconductor Price Trends Kenneth Flamm, University of Texas at Austin   151 III.   APPENDIXES     A.   Biographies of Speakers   173 B.   Participants List   183 C.   Bibliography   185

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Productivity and Cyclicality in Semiconductors: Trends, Implications, and Questions - Report of a Symposium Preface This report is the first in a series designed to improve our understanding of the technological and economic trends underlying the growth and productivity increases that have created what many refer to as the New Economy. Led by the National Research Council’s Board on Science, Technology, and Economic Policy (STEP), the goal of this analytical effort is to improve national policy making by improving our understanding of the sources of gains in growth and productivity and our understanding of the policies required to sustain the benefits of this New Economy for the nation. Even the casual observer is aware of the ongoing revolution in communications, computing, and information management.1 In the mid-1990s, this technological revolution contributed to a distinct rise in the long-term growth trajectory of the United States.2 The term “New Economy” captures this new reality and has now become widely accepted by leading economists as a long-term pro- 1   This is especially so for the computer hardware sector and perhaps for the Internet as well, although there is insufficient empirical evidence on the degree to which the Internet may be responsible. For a discussion of the impact of the Internet on economic growth see, “A Thinker’s Guide,” The Economist, March 30, 2000. For a broad study of investment in technology capital and its use in various sectors, see McKinsey Global Institute, U.S. Productivity Growth 1995-2000, Understanding the Contribution of Information Technology Relative to Other Factors. Washington, D.C.: McKinsey & Co., October 2001. 2   See Dale Jorgenson and Kevin Stiroh, “Raising the Speed Limit: U.S. Economic Growth in the Information Age,” in National Research Council, Measuring and Sustaining the New Economy, D. Jorgenson and C. Wessner, eds, Washington, D.C.: National Academy Press, 2002.

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Productivity and Cyclicality in Semiconductors: Trends, Implications, and Questions - Report of a Symposium ductivity shift of major significance.3 What is less widely appreciated is that much of this progress is derived from the significant and sustained increases in semiconductor productivity, predicted over 30 years ago by Gordon Moore and known as Moore’s Law.4 In approaching a phenomenon as complex as the New Economy, it is important to understand—and sort out—diverse elements of technological innovation, structural change, and the impact of public policy as well as issues of measurement. Technological innovation—more accurately, the rapid rate of technological innovation in information technology (including semiconductors, computers, software, and telecommunications) and the rapid growth of the Internet—are seen as the sources of the productivity gains that characterize the New Economy. These productivity gains derive first from the exponential growth in semiconductor performance at ever lower cost.5 In addition, the use of information technologies in the production of computers has greatly increased the productivity of this industry while having substantial positive effects (albeit with a lag) on the productivity of other important sectors of the economy such as banking, retail, and transportation.6 Many therefore believe that the productivity gains of the New Economy are closely linked to this unprecedented rate of technological innovation.7 3   The introduction of advanced productivity-enhancing technologies obviously does not eliminate the business cycle. See Organisation for Economic Cooperation and Development, Is There a New Economy? A First Report on the OECD Growth Project, Paris: Organisation for Economic Cooperation and Development, June 2000, p. 17. For an early discussion, see also M. N. Baily and R. Z. Lawrence, “Do We Have an E-conomy?” NBER Working Paper 8243, April 23, 2001, at <http://www.nber.org/papers/w8243>. 4   Academic and policy interest in the New Economy was highlighted by the “Roundtable on the New Economy and Growth in the United States” at the 2003 annual meetings of the American Economic Association, held in Washington, D.C. Roundtable participants included Martin Baily, Martin Feldstein, Robert J. Gordon, Dale Jorgenson, Joseph Stiglitz, and Lawrence Summers. 5   Price declines, for higher performance, have remained on the order of 17 to 20 percent per annum. See the presentation by Kenneth Flamm in this volume. 6   See, for example, Stephen Oliner and Daniel Sichel, “The Resurgence of Growth in the Late 1990s: Is Information Technology the Story?” Journal of Economic Perspectives, 14(4): Fall 2000. Oliner and Sichel estimate that improvements in the computer industry’s own productive processes account for about a quarter of the overall productivity increase. They also note that the use of information technology by all sorts of companies accounts for nearly half the rise in productivity. 7   See Alan Greenspan’s remarks before the White House Conference on the New Economy, Washington, D.C., April 5, 2000, <www.federalreserve.gov/BOARDDOCS/SPEECHES/2000/20000405.HTM>. For a historical perspective, see the Proceedings. Kenneth Flamm compares favorably the economic impact of semiconductors today with the impact of railroads in the nineteenth century.

