Enhancing Productivity Growth in the Information Age Measuring and Sustaining the New Economy (2007) / Chapter Skim
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III SUMMARY OF THE NRC CONFERENCES ON THE NEW ECONOMY, The NRC Conferences on the New Economy
III SUMMARY OF THE NRC CONFERENCES ON THE NEW ECONOMY, The NRC Conferences on the New Economy
Pages 61-130
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From page 63... ...
To this end, the National Academies' Board on Science, Technology, and Economic Policy (STEP) has since 2000 held a series of workshops to better understand the New Economy phenomenon and to develop policies needed to sustain the positive contribution of modern information and communications technologies to U.S.
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Stiroh, "Raising the Speed Limit: U.S. Economic Growth in the Information Age," in National Research Council, Measuring and sustaining the new economy, op.
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8For a historical overview of Moore's Law, see Kenneth Flamm, "Moore's Law and the Economics of Semiconductor Price Trends," in National Research Council, productiity and Cyclicality in semiconductors: trends, Implications, and Questions, Dale Jorgenson and Charles Wessner, eds., Washington, D.C.: The National Academies Press, 2004. 9See Gordon E
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Moore, "The Continuing Silicon Technology Evolution Inside the PC Platform," Intel Deeloper Update, Issue 2, October 15, 1997, where he notes that he "first observed the `doubling of transistor density on a manufactured die every year' in 1965, just four years after the first planar integrated circuit was discovered. The press called it "Moore's Law," and the name stuck.
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The Moore's Law phenomenon also appears to extend from microprocessors and memory chips to high-technology hardware such as computers and communications equipment. BEA figures highlighted by Dale Jorgenson reveal also that computer prices have declined at about 15 percent per year since 1977.
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NOTE: All price indexes are divided by the output price index. procfig3 While Moore's Law appears to predict ever "faster, better, cheaper" semiconductors and computers, it is not a deterministic law of nature, enduring instead by setting the expectations among participants in the semiconductor and computer industry of the pace of innovation and the introduction of new products to market.
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NOTE: All price indexes are divided by the output price index. procfig4 The Challenge of Measurement As several participants at the initial conference noted, conventional statistical methods are not adequately adapted to capture what is happening in the economy.
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15Kenneth Flamm, "Microprocessors and Computers: The Phenomenon of Price Declines," in National Research Council, Measuring and sustaining the new economy, op.
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Sloan Foundation noted in the roundtable discussion that concluded the initial conference, the ability to absorb rapid advances in technology and the cost of re-doing the business organization to take advantage of these advances are, in many cases, more significant for sustaining productivity-led growth than the rate of technological adance. In essence, the question is not merely one of better or cheaper technology, but rather one of how enterprises can integrate productivity-enhancing technologies into the way business is conducted.
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Rapid increases in the power of semiconductors, foreseen by Moore's Law, and corresponding rapid declines in the price of semiconductor-based information technologies have lead to their swift diffusion across the economy and propelled their adoption across an array of applications.19 Drawing on his 2001 presidential address to the American Economics Association, Dale Jorgenson reminded the conference participants that the resurgence in the U.S. economic growth trajectory since 1995 is associated with a "relentless" fall in semiconductor prices and coincident with a shift in product cycle for semiconductors from 3 to 2 years.20 Jorgenson drew attention to a series of documented events -- summarized in Box B -- between an intensifying pace of competition in the market for semiconductor products and the boost in the aggregate growth rate of the U.S.
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In the semiconductor industry, however, these economies are not generated so much by greater labor productivity as by incremental changes to the automated technology. As Kenneth Flamm noted, improvements over the lifetime of a product's production come from more efficient die shrinks, which increase the chip density of a silicon wafer, and from yield learning, where the number of good chips on a wafer 21See the presentation by Dale W
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While, as noted above, the learning economies related to more efficient die shrinks and yield learning help cut costs, the hidden added capacity that results can also contribute to a chip 23 Kenneth Flamm, "Economic Growth and Semiconductor Productivity," in National Research Council, productiity and Cyclicality in semiconductors: trends, Implications, and Questions, op.
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A Possible Model of the Semiconductor Industry Models of the semiconductor industry that reflect its characteristic cyclicality can be a useful tool to predict semiconductor price behavior. In his conference presentation, Ariel Pakes of Harvard University described a modeling strategy that he has developed that he said can capture key features of complex and dynamic industries.27 This model is based on "primitives" that determine each firm's profits conditional on the qualities of the products marketed, the costs of production, and the prices charged by all firms.
