ECONOMICS DEPARTMENT WORKING PAPERS NO. 261

Transcription

1 Unclassfed ECO/WKP(2000)34 Organsaon de Coopéraon e de Développemen Economques OLIS : 31-Oc-2000 Organsaon for Economc Co-operaon and Developmen Ds. : 09-Nov-2000 Englsh ex only ECONOMICS DEPARTMENT ECO/WKP(2000)34 Englsh ex only Unclassfed RAISING THE SPEED LIMIT: US ECONOMIC GROWTH IN THE INFORMATION AGE ECONOMICS DEPARTMENT WORKING PAPERS NO. 261 by Dale W. Jorgenson and Kevn J. Sroh Cancels & replaces he same documen: dsrbued 20-Oc-2000 Mos Economcs Deparmen Workng Papers begnnng wh No. 144 are now avalable hrough OECD s Inerne Web se a hp://ww.oecd.org/eco/eco Documen comple dsponble sur OLIS dans son forma d orgne Complee documen avalable on OLIS n s orgnal forma

2 ABSTRACT/RÉSUMÉ Ths paper examnes he underpnnngs of he successful performance of he US economy n he lae 1990s. Relave o he early 1990s, oupu growh has acceleraed by nearly wo percenage pons. We arbue hs o rapd capal accumulaon, a surge n hours worked, and faser growh of oal facor producvy. The acceleraon of producvy growh, drven by nformaon echnology, s he mos remarkable feaure of he US growh resurgence. We consder he mplcaons of hese developmens for he fuure growh of he US economy. JEL classfcaon: O3, O4 Keywords: Producvy, economc growh, capal sock **** Ce documen examne les faceurs qu on conrbués aux rès bonnes performances de l économe amércane à la fn des années 90. Par rappor au débu des années 90, le aux de crossance a augmené de près de deux pons de pourcenage. Nous arbuons cec à la crossance accrue du capal, une augmenaon mporane des heures ravallées e une crossance plus rapde de la producvé mulfacorelle. Cee accéléraon de la crossance de la producvé, poussée par les echnologes de l nformaon, es l aspec le plus remarquable de la remonée de la crossance amércane. Nous prenons en consdéraon les mplcaons de ces développemens pour la crossance fuure de l économe amércane. Classfcaon JEL : O3, O4 Mos-clés :producvé, crossance économque, sock du capal Copyrgh: OECD 2000 Applcaons for permsson o reproduce or ranslae all, or par of, hs maeral should be made o: Head of Publcaons Servce, OECD, 2 rue André-Pascal, PARIS CEDEX 16, Pars. 2

3 TABLE OF CONTENTS RAISING THE SPEED LIMIT: US ECONOMIC GROWTH IN THE INFORMATION AGE...5 I. Inroducon...5 II. The recen US growh experence...7 a) Sources of economc growh...8 ) Producon possbly froner...8 ) Compuers, sofware, and communcaons equpmen...9 b) Oupu...10 c) Capal sock and capal servces...11 d) Measurng labor servces...13 e) Quanfyng he sources of growh...14 ) Oupu growh...15 ) Average labor producvy growh...17 ) Toal facor producvy growh...18 f) Alernave growh accounng esmaes...18 g) Decomposon of TFP esmaes...20 III. Seng he speed lm...21 a) A bref revew of forecas mehodologes...21 b) CBO s growh projecons...22 c) Evaluang CBO s projecons...24 IV. Indusry producvy...25 a) Mehodology...25 b) Daa sources...27 c) Emprcal resuls...27 ) Sources of ndusry growh...27 ) Comparson o oher resuls...30 ) Domar aggregaon...31 V. Conclusons...32 Appendx A - Esmang oupu...35 Appendx B - Esmang capal servces...35 ) Capal servces mehodology...35 ) Invesmen and capal daa...39 Appendx C - Esmang labor npu...41 ) Labor npu mehodology...41 ) Labor daa...43 Appendx D - Esmang ndusry-level producvy...43 Appendx E - Exrapolaon for BIBLIOGRAPHY...45 TABLES AND FIGURES

4 Tables 1. Average Growh Raes of Seleced Oupus and Inpus 2. Growh n US Prvae Domesc Oupu and he Sources of Growh, The Sources of ALP Growh, Impac of Alernave Deflaon of Sofware and Communcaons Equpmen on he Sources of US EconomcGrowh, Informaon Technology Decomposon of TFP Growh for Alernave Deflaon Cases, Growh Raes of Oupu, Inpus and Toal Facor Producvy Comparson of BLS, CBO and Jorgenson-Sroh Value-Added and Gross Oupu by Indusry 8. Sources of US Economc Growh by Indusry, Chars 1. Relave Prces of Informaon Technology Oupus, Oupu Shares of Informaon Technology, Inpu Shares of Informaon Technology, Sources of US Economc Growh, Oupu Conrbuon of Informaon Technology, Oupu Conrbuon of Informaon Technology Asses, Inpu Conrbuon of Informaon Technology, Inpu Conrbuon of Informaon Technology Asses, Sources of Labor Producvy Growh, TFP Decomposon for Alernave Deflaon Cases 11. Indusry Conrbuons o Aggregae Toal Facor Producvy Growh, Appendx ables A-1 Prvae Domesc Oupu and Hgh-Tech Asses B-1 Invesmen and Capal Sock by Asse Type and Class B-2 Toal Capal Sock and Hgh-Tech Asses B-3 Toal Capal Servces and Hgh-Tech Asses C-1 Labor Inpu 4

5 RAISING THE SPEED LIMIT: US ECONOMIC GROWTH IN THE INFORMATION AGE Dale W. Jorgenson and Kevn J. Sroh 1 I. Inroducon 1. The connued srengh and valy of he US economy connues o asonsh economc forecasers. 2 A consensus s now emergng ha somehng fundamenal has changed wh new economy proponens ponng o nformaon echnology as he causal facor behnd he srong performance of he US economy. In hs vew, echnology s profoundly alerng he naure of busness, leadng o permanenly hgher producvy growh hroughou he economy. Skepcs argue ha he recen success reflecs a seres of favorable, bu emporary, shocks. Ths argumen s buressed by he vew ha he US economy behaves raher dfferenly han envsoned by new economy advocaes Whle producvy growh, capal accumulaon, and he mpac of echnology were once reserved for academc debaes, he recen success of he US economy has moved hese opcs no popular dscusson. The purpose of hs paper s o employ well-esed and famlar mehods o analyze mporan new nformaon made avalable by he recen benchmark revson of he US Naonal Income and Produc Accouns (NIPA). We documen he case for rasng he speed lm for upward revson of nermedaeerm projecons of fuure growh o reflec he laes daa and rends. 3. The lae 1990s have been exceponal n comparson wh he growh experence of he US economy over he pas quarer cenury. Whle growh raes n he 1990s have no ye reurned o hose of he golden age of he US economy n he l960s, he daa noneheless clearly reveal a remarkable ransformaon of economc acvy. Rapd declnes n he prces of compuers and sem-conducors are well known and carefully documened, and evdence s accumulang ha smlar declnes are akng place n he prces of sofware and communcaons equpmen. Unforunaely, he emprcal record s serously 1. Jorgenson: Deparmen of Economcs, Harvard Unversy, djorgenson@harvard.edu., (617) Sroh: Bankng Sudes Funcon, Federal Reserve Bank of New York, kevn.sroh@ny.frb.org, (212) We are ndebed o Mun Ho for hs commens and asssance wh he ndusry and labor daa. We are also graeful o Bob Arnold of CBO for helpful commens and dscussons of he CBO s resuls and mehods and Bruce Grmm and Dave Wasshausen of BEA for deals on he BEA nvesmen daa and prces. Our hanks are due o Erwn Dewer, Rober Gordon, Seve Olner, Dan Schel, as well as semnar parcpans a he Brookngs Panel on Economc Acvy, he Federal Reserve Bank of New York, and he Federal Reserve Board for helpful commens and advce. Dave Fore provded excellen research asssance. The vews expressed n hs paper are hose of he auhors only and do no necessarly reflec he vews of he Federal Reserve Bank of New York or he Federal Reserve Sysem. 2. Labor producvy growh for he busness secor averaged 2.7% for , he four fases annual growh raes n he 1990s, excep for a emporary jump of 4.3% n 1992 as he economy exed recesson (BLS (2000)). 3. Sroh (1999) crques alernave new economy vews, Trple (1999) examnes daa ssues n he new economy debae, and Gordon (1999b) provdes an ofen-ced rebual of he new economy hess. 5

