III
SUMMARY OF THE NRC CONFERENCES ON THE NEW ECONOMY



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Measuring and Sustaining the New Economy: Enhancing Productivity Growth in the Information Age III SUMMARY OF THE NRC CONFERENCES ON THE NEW ECONOMY

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Measuring and Sustaining the New Economy: Enhancing Productivity Growth in the Information Age The NRC Conferences on the New Economy Faster, better, and cheaper semiconductors and computers as well as software and telecommunications equipment have led, especially over the past decade, to the widespread adoption and use of modern information and communications technologies. This, in turn, is rapidly ushering fundamental changes to the way in which (and the rapidity with which) goods and services are developed, manufactured, and distributed around the world and the way in which individuals and businesses everywhere consume, interact and transact. This “New Economy” poses new challenges, requiring new approaches to economic measurement and policy analysis. To this end, the National Academies’ Board on Science, Technology, and Economic Policy (STEP) has since 2000 held a series of workshops to better understand the New Economy phenomenon and to develop policies needed to sustain the positive contribution of modern information and communications technologies to U.S. growth and competitiveness. This section of the report summarizes and provides background for some of the key issues raised over the course of the five conferences hosted by the STEP Board (listed in the Preface) on Measuring and Sustaining the New Economy. The proceedings of each of these conferences have been published in separate volumes by The National Academies Press. Although the technologies of the industries considered at these conferences continue to evolve rapidly, the reports nonetheless capture conceptual issues of continued policy relevance to the industry leaders, academics, policy analysts, and others who participated in these workshops.

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Measuring and Sustaining the New Economy: Enhancing Productivity Growth in the Information Age MOORE’S LAW AND THE NEW ECONOMY At the time of the STEP Board’s first conference in 2000, many economists were still reluctant to proclaim a technology-driven New Economy if only because there were few or no data reflecting economy-wide returns to the substantial investments made by U.S. business in new information and communications technologies.1 Throughout the 1970s and 1980s, Americans and American businesses regularly invested in ever more powerful and cheaper computers and communications equipment. They assumed that advances in information technology—by making more information available faster and cheaper—would yield higher productivity and lead to better business decisions. The expected benefits of these investments did not appear to materialize—at least in ways that were being measured. Even in the first half of the 1990s, productivity remained at historically low rates, as it had since 1973. This phenomenon was called “the computer paradox,” after Robert Solow’s casual but often repeated remark in 1987: “We see the computer age everywhere except in the productivity statistics.”2 Raising the Speed Limit At the National Academies first conference on the New Economy, however, Dale Jorgenson pointed to new data that showed that the U.S. economy was undergoing a fundamental change.3 While growth rates had not returned to those of the “golden age” of the U.S. economy in the 1960s, he noted, new data did reveal an acceleration of growth accompanying a transformation of economic activity. This shift in the rate of growth by the mid-1990s, he added, coincided with a sudden, substantial, and rapid decline in the quality-adjusted prices of semiconductors from an average of 15 percent annually before 1995 to 28 percent annually after 1995.4 In response to the rise in capability of computers and drop in price, investment in semiconductor-based technologies exploded, leading to a positive impact on economic growth. Jorgenson and Stiroh have calculated that computers’ con- 1 For the views of a notable skeptic, see Robert J. Gordon, “Does the ‘New Economy’ Measure Up to the Great Inventions of the Past?” Journal of Economic Perspectives, American Economic Association, 14(4):49-74, 2000. 2 R. Solow, “We’d Better Watch Out,” New York Times Book Review, July 12, 1987. The implications of the Solow Productivity Paradox have since been actively discussed. For example, see J.E. Triplett, “The Solow Productivity Paradox: What Do Computers Do to Productivity?” Canadian Journal of Economics, 32(2):309-34, April 1999. 3 National Research Council, Measuring and Sustaining the New Economy, Dale W. Jorgenson and Charles W. Wessner, eds., Washington, D.C.: National Academy Press, 2002. 4 Dale W. Jorgenson and Kevin J. Stiroh, “Raising the Speed Limit: U.S. Economic Growth in the Information Age,” in National Research Council, Measuring and Sustaining the New Economy, op. cit., 2002, Appendix A.

