MEASURING AND SUSTAINING THE NEW ECONOMY
SOFTWARE, GROWTH, AND THE FUTURE OF THE U.S. ECONOMY
Report of a Symposium
DALE W. JORGENSON AND CHARLES W. WESSNER, EDITORS
THE NATIONAL ACADEMIES PRESS
Washington, D.C.
www.nap.edu
THE NATIONAL ACADEMIES PRESS
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NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the committee responsible for the report were chosen for their special competences and with regard for appropriate balance.
This study was supported by: Contract/Grant No. CMRC-50SBNB9C1080 between the National Academy of Sciences and the U.S. Department of Commerce; Contract/Grant No. NASW-99037, Task Order 103, between the National Academy of Sciences and the National Aeronautics and Space Administration; Contract/Grant No. CMRC-SB134105C0038 between the National Academy of Sciences and the U.S. Department of Commerce; OFED-13416 between the National Academy of Sciences and Sandia National Laboratories; Contract/Grant No. N00014-00-G-0230, DO #23, between the National Academy of Sciences and the Department of the Navy; Contract/Grant No. NSF-EIA-0119063 between the National Academy of Sciences and the National Science Foundation; and Contract/Grant No. DOE-DE-FG02-01ER30315 between the National Academy of Sciences and the U.S. Department of Energy. Additional support was provided by Intel Corporation. Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the views of the organizations or agencies that provided support for the project.
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THE NATIONAL ACADEMIES
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Committee on Software, Growth, and the Future of the U.S. Economy*
Dale W. Jorgenson, Chair Samuel W. Morris University Professor
Harvard University
Kenneth Flamm Dean Rusk Chair in International Affairs
LBJ School of Public Affairs
University of Texas at Austin
Jack Harding Chairman, President, and CEO
eSilicon Corporation
Monica S. Lam Professor of Computer Science
Stanford University
William Raduchel
Anthony E. Scott Chief Information Technology Officer
General Motors
William J. Spencer Chairman Emeritus, retired
International SEMATECH
Hal R. Varian Class of 1944 Professor
School of Information Management and Systems
University of California at Berkeley
Committee on Measuring and Sustaining the New Economy*
Dale Jorgenson, Chair Samuel W. Morris University Professor
Harvard University
M. Kathy Behrens Managing Director of Medical Technology
Robertson Stephens Investment Management
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 Service
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, retired
International SEMATECH
David T. Morgenthaler Founding Partner
Morgenthaler Ventures
Mark B. Myers Visiting Executive Professor of Management
The Wharton School
University of Pennsylvania
Roger Noll Morris M. Doyle Centennial Professor of Economics
Stanford University
Edward E. Penhoet Chief Program Officer
Science and Higher Education
Gordon and Betty Moore Foundation
William Raduchel
Alan Wm. Wolff Managing Partner
Dewey Ballantine
Project Staff*
Charles W. Wessner Study Director
Sujai J. Shivakumar Program Officer
Ken Jacobson Consultant
McAlister T. Clabaugh Program Associate
David E. Dierksheide 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 Samuel W. Morris University Professor
Harvard University
M. Kathy Behrens Managing Director of Medical Technology
Robertson Stephens Investment Management
Bronwyn Hall Professor of Economics
University of California at Berkeley
James Heckman
Henry Schultz Distinguished Service
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, retired
International SEMATECH
David T. Morgenthaler Founding Partner
Morgenthaler
Mark B. Myers Visiting Executive Professor of Management
The Wharton School
University of Pennsylvania
Roger Noll Morris M. Doyle Centennial Professor of Economics
Stanford University
Edward E. Penhoet Chief Program Officer
Science and Higher Education
Gordon and Betty Moore Foundation
William Raduchel
Alan Wm. Wolff Managing Partner
Dewey Ballantine
STEP Staff*
Stephen A. Merrill Executive Director
Russell Moy Senior Program Officer
Craig M. Schultz Research Associate
McAlister T. Clabaugh Program Associate
Charles W. Wessner Program Director
Sujai J. Shivakumar Program Officer
David E. Dierksheide Program Associate
Contents
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Introduction |
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The Economics of Software |
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The Role of Software—What Does Software Do? |
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How Do We Make Software and Why Is It Unique? |
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How Do We Make It? |
Open-Source Software |
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Making Software Secure and Reliable |
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Software Measurement—What Do We Track Today? |
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Measuring Prices of Prepackaged Software |
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Accounting Rules: What Do They Capture and What Are the Problems? |
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A BEA Perspective: Private Fixed Software Investment |
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What Is in the OECD Accounts and How Good Is It? |
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Moving Offshore: The Software Labor Force and the U.S. Economy |
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Hiring Software Talent |
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Current Trends and Implications: An Industry View |
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Implications of Offshoring and National Policy |
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Offshoring Policy Options |
Participants’ Roundtable—Where Do We Go from Here? Policy Issues? |
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Concluding Remarks |