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Productivity and Cyclicality in Semiconductors: Trends, Implications, and Questions - Report of a Symposium Structural changes arise from a reconfiguration of knowledge networks and business patterns made possible by innovations in information technology. Phenomena such as business-to-business e-commerce and Internet retailing are altering how firms and individuals interact, enabling greater efficiency in purchases, production processes, and inventory management.8 These structural changes are still emerging as the use and applications of the Internet continue to evolve. Public policy plays a major role at several levels. This includes the government’s role in fostering rules of interaction within the Internet9 and its discretion in setting and enforcing the rules by which technology firms, among others, compete.10 More familiarly, public policy concerns particular fiscal and regulatory choices that can affect the rate and focus of investments in sectors such as telecommunications. The government also plays a critical role within the innovation system.11 It supports national research capacities, providing incentives (or disincentives) to promote education and training in key disciplines, and funds most of the nation’s basic research.12 The government also plays a major role in stimulating innovation. It does this most broadly through the patent system.13 In addition, government procurement and innovation awards have 8   See, for example, Brookes Martin and Zaki Wahhaj, “The Shocking Economic Impact of B2B,” Global Economic Paper, 37. Goldman Sachs. February 3, 2000. 9   Dr. Vint Cerf notes that the ability of individuals to interact in potentially useful ways within the infrastructure of the still-expanding Internet rests on its basic rule architecture: “The reason it can function is that all the networks use the same set of protocols. An important point is these networks are run by different administrations, which must collaborate both technically and economically on a global scale.” See comments by Dr. Cerf in National Research Council, Measuring and Sustaining the New Economy, op. cit. Also in the same volume, see the presentation by Dr. Shane Greenstein on the evolution of the Internet from academic and government-related applications to the commercial world. 10   The relevance of competition policy to the New Economy is manifested by the intensity of interest in the antitrust case United States v. Microsoft and associated policy issues. 11   See Richard Nelson, ed., National Innovation Systems, New York: Oxford University Press, 1993. 12   National Research Council, Trends in Federal Support of Research in Graduate Education, Washington, D.C.: National Academy Press, 2001. 13   In addition to government-funded research, intellectual property protection plays an essential role in the continued development of the biotechnology industry. See Wesley M. Cohen and John Walsh, “Public Research, Patents, and Implications for Industrial R&D in the Drug, Biotechnology, Semiconductor, and Computer Industries,” in Capitalizing on New Needs and New Opportunities: Government-Industry Partnerships in Biotechnology and Information Technologies, Washington, D.C.: National Academy Press, 2002.

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Productivity and Cyclicality in Semiconductors: Trends, Implications, and Questions - Report of a Symposium played key roles in the development of new technologies to fulfill national missions in defense, agriculture, health, and the environment.14 This report seeks to explore the economics underpinning Moore’s Law, to identify current R&D challenges and analyze new trends in the semiconductor industry, to discuss how cyclical swings in the industry might be better understood, and to discuss the policy responses available to sustain the benefits of the New Economy. THE CONTEXT OF THIS REPORT Since 1991 the National Research Council’s Board on Science, Technology, and Economic Policy (STEP) has undertaken a program of activities to improve policy makers’ understanding of the interconnections between science, technology, and economic policy and their importance to the American economy and its international competitive position. The Board’s interest in the New Economy and its underpinnings derives directly from its mandate.15 The STEP Board’s activities have corresponded with an increased recognition by policy makers of the importance of technology to economic growth.16 This mandate is reflected in an earlier STEP study, titled U.S. Industry in 2000, which assesses the determinants of competitive performance in a wide range of manufacturing and service industries, including those relating to information technology.17 The Board also undertook a major study, chaired by Gordon Moore, Chairman Emeritus of Intel, on how government-industry partnerships support the growth of new technologies.18 Reflecting a growing recognition of the impact of new information technologies on the surge in productivity since 1995, the Board launched this assessment of the New Economy phenomenon, designed to explore the sources of growth, measurement challenges, and the policy frame- 14   For example, government support played a critical role in the early development of computers. See K. Flamm, Creating the Computer, Washington, D.C.: The Brookings Institution, 1988. For an overview of government-industry collaboration and a discussion of one effective collaborative program, see the introduction to the recent report on the Advanced Technology Program, National Research Council, The Advanced Technology Program: Assessing Outcomes, Charles W. Wessner, ed. Washington, D.C.: National Academy Press, 2001. 15   See the Front Matter in this volume. 16   See Gene Grossman and Elhannan Helpman, Innovation and Growth in the Global Economy, Cambridge, MA: MIT Press, 1993. 17   National Research Council, U.S. Industry in 2000, Studies in Competitive Performance, David C. Mowery, ed., Washington, D.C.: National Academy Press, 1999. 18   For a summary of this multivolume study, See National Research, Government-Industry Partnerships for the Development of New Technologies, Summary Report, Charles W. Wessner, ed., Washington, D.C.: The National Academies Press, 2003.