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Measuring and Sustaining the New Economy: Enhancing Productivity Growth in the Information Age tribution to growth 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 1995-1998. And their preliminary estimates through 1999 revealed further increases for all three categories.5 Jorgenson thus made the case for “raising the speed limit”—that is, for revising upward the intermediate-term projections of growth for the U.S. economy.6 The Role of Moore’s Law Moore’s Law describes the speed at which semiconductor technology develops. Semiconductors are the core enablers for the wide array of information and communications technology. The pace of semiconductor development is, therefore, critical to the development of the broader range of computing and telecommunications technologies that are the basis for modern economic processes. Moore’s Law is based on a prediction made by Gordon Moore in a 1965 paper titled “Cramming More Components onto Integrated Circuits,” where he noted: The complexity for minimum component costs has increased at a rate of roughly a factor of two per year. Certainly, over the short term, the rate of increase is a bit more uncertain, although there is no reason to believe it will not remain nearly constant for at least 10 years. That means by 1975, the number of components per integrated circuit for minimum cost will be 65,000.7 Extrapolating this trend (see Figure 1), Gordon Moore predicted an exponential growth of chip capacity at 35 to 45 percent per year through 1975.8 Gordon Moore revised his original prediction in 1975 (the endpoint of his earlier projection) stating that increases in components per chip would continue, approximately doubling every 2 years, rather than every year.9 Believing that human ingenuity would further sustain the growth of chip capacity, he noted that manufacturers were using “finer scale microstructures” to engineer higher density of components per chip. As Kenneth Flamm pointed out at the National Academies’ 2001 conference on semiconductors, the idea popularly known today as “Moore’s Law” (drawn from but not identical to Gordon Moore’s predictions) anticipates the doubling of 5 Ibid. 6 Ibid. 7 See Gordon E. Moore, “Cramming More Components onto Integrated Circuits,” Electronics, 38(8), April 1965. 8 For a historical overview of Moore’s Law, see Kenneth Flamm, “Moore’s Law and the Economics of Semiconductor Price Trends,” in National Research Council, Productivity and Cyclicality in Semiconductors: Trends, Implications, and Questions, Dale Jorgenson and Charles Wessner, eds., Washington, D.C.: The National Academies Press, 2004. 9 See Gordon E. Moore, “Progress in Digital Integrated Circuits,” Proceedings of the 1975 International Electron Devices Meeting, pp. 11-13.

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Measuring and Sustaining the New Economy: Enhancing Productivity Growth in the Information Age FIGURE 1 The original “Moore’s Law” plot from Electronics, April 1965. the number of transistors on a chip every 18 months.10 While not deterministic, Moore’s Law accurately reflects the pace for growth in the capacity of memory chips and logic chips from 1970 to 2002, as shown in Figure 2.11 10 See Kenneth Flamm, “Moore’s Law and the Economics of Semiconductor Price Trends,” in National Research Council, Productivity and Cyclicality in Semiconductors, op. cit., for a comparison of Moore’s predictions with the historical record. Flamm notes that Moore’s own observations differ from what is popularly interpreted by the technology community and the press as Moore’s Law. Though prescient, Moore did not anticipate the resilience of his earlier prediction. See Gordon E. Moore, “The Continuing Silicon Technology Evolution Inside the PC Platform,” Intel Developer Update, Issue 2, October 15, 1997, where he notes that he “first observed the ‘doubling of transistor density on a manufactured die every year’ in 1965, just four years after the first planar integrated circuit was discovered. The press called it “Moore’s Law,” and the name stuck. To be honest, I did not expect this law to still be true some 30 years later, but now I am confident that it will be true for another 20 years.” 11 For a review of Moore’s Law on its fortieth anniversary, see the Economist, “Moore’s Law at 40,” March 23, 2005.

