What is the New Economy?

What is the New Economy? Tokyo June 29-30, 2007 By Dale W. Jorgenson, Mun Ho, Jon Samuels, and Kevin Stiroh Harvard University, Resources for the Future, Johns Hopkins University, and the Federal Reserve Bank of New York http://post.economics.harvard.edu/faculty/jorgenson/

Economic Growth in the Information Age INTRODUCTION: Prices of Information Technology THE INFORMATION AGE: Faster, Better, Cheaper! ROLE OF INFORMATION TECHNOLOGY: IT Prices and the Cost of Capital AMERICAN GROWTH RESURGENCE: IT Investment and Productivity Growth ECONOMICS ON INTERNET TIME: The New Research Agenda

THE INFORMATION AGE: Faster, Better, Cheaper! MOORE (1998): "If the automobile industry advanced as rapidly as the semiconductor industry, a Rolls Royce would get half a million miles per gallon, and it would be cheaper to throw it away than to park it." INVENTION OF THE TRANSISTOR: Development of Semiconductor Technology. THE INTEGRATED CIRCUIT: Memory Chips; Logic Chips. MOORE'S LAW: The number of transistors on a chip doubles every 18-24 months(pentium 4, released November 20,2000, has 42 million transistors).

Source: No Exponential is Forever, Gordon Moore ftp://download.intel.com/research/silicon/gordon_moore_isscc_021003.pdf)

HOLDING QUALITY CONSTANT Matched Models and Hedonics SEMICONDUCTOR PRICE INDEXES: Memory and Logic Chips. COMPUTER PRICE INDEXES: The BEA-IBM Collaboration. COMMUNICATIONS EQUIPMENT: Terminal, Switching, and Transmission. SOFTWARE: Prepackaged, Custom, and Own-Account.

100,000.0 Relative Prices of Computers and Semiconductors, 1960-2005 10,000.0 Log Scale (2000=1) 1,000.0 100.0 10.0 1.0 0.1 0.0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Computers Memory Logic Note: All price indexes are divided by the output prie index.

500 350 92 95 97 99 02 05 08 11 1992 NTRS 1994 NTRS Minimum Feature Size (nm) (DRAM Half Pitch) 250 180 130 100 70 International SEMATECH 1997 NTRS 1998 / 1999 ITRS 2001/ 2003 ITRS* 50 35 Area for Future ITRS Acceleration Acceleration 25 92 95 97 99 02 05 08 11 *Note the 2003 ITRS timing is unchanged from the 2001 ITRS Semiconductor Roadmap Acceleration

Relative Prices of Computers, Central Office Switching Equipment, and Prepackaged Software, 1960-2005 10,000 1,000 Log Scale (2000=1) 100 10 1 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Computers Central Office Switching Equipment Prepackaged Software Note: All price indexes are divided by the output price index.

Relative Prices of Computers, Communications, Semiconductors, and Software and Computer Services Industry Output, 1960-2005 1000 100 Log Scale (2000=1) 10 1 0.1 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Computers Communications Equipment Electronic Components Software and Computer Services

ROLE OF INFORMATION TECHNOLOGY: Growth of Output. OUTPUT SHARES OF IT: Computers, Communications Equipment, Semiconductors, and Software. OUTPUT CONTRIBUTION BY TYPE: Computers, Communications Equipment, Semiconductors, and Software. OUTPUT CONTRIBUTION OF IT: IT-Producing, IT-Using, and Non-IT Value Added.

4.0 Value Added Shares of Information Technology by Type, 1960-2005 Share of Current Dollar GDP. 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Computers Communications Equipment Electronic Components Software and Computer Services Total IT

0.8 Industry Contributions to Value Added Value added weighted contributions of industry value added. 0.7 0.6 Annual Contribution (%) 0.5 0.4 0.3 0.2 0.1 0-0.1 1960-1995 1995-2000 2000-2005 Computers Communications Equipment Electronic Components Software and Computer Services

4.50 Industry Contributions to Value Added Growth Value added weighted contributions of industry value added. 4.00 3.50 Annual Contribution (%) 3.00 2.50 2.00 1.50 1.00 0.50 0.00 1960-1995 1995-2000 2000-2005 Non-IT Industries IT-Using Industries IT-Producing Industries

Comparison of Production Possibility Frontier and Aggregate Production Function 6.00 5.00 4.00 Annual Growth (%) 3.00 2.00 1.00 0.00 1960-1995 1995-2000 2000-2005 Aggregate Production Function Value-Added Aggregate Production Possibility Frontier Value-Added

ROLE OF INFORMATION TECHNOLOGY: Contribution of Capital Input. INPUT SHARES OF IT: Computers, Communications Equipment, and Software. CAPITAL CONTRIBUTION: IT versus Non-IT Capital Services.