6 ncomplee, so much remans o be done before defnve quanave assessmens can be made abou he complee role of hese hgh-ech asses. 4. Despe he lmaons of he avalable daa, he mechansms underlyng he srucural ransformaon of he US economy are readly apparen. As an llusraon, consder he ncreasng role ha compuer hardware plays as a source of economc growh. 4 For he perod 1959 o 1973, compuer npus conrbued less han one-enh of one percen o U.S. economc growh. Snce 1973, however, he prce of compuers has fallen a hsorcally unprecedened raes and frms and households have followed a basc prncple of economcs hey have subsued owards relavely cheaper npus. Snce 1995 he prce declne for compuers has acceleraed, reachng nearly 28% per year from 1995 o In response, nvesmen n compuers has exploded and he growh conrbuon of compuers ncreased more han fve-fold o 0.46 percenage pons per year n he lae 1990s. 5 Sofware and communcaons equpmen, wo oher nformaon echnology asses, conrbued an addonal 0.29 percenage pons per year for Prelmnary esmaes hrough 1999 reveal furher ncreases n hese conrbuons for all hree hgh-ech asses. 5. Nex, consder he acceleraon of average labor producvy (ALP) growh n he 1990s. Afer a 20-year slowdown dang from he early 1970s, ALP grew 2.4% per year for , more han a percenage pon faser han durng A dealed decomposon shows ha capal deepenng, he drec consequence of prce-nduced subsuon and rapd nvesmen, added 0.49 percenage pons o ALP growh. Faser oal facor producvy (TFP) growh conrbued an addonal 0.63 percenage pons, largely reflecng echncal change n he producon of compuers and he resulng acceleraon n he prce declne of compuers. Slowng labor qualy growh rearded ALP growh by 0.12 percenage pons, relave o he early 1990s, a resul of exhauson of he pool of avalable workers. 6. Focusng more specfcally on TFP growh, hs was an anemc 0.34% per year for , bu acceleraed o 0.99% for Afer more han weny years of sluggsh TFP growh, four of he las fve years have seen growh raes near 1%. I could be argued hs represens a new paradgm. Accordng o hs vew, he dffuson of nformaon echnology mproves busness pracces, generaes spllovers, and rases producvy hroughou he economy. If hs rend s susanable, could revve he opmsc expecaons of he 1960s and overcome he pessmsm of The Age of Dmnshed Expecaons, he le of Krugman s (1990) nfluenal book. 7. A closer look a he daa, however, shows ha gans n TFP growh can be raced n subsanal par o nformaon echnology ndusres, whch produce compuers, sem-conducors, and oher hgh-ech gear. The evdence s equally clear ha compuer-usng ndusres lke fnance, nsurance, and real esae (FIRE) and servces have connued o lag n producvy growh. Reconclaon of massve hgh-ech 4. Our work on compuers bulds on he pah-breakng research of Olner and Schel (1994, 2000) and Schel (1997, 1999), and our own earler resuls, repored n Jorgenson and Sroh (1995, 1999, 2000) and Sroh (1998a). Oher valuable work on compuers ncludes Hamowz (1998), Kley (1999), and Whelan (1999). Gordon (1999a) provdes valuable hsorcal perspecve on he sources of U.S. economc growh and Brynjolfsson and Yang (1996) revew he mcro evdence on compuers and producvy. 5. See Baly and Gordon (1988), Sroh (1998a), Jorgenson and Sroh (1999) and Deparmen of Commerce (1999) for earler dscussons of relave prce changes and npu subsuon n he hgh-ech areas. 6. BLS (2000) esmaes for he busness secor show a smlar ncrease from 1.6% for o 2.6% for See CEA (2000, pg. 35) for a comparson of producvy growh a varous pons n he economc expansons of he 1960s, 1980s, and 1990s. 6

7 nvesmen and relavely slow producvy growh n servce ndusres remans an mporan ask for proponens of he new economy poson Wha does hs mply for he fuure? The susanably of growh n labor producvy s he key ssue for fuure growh projecons. For some purposes, he dsncons among capal accumulaon and growh n labor qualy and TFP may no maer, so long as ALP growh can be expeced o connue. I s susanable labor producvy gans, afer all, ha ulmaely drve long-run growh and rase lvng sandards. 9. In hs respec, he recen experence provdes grounds for cauon, snce much depends on producvy gans n hgh-ech ndusres. Ongong echnologcal gans n hese ndusres have been a drec source of mprovemen n TFP growh, as well as an ndrec source of more rapd capal deepenng. Susanably of growh, herefore, hnges crcally on he pace of echnologcal progress n hese ndusres. As measured by relave prce changes, progress has acceleraed recenly, as compuer prces fell 28% per year for compared o 15% n There s no guaranee, of course, of connued producvy gans and prce declnes of hs magnude. Noneheless, as long as hgh-ech ndusres manan he ably o nnovae and mprove her producvy a raes comparable o her long-erm averages, relave prces wll fall and he vruous crcle of an nvesmen-led expanson wll connue Fnally, we argue ha rewards from new echnology accrue o he drec parcpans; frs, o he nnovang ndusres producng hgh-ech asses and, second, o he ndusres ha resrucure o mplemen he laes nformaon echnology. There s no evdence of spllovers from producon of nformaon echnology o he ndusres ha use hs echnology. Indeed, many of he ndusres ha use nformaon echnology mos nensvely, lke FIRE and servces, show hgh raes of subsuon of nformaon echnology for oher npus and relavely low raes of producvy growh. In par, hs may reflec problems n measurng he oupu from hese ndusres, bu he emprcal record provdes lle suppor for he new economy pcure of spllovers cascadng from nformaon echnology producers ono users of hs echnology The paper s organzed as follows. Secon II descrbes our mehodology for quanfyng he sources of U.S. economc growh. We presen resuls for he perod , and focus on he new economy era of he lae 1990s. Secon III explores he mplcaons of he recen experence for fuure growh, comparng our resuls o recen esmaes produced by he Congressonal Budge Offce, he Councl of Economc Advsors, and he Offce of Managemen and Budge. Secon IV moves beyond he aggregae daa and quanfes he producvy growh a he ndusry level. Usng mehodology nroduced by Domar (1961), we consder he mpac of nformaon echnology on aggregae producvy. Secon V concludes. II. The recen US growh experence 12. The US economy has undergone a remarkable ransformaon n recen years wh growh n oupu, labor producvy, and oal facor producvy all accelerang snce he md-1990s. Ths growh 7. See Gullckson and Harper (1999), Jorgenson and Sroh (2000), and Secon IV, below, for ndusry-level analyss. 8. There s no consensus, however, ha echncal progress n compuer and sem-conducor producon s slowng. Accordng o Fsher (2000), chp processng speed connues o ncrease rapdly. Moreover, he produc cycle s accelerang as new processors are brough o marke more quckly. 9. See Dean (1999) and Gullckson and Harper (1999) for he BLS perspecve on measuremen error; Trple and Bosworh (2000) provde an overvew of measurng oupu n he servce ndusres. 7