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The Economics of Software: Technology, Processes, and Policy Issues |
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Selected Bibliography on Measuring and Sustaining the New Economy |
Preface
Significant and sustained increases in semiconductor productivity, predicted by Moore’s Law, has ushered a revolution in communications, computing, and information management.1 This technological revolution is linked to a distinct rise in the mid 1990s of the long-term growth trajectory of the United States.2 Indeed, U.S. productivity growth has accelerated in recent years, despite a series of negative economic shocks. Analysis by Dale Jorgenson, Mun Ho, and Kevin Stiroh of the sources of this growth over the 1996 to 2003 period suggests that the production and use of information technology account for a large share of the gains. The authors go further to project that during the next decade, private-sector
productivity growth will continue at a rate of 2.6 percent per year.3 The New Economy is, thus, not a fad, but a long-term productivity shift of major significance.4
The idea of a “New Economy” brings together the technological innovations, structural changes, and public policy challenges associated with measuring and sustaining this remarkable economic phenomenon.
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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 now widely seen as underpinning the productivity gains that characterize the New Economy.5 These productivity gains derive from greater efficiencies in the production of computers from expanded use of information technologies.6 Many therefore believe that the productivity growth of the New Economy draws from the technological innovations found in information technology industries.7
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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 pur-
3 |
Dale W. Jorgenson, Mun S. Ho, and Kevin J. Stiroh, “Will the U.S. Productivity Resurgence Continue?” FRBNY Current Issues in Economics and Finance, 10(1), 2004. |
4 |
The introduction of advanced productivity-enhancing technologies obviously does not eliminate the business cycle. See Organisation for Economic Co-operation and Development, Is There a New Economy? A First Report on the OECD Growth Project, Paris: Organisation for Economic Cooperation and Development, June 2000, p. 17. See also, M.N. Baily and R.Z. Lawrence, “Do We Have an E-conomy?” NBER Working Paper 8243, April 23, 2001, at <http://www.nber.org/papers/w8243>. |
5 |
Broader academic and policy recognition of the New Economy can be seen, for example, from the “Roundtable on the New Economy and Growth in the United States” at the 2003 annual meetings of the American Economic Association, held in Washington, D.C. Roundtable participants included Martin Baily, Martin Feldstein, Robert J. Gordon, Dale Jorgenson, Joseph Stiglitz, and Lawrence Summers. Even those who were initially skeptical about the New Economy phenomenon now find that the facts support the belief that faster productivity growth has proved more durable and has spread to other areas of the economy—e.g., retail, banking. See The Economist, “The new ‘new economy,’ ” September 11, 2003. |
6 |
See, for example, Stephen Oliner and Daniel Sichel, “The Resurgence of Growth in the late 1990’s: Is Information Technology the Story?” Journal of Economic Perspectives, 14(4) Fall 2000. Oliner and Sichel estimate that improvements in the computer industry’s own productive processes account for about a quarter of the overall productivity increase. They also note that the use of information technology by all sorts of companies accounts for nearly half the rise in productivity. |
7 |
See Alan Greenspan’s remarks before the White House Conference on the New Economy, Washington D.C., April 5, 2000, <http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2000/20000405.HTM>. For a historical perspective, see the Proceedings of this volume. Ken Flamm compares the economic impact of semiconductors today with the impact of railroads in the nineteenth century. |
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chases, production processes, and inventory management.8 Offshore outsourcing of service production is another manifestation of structural changes made possible by new information and communications technologies. 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 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 provides national research capacities,12 incentives to promote education and training in critical disciplines, and funds most of the nation’s basic research.13 The government also plays a major role in stimulating innovation, most broadly through the patent system.14 Government procurement and awards
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also encourage the development of new technologies to fulfill national missions in defense, health, and the environment.15
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. This is particularly important because of the “unbounded” nature of information technology that underpins the New Economy. Information technology and software production are not commodities that the United States can potentially afford to give up overseas suppliers but, as William Raduchel noted in his workshop presentation, a part of the economy’s production function. This characteristic means that a loss of U.S. leadership in information technology and software will damage, in an ongoing way, the nation’s future ability to compete in diverse industries, not least the information technology industry. Collateral consequences of a failure to develop adequate policies to sustain national leadership in information technology is likely to extend to a wide variety of sectors from financial services and health care to telecom and automobiles, with critical implications for our nation’s security and the well-being of our citizens.