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Productivity and Cyclicality in Semiconductors: Trends, Implications, and Questions - Report of a Symposium work required to sustain the New Economy. The first exploratory volume was published in 2002.19 Subsequent workshops and ensuing reports in this series include Deconstructing the Computer and Productivity and Cyclicality in Semiconductors: Trends, Implications, and Questions—the present report. Future reports in the series will address the software sector, as well as the policies required to sustain the New Economy. SYMPOSIUM AND DISCUSSIONS The Committee on Measuring and Sustaining the New Economy convened this symposium to explore how the growth and increased productivity in the semiconductor industry are linked to the economic gains and productivity growth associated with the New Economy. Understanding these trends is important to understanding how to better measure this growth and how to develop the appropriate policy mix to support it. The symposium, convened at Harvard University on September 24, 2001, included presentations and remarks from leading academics and innovators in the information technology sector (Appendix B lists these individuals). The “Proceedings” chapter of this volume contains summaries of their presentations and discussions. Three papers complete the volume. The first, “Information Technology and the U.S. Economy,” by Dale W. Jorgenson, provides economic underpinning for the symposium discussion and served as the basis for his presentation. The second, “International Technology Roadmaps: The U.S. Semiconductor Experience” by William J. Spencer and T. E. Seidel of SEMATECH, also provided information for the symposium proceedings and was available to participants. The third paper, “Moore’s Law and the Economics of Semiconductor Price Trends,” by Kenneth Flamm of the University of Texas at Austin, was also distributed at the symposium and was the basis of his presentation. We have made every effort to capture the main points made during the presentations and the ensuing discussions. We apologize for any inadvertent errors or omissions in our summary of the proceedings. The lessons from this symposium and others in this series will contribute to the Committee’s final consensus report on measuring and sustaining the New Economy. ACKNOWLEDGMENTS There is considerable interest in the policy community in a better understanding of the technological drivers and appropriate regulatory framework for the New Economy, as well as in a better grasp of its operation. This interest is reflected in the support on the part of agencies that have played a role in the 19   National Research Council, Measuring and Sustaining the New Economy, op.cit.

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Productivity and Cyclicality in Semiconductors: Trends, Implications, and Questions - Report of a Symposium creation and development of the New Economy. We are grateful for the participation and the contributions of the National Aeronautics and Space Administration, the Department of Energy, the National Institute of Standards and Technology, the National Science Foundation, and Sandia National Laboratories. Several members of the STEP staff and consultants to STEP deserve recognition for their contributions to the preparation of this report. We are indebted to Alan Anderson for his preparation of the meeting summary. We wish to thank Sujai Shivakumar for his many contributions to the report. We are also indebted to David E. Dierksheide and McAlister Clabaugh, who have once again played an instrumental role both in preparing the conference and, with Christopher Hayter, in preparing this report for publication. This report has been reviewed in draft form by individuals chosen for their diverse perspectives and technical expertise, in accordance with procedures approved by the NRC’s Report Review Committee. The purpose of this independent review is to provide candid and critical comments that will assist the institution in making its published report as sound as possible and to ensure that the report meets institutional standards for objectivity and evidence. The review comments and draft manuscript remain confidential to protect the integrity of the deliberative process. We wish to thank the following individuals for their review of this report: Ana Aizcorbe, Federal Reserve Bank; Ellen Dulberger, IBM; David Hodges, University of California at Berkeley; Larry Sumney, Semiconductor Research Corporation; and Larry Thompson, Ultratech Stepper, Inc. Although the reviewers listed above have provided many constructive comments and suggestions, they were not asked to endorse the content of the report, nor did they see the final draft before its release. The review of this report was overseen by R. Stephen Berry, University of Chicago, and Gerald P. Dinneen. Appointed by the National Research Council, they were responsible for making certain that an independent examination of this report was carried out in accordance with institutional procedures and that all review comments were carefully considered. Responsibility for the final content of this report rests entirely with the authoring committee and the institution. This report is one step in a major research effort by the Board on Science, Technology, and Economic Policy to advance our understanding of the factors shaping the New Economy in order to better understand it and thereby improve our ability to maintain and develop the policies best suited to sustaining the greater productivity and prosperity that it promises. Dale W. Jorgenson Charles W. Wessner