8 resurgence has led o a wdenng debae abou sources of economc growh and changes n he srucure of he economy. New economy proponens race he changes o developmens n nformaon echnology, especally he rapd commercalzaon of he Inerne, ha are fundamenally changng economc acvy. Old economy advocaes focus on lackluser performance durng he frs half of he 1990s, he ncrease n labor force parcpaon and rapd declne n unemploymen snce 1993, and he recen nvesmen boom. 13. Our objecve s o quanfy he sources of he recen surge n U.S. economc growh, usng new nformaon made avalable by he benchmark revson of he US Naonal Income and Produc Accouns (NIPA) released n Ocober 1999, BEA (1999). We hen consder he mplcaons of our resuls for nermedae-erm projecons of U.S. economc growh. We gve specal aenon o he rapd escalaon n growh raes n he offcal projecons, such as hose by he Congressonal Budge Offce (CBO) and he Councl of Economc Advsers (CEA). The CBO projecons are parcularly suable for our purposes, snce hey are wdely dssemnaed, well documened, and represen bes pracce. We do no focus on he ssue of nflaon and do no commen on poenal mplcaons for moneary polcy. a) Sources of economc growh 14. Our mehodology s based on he producon possbly froner nroduced by Jorgenson (1966) and employed by Jorgenson and Grlches (1967). Ths capures subsuons among oupus of nvesmen and consumpon goods, as well npus of capal and labor. We denfy nformaon echnology (IT) wh nvesmens n compuers, sofware, and communcaons equpmen, as well as consumpon of compuer and sofware as oupus. The servce flows from hese asses are also npus. The aggregae producon funcon employed by Solow (1957, 1960) and, more recenly by Greenwood, Hercowz, and Krusell (1997), s an alernave o our model. In hs approach a sngle oupu s expressed as a funcon of capal and labor npus. Ths mplcly assumes, however, ha nvesmens n nformaon echnology are perfec subsues for oher oupus, so ha relave prces do no change. 15. Our mehodology s essenal n order o capure wo mporan facs abou whch here s general agreemen. The frs s ha prces of compuers have declned drascally relave o he prces of oher nvesmen goods. The second s ha hs rae of declne has recenly acceleraed. In addon, esmaes of nvesmen n sofware, now avalable n he NIPA, are comparable o nvesmen n hardware. The new daa show ha he prce of sofware has fallen relave o he prces of oher nvesmen goods, bu more slowly han prce of hardware. We examne he esmaes of sofware nvesmen n some deal n order o assess he role of sofware n recen economc growh. Fnally, we consder nvesmen n communcaons equpmen, whch shares many of he echnologcal feaures of compuer hardware. ) Producon possbly froner 16. Aggregae oupu Y consss of nvesmen goods I and consumpon goods C. These oupus are produced from aggregae npu X, conssng of capal servces K and labor servces L. We represen producvy as a Hcks-neural augmenaon A of aggregae npu: 10 (1) Y I, C ) = A X ( K, L ). ( 10. I would be a sraghforward change o make echnology labor-augmenng or Harrod-neural, so ha he producon possbly froner could be wren: Y(I, C) = X(K,AL). Also, here s no need o assume ha npus and oupus are separable, bu hs smplfes our noaon. 8

9 The oupus of nvesmen and consumpon goods and he npus of capal and labor servces are hemselves aggregaes, each wh many sub-componens. 17. Under he assumpons of compeve produc and facor markes, and consan reurns o scale, growh accounng gves he share-weghed growh of oupus as he sum of he share-weghed growh of npus and growh n oal facor producvy (TFP): wi, ln I + wc, ln C = vk, ln K + v ln L ln A (2) L, +, where w I, s nvesmen s average share of nomnal oupu, w C, s consumpon s average share of nomnal oupu, v K, s capal s average share of nomnal ncome, v K, s labor s average share of nomnal ncome, w I, + wc, = vk, + vl, = 1, and refers o a frs dfference. Noe ha we reserve he erm oal facor producvy for he augmenaon facor n Equaon (1). 18. Equaon (2) enables us o denfy he conrbuons of oupus as well as npus o economc growh. For example, we can quanfy he conrbuons of dfferen nvesmens, such as compuers, sofware, and communcaons equpmen, o he growh of oupu by decomposng he growh of nvesmen among s sub-componens. Smlarly, we can quanfy he conrbuons of dfferen ypes of consumpon, such as servces from compuers and sofware, by decomposng he growh of consumpon. As shown n Jorgenson and Sroh (1999), boh compuer nvesmen and consumpon of IT have made mporan conrbuons o U.S. economc growh n he 1990s. We also consder he oupu conrbuons of sofware and communcaons equpmen as dsnc hgh-ech asses. Smlarly, we decompose he conrbuon of capal npu o solae he mpac of compuers, sofware, and communcaons equpmen on npu growh. 19. Rearrangng Equaon (2) enables us o presen our resuls n erms of growh n average labor producvy (ALP), defned as y = Y / H, where Y s oupu, defned as an aggregae of consumpon and nvesmen goods, and k = K / H s he rao of capal servces o hours worked H : (3) ( ln L ln H ) + ln A ln y = vk, ln k + vl,. 20. Ths gves he famlar allocaon of ALP growh among hree facors. The frs s capal deepenng, he growh n capal servces per hour. Capal deepenng makes workers more producve by provdng more capal for each hour of work and rases he growh of ALP n proporon o he share of capal. The second erm s he mprovemen n labor qualy, defned as he dfference beween growh raes of labor npu and hours worked. Reflecng he rsng proporon of hours suppled by workers wh hgher margnal producs, labor qualy mprovemen rases ALP growh n proporon o labor s share. The hrd facor s TFP growh, whch ncreases ALP growh on a pon-for-pon bass. ) Compuers, sofware, and communcaons equpmen 21. We now consder he mpac of nvesmen n compuers, sofware, and communcaons equpmen on economc growh. For hs purpose we mus carefully dsngush he use of nformaon echnology and he producon of nformaon echnology. 11 For example, compuers hemselves are an 11. Baly and Gordon (1988), Grlches (1992), Sroh (1998a), Jorgenson and Sroh (1999), Whelan (1999), and Olner and Schel (2000) dscuss he mpac of nvesmen n compuers from hese wo perspecves. 9