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Measuring and Sustaining the New Economy: Enhancing Productivity Growth in the Information Age FIGURE 2 Transistor density on microprocessors and memory chips. As Kenneth Flamm further noted, Moore’s Law also captures an economic corollary that successive generations of semiconductors and related information technology products will not only be faster but also successively cheaper. Data from the Bureau of Economic Analysis (BEA), depicted in Figure 3 (and displayed by Dale Jorgenson at the conference on software), shows that quality-adjusted semiconductor prices have been declining by about 50 percent a year for logic chips and about 40 percent a year for memory chips between 1977 and 2000. This is unprecedented for a major industrial input. The Moore’s Law phenomenon also appears to extend from microprocessors and memory chips to high-technology hardware such as computers and communications equipment. BEA figures highlighted by Dale Jorgenson reveal also that computer prices have declined at about 15 percent per year since 1977. (See Figure 4.)

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Measuring and Sustaining the New Economy: Enhancing Productivity Growth in the Information Age FIGURE 3 Relative prices of computers and semiconductors, 1977-2000. NOTE: All price indexes are divided by the output price index. While Moore’s Law appears to predict ever “faster, better, cheaper” semiconductors and computers, it is not a deterministic law of nature, enduring instead by setting the expectations among participants in the semiconductor and computer industry of the pace of innovation and the introduction of new products to market. Before describing the basis of Moore’s Law and what is required to sustain this remarkable phenomenon, we first summarize some of the discussion of the economic implications of Moore’s Law and the challenges they pose to measuring the New Economy. MEASURING THE NEW ECONOMY Measuring the New Economy is a challenge given the fast-changing nature of information and communications technology and the complex and often-invisible roles it plays in economic processes. This means that current data collection methods have to be updated to stay relevant to new products, new categories, and new concepts.

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Measuring and Sustaining the New Economy: Enhancing Productivity Growth in the Information Age FIGURE 4 Relative prices of computers, communications, and software, 1977-2000. NOTE: All price indexes are divided by the output price index. The Challenge of Measurement As several participants at the initial conference noted, conventional statistical methods are not adequately adapted to capture what is happening in the economy. Illustrating the challenges facing the federal statistical system, Timothy Bresnahan of Stanford University noted the discrepancy between measures of output in the information technology sector (which he noted are adequate) and measures of output where information technology is used as an input in other sectors (which are not).12 Shane Greenstein of Northwestern University added that conventional measures of Gross Domestic Product (GDP) provide good data on established channels by which goods and services are distributed, but fail to capture such information about goods and services when there are concurrent changes in the distribution methods.13 Illustrating the implications of asymmetries in data availability, Lee Price (then of the Department of Commerce) observed that data on the value of pre- 12 Tim Bresnahan, “Investments in Information Technology Applications,” in National Research Council, Measuring and Sustaining the New Economy, op. cit., pp. 115-119. 13 Shane Greenstein, “Communications,” in National Research Council, Measuring and Sustaining the New Economy, op. cit., pp. 101-105.

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Measuring and Sustaining the New Economy: Enhancing Productivity Growth in the Information Age Box A: Challenges in Measuring of the New Economy Key challenges to measuring the New Economy—as noted by several of the participants at the initial conference on Measuring and Sustaining the New Economy—include: the need for better measurement of the output of the service sectors, the impact of technology on user sectors, the contribution of the semiconductor industry, the rapid changes in the communications industry, changes in distribution methods, organizational capital and other intangibles, assessing the value of business information systems, and difficulties when investments are reported as expenses in source data. packaged software (which is more easily measured in terms of both nominal value and price) might not be as important to productivity as custom and own-account software whose value is more difficult to capture—resulting in their under-valuation. He stressed the need to refine statistical methods to better quantify the value of information technology.14 Several participants at the initial conference also emphasized the problems in valuing information technologies. Kenneth Flamm observed that it is difficult to calculate the percentage of improvement in computers that come from semiconductors.15 Eric Brynjolfsson of the Massachusetts Institute of Technology (MIT) further noted some hazards in equating price with value for computers, particularly given that many consumers are not price-sensitive, valuing service, brand loyalty, and perceived quality instead.16 Further to the issue of value, David Mowery of the University of California at Berkeley noted that it is statistically difficult to see the contributions of the semiconductor industry since it is hard to measure the output of “user” industries. He added that the economy outside the computer industry has become “a bit of a black planet” in terms of understanding quality improvements in its products.17 This value issue was further elaborated at the conference on Deconstructing the Computer. 14 This issue was pursued further in the 2003 National Academies conference on Software and the New Economy. 15 Kenneth Flamm, “Microprocessors and Computers: The Phenomenon of Price Declines,” in National Research Council, Measuring and Sustaining the New Economy, op. cit., pp. 82-89. 16 Eric Brynjolfsson, “Economic Issues of E-Business,” in National Research Council, Measuring and Sustaining the New Economy, op. cit., pp. 115-119. 17 David Mowery, “Semiconductors, Economics of the New Economy,” in National Research Council, Measuring and Sustaining the New Economy, op. cit., pp. 69-74.