1996 1998 2000 2002 2004 1994 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 IT Share of Capital Input, 1960-2005 Share of Current Dollar GDP. 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1972 1970 1968 1966 1964 1962 1960

Capital Input Contribution of Information Technology 2.50 Annual percentage growth rates, weighted by income shares. 2.00 Annual Contribution (%) 1.50 1.00 0.50 0.00 1960-1995 1995-2000 2000-2005 Non-IT Capital Services IT Capital Services

GROWTH IN THE NEW MILLENNIUM: IT Investment and Productivity Growth. TOTAL FACTOR PRODUCTIVITY: IT-Producing, IT-Using, and Non-IT Production. SOURCES OF U.S. ECONOMIC GROWTH: Capital Input, Labor Input, and TFP. AVERAGE LABOR PRODUCTIVITY GROWTH: Capital Deepening, Labor Quality, TFP.

1.60 Industry Contributions to Productivity Growth Domar weighted productivity. 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00-0.20 1960-1995 1995-2000 2000-2005 Non-IT Industries IT-Using Industries IT-Producing Industries

1.60 Sources of Aggregate TFP Growth 1.40 1.20 1.00 Annual Contribution (%) 0.80 0.60 0.40 0.20 0.00-0.20-0.40 1960-1995 1995-2000 2000-2005 IT-Producing Industries IT-Using Industries Non-IT Industries Reallocation of Capital Input Reallocation of Labor Input

4.50 Sources of U.S. Economic Growth 4.00 3.50 3.00 Annual Contribution (%) 2.50 2.00 1.50 1.00 0.50 0.00-0.50 1960-1995 1995-2000 2000-2005 Non-college Labor College Labor Non-IT Capital IT Capital Aggregate TFP

3.50 Sources of U.S. Labor Productivity Growth 3.00 2.50 Annual Contribution (%) 2.00 1.50 1.00 0.50 0.00-0.50 1960-1995 1995-2000 2000-2005 Reallocation of Hours Non-college Labor Quality College Labor Quality Non-IT Capital Deepening IT Capital Deepening Aggregate TFP

ECONOMICS ON INTERNET TIME: The New Research Agenda. The Solow Paradox -- we see computers everywhere but in the productivity statistics -- versus the Information Age. Equity Valuations and Growth Prospects: accumulation of intangible assets versus irrational exuberance. Widening Wage Inequality:capital-skill complementarity versus skill-biased technical change. Modeling IT and the semiconductor industry: permanent versus transitory contributions to economic growth.

Private households Wholesale trade Real Estate- other S&L education Retail trade exc motor veh Computers & Office Eq Telephone and telegraph Electronic Components S&L excl health,educ Business svc exc computer Depository Inst Nondeposit; Sec-com brokers;inves Offices of health practitioners Misc professional services Computer services Food Electric utilities (pvt) Retail trade; motor vehicles Farms Trucking and warehousing Chemicals excl drugs Social svc and membership org Air transport. Hospitals, private Rubber and misc plastics Motor vehicles Machinery excl computers Fabricated metal prd Federal gen govt excl health Insurance carriers, ins agents, services Construction Recreation services Paper and allied Textile Other Electrical machinery Drugs Communications Equipment S&L govt enterprises Auto services Health services, nec Eating and drinking Printing and reproduction Industry Contributions to Value Added Growth, 1960-2005 -0.1 0 0.1 0.2 0.3 0.4 0.5 0.6

Industry Contributions to Value Added Growth, 1960-2005 (cont.) Hotels Federal govt enterprises Aerospace Medical equipment and opthalmic Legal services Agri services, forestry Nursing and personal care facilities Nonmetallic mineral products Furniture and fixtures Educational services (private) Research Government Hospitals Transportation svcs & Pipelines Measuring instruments Other Instruments Personal services Apparel Lumber and wood Motion pictures Misc manufacturing Publishing Audio and video equip Petroleum and coal products Coal mining Water transport. Primary metals Railroad transportation Misc repair Govt other health Radio and TV Nonmetal mining Other Transportation equipment Ships and boats Fishing Insulated wire Local passenger transit Water and sanitation Metal mining Leather Tobacco Oil and gas extraction Military Gas utilities -0.1 0.0 0.1 0.2 0.3 0.4 0.5 0.6

Private households Wholesale trade Business svc exc computer Telephone and telegraph Nondeposit; Sec-com Real Estate- other Insurance carriers, ins agents, Depository Inst Machinery excl computers Computer services S&L education Military S&L excl health,educ Misc professional services Retail trade exc motor veh Radio and TV Legal services Retail trade; motor vehicles Electric utilities (pvt) Publishing Federal govt enterprises Hospitals, private Chemicals excl drugs Electronic Components Construction Oil and gas extraction S&L govt enterprises Food Communications Equipment Eating and drinking Social svc and membership org Computers & Office Eq Printing and reproduction Air transport. Fabricated metal prd Transportation svcs & Pipelines Other Electrical machinery Research Medical equipment and Federal gen govt excl health Offices of health practitioners Measuring instruments Industry Contributions to Capital Input Growth, 1960-2005 -0.1 0 0.1 0.2 0.3 0.4 0.5 IT Capital Non-IT Capital