10 oupu from one ndusry (he compuer-producng ndusry, Commercal and Indusral Machnery), and compung servces are npus no oher ndusres (compuer-usng ndusres lke Trade, FIRE, and Servces). 22. Massve ncreases n compung power, lke hose experenced by he US economy, herefore reflec wo effecs on growh. Frs, as he producon of compuers mproves and becomes more effcen, more compung power s beng produced from he same npus. Ths rases overall producvy n he compuer-producng ndusry and conrbues o TFP growh for he economy as a whole. Labor producvy also grows a boh he ndusry and aggregae levels Second, he rapd accumulaon of compuers leads o npu growh of compung power n compuer-usng ndusres. Snce labor s workng wh more and beer compuer equpmen, hs nvesmen ncreases labor producvy. If he conrbuons o oupu are capured by he effec of capal deepenng, aggregae TFP growh s unaffeced. As Baly and Gordon (1988) remark, here s no shf n he user frm s producon funcon (pg. 378), and hus no gan n TFP. Increasng deploymen of compuers ncreases TFP only f here are spllovers from he producon of compuers o producon n he compuer-usng ndusres, or f here are measuremen problems assocaed wh he new npus. 24. We conclude ha rapd growh n compung power affecs aggregae oupu hrough boh TFP growh and capal deepenng. Progress n he echnology of compuer producon conrbues o growh n TFP and ALP a he aggregae level. The accumulaon of compung power n compuer-usng ndusres reflecs he subsuon of compuers for oher npus and leads o growh n ALP. In he absence of spllovers hs growh does no conrbue o growh n TFP. 25. The remander of hs secon provdes emprcal esmaes of he varables n Equaons (1) hrough (3). We hen employ Equaons (2) and (3) o quanfy he sources of growh of oupu and ALP for and varous sub-perods. b) Oupu 26. Our oupu daa are based on he mos recen benchmark revson of NIPA. 13 Real oupu Y s measured n chaned 1996 dollars, and P Y, s he correspondng mplc deflaor. Our oupu concep s smlar, bu no dencal, o one used n he Bureau of Labor Sascs (BLS) producvy program. Lke BLS, we exclude he governmen secor, bu unlke BLS we nclude mpuaons for he servce flow from consumers durables and owner-occuped housng. These mpuaons are necessary o preserve comparably beween durables and housng and also enable us o capure he mporan mpac of nformaon echnology on households. 27. Our esmae of curren dollar, prvae oupu n 1998 s $8,013B, ncludng mpuaons of $740B ha prmarly reflec servces of consumers durables. 14 Real oupu growh was 3.63% for he full perod, 12. Trple (1996) pons ou ha much of declne of compuer prces reflecs fallng sem-conducor prces. If all npus are correcly measured for qualy change, herefore, much of he TFP gans n compuer producon are rghly pushed back o TFP gans n sem-conducor producon snce sem-conducors are a major nermedae npu n he producon of compuers. See Flamm (1993) for early esmaes on semconducor prces. We address hs furher n Secon IV. 13. See Appendx A for deals on our source daa and mehodology for oupu esmaes. 14. Curren dollar NIPA GDP n 1998 was $8,759.9B. Our esmae of $8,013B dffers due o oal mpuaons ($740B), excluson of general governmen and governmen enerprse secors ($972B and $128B, respecvely, and excluson of ceran real axes ($376B). 10

11 compared o 3.36% for he offcal GDP seres. Ths dfference reflecs boh our mpuaons and our excluson of he governmen secors n he NIPA daa. Appendx Table A-1 presens he curren dollar value and correspondng prce ndex of oal oupu and he IT asses nvesmen n compuers I c, nvesmen n sofware I s, nvesmen n communcaons equpmen I m, consumpon of compuers and sofware C c, and he mpued servce flow from consumers compuers and sofware, D c. 28. The mos srkng feaure of hese daa s he enormous prce declne for compuer nvesmen, 18% per year from 1960 o 1995 (Char 1). Snce 1995 hs declne has acceleraed o 27.6% per year. By conras he relave prce of sofware has been fla for much of he perod and only began o fall n he lae 1980s. The prce of communcaons equpmen behaves smlarly o he sofware prce, whle consumpon of compuers and sofware shows declnes smlar o compuer nvesmen. The op panel of Table 1 summarzes he growh raes of prces and quanes for major oupu caegores for and for In erms of curren dollar oupu, nvesmen n sofware s he larges IT asse, followed by nvesmen n compuers and communcaons equpmen (Char 2). Whle busness nvesmens n compuers, sofware, and communcaons equpmen are by far he larges caegores, households have spen more han $20B per year on compuers and sofware snce 1995, generang a servce flow of comparable magnude. c) Capal sock and capal servces 30. Ths secon descrbes our capal esmaes for he US economy from 1959 o We begn wh nvesmen daa from he Bureau of Economc Analyss, esmae capal socks usng he perpeual nvenory mehod, and aggregae capal socks usng renal prces as weghs. Ths approach, orgnaed by Jorgenson and Grlches (1967), s based on he denfcaon of renal prces wh margnal producs of dfferen ypes of capal. Our esmaes of hese prces ncorporae dfferences n asse prces, servce lves and deprecaon raes, and he ax reamen of capal ncomes We refer o he dfference beween growh n capal servces and capal sock as he growh n capal qualy q K, ; hs represens subsuon owards asses wh hgher margnal producs. 17 For example, he shf oward IT ncreases he qualy of capal, snce compuers, sofware, and communcaons equpmen have relavely hgh margnal producs. Capal sock esmaes, lke hose orgnally employed by Solow (1957), fal o accoun for hs ncrease n qualy. 32. We employ a broad defnon of capal, ncludng angble asses such as equpmen and srucures, as well as consumers durables, land, and nvenores. We esmae a servce flow from he nsalled sock of consumers durables, whch eners our measures of boh oupu and npu. I s essenal o nclude hs servce flow, snce a seadly rsng proporon s assocaed wh nvesmens n IT by he household secor. In order o capure he mpac of nformaon echnology on U.S. economc growh, 15. See Appendx B for deals on heory, source daa, and mehodology for capal esmaes. 16. Jorgenson (1996) provdes a recen dscusson of our model of capal as a facor of producon. BLS (1983) descrbes he verson of hs model employed n he offcal producvy sascs. Hulen (2000) provdes a revew of he specfc feaures of hs mehodology for measurng capal npu and he lnk o economc heory. 17. More precsely, growh n capal qualy s defned as he dfference beween he growh n capal servces and he growh n he average of he curren and lagged sock. Appendx B provdes deals. We use a geomerc deprecaon rae for all reproducble asses, so ha our esmaes are no dencal o he wealh esmaes publshed by BEA (1998b). 11

