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THE NATIONAL ACADEMIES
National Academy of Sciences
National Academy of Engineering
Institute of Medicine
National Research Council
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Steering Committee for Measuring and Sustaining the New Economy*
Dale Jorgenson, Chair Frederic Eaton Abbe Professor of Economics
Harvard University
M. Kathy Behrens Managing Partner
Robertson, Stephens Investment Management
Vinton G. Cerf Senior Vice President
WorldCom
Kenneth Flamm Dean Rusk Chair in International Affairs
LBJ School of Public Affairs University of Texas at Austin
Bronwyn Hall Professor of Economics
University of California at Berkeley
James Heckman Henry Schultz Distinguished Professor of Economics
University of Chicago
Ralph Landau Consulting Professor of Economics
Stanford University
William J. Spencer, Vice Chair Chairman Emeritus
SEMATECH
Richard Levin President
Yale University
David T. Morgenthaler Founding Partner
Morgenthaler
Mark B. Myers Senior Vice President, retired
Xerox Corporation
Roger Noll Morris M. Doyle Centennial Professor of Economics
Stanford University
Edward E. Penhoet Dean, School of Public Health
University of California at Berkeley
William Raduchel Chief Technology Officer
AOL Time Warner
Alan Wm. Wolff Managing Partner
Dewey Ballantine
Project Staff*
Charles W. Wessner Study Director
Alan H. Anderson Consultant
Adam K. Korobow Consultant
Sujai J. Shivakumar Program Officer
McAlister T. Clabaugh Program Associate
David E. Dierksheide Program Associate
Christopher S. Hayter Program Associate
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 Frederic Eaton Abbe Professor of Economics
Harvard University
M. Kathy Behrens Managing Partner
Robertson, Stephens Investment Management
Vinton G. Cerf Senior Vice President
WorldCom
Bronwyn Hall Professor of Economics
University of California at Berkeley
James Heckman Henry Schultz Distinguished Professor of Economics
University of Chicago
Ralph Landau Consulting Professor of Economics
Stanford University
Richard Levin President
Yale University
William J. Spencer, Vice Chair Chairman Emeritus
SEMATECH
David T. Morgenthaler Founding Partner
Morgenthaler
Mark B. Myers Senior Vice President, retired
Xerox Corporation
Roger Noll Morris M. Doyle Centennial Professor of Economics
Stanford University
Edward E. Penhoet Dean, School of Public Health
University of California at Berkeley
William Raduchel Chief Technology Officer
AOL Time Warner
Alan Wm. Wolff Managing Partner
Dewey Ballantine
STEP Staff*
Stephen A. Merrill Executive Director
Philip Aspden Senior Program Officer
McAlister T. Clabaugh Program Associate
Camille M. Collett Program Associate
David E. Dierksheide Program Associate
Charles W. Wessner Program Director
Christopher S. Hayter Program Associate
Adam K. Korobow Consultant
Sujai J. Shivakumar Program Officer
Craig M. Schultz Research Associate
National Research Council Board on Science, Technology, and Economic Policy
Sponsors
The National Research Council gratefully acknowledges the support of the following sponsors:
National Aeronautics and Space Administration
Department of Energy
National Institute of Standards and Technology
Sandia National Laboratories
Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the authors and do not necessarily reflect the views of the project sponsors.
Contents
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Introduction |
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Welcome to the New Economy |
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Defining and Measuring the New Economy |
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Raising the Speed Limit: U.S. Economic Growth in the Information Age |
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Drivers of the New Economy |
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Semiconductors: The Arrival of the New Economy |
Semiconductors: Economics of the New Economy |
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Microprocessors and Computers: Five Trends |
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Microprocessors and Computers: The Phenomenon of Price Declines |
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Communications and Software |
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Communications |
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Software: The Challenge to Getting There |
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Applications and Policy Issues |
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Communications |
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Economic Issues of E-Business |
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E-Business Policy Issues |
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Investments in Information Technology Applications |
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Old Business to E-Business: The Change Dynamic |
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Roundtable Discussion |
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Raising the Speed Limit: U.S. Economic Growth in the Information Age |
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Preface
The decade of the 1990s witnessed rapid technological change in communications, computing, and information management. This phenomenon coincided with the sustained expansion of the U.S. economy through much of the 1990s.1 Along with other structural and policy explanations this technological change is a key element in the strong growth in labor productivity, especially after 1995. The term “New Economy” captures the role that these new technologies are thought to play in contributing to the non-inflationary growth and high employment that characterized this period.
Although the New Economy is, itself, a macro phenomenon, its underlying dynamics appear to combine elements of technological innovation, structural change, and public policy.
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Technological innovation—more accurately, the rapid rate of technological innovation in information technology (including computers, software, and telecommunications) and the rapid growth of the Internet—are seen by some as underpinning the productivity gains that characterize the New Economy. These productivity gains derive from greater efficiencies in the production of computers from expanded use of information technologies.2
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Many therefore believe that the New Economy is closely linked to the unprecedented rate of technological innovation characteristic of information technology industries.3
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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.4 These structural changes are still emerging as the use and applications of the Internet continue to evolve.