THE CONTEXT OF THIS REPORT
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 derive directly from its mandate.
This mandate has previously been reflected in STEP’s widely cited volume, 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.16 The Board also undertook a major study, chaired by Gordon Moore of Intel, on how government-industry partnerships can support growth-enhancing technologies.17 Reflecting a growing recognition of the importance of the surge in productivity since 1995, the Board launched a multifaceted assessment, exploring the sources of growth, measurement challenges, and the policy framework required to sustain the New Economy. The first exploratory volume was published in 2002.18 Subsequent workshops and ensuing reports in this series include Productivity and Cyclicality in the Semiconductor Industry and Deconstructing the Computer. The present report, Software, Growth, and the Future of the U.S. Economy, examines the role of software and its importance to U.S. productivity growth; how software is made and why it is unique; the measurement of software in national and business accounts; the implications of the movement of the U.S. software industry offshore; and related policy issues.
SYMPOSIUM AND DISCUSSIONS
Believing that increased productivity in the semiconductor, computer component, and software industries plays a key role in sustaining the New Economy, the Committee on Measuring and Sustaining the New Economy, under the auspices of the STEP Board, convened a symposium February 20, 2004, at the National Academy of Sciences, Washington, D.C. The symposium on Software, Growth, and the Future of the U.S. Economy drew together expertise from leading academics, national accountants, and innovators in the information technology sector (Appendix B lists these individuals).
The “Proceedings” chapter of this volume contains summaries of their workshop presentations and discussions. Also included in this volume is a paper by William Raduchel on “The Economics of Software,” which was presented at the symposium. 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. 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.
ACKNOWLEDGMENTS
There is considerable interest in the policy community in developing 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 Aeronautical and Space Administration, the Department of Energy, the National Institute of Standards and Technology, the National Science Foundation, and Sandia National Laboratories.
We are indebted to Ken Jacobson for his preparation of the meeting summary. Several members of the STEP staff also deserve recognition for their contributions to the preparation of this report. We wish to thank Sujai Shivakumar for his contributions to the introduction to the report. We are also indebted to McAlister Clabaugh and David Dierksheide for their role in preparing the conference and getting this report ready 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 National Academies’ 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 quality and objectivity. The review comments and draft manuscript remain confidential to protect the integrity of the process.
We wish to thank the following individuals for their review of this report: Bruce Grimm, Bureau of Economic Analysis; Shane Greenstein, Northwestern University; David Messerschmitt, University of California, Berkeley; William Scherlis, Carnegie Mellon University; and Andrew Viterbi, Viterbi Group LLC.
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 Robert White, Carnegie Mellon University. Appointed by the National Academies, 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 authors and the institution.
STRUCTURE
This report has three parts: an Introduction; a summary of the proceedings of the February 20, 2004, symposium; and a research paper by Dr. William Raduchel. Finally, a bibliography provides additional references.
This report represents an important 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, the metrics necessary to understand it better, and the policies best suited to sustaining the greater productivity and prosperity that it promises.
Dale W. Jorgenson |
Charles W. Wessner |