12 nvesmens by busness and household secors as well as he servces of he resulng capal socks mus be ncluded. 33. Our esmae of capal sock s $26T n 1997, subsanally larger han he $17.3T n fxed prvae capal esmaed by BEA (1998b). Ths dfference reflecs our ncluson of consumer s durables, nvenores, and land. Our esmaes of capal sock for comparable caegores of asses are que smlar o hose of BEA. Our esmae of fxed prvae capal n 1997, for example, s $16.8T, almos he same as ha of BEA. Smlarly, our esmae of he sock of consumers' durables s $2.9T, whle BEA's esmae s $2.5T. The remanng dscrepances reflec our ncluson of land and nvenores. Appendx Table B-1 ls he componen asses and 1998 nvesmen and sock values; Table B-2 presens he value of capal sock from 1959 o 1998, as well as prce ndces for oal capal and IT asses. 34. The socks of IT busness asses (compuers, sofware, and communcaons nvesmen equpmen), as well as consumers purchases of compuers and sofware, have grown dramacally n recen years, bu reman relavely small. In 1998, combned IT asses accouned for only 3.4% of angble capal, and 4.6% of reproducble, prvae asses. 35. We now move o esmaes of capal servces flows, where capal socks of ndvdual asses are aggregaed usng renal prces as weghs. Appendx Table B-3 presens he curren dollar servce flows and correspondng prce ndexes for , and he second panel of Table 1 summarzes he growh raes for prces and quanes of npus for and There s a clear acceleraon of growh of aggregae capal servces from 2.8% per year for o 4.8% for Ths s largely due o rapd growh n servces from IT equpmen and sofware, and reverses he rend oward slower capal growh hrough Whle nformaon echnology asses are only 11.2% of he oal, he servce shares of hese asses are much greaer han he correspondng asse shares. In 1998 capal servces are only 12.4% of capal socks for angble asses as a whole, bu servces are 40.0% of socks for nformaon echnology. Ths reflecs he rapd prce declnes and hgh deprecaon raes ha ener no he renal prces for nformaon echnology. 37. Char 3 hghlghs he rapd ncrease n he mporance of IT asses, reflecng he accelerang pace of relave prce declnes. In he 1990s, he servce prce for compuer hardware fell 14.2% per year, compared o an ncrease of 2.2% for non-nformaon echnology capal. As a drec consequence of hs relave prce change, compuer servces grew 24.1%, compared o only 3.6% for he servces of non-it capal n he 1990s. The curren dollar share of servces from compuer hardware reached nearly 3.5% of all capal servces n The rapd accumulaon of sofware, however, appears o have dfferen orgns. The prce of sofware nvesmen has declned much more slowly, -1.7% per year for sofware versus -19.5% for compuer hardware for 1990 o These dfferences n nvesmen prces lead o a much slower declne n servce prces for sofware and compuers, -1.6% versus -14.2%. Noneheless, frms have been accumulang sofware que rapdly, wh real capal servces growng 13.3% per year n he 1990s. Whle lower han he 24.1% growh n compuers, sofware growh s much more rapd han growh n oher forms of angble capal. Complemenary beween sofware and compuers s one possble explanaon. 18. Tevln and Whelan (1999) provde emprcal suppor for hs explanaon, reporng ha compuer nvesmen s parcularly sensve o he cos of capal, so ha he rapd drop n servce prces can be expeced o lead o large nvesmen response. 12

13 Frms respond o he declne n relave compuer prces by accumulang compuers and nvesng n complemenary npus lke sofware o pu he compuers no operaon A compeng explanaon s ha he offcal prce ndexes used o deflae sofware nvesmen om a large par of rue qualy mprovemens. Ths would lead o a subsanal oversaemen of prce nflaon and a correspondng undersaemen of real nvesmen, capal servces, and economc growh. Accordng o Moulon, Parker, and Seskn (1999) and Parker and Grmm (2000), only prces for prepackaged sofware are calculaed from consan-qualy prce deflaors based on hedonc mehods. Prces for busness own-accoun sofware are based on npu-cos ndexes, whch mplcly assume no change n he producvy of compuer programmers. Cusom sofware prces are a weghed average of prepackaged sofware and own-accoun sofware, wh an arbrary 75% wegh for busness own-accoun sofware prces. Thus, he prce deflaors for nearly wo-hrds of sofware nvesmen are esmaed under he mananed assumpon of no gan n producvy. 20 If he qualy of own-accoun and cusom sofware s mprovng a a pace even remoely close o packaged sofware, hs mples a large undersaemen n nvesmen n sofware. 40. Alhough he prce declne for communcaons equpmen durng he 1990s s comparable o ha of sofware, as offcally measured n he NIPA, nvesmen has grown a a rae ha s more n lne wh prces. However, here are also possble measuremen bases n he prcng of communcaons equpmen. The echnology of swchng equpmen, for example, s smlar o ha of compuers; nvesmen n hs caegory s deflaed by a consan-qualy prce ndex developed by BEA. Convenonal prce deflaors are employed for ransmsson gear, such as fber-opc cables, whch also appear o be declnng rapdly n prce. Ths could lead o an underesmae of he rae of growh n communcaons equpmen nvesmen, capal sock, and capal servces, as well as an overesmae of he rae of nflaon. 21 We reurn o hs ssue a he end of Secon II. d) Measurng labor servces 41. Ths secon descrbes our esmaes of labor npu for he US economy from 1959 o We begn wh ndvdual daa from he Census of Populaon for 1970, 1980, and 1990, as well as he annual Curren Populaon Surveys. We esmae consan qualy ndexes for labor npu and s prce o accoun for heerogeney of he workforce across sex, employmen class, age, and educaon levels. Ths follows he approach of Jorgenson, Gollop and Fraumen (1987), whose esmaes have been revsed and updaed by Ho and Jorgenson (1999) The dsncon beween labor npu and labor hours s analogous o he dsncon beween capal servces and capal sock. Growh n labor npu reflecs he ncrease n labor hours, as well as changes n he composon of hours worked as frms subsue among heerogeneous ypes of labor. We defne he growh n labor qualy as he dfference beween he growh n labor npu and hours worked. 19. An economerc model of he responsveness of dfferen ypes of capal servces o own- and cross-prce effecs could be used o es for complemenary, bu hs s beyond he scope of he paper. 20. Accordng o Parker and Grmm (2000), oal sofware nvesmen of $123.4B ncludes $35.7B n prepackaged sofware, $42.3B n cusom sofware, and $45.4B n own-accoun sofware n Applyng he weghng convenons employed by BEA, hs mples $46.3B=$35.7B+0.25*$42.3B, or 38% of he oal sofware nvesmen, s deflaed wh explc qualy adjusmens. 21. Grmm (1997) presens hedonc esmaes for dgal elephone swches and repors average prce declnes of more han 10% per year from 1985 o Appendx C provdes deals on he source daa and mehodology. 13

14 Labor qualy reflecs he subsuon of workers wh hgh margnal producs for hose wh low margnal producs, whle he growh n hours employed by Solow (1957) and ohers does no capure hs subsuon. Appendx Table C-1 presens our esmaes of labor npu, hours worked, and labor qualy. 43. Our esmaes show he value of labor expendures o be $4,546B n 1998, roughly 57% of he value of oupu. Ths value share accuraely reflecs he NIPA measure of oupu and our mpuaons for capal servces. If we exclude hese mpuaons, labor s share rses o 62%, n lne wh convenonal esmaes. As shown n Table 1, he growh of he ndex of labor npu L approprae for our model of producon n Equaon (1) acceleraed o 2.8% for , from 2.0% for Ths s prmarly due o he growh of hours worked, whch rose from 1.4% for o 2.4% for , as labor force parcpaon ncreased and unemploymen raes plummeed The growh of labor qualy deceleraed n he lae 1990s, from 0.65% for o 0.43% for Ths slowdown capures well-known underlyng demographc rends n he composon of he work force, as well as exhauson of he pool of avalable workers as unemploymen raes have seadly declned. Projecons of fuure economc growh ha om labor qualy, lke hose of CBO, mplcly ncorporae changes n labor qualy no measured TFP growh. Ths reduces he relably of projecons of fuure economc growh. Forunaely, hs s easly remeded by exrapolang demographc changes n he work force n order o reflec foreseeable changes n composon by characerscs of workers such as age, sex, and educaonal aanmen. e) Quanfyng he sources of growh 45. Table 2 presens resuls of our growh accounng decomposon based on Equaon (2) for he perod 1959 o 1998 and varous sub-perods, as well as prelmnary esmaes hrough As n Jorgenson and Sroh (1999), we decompose economc growh by boh oupu and npu caegores n order o quanfy he conrbuon of nformaon echnology (IT) o nvesmen and consumpon oupus, as well as capal and consumers durable npus. We exend our prevous reamen of he oupus and npus of compuers by denfyng sofware and communcaons equpmen as dsnc IT asses. 46. To quanfy he sources of IT-relaed growh more explcly, we employ he exended producon possbly froner: (4) Y ( Y, C, I, I, I, D ) = A X ( K, K, K, K, D, D, L) n c c s m c where oupus nclude compuer and sofware consumpon C c, compuer nvesmen I c, sofware nvesmen I s, elecommuncaons nvesmen I m, he servces of consumers compuers and sofware D c, and oher oupus Y n, Inpus nclude he capal servces of compuers K c, sofware K s, elecommuncaons equpmen K m, and oher capal asses K n, servces of consumers compuers and sofware D c and oher durables D n, and labor npu L. 24 As n Equaon (1), oal facor producvy s denoed by A and represens he ably o produce more oupu from he same npus. Tme subscrps have been dropped for convenence. 47. The correspondng exended growh accounng equaon s: 23. By comparson, BLS (2000) repors growh n busness hours of 1.2% for and 2.3% for The slgh dscrepances reflec our mehods for esmang hours worked by he self-employed, as well as mnor dfferences n he scope of our oupu measure 24. Noe we have broken broadly defned capal no angble capal servces, K, and consumers durable servces, D. n c s m n c 14