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Measuring and Sustaining the New Economy: Enhancing Productivity Growth in the Information Age Additional measurement challenges deal with how well information technologies are integrated and adopted across the economy. There were divergent views on where the United States was on the technology adoption curve at the turn of the century: Some argued that the United States was near the bottom of the S-shaped curve and about to take off; others suggested that the United States was in the middle and thus enjoying rapid productivity gains from the widespread adoption of information technologies; still others believed that marginal productivity gains from information technologies might be declining, signifying that the United States was already near the top of the technology adoption curve. This diversity of opinion, and the contrasting policy actions that it implies, pointed to a need to better measure the distinctive features of today’s economy. Another major constraint in sustaining the growth in productivity is the rate of technology absorption. Sid Abrams of AT Kearney noted that business organizations often face challenges in reengineering themselves to take better advantage of the technologies available. While the cutting edge of technologies may advance, their potential to advance business productivity may depend on the extent to which executives and others are aware of the possibilities and/or uncertain of the effects of adopting new technologies in their organization.18 Indeed, as Ralph Gomery of the Alfred P. Sloan Foundation noted in the roundtable discussion that concluded the initial conference, the ability to absorb rapid advances in technology and the cost of re-doing the business organization to take advantage of these advances are, in many cases, more significant for sustaining productivity-led growth than the rate of technological advance. In essence, the question is not merely one of better or cheaper technology, but rather one of how enterprises can integrate productivity-enhancing technologies into the way business is conducted. Sustaining the benefits of new technologies requires that we better understand the nature of these technologies and the circumstances that promote their development and deployment. STEP’s series of conferences on the New Economy has thus sought to bring together leading economists and also to draw on the knowledge and experience of industry leaders and other experts to describe current trends and their origins, with the challenge to economists to identify data and tools required for measuring and modeling key facets of the New Economy. Modeling the Productivity and Cyclicality of the Semiconductor Industry Reflecting the centrality of semiconductors to the information technologies, STEP’s conference of September 24, 2001, examined the rapid evolution of semiconductor technologies and a possible modeling strategy that could be used to predict the effects of alternative policy choices for the semiconductor industry. 18 Sid Abrams, “Old Business to E-Business: The Change Dynamic,” in National Research Council, Measuring and Sustaining the New Economy, op. cit., pp. 119-124.

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Measuring and Sustaining the New Economy: Enhancing Productivity Growth in the Information Age the nation could close the broadband gap, of which some key approaches are previewed below. • Directed Government Incentives: Ferguson suggested that the nations that were ahead of the United States in broadband penetration shared two characteristics. The first was that their governments are “much more heavily involved in providing incentives and/or money and/or direct construction of networks than is the case in the United States.” The second was that their Internet providers are under government pressure to improve their price and performance. For example, he said that the Chinese government had made it clear to the country’s principal telecommunications providers that broadband deployment was a major national priority. The situation was similar in Japan and Korea, adding that government encouragement in Canada and the Scandinavian countries had also enabled those countries to surge ahead of the United States in high-bandwidth broadband penetration.135 For the United States, Ferguson recommended a variety of policy measures to bridge the broadband gap. Initiatives could include subsidizing the deployment of municipal networks and offering investment incentives to public and private providers. Putting more pressure on incumbents to open up their networks so that there is an open architecture broadband system that is more analogous to the structure of the Internet is another avenue. • Faith in Efficient Markets: In contrast to this more policy-driven approach, Verizon’s Wegleitner noted that broader technical, financial, and regulatory improvements would reduce uncertainty and allow markets to function efficiently. While admitting that current challenges resisted simple solutions, he put forward what he called a short answer to the problem: “Let the markets rule.” By this, he envisioned the Internet of the future as an interconnection of commercial networks such as Verizon’s rather than the confederation of commercial providers that it is now. He added that the future requirements for services offered customers via broadband would be of such quality and scope that only an interconnection of commercial networks could provide this service.136 To make this network of the future possible, Wegleitner recommended further development of appropriate standards for communication protocols and a new way of levying tolls on customers for use of the infrastructure that belongs to companies like Verizon, combined with a light regulatory touch.137 135 For an assessment of Japanese policies to catch up and surpass the United States in broadband connectivity, see Thomas Bleha, “Down to the Wire,” Foreign Affairs, 84(3):0015-7120, 2005. 136 The current Internet is based on a confederation made up of multiple service providers. Their ability (or inability) to maintain their interconnection arises from commercial issues, and not from the current design of the Internet. 137 Responding to such proposals by the telcos, proponents of “net neutrality” have argued that basic Internet protocols should remain neutral with respect to the diverse ways in which they can be used.

