MEASURING AND SUSTAINING THE NEW ECONOMY
ENHANCING PRODUCTIVITY GROWTH IN THE INFORMATION AGE
Dale W. Jorgenson and Charles W. Wessner, Editors
THE NATIONAL ACADEMIES PRESS
Washington, D.C.
www.nap.edu
THE NATIONAL ACADEMIES PRESS
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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. CMRC-50SBNB9C1080 between the National Academy of Sciences and the U.S. Department of Commerce; Contract/ Grant No. NASW-99037, Task Order 103, between the National Academy of Sciences and the National Aeronautics and Space Administration; Contract/Grant No. CMRC-SB134105C0038 between the National Academy of Sciences and the U.S. Department of Commerce; Contract/Grant No. OFED-13416 between the National Academy of Sciences and Sandia National Laboratories; Contract/Grant No. N00014-00-G-0230, DO #23, between the National Academy of Sciences and the Department of the Navy; Contract/ 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.
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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
Richard Levin President
Yale University
David T. Morgenthaler Founding Partner
Morgenthaler Ventures
William J. Spencer, Vice Chair Chairman Emeritus, retired
SEMATECH
Mark B. Myers Visiting Executive Professor of Management
The Wharton School University of Pennsylvania
Roger Noll Morris M. Doyle Centennial Professor of Economics
Director,
Public Policy Program Stanford University
Edward E. Penhoet President
Gordon and Betty Moore Foundation
William Raduchel Chairman and CEO
The Ruckus Network
Alan Wm. Wolff Managing Partner
Dewey Ballantine
Project Staff*
Charles W. Wessner Study Director
McAlister T. Clabaugh Program Associate
David E. Dierksheide Program Officer
Paul J. Fowler Senior Research Associate
Jeffrey McCullough Program Associate
Sujai J. Shivakumar Program Officer
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
Timothy Bresnahan
Landau Professor in Technology and the Economy
Stanford University
Lewis Coleman
President
DreamWorks Animation
Kenneth Flamm
Dean Rusk Chair in International Affairs
Lyndon B. Johnson School of Public Affairs
University of Texas at Austin
Mary L. Good
Donaghey University Professor
Dean, Donaghey College of Information Science and Systems Engineering
University of Arkansas at Little Rock
Amo Houghton
Member of Congress (ret.)
David T. Morgenthaler
Founding Partner
Morgenthaler Ventures
Joseph Newhouse
John D. MacArthur Professor of Health Policy and Management
Harvard University
Edward E. Penhoet
President
Gordon and Betty Moore Foundation
Arati Prabhakar
General Partner
U.S. Venture Partners
William J. Raduchel
Chairman and CEO
The Ruckus Network
Jack Schuler
Chairman
Ventana Medical Systems
Suzanne Scotchmer
Professor of Economics and Public Policy
University of California at Berkeley
STEP Staff*
Stephen A. Merrill
Executive Director
McAlister T. Clabaugh
Program Associate
David E. Dierksheide
Program Officer
Paul Fowler
Senior Research Associate
Charles W. Wessner
Program Director
Jeffrey McCullough
Program Associate
Ben Roberts
Christine Mirzayan Science and Technology Policy Fellow
Sujai J. Shivakumar
Program Officer
Preface
The New Economy refers to technological and structural changes in the U.S. economy as individuals capitalize on new technologies, new opportunities, and national investments in computing, information, and communications technologies. Ongoing rapid declines in the prices of computers and semiconductors as well as apparent similar declines in the prices of software and communications equipment have led to diverse new information technology (IT)-enabled capabilities and the widespread adoption of information technologies. These investments have significantly improved the nation’s productivity, raising the trajectory of economic growth since the mid-1990s.1 This gain appears to be robust, having survived the dot-com crash, the short recession of 2001, and the tragedy of 9/11. Since the end of the previous recession of 2001, productivity growth had been running at about two-tenths of a percentage point higher than in any recovery of the post-World War II period.2
A structural change most associated with the New Economy today is the transformation of the Internet from a communication media to a platform for service delivery.3 This has led to the remarkable growth of the U.S. service
economy, as companies like Google and eBay increasingly exploit information services in new ways.
THE CONTEXT OF THIS REPORT: THE COMMITTEE’S TASK
In order to sustain the benefits of higher productivity and economic growth, policy makers need to improve their understanding of the operation of this new American economy. Unfortunately, the empirical record of this change is incomplete, with much remaining to be done before definitive quantitative assessments can be made about the role that these new technological assets play in the U.S. economy.