15 (5) w lny + w lnc + w lni + w lni + w lni Yn v Kn n Cc lnk + v n Kc c lnk Ic c + v Ks c Is lnk + v s s Km Im lnk + v m m Dn + w lnd = Dc lnd + v n Dc c lnd + v lnl+ lna c L where w and v denoe average shares n nomnal ncome for he subscrped varable wyn + wcc + wic + wis+ wim+ wdc = v Kn + vkc + vks+ vkm+ vdn + vdc + vl = 1, and we refer o a share-weghed growh rae as he conrbuon of an npu or oupu. ) Oupu growh 48. We frs consder he sources of oupu growh for he enre perod 1959 o Capal servces make he larges growh conrbuon of 1.8 percenage pon (1.3 percenage pons from busness capal and 0.5 from consumers durable asses), labor servces conrbue 1.2 percenage pons, and TFP growh s responsble for only 0.6 percenage pons. Inpu growh s he source of nearly 80 percen of U.S. growh over he pas 40 years, whle TFP has accouned for approxmaely one-ffh. Char 4 hghlghs hs resul by showng he relavely small growh conrbuon of he TFP resdual n each sub-perod. 49. More han hree-quarers of he conrbuon of broadly defned capal reflecs he accumulaon of capal sock, whle ncreased labor hours accoun for slghly less han hree-quarers of labor s conrbuon. The qualy of boh capal and labor have made mporan conrbuons, 0.45 percenage pons and 0.32 percenage pons per year, respecvely. Accounng for subsuon among heerogeneous capal and labor npus s herefore an mporan par of quanfyng he sources of economc growh. 50. A look a he US economy before and afer 1973 reveals some famlar feaures of he hsorcal record. Afer srong oupu and TFP growh n he 1960s and early 1970s, he US economy slowed markedly hrough 1990, wh oupu growh fallng from 4.3% o 3.1% and TFP growh fallng almos wo-hrds of a percenage pon from 1.0% o 0.3%. Growh n capal npus also slowed, fallng from 5.0% for o 3.8% for , whch conrbued o sluggsh ALP growh, 2.9% for o 1.4% for We now focus on he perod and hghlgh recen changes. 25 Relave o he early 1990s, oupu growh has ncreased by nearly wo percenage pons. The conrbuon of capal jumped by 1.0 percenage pon, he conrbuon of labor rose by 0.4 percenage pons, and TFP growh acceleraed by 0.6 percenage pon. ALP growh rose 1.0 percenage pon. The rsng conrbuons of capal and labor encompass several well-known rends n he lae 1990s. Growh n hours worked acceleraed as labor markes ghened, unemploymen fell o a 30-year low, and labor force parcpaon raes ncreased. 26 The conrbuon of capal reflecs he nvesmen boom of he lae 1990s as busnesses poured resources no plan and equpmen, especally compuers, sofware, and communcaons equpmen. 52. The acceleraon n TFP growh s perhaps he mos remarkable feaure of he daa. Afer averagng only 0.34% per year from 1973 o 1995, he acceleraon of TFP o 0.99% suggess massve 25. Table 2 also presens prelmnary resuls for he more recen perod , where he 1999 numbers are based on he esmaon procedure descrbed n Appendx E, raher han he dealed model descrbed above. The resuls for and are que smlar; we focus our dscusson on he perod See Kaz and Krueger (1999) for explanaons for he srong performance of he US labor marke, ncludng demographc shfs oward a more maure labor force, a rse n he prson age populaon, mproved effcency n labor markes, and he weak backbone hypohess of worker resran. 15

16 mprovemens n echnology and ncreases n he effcency of producon. Whle he resurgence n TFP growh n he 1990s has ye o surpass perods of he 1960s and early 1970s, more rapd TFP growh s crcal for susaned growh a hgher raes. 53. Chars 5 and 6 hghlgh he rsng conrbuons of nformaon echnology (IT) oupus o U.S. economc growh. Char 5 shows he breakdown beween IT and non-it oupus for varous sub-perods from 1959 o 1998, whle Char 6 decomposes he conrbuon of IT oupus no s componens. Alhough he role of IT has seadly ncreased, Char 5 shows ha he recen nvesmen and consumpon surge nearly doubled he oupu conrbuon of IT for relave o Char 6 shows ha compuer nvesmen s he larges sngle IT conrbuor n he lae 1990s, and ha consumpon of compuers and sofware s becomng ncreasngly mporan as a source of oupu growh. 54. Chars 7 and 8 presen a smlar decomposon of he role of IT as an npu no producon, where he conrbuon s rsng even more dramacally. Char 7 shows ha he capal and consumers durable conrbuon from IT ncreased rapdly n he lae 1990s, and now accouns for more wo-ffhs of he oal growh conrbuon from broadly defned capal. Char 8 shows ha compuer hardware s also he sngle larges IT conrbuor on he npu sde, whch reflecs he growng share and rapd growh raes of he lae 1990s. 55. The conrbuon of compuers, sofware, and communcaons equpmen presens a dfferen pcure from Jorgenson and Sroh (1999) for boh daa and mehodologcal reasons. Frs, he BEA benchmark revson has classfed sofware as an nvesmen good. Whle sofware s growng more slowly han compuers, he subsanal nomnal share of sofware servces has rased he conrbuon of nformaon echnology. Second, we have added communcaons equpmen, also a slower growng componen of capal servces, wh smlar effecs. Thrd, we now ncorporae asse-specfc revaluaon erms n all renal prce esmaes. Snce he acquson prces of compuers are seadly fallng, asse-specfc revaluaon erms have rased he esmaed servce prce and ncreased he share of compuer servces. Fnally, we have modfed our mng convenon and now assume ha capal servces from ndvdual asses are proporonal o he average of he curren and lagged sock. For asses wh relavely shor servce lves lke IT, hs s a more reasonable assumpon han n our earler work, whch assumed ha ook a full year for new nvesmen o become producve Ths large ncrease n he growh conrbuon of compuers and sofware s conssen wh recen esmaes by Olner and Schel (2000), alhough her esmae of conrbuon s somewha larger. They repor ha compuer hardware and sofware conrbued 0.93 percenage pons o growh for , whle communcaons conrbued anoher The dscrepancy prmarly reflecs our broader oupu concep, whch lowers he npu share of hese hgh-ech asses, and also mnor dfferences n ax parameers and sock esmaes. Whelan (1999) also repors a larger growh conrbuon of 0.82 percenage pons from compuer hardware for The dscrepancy also reflecs our broader oupu concep. In addon, Whelan (1999) nroduces a new mehodology o accoun for reremen and suppor coss ha generaes a consderably larger capal sock and rases he npu share and he growh conrbuon from compuer capal. 57. Despe dfferences n mehodology and daa sources among sudes, a consensus s buldng ha compuers are havng a subsanal mpac on economc growh. 28 Wha s drvng he ncrease n he conrbuons of compuers, sofware, and communcaons equpmen? As we argued n Jorgenson and 27. We are ndebed o Dan Schel for very helpful dscussons of hs mng convenon. 28. Olner and Schel (2000) provde a dealed comparson of he resuls across several sudes of compuers and economc growh. 16

