Software, Growth, and the Future of the U.S Economy Report of a Symposium (2006) / Chapter Skim
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I Introduction -- Software and the New Economy
I Introduction -- Software and the New Economy
Pages 1-28
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productivity growth that emerged in the mid-1990s, in part as a result of the acceleration of Moore's Law and the resulting expansion in the application of lower cost, higher performance information technologies.
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As William Raduchel observed, it seems that the failure of one line of code, buried in an energy management system from General Electric, was the initial source leading to the electrical blackout of August 2003 that paralyzed much of the northeastern and midwestern United States.3 · Software is also redefining the consumer's world. Microprocessors embedded in today's automobiles require software to run, permitting major improvements in their performance, safety, and fuel economy.
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This is unprecedented for a major industrial input. According to Dale Jorgenson, this increase in chip capacity and the concurrent fall in price-the "faster-cheaper" effect -- created powerful incentives for firms to substitute information technology for other forms of capital, leading to the productivity increases that are the hallmark of the New Economy.6 The second National Academies conference on the New Economy, "Deconstructing the Computer," examined how the impact of Moore's Law and 4See William Raduchel, "The Economics of Software," in this volume.
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its price corollary extended from microprocessors and memory chips to high technology hardware such as computers and communications equipment. While highlighting the challenges of measuring the fast-evolving component industries, that conference also brought to light the impact of computers on economic growth based on BEA price indexes for computers (See Figure 3)
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NOTE: All price indexes are divided by the output price index.
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There remain large gaps in our knowledge about custom software (such as those produced by SAP or Oracle for database management, cost accounting, and other business functions) and ownaccount software (which refers to special purpose software such as for airlines reservations systems and digital telephone switches)
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Moreover, it is not static. Software grows more complex as more and more lines of code accrue to the stack, making software engineering much more difficult than other fields of engineering.
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Raduchel.14 Configuring, testing, and tuning the software account for 95 to 99 percent of the cost of all software in operation. These non-linear complementarities in the production of software mean that simply adding workers to one part of the production process is not likely to make a software project finish faster.15 Further, since a majority of time in devel 13 This is widely accepted folklore in the software industry, but one that is difficult to substantiate because it is very difficult to measure software engineering productivity.
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In the real world, which is always more complex, there are a wide range of access models for opensource software, and many proprietary software makers provide "open"-source access to their product but with proprietary markings.18 While open-source software is a public good, there are many motivations for writing open-source software, he added, including (at the edge) scratching a creative itch and demonstrating skill to one's peers.
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Interestingly, as Dr. Raduchel noted, open-source software has the potential to be much more reliable and secure than proprietary software,19 adding that the opensource software movement could also serve as an alternative and counterweight to monopoly proprietorship of code, such as by Microsoft, with the resulting competition possibly spurring better code writing.20 The experience in contributing to open-source also provides important training in the art of software development, he added, helping to foster a highly specialized software labor force.
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Lipson, "Tracking and Tracing Cyber-Attacks: Technical Challenges and Global Policy Issues," CERT Coordination Center, CMU/SEI2002-SR-009, November 2002.
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THE CHALLENGE OF MEASURING SOFTWARE The unique nature of software poses challenges for national accountants who are interested in data that track software costs and aggregate investment in software and its impact on the economy. This is important because over the past 5 years investment in software has been about 1.8 times as large as private fixed investment in computers peripheral equipment, and was about one-fifth of all private fixed investment in equipment and software.23 Getting a good measure of this asset, however, is difficult because of the unique characteristics of software development and marketing: Software is complex; the market for software is different from that of other goods; software can be easily duplicated, often at low cost; and the service life of software is often hard to anticipate.24 Even so, repre 23 Bureau of Economic Analysis, National Income and Product Income Table 5.3.5 on Private Fixed Investment by Type.
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Speaking from the perspective of software company, Greg Beams of Ernst & Young noted that while sales of prepackaged software is generally reported at the time of sale, more complex software systems require recurring maintenance to fix bugs and to install upgrades, causing revenue reporting to become more complicated. In light of these multiple deliverables, software companies come up against rules requiring that they allocate value to each of those deliverables and then recognize revenue in accordance with the 25The Financial Accounting Standards Board is a private organization that establishes standards of financial accounting and reporting governing the preparation of financial reports.