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To this end, conference participants considered how the Moore's Law phenomenon of rapidly expanding capabilities applies to the various computer component industries.29 Although Gordon Moore's initial prediction pertained to changes in the semiconductor capacity, Moore's Law today more popularly captures the phenomenon of "faster" as well as "cheaper" development across a variety of computer components.30 The conference brought together industrialists from leading computer hardware firms to explain how Moore's Law applied to their products and described the types of internal measures that industry had developed to track this change. · Microprocessors: William Seigle of AMD, a microprocessor manufacturer, compared the Am386, introduced by his company in 1991, with the Opteron, introduced in April 2003.
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noted the apparent observance of Gilder's Law, which states that the total bandwidth of communication systems triples every 12 months.33 Further, he noted that storage devices achieve 100 percent growth in density annually, a reality that translates into better cost at a dramatic rate.34 · Graphics: Chris Malachowsky of NVIDIA documented product performance improvements in graphics from the second half of 1997 to the first half of 2003 at an annualized rate of 215 to 229 percent. Rapid technological advances in graphics technology, he noted, rendered moviemaking chores, previously requiring farms of thousands of machines, to be possible using consumer PCs, dramatically lowering prices.35 Developing Hedonic Price Indexes Several participants at the conference on computers emphasized the need to develop appropriate categories and performance measures to capture the growth of these dynamic and complex industries.
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Developed 40 years ago by Zvi Griliches and enhanced since, this econometric method takes into account an array of characteristics possessed by a product and their functional relation to price.37 Many economists regard hedonic price indexes to be a theoretically promising way of adjusting for quality when measuring the price of computing power through time, while recognizing the need for further development.38 Methodological Challenges and Opportunities for Hedonic Pricing In practice, however, the continued dynamism and complexity of the relevant industries will make the task of developing robust measures of computer performance highly challenging. Rapid supply-driven evolution of products and concepts, as well as changing consumer behavior, keeps the industry in flux, rendering the economist's task more difficult.
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Another challenge to developing robust hedonic price indexes arises when-as David McQueeney of IBM put it -- "faster, better, cheaper," collides with the "good enough phenomenon."43 He noted, for example, that many current models of displays and home computers have crossed the "good enough" threshold for most of today's home computing needs -- the point also raised by Dr. Taub, above.
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45Ibid. This point was further developed in the NRC conference on the telecommunications Challenge: Changing technologies and eoling policies, which is a part of the New Economy series.
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National accountants have to determine, for example, whether Oracle 10i, which is sold in a product-like fashion with a license, is to be categorized as custom or prepackaged software. 49David Wasshausen, "A BEA Perspective: Private Fixed Software Investment," in National Research Council, software, Growth, and the Future of the U.s.
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As Anthony Scott of General Motors pointed out, the process by which corporations build software is "somewhat analogous to the Winchester Mystery House," where accretions to the stack over time create a complex maze that is difficult to fix or change.55 50A weakness of the official price estimates for custom and own-account software is that they are not well adjusted for quality change. The Bureau of Economic Analysis has contracted with a private firm to produce improved price indexes for custom software using hedonic methods and a number of functional characteristics as explanatory variables.
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This is important because over the past 5 years, investment in software has been about 1.8 times as large as private fixed investment in computers' peripheral equipment and was about one-fifth of all private fixed investment in equipment and software.57 Getting a good measure of this asset, however, is difficult because of the unique characteristics of software development and marketing, as well as the conventions by which it is reported. According to Shelly Luisi of the Securities and Exchange Commission (SEC)
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Gauging Private Fixed Software Investment Although the computer entered into commercial use some four decades earlier, the Bureau of Economic Analysis has recognized software as a capital investment (rather than as an intermediate expense) only since 1999.
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noted at the same conference that methods for estimating software investment have been inconsistent across the countries of the OECD.65 One problem contributing to the variation in measures of software investment is that the computer services industry represents a heterogeneous range of activities, including not only software production, but also such things as consulting services. National accountants have had differing methodological approaches (for example, on criteria determining what should be capitalized)
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Wasshausen noted that accurate software measurement continued to pose severe challenges for national accountants simply because software is such a rapidly changing field. He noted, in this regard, the rise of demand computing, open-source code development and overseas outsourcing, which create new concepts, categories, and measurement challenges.67 Characterizing attempts made so far to deal with the issue of measuring the New Economy as "piecemeal" -- "we are trying to get the best price index for software, the best price index for hardware, the best price index for LAN equipment routers, switches, and hubs" -- he suggested that a single comprehensive measure might better capture the value of hardware, software, and communications equipment in the national accounts.
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Stiroh, "Raising the Speed Limit: U.S. Productivity Growth in the Information Age," Brookings Papers on Economic Activity, Washington, D.C.: The Brookings Institution, 2000.