17 Sroh (1999), prce changes lead o subsuon oward capal servces wh lower relave prces. Frms and consumers are respondng o relave prce changes. 58. Table 1 shows he acquson prce of compuer nvesmen fell nearly 28% per year, he prce of sofware fell 2.2%, and he prce of communcaons equpmen fell 1.7% durng he perod , whle oher oupu prces rose 2.0%. In response o hese prce changes, frms accumulaed compuers, sofware, and communcaons equpmen more rapdly han oher forms of capal. Invesmen oher han nformaon echnology acually declned as a proporon of prvae domesc produc. The sory of household subsuon oward compuers and sofware s smlar. These subsuons sugges ha gans of he compuer revoluon accrue o frms and households ha are adep a resrucurng acves o respond o hese relave prce changes. ) Average labor producvy growh 59. To provde a dfferen perspecve on he sources of economc growh we can focus on ALP growh. By smple arhmec, oupu growh equals he sum of hours growh and growh n labor producvy. 29 Table 3 shows he oupu breakdown beween growh n hours and ALP for he same perods as n Table 2. For he perod , ALP growh was he predomnan deermnan of oupu growh, ncreasng jus over 2% per year for , whle hours ncreased abou 1.6% per year. We hen examne he changng mporance of he facors deermnng ALP growh. As shown n Equaon (3), ALP growh depends on a capal deepenng effec, a labor qualy effec, and a TFP effec. 60. Char 9 shows he mporance of each facor, revealng he well-known producvy slowdown of he 1970s and 1980s, and hghlghng he acceleraon of labor producvy growh n he lae 1990s. The slowdown hrough 1990 reflecs less capal deepenng, declnng labor qualy growh, and decelerang growh n TFP. The growh of ALP slpped furher durng he early 1990s wh he serous slump n capal deepenng only parly offse by a revval n he growh of labor qualy and an up-ck n TFP growh. Slow growh n hours combned wh slow ALP growh durng o produce a furher slde n he growh of oupu. Ths sands ou from prevous cyclcal recoveres durng he poswar perod, when oupu growh acceleraed durng he recovery, powered by more rapd hours and ALP growh. 61. For he mos recen perod of , srong oupu growh reflecs growh n labor hours and ALP almos equally. Comparng o , oupu growh acceleraed by nearly 2 percenage pons due o a 1 percenage pon ncrease n hours worked, and a 1.0 percenage pon ncrease n ALP growh. 30 Char 9 shows he acceleraon n ALP growh s due o capal deepenng from he nvesmen boom, as well as faser TFP growh. Capal deepenng conrbued 0.49 percenage pons o he acceleraon n ALP growh, whle acceleraon n TFP growh added 0.63 percenage pons. Growh n labor qualy slowed somewha as growh n hours acceleraed. Ths reflecs he fallng unemploymen rae and ghenng of labor markes as more workers wh relavely low margnal producs were drawn no he workforce. Olner and Schel (2000) also show a declne n he growh conrbuon of labor qualy n he lae 1990s, from 0.44 for o 0.31 for Our decomposon also hrows some lgh on he hypohess advanced by Gordon (1999b), who argues he vas majory of recen ALP gans are due o he producon of IT, parcularly compuers, raher han he use of IT. As we have already poned ou, more effcen IT-producon generaes aggregae TFP growh as more compung power s produced from he same npus, whle IT-use affecs ALP growh va 29. See Krugman (1997) and Blnder (1997) for a dscusson of he usefulness of hs relaonshp. 30. BLS (2000) shows smlar rends for he busness secor wh hours growh ncreasng from 1.2% for o 2.3% for , whle ALP ncreased from 1.58% o 2.63%. 17

18 capal deepenng. In recen years, acceleraon of TFP growh s a slghly more mporan facor n he acceleraon of ALP growh han capal deepenng. Effcency gans n compuer producon are mporan par of aggregae TFP growh, as Gordon s resuls on ALP sugges. We reurn o hs ssue n Secon III. ) Toal facor producvy growh 63. Fnally, we consder he remarkable performance of U.S. TFP growh n recen years. Afer mananng an average rae of 0.33% for he perod , TFP growh rose o 0.36% for and hen vauled o 0.99% per year for Ths jump s a major source of growh n oupu and ALP for he US economy (Chars 4 and 9). Whle TFP growh for he 1990s has ye o aan he peaks of some perods n he golden age of he 1960s and early 1970s, he recen acceleraon suggess ha he US economy may be recuperang form he anemc producvy growh of he pas wo decades. Of course, cauon s warraned unl more hsorcal experence s avalable. 64. As early as Domar (1961), economss have ulzed a mul-ndusry model of he economy o race aggregae producvy growh o s sources a he level of ndvdual ndusres. Jorgenson, Gollop, and Fraumen (1987) and Jorgenson (1990) have employed hs model o denfy he ndusry-level sources of growh. More recenly, Gullckson and Harper (1999) and Jorgenson and Sroh (2000) have used he model for smlar purposes. We pospone more dealed consderaon of he sources of TFP growh unl we have examned he mplcaons of he recen growh resurgence for nermedae-erm projecons. f) Alernave growh accounng esmaes 65. Tables 1 hrough 3 and Chars 1 hrough 9 repor our prmary resuls usng he offcal daa publshed n he NIPA. As we have already noed, however, here s reason o beleve ha he raes of nflaon n offcal prce ndces for ceran hgh-ech asses, noably sofware and elecommuncaons equpmen, may be oversaed. Moulon, Parker, and Seskn (1999) and Parker and Grmm (2000), for example, repor ha only he pre-packaged poron of sofware nvesmen s deflaed wh a consan-qualy deflaor. Own-accoun sofware s deflaed wh an npu cos ndex and cusom sofware s deflaed wh a weghed average of he prepackaged and own-accoun deflaor. Smlarly, BEA repors ha n he communcaons equpmen caegory, only elephone swchng equpmen s deflaed wh a consan-qualy, hedonc deflaor. 66. Ths subsecon ncorporaes alernave prce seres for sofware and communcaons equpmen and examnes he mpac on he esmaes of U.S. economc growh and s sources. Table 4 presens growh accounng resuls under hree dfferen scenaros. The Base Case repeas he esmaes from Table 2, whch are based on offcal NIPA prce daa. Two addonal cases, Moderae Prce Declne and Rapd Prce Declne, ncorporae prce seres for sofware and communcaons equpmen ha show faser prce declnes and correspondngly more rapd real nvesmen growh The Moderae Prce Declne case assumes ha prepackaged sofware prces are approprae for all ypes of prvae sofware nvesmen, ncludng cusom and busness own-accoun sofware. Snce he ndex for prepackaged sofware s based on explc qualy adjusmens, falls much faser han he prces 31. The noon ha offcal prce deflaors for nvesmen goods om subsanal qualy mprovemens s hardly novel. The magseral work of Gordon (1990) successfully quanfed he oversaemens of raes of nflaon for he prces of a wde array of nvesmen goods, coverng all producers durable equpmen n he NIPA. 18