Government Hospitals Gas utilities Trucking and warehousing Drugs Aerospace Nonmetallic mineral products Rubber and misc plastics Motor vehicles Motion pictures Paper and allied Other Instruments Primary metals Nursing and personal care facilities Misc repair Auto services Recreation services Hotels Other Transportation equipment Educational services (private) Petroleum and coal products Textile Apparel Misc manufacturing Lumber and wood Personal services Railroad transportation Ships and boats Insulated wire Furniture and fixtures Govt other health Health services, nec Tobacco Farms Water and sanitation Water transport. Local passenger transit Coal mining Leather Audio and video equip Nonmetal mining Metal mining Fishing Agri services, forestry Industry Contributions to Capital Input Growth, 1960-2005 (cont) -0.1 0.0 0.1 0.2 0.3 0.4 0.5 IT Capital Non-IT Capital

Industry Contributions to Productivity Growth, 1960-2005 Domar weighted contribution. Computers & Office Eq Wholesale trade Real Estate- other Electronic Components Retail trade exc motor veh Farms Telephone and telegraph Food Depository Inst Textile Rubber and misc plastics Railroad transportation Aerospace Retail trade; motor vehicles Motor vehicles Chemicals excl drugs Fabricated metal prd Offices of health practitioners Other Electrical machinery Air transport. Trucking and warehousing Apparel Paper and allied Nonmetallic mineral products Furniture and fixtures Electric utilities (pvt) Audio and video equip Other Instruments Medical equipment and Personal services Communications Equipment Computer services Printing and reproduction Primary metals Measuring instruments Petroleum and coal products Water transport. Misc manufacturing Agri services, forestry Coal mining Transportation svcs & Drugs -0.12-0.07-0.02 0.03 0.08 0.13

Lumber and wood Local passenger transit Recreation services Ships and boats Machinery excl computers Other Transportation equipment Leather Social svc and membership org Insulated wire Fishing Nonmetal mining Research Military S&L govt enterprises S&L excl health,educ S&L education Govt other health Government Hospitals Federal govt enterprises Federal gen govt excl health Private households Motion pictures Hotels Metal mining Water and sanitation Health services, nec Nursing and personal care facilities Nondeposit; Sec-com brokers;inves Tobacco Misc repair Auto services Publishing Eating and drinking Educational services (private) Misc professional services Legal services Radio and TV Gas utilities Insurance carriers, ins agents, services Hospitals, private Business svc exc computer Oil and gas extraction Construction Industry Contributions to Productivity Growth, 1960-2005 (cont.) Domar weighted contribution. -0.12-0.07-0.02 0.03 0.08 0.13

Change in Contribution to Productivity: 2000-2005 less 1960-1995 IT-Users Telephone and telegraph Business svc exc computer Insurance carriers, ins agents, services Air transport. Social svc and membership org Misc professional services Wholesale trade Radio and TV Machinery excl computers Medical equipment and opthalmic goods Measuring instruments Aerospace Publishing Gas utilities Audio and video equip Legal services Ships and boats Educational services (private) Other Electrical machinery Transportation svcs & Pipelines Other Transportation equipment Printing and reproduction Other Instruments Misc repair Insulated wire Research Motion pictures Nondeposit; Sec-com brokers;inves -0.15-0.1-0.05 0 0.05 0.1 0.15 0.2

IT Producing Industries Communications Equipment Computer services Computers & Office Eq Electronic Components

IT Using Industries Audio and video equip Insulated wire Other Electrical machinery Aerospace Air transport. Business svc exc computer Educational services (private) Gas utilities Insurance carriers, ins agents, services Legal services Machinery excl computers Measuring instruments Medical equipment and opthalmic goods Misc professional services Misc repair Motion pictures Nondeposit; Sec-com brokers;inves Other Instruments Other Transportation equipment Printing and reproduction Publishing Radio and TV Research Ships and boats Social svc and membership org Telephone and telegraph Transportation svcs & Pipelines Wholesale trade * Industries with an IT Capital Share of 15% or greater in 1995.

Non-IT Industries Agri services, forestry Apparel Auto services Chemicals excl drugs Coal mining Construction Depository Inst Drugs Eating and drinking Electric utilities (pvt) Fabricated metal prd Farms Fishing Food Furniture and fixtures Government Health services, nec Hospitals, private Hotels Leather Local passenger transit Lumber and wood Metal mining Misc manufacturing Motor vehicles Nonmetal mining Nonmetallic mineral products Nursing and personal care facilities Offices of health practitioners Oil and gas extraction Paper and allied Personal services Petroleum and coal products Primary metals Railroad transportation Real Estate- other Recreation services Retail trade exc motor veh Retail trade; motor vehicles Rubber and misc plastics Textile Tobacco Trucking and warehousing Water and sanitation Water transport.