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Measuring and Sustaining the New Economy: Enhancing Productivity Growth in the Information Age • Networks in the Hands of Customers: In the discussion that followed the first panel, Jay Hellman, a real estate developer, observed that there exist business opportunities both in laying fiber to the home and in making sure it functions. He likened the duo of fiber and services to a public roadway where service companies like FedEx and UPS competitively ply their fleets. It was desirable, he added, that the street be accessible to as many competitors as possible. He also added that his own frustration with the capacity offered by existing providers had prompted him to start his own small telecommunications company. Responding to this comment, David Isenberg noted that the development of technologies that allow customers to create their own networks and that create opportunities for individuals to provide service innovations was important to sustain innovation and provided a broader, more generic solution to the broadband challenge. • Municipally Owned Fiber: Thompson proposed a different approach, recommending the development of non-profit public-private partnerships at the local level to stimulate the development of broadband to the home. These partnerships would serve as a utility, lighting fiber but not providing any service on that fiber except those municipal services that the town or community base chose to provide. The network would be open to any and all service providers with an Internet Protocol basis—be they telephone companies, cable companies, software companies, or others providing on-line entertainment—and it would be used by all under the same terms and prices. Communities could build this network, just as municipalities build and maintain roads and sewers, he added, citing the case of Ireland where, Thompson said, such partnerships have been successfully developed to provide broadband access. While separating the network access component from retail services may help municipal providers of network infrastructure, more needs to be learned about the feasibility of this idea in the United States, including whether customers want to buy their services in this way. The issue of whether the municipal provision of infrastructure will in fact lead to more competition for broadband access also remains to be studied. • The Wireless Wildcard—A Silver Bullet? Wireless broadband access can be a third tier that competes with cable and DSL, according to David Lippke of HighSpeed America.138 In this way, wireless broadband can help overcome the limitations associated with traditional wired They argue that net neutrality protection is critical for the Internet to continue to meet its innovative promise. Others argue that recouping all new network construction costs from consumers alone could drive up prices or discourage investment, exacerbating the broadband gap. See The Wall Street Journal, “‘Net Neutrality’ Snags Overhaul of Telecom Laws,” June 29, 2006, p. A7. 138 Also mentioned at the conference was broadband over power lines, which at the time was being reviewed by the FCC.