To meet this need, the Board on Science, Technology, and Economic Policy (STEP) appointed a committee to convene a series of conferences designed to identify and address the policy issues associated with the measurement, development, and growth characteristic of the “New Economy.” Focusing primarily on the Information Technology sector as the major driver of productivity growth from the 1990s, the study has examined key sectors, or building blocks, that underpin this new and more productive U.S. economy. These sectors include semiconductors (one of the principal drivers of productivity growth), computers and their various components (another driver of productivity), software in its various forms (pervasive throughout the economy), and the contributions of dramatically improved capacity and lower cost of telecommunication services and data transmission.
The study took up a series of issues such as:
-
measurement issues, such as data classification and collection requirements;
-
the building block technologies of the “new economy,” including their special characteristics and synergies across industries; and
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policy and regulatory issues.
CONFERENCES ON THE NEW ECONOMY
Following an initial conference that provided the impetus for this project, separate conferences on each of these sectors were convened over several years. Each identified major issues associated with the measurement and analysis of the current U.S. economy, the technologies underpinning its growth, and the government-industry collaborations and regulatory framework necessary to sustain its continued advance. The proceedings of each of these conferences have been captured in separate reports. These reports, together with commissioned
for the Next Generation of Software” September 30, 2005. Accessed at <http://www.oreillynet.com/pub/a/oreilly/tim/news/2005/09/30/what-is-web-20.html>. |
papers, have been used to establish a basis for this final consensus report by the Committee.
The conferences included:
-
Measuring and Sustaining the New Economy. Held on October 6, 2000, at the National Academies, Washington, D.C., this initial exploratory conference described the nature and sources of growth in the “new” economy and set out the broad challenges faced in measuring and sustaining the growth in productivity that characterizes it. The conference provided the initial impetus for this project and, with subsequent approval and funding, led to a series of workshops dealing with the specific sectors most closely linked to emergence and sustainability of the positive trends that now distinguish the U.S. economy. An initial report captured the deliberations of this conference and attracted the interest of Washington policy makers.4
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Productivity and Cyclicality in the Semiconductor Industry. Held at Harvard University on September 24, 2001, soon after the 11 September terror attacks, this conference looked at the trends, implications, and policy questions that arise from an understanding of the Moore’s Law phenomenon in semiconductors. It explored how the cyclicality found in the semiconductor industry might be modeled. It also highlighted a variety of policy initiatives needed to help sustain a vibrant semiconductor industry in the United States.5
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Deconstructing the Computer. This conference, held on February 28, 2003, brought together leading figures from the different industries that develop and manufacture computer components (such as printers, memories, and monitors) to examine the extent of Moore’s Law phenomenon in their industry and to explore how best to measure computer performance and how to sustain the benefits to the economy arising from a Moore’s Law for computer components.6
-
Software, Growth, and the Future of the U.S. Economy. This conference, held on February 20, 2004, examined the nature of software, reviewed how software has been measured in the national accounts, and discussed the challenges of capturing the value and vulnerabilities of software, given that the nature of software is itself rapidly evolving. The meeting also highlighted the globalization of the software industry, the recent “offshoring” phenomenon, and the policy challenges that these developments pose.7
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The Telecommunications Challenge: Changing Technologies and Evolving Policies. Taking stock of the rapid convergence between telecommunications and information technologies, participants at this final conference in the series, held on November 15, 2004, examined the need to expand the reach of the nation’s high-bandwidth broadband network. Discussed in this context was the need for an adaptive policy framework that encourages innovation in telecommunications, and the development of new business models for telephony as well as voice and video entertainment.8
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. Part III of this report summarizes key issues taken up at these five conferences. The knowledge and insights reflected in the remarks of industry and policy representatives capture tacit knowledge that is not always available through formal academic analysis. These insights, buttressed by the commissioned papers, provide a valuable review and, in some cases, analysis of selected themes. Both the workshop summaries and the papers contributed to this consensus report.
While this report reflects the wide scope of the Committee’s deliberations, it does not attempt (nor could it hope) to address all aspects of the causes and effects of the modern information economy. For instance, this volume does not provide a comprehensive study of the developments within industries that use information technologies, such as the retailing or transportation industries. Nor does it provide a detailed discussion of the experience of information technology-supplying industries that are related to but outside the Internet, such as the supercomputing or cellular industries. Other areas not covered include the potential role of standards committees in fostering technical advance, possible changes to the Generally Accepted Accounting Principles to improve how R&D is captured, the role nanotechnologies could play in advancing information technology, and changes in spectrum policy to move the spectrum from low value to higher value uses.