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Price Indexes for Operating Systems and Productivity Suite PC Software," draft working paper, 2004. communications Challenge an overview of what the current official numbers say, and the challenges of coming up with good price indexes for communications equipment and services.
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Whereas money spent on telecommunications was relatively easier to track 25 years ago when most purchases were of telephone switches, today's telecommunications equipment includes a wide array of technologies related to data, computer networking, and fiber optics. Current methodologies for making inter-temporal comparisons in price and quality understate true price declines because they do not fully track these technological changes.
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" Federal Reserve Bank of San Fransisco Working Paper 2003-15, 2003. 75Kenneth Flamm, "Moore's Law and the Economics of Semiconductor Price Trends," in National Research Council, productiity and Cyclicality in semiconductors: trends, Implications, and Questions, op.
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78Robert Doering, "Physical Limits of Silicon CMOS and Semiconductor Roadmap Predictions," in National Research Council, productiity and Cyclicality in semiconductors: trends, Implications, and Questions, op.
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81Randall Isaac, "Semiconductor Productivity and Computers," in National Research Council, productiity and Cyclicality in semiconductors: trends, Implications, and Questions, op.
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seems to have recently flattened out, he said that this trend remains a source of concern.84 · Funding for Research: Bob Doering and George Scalise, along with Clark McFadden of Dewey Ballantine LLP, noted that declines in federal R&D funding makes it harder for the semiconductor industry to overcome loom 82 George Scalise, "The Industry Perspective on Semiconductors," in National Research Council, productiity and Cyclicality in semiconductors: trends, Implications, and Questions, op.
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Cooperative ventures in Semiconductor Research According to George Scalise and Kenneth Flamm, these developments highlight the importance of sustaining a variety of cooperative efforts to strengthen the 85National Research Council, productiity and Cyclicality in semiconductors: trends, Implications, and Questions, op.
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Expanding the Use of Technology Roadmaps Technology roadmaps are another important mechanism for sustaining Moore's Law. Providing a graphical portrayal of the structural relationships among science, technology, and applications over a period, a technology roadmap is a tool for firms in an industry to identify potential technical showstoppers and cooperate 89See, in particular, remarks by George Scalise, Bob Doering, Kenneth Flamm, and Dale Jorgenson in National Research Council, productiity and Cyclicality in semiconductors: trends, Implications, and Questions, op.
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At the conference on Productivity and Cyclicality in Semiconductors, Kenneth Flamm noted that although the international semiconductor roadmap is often described as a descriptive or predictive process, its role is to coordinate a complex technology with different pieces and multiple suppliers.91 "What you really have is people identifying potential showstoppers and trying to mobilize people at choke points." Clark McFadden added that the roadmap is not a "solution" to technological problems but rather a description of various options, challenges, and gaps in charting the future course of a technology. The role of the roadmap, he said, is to communicate information about these options, challenges, and gaps to the industry in a way that suppliers, manufacturers, and customers can appreciate and use.
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TheworkingformatimprovisedinTexas -- "aprettyrushedjobcomparedtohow wedoitnow,"asDr.Doering,anoriginalparticipant,putit -- servedasatemplate forthesubsequent1994and1997roadmapsupdates.bWiththeinternationaliza tionofSEMATECH,theInternationalTechnologyRoadmapforSemiconductors (ITRS) wasformedin1998,withascheduleofreportswithalternatingsemi-annual updatesandsemi-annualfullrevisions.UndertheleadershipoftheSemiconductor ResearchCorporation(SRC)
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Display Consortium94 -- Dale Jorgenson cautioned that successful models, such as the semiconductor industry roadmap, must be adapted to the operational exigencies of the computer component industry in question. Software and the New Economy The next conference in the New Economy series examined the importance of software in the New Economy and the vulnerability of the U.S.
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NIST found that over half of these costs are borne by software users in the form of error avoidance and mitigation activities. The remaining costs are borne by software developers and reflect the additional testing resources that are consumed due to inadequate testing tools.
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cit. 101Figure 8 is based on analysis by Symantec Security Response using data from Symantec, IDC, and ICSA.
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SOURCE: Analysis by Symantec Security Response using data from Symantec, IDC, and ICSA. Procfig8 alone was $38.5 billion.102 He added that the e-Commerce times had estimated the global impact of worms and viruses in 2003 to be over one trillion dollars.
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Varian, lies in ensuring the existence of incentives that sufficiently motivate individuals to develop robust basic software components through open-source coordination, while ensuring that, once they are built, they will be widely available at low cost so that future development is stimulated. The Software Labor Market and the Offshoring Impetus Another major and topical issue concerning software and the New Economy concerns the increasingly globalized labor market for software production.