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Measuring and Sustaining the New Economy: Enhancing Productivity Growth in the Information Age broadband access. While wireless broadband has been in limited use so far due to relatively high subscriber costs and technological limitations such as problems with obstacle penetration, rapid advances in technology are likely to overcome such challenges. Moore’s Law applies to wireless no less than other forms of telecommunications, he noted, predicting that wireless data rates would reach all the points through which traditional telecom had passed. In particular, scientists and engineers working on the upcoming WiMAX standard have resolved a number of problems that had bedeviled existing wireless protocols such as WiFi. The prospect of reaching gigabit speeds was now being mentioned, and other quality-of-service issues as well as lower costs of installation are being addressed. To the extent that these predictions are realized, the WiMAX protocol may well offer an effective wireless solution to the broadband gap, especially for smaller towns and communities across the United States. The End of Stovepiping The move from analog to digital information and communication technologies is ushering a major transformation disrupting how telecom, cable, and music and video entertainment companies, among others, do business. Because analog solutions were all that existed until recently (except in some fields of computing), these industries each matured into separate industries, with separately evolved business models and regulatory frameworks. In the digital age, however, basic technologies like digital sampling and packet switching enable the commoditization of voice, data, and images into digital packets that resemble each other. These packets can be sent over the Internet with no distinction as to what they are, to be reassembled at the intelligent ends of the network. Drawing on these observations, William Raduchel noted at the conference that the information and communications technology revolution will usher the end to stovepiping as service and content providers shift from vertical integration to a greater reliance on horizontal platforms. This change, he noted, will give rise to a variety of public policy issues as individuals and businesses in the economy restructure to take advantage of the potential offered by new technologies.139 He also noted that the speed of change is likely to be such that the economy may not be able to adjust to it readily. Among the issues to be addressed is the challenge to intellectual property rights and the question of regulation, which is expected to be very challenging. The potential and implications of the move from analog to digital information and communication technologies were discussed by several of the conference’s participants. Key points from these discussions are summarized below. As in any 139 A key example of contemporary relevance is the offshore outsourcing issue. For a discussion of this issue, see National Research Council, Software, Growth, and the Future of the U.S. Economy, op. cit. See also Catherine L. Mann, High-Technology and the Globalization of America, forthcoming.

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Measuring and Sustaining the New Economy: Enhancing Productivity Growth in the Information Age Box I: Some Factors Affecting the End of Stovepiping While the digital transformation has the potential to disrupt traditional vertically integrated industrial organizations, some factors may inhibit a transformation to a fully horizontal platform. Open Network Architecture: The horizontal organization of communications requires a relatively open network architecture. However, if systems or content providers do not have access to physical or logical pipes, those providers cannot reach their customers.a Separation of Carriage from Content: Some customers may prefer to purchase services in bundles that include access, as noted by Lisa Hook. Here, vertically integrated firms may have a competitive advantage over firms that supply pipes or content exclusively. Social Policies that Favor Universal Access: Where social policies set access price below a competitive market price, the supplier of the access must also be able to cover its total cost from the supply of some other higher-margin services or receive a subsidy. Economies of Scope: There may be economies of scope between providing communications services and network facilities.    aConsider, for example, the FCC’s Video Dialtone initiative in the 1990s, which attracted substantial investment from incumbent telephone companies until it was determined that some portion of the bandwidth had to be made available to competing content providers. For a wider discussion of the limitations of open access cable, see Thomas W. Hazlett and George Bittlingmayer, “The Political Economy of Cable ‘Open Access,’” Stanford Technology Law Review, 4, 2003. conference that includes a variety of perspectives, some of these policy recommendations are mutually contradictory, and evidence may be required regarding their efficacy. Convergence and Competition Raduchel sees the Internet as having two complementary aspects—it is both a physical set of networks as well as a protocol known as TCP/IP. At present, the physical network can only support movies and other applications at low bit volumes and is often not cost-effective—although this can be expected to change as technology improves and the broadband gap is overcome. The significance of the Internet Protocol, he said, is that it makes all networks look the same and allows interoperability. It was for this reason that the telecommunications world could be expected to move to one set of interconnected webs, he said, predicting that “five to ten years from now, we will be online all the time.”