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Public policy plays a major role at several levels. This includes the government’s role in fostering rules of interaction within the Internet5 and its discretion in setting and enforcing the rules by which technology firms, among others, compete.6 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.7 It provides national research capacities,8 incentives to promote education and training in critical disciplines, and funds most of the nation’s basic research.9 The government also plays a major role in stimulating innovation, most
3 |
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 below. Ken Flamm compares the economic impact of semiconductors today with the impact of railroads in the nineteenth century. |
4 |
See, for example, Brookes Martin and Zaki Wahhaj. 2000. “The Shocking Economic Impact of B2B,” Global Economic Paper, 37, Goldman Sachs, February 3. |
5 |
Dr. Vint Cerf notes, in the Proceedings, 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.” Also in the Proceedings, see the presentation by Dr. Shane Greenstein on the evolution of the Internet from academic and government-related applications to the commercial world. |
6 |
The relevance of competition policy to the New Economy is manifested by the intensity of interest in the antitrust case, United States versus Microsoft, and associated policy issues. |
7 |
See Richard Nelson, ed. 1993. National Innovation Systems, New York: Oxford University Press. |
8 |
The STEP Board has underway a major review of the role and operation of government-industry partnerships for the development of new technologies. Major recent publications include National Research Council, Charles W. Wessner, ed. 2001. The Advanced Technology Program—Assessing Outcomes, Washington, D.C.: National Academy Press, and National Research Council. 2000. SBIR— An Assessment of the Department of Defense Fast Track Initiative, Washington D.C.: National Academy Press. |
9 |
National Research Council. 2001. Trends in Federal Support of Research in Graduate Education, Washington, D.C.: National Academy Press. |
Box A: The New Economy Enigma “How can it be that the recent surge in investment in computers, and the great efforts most companies are making to get the most out of the Internet and other new technologies, are failing to have a marked effect, or indeed any cyclically adjusted effect, on America’s service and non-durable manufacturing industries? One possibility is that the output of these industries is not being properly measured. Measuring the output of service industries is notoriously difficult; so is measuring the inputs of the high-tech capital that many such industries use intensively. Maybe investment and production of final goods and services have both been understated. If so, the performance of the American economy would be much better than the figures seem to suggest, and perhaps even as good as most people appear to think.” The Economist , “Performing Miracles,” June 15, 2000 |
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broadly through the patent system.10 Government procurement and awards also encourage the development of new technologies to fulfill national missions in defense, health, and the environment.11 Collectively, these public policies play a central role in the development of the New Economy.
Sustaining this New Economy will require public policy to remain relevant to the rapid technological and structural changes that characterize it. Data on the New Economy is a key input in the policy-making process. Yet, current statistics do not fully capture changes in productivity and growth brought about by recent applications of information technologies.12
While recent studies confirm soaring labor productivity in the computer manufacturing industry and in the durable goods manufacturing industry, the surge in investments and use of new information technologies is not captured in the statistics on the American service and non-durable manufacturing industries.13 Measurement problems continue to hamper our understanding of the impact of advances and cost reductions in areas such as telecommunications.
THE ROLE OF THE STEP BOARD
Since 1991 the National Research Council’s Board on Science, Technology, and Economic Policy (STEP) has undertaken a program of activities to improve policymakers’ 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 derive directly from its mandate. The STEP Board’s activities have corresponded with an increased recognition by policymakers of the importance of technology to economic growth.14
WORKSHOP AND DISCUSSIONS
The impetus for this workshop follows from a recognition by members of the STEP Board that economic issues related to the phenomenon referred to as the New Economy are distinguished by important questions on one hand and a surprising lack of data on the other. As with other STEP Board initiatives, this study is intended to bring together the needed expertise to illuminate a complex and important area of policy research.
To this end, on October 6, 2000, the STEP Board convened a workshop on Measuring and Sustaining the New Economy. The workshop 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. Given the quality and the number of presentations, summarizing the workshop proceedings has been a challenge. 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.
ACKNOWLEDGEMENTS
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 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, and Sandia National Laboratories.
Several members of the STEP staff deserve recognition for their contributions to the preparation of this report. We are once again indebted to Alan Anderson for his preparation of the meeting summary and his contribution to the introduction. We wish to thank Sujai Shivakumar, who recently joined the STEP team, 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, helped prepare 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 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, evidence, and responsiveness to the study charge. 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: Dr. Martin N. Baily, Institute for International Economics; Dr. Kenneth Flamm; Lyndon B. Johnson School of Public Affairs, University of Texas; Dr. Barbara M. Fraumeni, Bureau of Economic Analysis; Dr. Robin Gaster, North Atlantic Research, Inc.; and Dr. Daryl Hatano, Semiconductor Industry Association.
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 Dr. Robert White, University Professor and Director, Data Storage Systems Center, Carnegie Mellon University. Appointed by the National Research Council, 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
This report has three parts: an Introduction which summarizes the proceedings and issues associated with the New Economy, followed by the Proceedings themselves, and supplemented by a recent research paper. This report represents the first step of a major research effort by the Board on Science, Technology, and Economic Policy designed to advance our understanding of the factors shaping the New Economy, the metrics necessary to better understand it, and the policies best suited to sustaining the greater productivity and prosperity that it promises.
Dale W. Jorgenson Charles W. Wessner