Advisers to the Nation on Science, Engineering, and Medicine

The National Academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Bruce M. Alberts is president of the National Academy of Sciences.

The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. Wm. A. Wulf is president of the National Academy of Engineering.

The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initiative, to identify issues of medical care, research, and education. Dr. Harvey V. Fineberg is president of the Institute of Medicine.

The National Research Council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy’s purposes of furthering knowledge and advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in providing services to the government, the public, and the scientific and engineering communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Bruce M. Alberts and Dr. Wm. A. Wulf are chair and vice chair, respectively, of the National Research Council.

www.national-academies.org

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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:

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This report is the first in a series designed to improve our understanding of the technological and economic trends underlying the growth and productivity increases that have created what many refer to as the New Economy. Led by the National Research Council’s Board on Science, Technology, and Economic Policy (STEP), the goal of this analytical effort is to improve national policy making by improving our understanding of the sources of gains in growth and productivity and our understanding of the policies required to sustain the benefits of this New Economy for the nation.

Even the casual observer is aware of the ongoing revolution in communications, computing, and information management.¹ In the mid-1990s, this technological revolution contributed to a distinct rise in the long-term growth trajectory of the United States.² The term “New Economy” captures this new reality and has now become widely accepted by leading economists as a long-term pro-

ductivity shift of major significance.³ What is less widely appreciated is that much of this progress is derived from the significant and sustained increases in semiconductor productivity, predicted over 30 years ago by Gordon Moore and known as Moore’s Law.⁴

In approaching a phenomenon as complex as the New Economy, it is important to understand—and sort out—diverse elements of technological innovation, structural change, and the impact of public policy as well as issues of measurement.

• Technological innovation—more accurately, the rapid rate of technological innovation in information technology (including semiconductors, computers, software, and telecommunications) and the rapid growth of the Internet—are seen as the sources of the productivity gains that characterize the New Economy. These productivity gains derive first from the exponential growth in semiconductor performance at ever lower cost.⁵ In addition, the use of information technologies in the production of computers has greatly increased the productivity of this industry while having substantial positive effects (albeit with a lag) on the productivity of other important sectors of the economy such as banking, retail, and transportation.⁶ Many therefore believe that the productivity gains of the New Economy are closely linked to this unprecedented rate of technological innovation.⁷

• 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.⁸ These structural changes are still emerging as the use and applications of the Internet continue to evolve.

• Public policy plays a major role at several levels. This includes the government’s role in fostering rules of interaction within the Internet⁹ and its discretion in setting and enforcing the rules by which technology firms, among others, compete.¹⁰ 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.¹¹ It supports national research capacities, providing incentives (or disincentives) to promote education and training in key disciplines, and funds most of the nation’s basic research.¹² The government also plays a major role in stimulating innovation. It does this most broadly through the patent system.¹³ In addition, government procurement and innovation awards have

played key roles in the development of new technologies to fulfill national missions in defense, agriculture, health, and the environment.¹⁴

This report seeks to explore the economics underpinning Moore’s Law, to identify current R&D challenges and analyze new trends in the semiconductor industry, to discuss how cyclical swings in the industry might be better understood, and to discuss the policy responses available to sustain the benefits of the New Economy.

Since 1991 the National Research Council’s Board on Science, Technology, and Economic Policy (STEP) has undertaken a program of activities to improve policy makers’ 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 derives directly from its mandate.¹⁵ The STEP Board’s activities have corresponded with an increased recognition by policy makers of the importance of technology to economic growth.¹⁶

This mandate is reflected in an earlier STEP study, titled U.S. Industry in 2000, which assesses the determinants of competitive performance in a wide range of manufacturing and service industries, including those relating to information technology.¹⁷ The Board also undertook a major study, chaired by Gordon Moore, Chairman Emeritus of Intel, on how government-industry partnerships support the growth of new technologies.¹⁸ Reflecting a growing recognition of the impact of new information technologies on the surge in productivity since 1995, the Board launched this assessment of the New Economy phenomenon, designed to explore the sources of growth, measurement challenges, and the policy frame-

work required to sustain the New Economy. The first exploratory volume was published in 2002.¹⁹ Subsequent workshops and ensuing reports in this series include Deconstructing the Computer and Productivity and Cyclicality in Semiconductors: Trends, Implications, and Questions—the present report. Future reports in the series will address the software sector, as well as the policies required to sustain the New Economy.

The Committee on Measuring and Sustaining the New Economy convened this symposium to explore how the growth and increased productivity in the semiconductor industry are linked to the economic gains and productivity growth associated with the New Economy. Understanding these trends is important to understanding how to better measure this growth and how to develop the appropriate policy mix to support it. The symposium, convened at Harvard University on September 24, 2001, 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. Three papers complete the volume. The first, “Information Technology and the U.S. Economy,” by Dale W. Jorgenson, provides economic underpinning for the symposium discussion and served as the basis for his presentation. The second, “International Technology Roadmaps: The U.S. Semiconductor Experience” by William J. Spencer and T. E. Seidel of SEMATECH, also provided information for the symposium proceedings and was available to participants. The third paper, “Moore’s Law and the Economics of Semiconductor Price Trends,” by Kenneth Flamm of the University of Texas at Austin, was also distributed at the symposium and was the basis of his presentation. 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. The lessons from this symposium and others in this series will contribute to the Committee’s final consensus report on measuring and sustaining the New Economy.

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, the National Science Foundation, and Sandia National Laboratories.

Several members of the STEP staff and consultants to STEP deserve recognition for their contributions to the preparation of this report. We are indebted to Alan Anderson for his preparation of the meeting summary. We wish to thank Sujai Shivakumar 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, in preparing this report for publication.

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 and evidence. 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: Ana Aizcorbe, Federal Reserve Bank; Ellen Dulberger, IBM; David Hodges, University of California at Berkeley; Larry Sumney, Semiconductor Research Corporation; and Larry Thompson, Ultratech Stepper, Inc.

Although the reviewers listed above have provided many constructive comments and suggestions, they were not asked to endorse the content of the report, nor did they see the final draft before its release. The review of this report was overseen by R. Stephen Berry, University of Chicago, and Gerald P. Dinneen. Appointed by the National Research Council, they were 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.

This report is one step in a major research effort by the Board on Science, Technology, and Economic Policy to advance our understanding of the factors shaping the New Economy in order to better understand it and thereby improve our ability to maintain and develop the policies best suited to sustaining the greater productivity and prosperity that it promises.

Dale W. Jorgenson

Charles W. Wessner