19 of cusom and own-accoun sofware, -10.1% vs. 0.4% and 4.1% respecvely, for he full perod accordng o Parker and Grmm (2000). For communcaons equpmen, he daa are more lmed and we assume prces fell 10.7% per year hroughou he enre perod. Ths esmae s he average annual smoohed declne for dgal swchng equpmen for repored by Grmm (1997). Whle hs seres may no be approprae for all ypes of communcaons equpmen, explos he bes avalable nformaon. 68. The Rapd Prce Declne case assumes ha sofware prces fell 16% per year for , he rae of qualy-adjused prce declne repored by Brynjolfsson and Kemerer (1996) for mcrocompuer spreadshees for Ths s a slghly faser declne han he 15% for esmaed by Gandal (1994), and consderably faser han he 3% annual declne for word processors, spreadshees, and daabases for repored by Olner and Schel (1994). For communcaons equpmen, we used esmaes from he mos recen perod from Grmm (1997), who repors a declne of 17.9% per year for Whle hs exercse necessarly nvolves some arbrary choces, he esmaes ncorporae he lmed daa now avalable and provde a valuable perspecve on he crucal mporance of accounng for qualy change n he prces of nvesmen goods. Comparsons among he hree cases are useful n suggesng he range of uncerany currenly confronng analyss of U.S. economc growh. 70. Before dscussng he emprcal resuls, s worhwhle o emphasze ha more rapd prce declne for nformaon echnology has wo drec effecs on he sources of growh, and one ndrec effec. The alernave nvesmen deflaors rase real oupu growh by reallocang nomnal growh away from prces and owards quanes. Ths also ncreases he growh rae of capal sock, snce here are larger nvesmen quanes n each year. More rapd prce declnes also gve greaer wegh o capal servces from nformaon echnology. 71. The couner-balancng effecs of ncreased oupu and ncreased npu growh lead o an ndrec effec on measured TFP growh. Dependng on he relave shares of hgh-ech asses n nvesmen and capal servces, he TFP resdual wll ncrease f he oupu effec domnaes or decrease f he effec on capal servces domnaes. 32 Followng Solow (1957, 1960), Greenwood, Hercowz, and Krusell (1997) om he oupu effec and arbue he npu effec o nvesmen-specfc (emboded) echncal change. Ths mus be carefully dsngushed from he effecs of ndusry-level producvy growh on TFP growh, dscussed n Secon IV. 72. Table 4 repors growh accounng resuls from hese hree scenaros Base Case, Moderae Prce Declne, and Rapd Prce Declne. The resuls are no surprsng he more rapd he prce declne for sofware and communcaons, he faser he rae of growh of oupu and capal servces. Relave o he Base Case, oupu growh ncreases by 0.16 percenage pons per year for n he Moderae Prce Declne case and by 0.34 percenage pons n he Rapd Prce Declne case. Capal npu growh shows slghly larger ncreases across he hree cases. Clearly, consan-qualy prce ndexes for nformaon echnology are essenal for furher progress n undersandng he growh mpac of hgh-ech nvesmen. 73. The acceleraon n oupu and npu growh reflecs he ncreased conrbuons from IT, as well as he effec on he TFP resdual. In parcular, he oupu conrbuon from sofware for ncreases from 0.21 percenage pons n he Base Case o 0.29 percenage pons under Moderae Prce Declne o 0.40 percenage pons wh Rapd Prce Declne. Smlarly, he capal servces conrbuon for sofware ncrease from 0.19 o 0.29 o 0.45 percenage pons. The conrbuon of communcaons equpmen 32. Ths pon was orgnally made by Jorgenson (1966); Hulen (2000) provdes a recen revew. 19

20 shows smlar changes. Resdual TFP growh falls slghly durng he 1990s, as he npu effec ouweghs he oupu effec, due o he large capal servces shares of IT. 74. Ths exercse llusraes he sensvy of he sources of growh o alernave prce ndexes for nformaon echnology. We do no propose o argue he wo alernave cases are more nearly correc han he Base Case wh he offcal prces from NIPA. Gven he paucy of qualy-adjused prce daa on hgh-ech equpmen, we smply do no know. Raher, we have red o hghlgh he mporance of correcly measurng prces and quanes o undersand he dynamc forces drvng U.S. economc growh. As hgh-ech asses connue o prolferae hrough he economy and oher nvesmen goods become ncreasngly dependen on elecronc componens, hese measuremen ssues wll become ncreasngly mporan. Whle he ask ha les ahead of us wll be onerous, he creaon of qualy-adjused prce ndexes for all hgh-ech asses deserves op prory. g) Decomposon of TFP esmaes. 75. We nex consder he role of hgh-ech ndusres as a source of connued TFP growh. As dscussed above, ncreased oupu of hgh-ech nvesmen goods has made mporan conrbuons o aggregae growh. 33 CEA (2000) allocaes annual TFP growh of 0.39 percenage pons o he compuer producon, whle Olner and Schel (2000) allocae 0.47 percenage pons o he producon of compuers and compuer-relaed sem-conducor producon for he perod We employ a mehodology based on he prce dual approach o measuremen of producvy a he ndusry level. Ancpang our complee ndusry analyss Secon IV, below, s worhwhle o spell ou he decomposon of TFP growh by ndusry. Usng he Domar approach o aggregaon, ndusry-level producvy growh s weghed by he rao of he gross oupu of each ndusry o aggregae value-added o esmae he ndusry conrbuon o aggregae TFP growh. In he dual approach, he rae of producvy growh s measured as he declne n he prce of oupu, plus a weghed average of he growh raes of npu prces. 77. In he case of compuer producon, hs expresson s domnaed by wo erms; namely, he prce of compuers and he prce of sem-conducors, a prmary nermedae npus no he compuer-producng ndusry. If sem-conducor ndusry oupu s used only o produce compuers, hen s conrbuon o compuer ndusry producvy growh, weghed by compuer ndusry oupu, precsely cancels s ndependen conrbuon o aggregae TFP growh. 34 Ths ndependen conrbuon from he sem-conducor ndusry, based on he complee Domar weghng scheme, s he value of sem-conducor oupu dvded by aggregae value added, mulpled by he rae of prce declne n sem-conducors. 78. We repor deals of our TFP decomposon for and n Table 5 and summarze he IT vs. non-it comparson n Char 10. In our Base Case, usng offcal NIPA daa, we esmae he producon of nformaon echnology accouns for 0.44 percenage pons for , compared o 0.25 percenage pons for Ths reflecs he accelerang relave prce changes prces due o radcal shorenng of he produc cycle for sem-conducors CEA (2000), Gordon (1999a), Jorgenson and Sroh (1999), Olner and Schel (2000), Sroh (1998), and Whelan (1999) have provded esmaes. 34. Ths calculaon shows ha he smplfed model of Olner and Schel (2000) s a specal case of he complee Domar weghng scheme used n Secon IV. 35. Relave prce changes n he Base Case are aken from he nvesmen prces n Table 5. Oupu shares are esmaed based on fnal demand sales avalable from he BEA webse for compuers and from Parker and 20