ACKNOWLEDGMENTS
There is considerable interest in the policy community in developing a better understanding of the technological drivers and appropriate regulatory framework
for the New Economy, as well as 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 creation and development of the technologies and regulatory frameworks that underpin the New Economy. We are grateful for the participation and the contributions of the National Science Foundation, the National Institute of Standards and Technology, the Department of Energy, the National Aeronautics and Space Administration, the Office of Naval Research, and Sandia National Laboratories.
Among STEP staff, we especially wish to thank Dr. Sujai Shivakumar for his instrumental role in the creation of this report. His ability to synthesize the diverse perspectives into a coherent whole while capturing key themes was essential. We are also indebted to David Dierksheide for his role in preparing this report for publication.
NRC REVIEW
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 National Academies’ 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, evidence, and responsiveness to the study charge. The review comments and draft manuscript remain confidential to protect the integrity of the process.
We wish to thank the following individuals for their review of this report: Ana Aizcorbe, Bureau of Economic Analysis; Bruce Grimm, Bureau of Economic Analysis; Paul Horn, IBM Thomas Watson Research Center; Way Kuo, University of Tennessee; William Scherlis, Carnegie Mellon University; Kevin Stiroh, Federal Reserve Bank of New York; William Taylor, NERA Economic Consulting; 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 conclusions or recommendations, nor did they see the final draft of the report before its release. The review of this report was overseen by Charles Phelps, University of Rochester. Appointed by the National Academies, he was 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.
STRUCTURE
Part I of this report is an introduction to the features and challenges of the New Economy by Dale Jorgenson. Part II of this report provides a summary of
the Committee’s findings and recommendations for each of the sectors covered in the series of conferences. Finally, Part III summarizes the main themes from the proceedings of the five conferences listed above, drawing together the main policy challenges for the United States in sustaining the productivity growth and improved welfare associated with the New Economy. The overview of the findings and recommendations that follows this preface is designed to provide the harried reader an overview of the new economy story as a whole, while Part II provides interested individuals a greater focus on the individual high-technology sectors that contribute to the remarkable growth of the United States economy.
Dale W. Jorgenson
List of Acronyms
BEA Bureau of Economic Analysis of the U.S. Department of Commerce
BLS Bureau of Labor Statistics of the U.S. Department of Labor
CD Compact Disc
CMOS Complementary Metal-Oxide Semiconductor, a major class of integrated circuits
DRAM Dynamic Random Access Memory
DSL Digital Subscriber Line is a family of technologies that provide digital data transmission over the wires of a local telephone network.
DVD Digital Video Disk
EUV Extreme Ultraviolet Lithography technology, capable of creating nanometer-scale patterns for use in semiconductor manufacturing
FASB The Financial Accounting Standards Board (FASB) develops Generally Accepted Accounting Principles in the United States.
FCC Federal Communications Commission
H-1B H-1B is a U.S. visa category that allows American companies and universities to employ foreign scientists, engineers, programmers, and other professionals in the United States.
IEEE Institute of Electrical and Electronics Engineers
IMEC The Interuniversity Microelectronics Centre is a microelectronics research facility on the outskirts of Leuven, Belgium.
IPTV Internet Protocol Television describes a system where a digital television service is delivered to subscribing consumers using the Internet Protocol over a broadband connection.
ITRS International Technology Roadmap for Semiconductors
LCD Liquid Crystal Display
LLU Local Loop Unbundling is the process of allowing telecommunications operators to use the twisted-pair telephone connections from the telephone exchange’s central office to the customer premises.
NIPA National Income and Product Accounts use double entry accounting to report the monetary value and sources of output produced in a country and the distribution of incomes that production generates.
OECD Organisation for Economic Co-operation and Development
OLED Organic Light Emitting Diode
SEC Securities and Exchange Commission
TCP/IP The Transmission Control Protocol (TCP) and the Internet Protocol (IP) are sets of communications protocols that implement the protocol stack on which the Internet and most commercial networks run.
VAT Value-Added Tax
VOIP Voice over Internet Protocol is the routing of voice conversations over the Internet or through any other IP-based network.
WDM Wavelength-division multiplexing is a technology that multiplexes multiple optical carrier signals on a single optical fiber by using different wavelengths (colors) of laser light to carry different signals.
WiFi A technology for wireless local area networks. Designed to be used for mobile computing devices such as laptops, it is increasingly used for applications including Internet access, gaming, and basic connectivity of consumer electronics such as televisions and DVD players.
WiMAX Worldwide Interoperability for Microwave Access. WiMAX is a standards-based wireless technology that provides high-throughput broadband connections over long distances. WiMAX can be used for a number of applications, including “last mile” broadband connections, hotspots and cellular backhaul, and high-speed enterprise connectivity for business.
WTO World Trade Organization