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Measuring and Sustaining the New Economy: Enhancing Productivity Growth in the Information Age This convergence is challenging the traditional business models of firms in these industries. How would telecom companies, for example, deal with new technology that makes cell phones work perfectly everywhere or with much cheaper VoIP service? The next decade, warned Dr. Raduchel, would be marked by “lots of dislocation” as firms attempt to adjust to new technological and commercial realities. According to Mr. LaJoie, the convergence of data, voice, video, wireless, public networks, and private networks in an end-to-end infrastructure was changing the terms of competition across industries. Where there was once a big separation between what the telecom and cable industries did for example, “now everybody is in everybody else’s business.” While cable television, Internet, Cellular, WiFi, and satellite transmission businesses were once distinct, LaJoie believes that they are all destined to overlap and offer similar kinds of products, suggesting with some optimism that the economic rewards that will arise from this competition would be what drives continued innovation, the advent of new services, and increased broadband connectivity. The potential end of stovepiping also poses new challenges for consumers. Many consumers, faced with a proliferation of Internet services, operating systems, and devices will want a service that is easy to use and integrated, predicted Ms. Hook. She noted that companies like AOL Broadband see a market opportunity as aggregators, packaging a variety of content and communications services over the Internet and protection against viruses and spy-ware that are easy to launch and use. Intellectual Property in the Era of Digital Distribution In addition to disruption in the business models of firms that deliver a digital signal is the disruption to business models of firms that provide the content. Indeed, the music and entertainment industries are among those that are also undergoing a fundamental shift in the digital age. Andrew Schuon of the International Music Feed television network noted that while the public’s desire to consume music has never been greater, with new technologies allowing users to take an entire music collection with them anywhere they go, the key problem for content providers is how to make money selling music in the new medium—given that technology already available has allowed consumers to share music and other content with each other for free. At present, he noted, legitimate downloads account for only a few percent of all downloads from the Internet. He noted that technology developed for building legitimate services makes it now possible to protect intellectual property, to monetize it, and to track licenses while, at the same time, creating a good experience for the consumer. However, this technology has to catch up with consumer expectations that have developed in the absence of such constraints: “If you steal the content, you can do anything you want with it—put it into any portable device, put it on as many computers

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Measuring and Sustaining the New Economy: Enhancing Productivity Growth in the Information Age FIGURE 11 Vertical silos to horizontal layers. as you have, use the content as you see fit.” The challenge for the music industry is to find a way to get the consumer to pay for its product while at the same time being more creative than the illegitimate download sites. The music industry, Mr. Shuon said, has to offer the modern customer the flexibility to use the content in the way they want to, in addition to offering superior content and a fair price. Steve Metalitz, of the law firm Smith and Metalitz, agreed that developing a legitimate market for copyrighted materials over broadband—for entertainment, services, software, video games, research and reference works—was indispensable for the long-term viability of these industries. Acknowledging that piracy will continue to be a problem, he added that the challenge for the future of broadband is to achieve a relatively low level of piracy and a very high level of legitimate products. Addressing this challenge requires: developing legitimate markets for copyrighted materials over broadband, providing greater security for delivering content to an end-user including measures to ensure that the income-generating potential of material going into the pipe did not vanish forever, creating a usable legal framework to protect the technological measures used to control access to copyrighted material in the network environment, focusing enforcement of piracy problems on organized criminal groups as well as dedicated amateurs who play a role in making the system insecure, and improving public education to make consumers aware that certain types of file sharing are illegal and of the need to secure permission to avoid copyright infringements. Cooperation, Mr. Metalitz concluded, is needed among providers of network services along with better communication with policymakers to advance these objectives.

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Measuring and Sustaining the New Economy: Enhancing Productivity Growth in the Information Age The Challenge for Regulation According to Peter Tenhula of the FCC, the challenge for regulation concerns the migration from decades of regulatory stovepipes towards a new vision of a variety of applications and services (covering voice, video, and data among others) that are provided over multiple and competing telecommunications platforms (including cable, satellite, DSL, and power lines). For this idea to work, content or service providers need a choice of mechanisms by which they can reach their customers. Rather than preserve the artificial vertical integration that had existed for decades and had created silos that grew up over the years, Mr. Tenhula suggested that it made better sense to let the natural layers fall as they might. (See Figure 11.) Replacing sector-specific communications regulation with a layered regulatory model, he added, would better complement the networked characteristic of the New Economy. The FCC’s agenda, he said, was to guide and propel the journey from a slow, conventional analog world to a digital world with significant opportunities for faster, more reliable, higher-quality information and communications, with the overall goal of providing substantial benefits for American consumers. Towards a New Agenda of Research Concluding the series of conferences on the New Economy, Dr. Jorgenson noted that the New Economy had witnessed a huge shift from a vertical model to a horizontal model in the computer, semiconductor, and communications industries. In this new model, he said, most of the interesting innovations were disruptive. The challenge for businesses in this changing environment was to figure out how to make money, which was hard given that consumers were both clever and unpredictable. It was “too bad,” he said, that the consumer ends up carrying away most of the welfare, which then cannot be delivered to shareholders. But in another respect, he added, the fact that “consumers emerge over and over again as the big winners … was a great thing about the New Economy.” Dr. Jorgenson characterized the policy issues in the telecommunications challenge as particularly difficult. While many economists are prone to offer private property as an answer to policy dilemmas, the presence of common property in the form of the digital communications infrastructure made matters more complex, he noted, adding that a way had to be found of maintaining common facilities within a market-based approach. The transmission of property such as data, software, and music across this network also raised questions about its protection, while ensuring privacy for users. Taken together, these issues provide a robust agenda for further study and consideration about the New Economy— which, he noted, has been a central aim of the National Academies’ Board on Science, Technology, and Economic Policy.