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In 2003, the BEA placed business purchases of prepackaged software at around $50 billion. Custom software refers to large software systems that perform business functions such as database management, human resource management, and cost accounting.26 In 2003, the BEA estimates business purchases of custom software at almost $60 billion.
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He noted in this regard, the rise of demand computing, open-source code development, and overseas outsourcing, 28The BEA's estimates for own-account are derived from employment and mean wage data from the Bureau of Labor Statistic's Occupational Employment Wage Survey and a ratio of operating expenses to annual payroll from the Census Bureau's Business Expenditures Survey. 29Organisation for Economic Co-operation and Development, Statistics Working Paper 2003/1: Report of the OECD Task Force on Software Measurement in the National Accounts, Paris: Organisation for Economic Co-operation and Development, 2003.
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White, "Price Indexes for Microsoft's Personal Computer Software Products," NBER Working Paper 9966, Cambridge, MA: National Bureau for Economic Research, 2003. The research was originally sponsored by Microsoft Corporation, though the authors are responsible for its analysis.
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They found that while the average price, which does not correct for quality changes, showed a growth rate of about 1 percent a year, the matched model showed a price decline of around 6 percent a year and the hedonic calculation showed a much larger price decline of around 16 percent. These quality-adjusted price declines for software operating systems, shown in Figure 5, support the general thesis that improved and cheaper information technologies contributed to greater information technology adoption leading to productivity improvements characteristic of the New Economy.32 32 Jorgenson et al., 2000, op cit.
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Mr. Harding noted that as the manufacturing technology grows more complex, a firm is forced to stay ahead of the efficiency curve through large recapitalization investments or "step aside and let somebody else do that part of
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Mr. Harding noted that it was actually the "Captive-Offshoring" quadrant, where American firms like Google or Oracle open production facilities overseas, that is the locus of a lot of the current "political pushback" about being "un-American" to take jobs abroad.33 Activity that could be placed in the "Outsource-Offshore" box, meanwhile, was marked by a trade-off where diminished corporate control had to be weighed against very low variable costs with adequate technical expertise.34 Saving money by outsourcing production offshore not only provides a compelling business motive, it has rapidly become "best practice" for new companies.
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Presenters did 35 Nevertheless, Dr. Hira implied that job loss and downward wage pressures in the United States information technology sector were related to the employment of hardware and software engineers abroad.
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Conference participants, including Ronil Hira and William Bonvillian, highlighted two schools of thought on the impact of offshore outsourcing -- both of which share the disadvantage of inadequate data support. Whereas some who take a macroeconomic perspective believe that offshoring will yield lower product and service costs and create new markets abroad fueled by improved local living standards, others, including some leading industrialists who understand the micro implications, have taken the unusual step of arguing that offshoring can erode the United States' technological competitive advantage and have urged constructive policy countermeasures.
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These more sanguine economic scenarios must be balanced against the lessons of modern growth theorists, warned William Bonvillian in his conference presentation. Alluding to Clayton Christiansen's observation of how successful companies tend to swim upstream, pursuing higher-end, higher-margin customers 36 Catherine Mann, "Globalization of IT Services and White Collar Jobs: The Next Wave of Productivity Growth," International Economics Policy Briefs, PB03-11, December 2003.
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leadership in information technology and soft ware will damage, in an ongoing way, the nation's future ability to com pete in diverse industries, not least the information technology industry. Collateral consequences of a failure to develop adequate policies to sus tain national leadership in information technology is likely to extend to a wide variety of sectors from financial services and health care to telecom and automobiles, with critical implications for our nation's security and the well-being of Americans.
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Bonvillian, losing a parts of that manufacturing to a foreign country will help develop technology clusters abroad while hampering their ability to thrive in the United States. These effects are already observable in semiconductor manufacturing, he added, where research and development is moving abroad to be close to the locus of manufacturing.42 This trend in hardware, now followed by software, will erode the United States' comparative advantage in high technology innovation and manufacture, he concluded.
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Calling it the central policy question of our time, he wondered if models of international trade and system of national accounting, which are based on the idea of a nation-state, continue to be valid in a world where companies increasingly take a global perspective. The current policy issue, he concluded, concerns giving American workers the skills that allow them to continue to command high wages and oppor tunities.
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Berndt and White on how to measure prepackaged software price while taking quality changes into account. Presentations by Mr.
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