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Measuring and Sustaining the New Economy: Enhancing Productivity Growth in the Information Age FIGURE 12 Productivity growth over the business cycle: 2001 recession compared with averages of earlier recessions. SOURCE: U.S. Department of Labor, Bureau of Labor Statistics. NOTES: Productivity series are normalized to equal 1.0 at the beginning of each recession. The 1973-2000 line represents average productivity growth over the four recessions during that period; the 1947-2000 line represents average productivity growth over the nine recessions during that period. THE FUTURE OF THE NEW ECONOMY The New Economy is alive and well today. Recent figures indicate that since the end of the previous recession in 2001, productivity growth had been running about two-tenths of a percentage point higher than in any recovery of the post-World War II period.140 (See Figure 12.) The challenge rests in developing evidence-based policies that will enable us to continue to enjoy the fruits of higher productivity in the future. It is with this aim that the Board on Science, Technology, and Economic Policy of the National Academies has undertaken a series of conferences to address the need to measure the parameters of the New Economy as an input to better policymaking, and to highlight the policy challenges and opportunities that this New Economy offers. 140 Dale W. Jorgenson, Mun S. Ho, and Kevin J. Stiroh, “Will the U.S. Productivity Resurgence Continue?” Current Issues in Economics and Finance, 10(13), November 2004.

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Measuring and Sustaining the New Economy: Enhancing Productivity Growth in the Information Age This ambitious series was begun in the midst of a tremendous economic boom, and although economic conditions have changed since then, the basic structural dynamics underpinning the New Economy have remained intact. Faster and cheaper computing power and communications capabilities continue to have a momentous impact on productivity growth in the United States and around the world. Understanding the basis and dimensions of this New Economy is important if we are to develop the economic policies required to ensure the nation’s future prosperity and growth. “STEP has produced the most detailed and comprehensive picture of the New Economy available to date.” —Dale Jorgenson STEP’s series of conferences on the New Economy have given momentum to this task. STEP’s first conference on Measuring and Sustaining the New Economy showed that technology is the main source of the development denoted by the term “New Economy,” and that the key technologies center on semiconductors. The second conference addressed semiconductors specifically, dealing—as described by Moore’s Law—with the speed at which semiconductor technology develops. At that conference, Robert Doering of Texas Instruments and other leading authorities in the field projected that semiconductor development would continue at that accelerated pace for at least another decade or so while highlighting what needs to done to keep Moore’s Law on track. The topic of the third conference in the series was computers. That conference brought to light that the industries that manufacture computers and computer components are also driven by a Moore’s Law phenomenon and that they have developed internal metrics to gauge rapid technological developments. The fourth conference of the series examined developments in software measurement, the vulnerabilities affecting the nations’ complex software infrastructure, as well as implications of the offshoring of software production abroad. The final meeting on the telecommunications challenge described a huge shift from a vertical model to a horizontal model of production made possible by inexpensive computing and communications. Low-cost and rapid data and voice transmission is transforming the competitive strengths of national economies by ushering the rapid globalization of research and production. How we adapt our laws and regulations to capitalize on these new technological opportunities will determine the future of the United States’ security and economic preeminence in the world. Taken together, the work sponsored by STEP under the rubric Measuring and Sustaining the New Economy has produced what Dale Jorgenson described as

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Measuring and Sustaining the New Economy: Enhancing Productivity Growth in the Information Age the most detailed and comprehensive picture available to date of what is known as the New Economy. This undertaking provides the basis for further research on the dimensions of the New Economy and policies that can enhance the benefits of the New Economy.

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