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This division of labor in software production, she said, reflects a larger qualitative difference among software developers, where the very best software developers are orders of magnitude -- up to 20 to 100 times -- better than the average software developer. This means that a surprisingly small number of people do a disproportionate amount of the field's creative work.105 Dr.
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While Dr. Rosing highlighted that the search for talent leads firms like Google to look abroad, Jack Harding of eSilicon noted that manufacturing complexity and business efficiency are often the main drivers of offshore outsourcing.108 Speaking at the conference on software, Mr.
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, he noted, nonetheless, that the effects of these shifts were palpable from the viewpoint of U.S. computer hardware engineers and electrical and electronics engineers whose ranks had faced record levels of unemployment in 2003.
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these prices and make tailoring of business-specific packages affordable, which will promote further diffusion of IT use and transformation throughout the US economy."110 Cheaper information technologies will lead to wider diffusion of information technologies, she has noted, sustaining productivity enhancement and economic growth.111 Dr. Mann has acknowledged that some jobs will go abroad as production of software and services moves offshore, but nonetheless holds that broader diffusion of information technologies throughout the economy will lead to an even greater demand for workers with information technology skills.112 110Catherine Mann, "Globalization of IT Services and White Collar Jobs: The Next Wave of Productivity Growth," International economics policy Briefs, PB03-11, December 2003.
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Bonvillian noted that nations can follow a similar path up the value chain.115 Low-end entry and capability, made possible by outsourcing these functions abroad, he noted, can fuel the desire and capacity of other nations to move to higher-end markets. Acknowledging that the current lack of data makes it impossible to track activity of many companies engaging in offshore outsourcing with any precision, Mr.
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117National Research Council, securing the Future: Regional and national programs to support the semiconductor Industry, op.
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Communications Technology: A vision of the Future Moore's Law, which in its modern interpretation anticipates the doubling of the number of transistors on a chip every 18 months, has spurred the modern revolution in digital technologies for over 40 years.122 It is likely to continue for 120See comments by Dale Jorgenson in National Research Council, the telecommunications Challenge: Changing technologies and eoling policies, Charles W Wessner, ed., Washington, D.C.: The National Academies Press, 2006.
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123 See, for example, Robert Doering, "Physical Limits of Silicon CMOS Semiconductor Roadmap Predictions," in National Research Council, productiity and Cyclicality in semiconductors: trends, Implications, and Questions, op.
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But equally powerfully, he contended, are opportunities that come from using software to provide a variety of services for the consumer. For example, by marrying it with the computer, phones could be programmed to control who can call through and when.128 · Grid Computing: Grid computing, which allows users to share data, software, and computing power over fiber optic networks is expected to be another major development in information and communications technology.
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With the advent of such a grid, both small and large companies would be able to buy the computing power they need and get the software they need over this grid of network systems as needed on a pay-as-you-go basis. In IBM's view, a part of the larger vision of Grid computing includes autonomic computing, where integrated computer systems are not only self-protecting, self-optimizing, self-configuring, and self-healing, but also come close to being self-managing.
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Broadband regulation, in particular, was identified by several conference participants as a bottleneck to realizing the benefits of new information and communications technologies in the new "wired" and "wireless" economy. Sustaining the New Economy: The Broadband Challenge Broadband, which refers in general to high-speed Internet connectivity, already supports a wide range of applications ranging from email and instant messaging to basic Web browsing and small file transfer, according to Mark Wegleitner of Verizon.129 In the near future, he said, improved broadband networks can lead to true two-way videoconferencing and gaming as well as VoIP.
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the Information Superhighway is capable of handling very high capacity in its fiber optic network, and while most desktops and laptops could function at between 1 and 3 gigabits per second, the problem was that there was often less than 1 megabit of connectivity between the two. This weak link -- the broadband gap -- was illustrated schematically by Thompson at the conference.
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tHe nRC ConFeRenCes on tHe neW eConoMY 5 Current Copper wire based cable modem and DSL "broadband" technologies choke information transfer Info Superhighway Desktop/Laptop ~1-3 Mbps Asymmetrical 1-5 Gbps Cable Modem/ 1-3 Gbps Symmetrical DSL in last mile Symmetrical Internal transfer speed desktop/laptop computer IXC and Metropolitan Fiber with today's hard drive network transmission speed per optical wavelength Access remains the weak link FIGURE 10 The broadband gap: Why aren't current services good enough? SOURCE: Paul Green, FTTH Council consultant.
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Implications of the Broadband Gap If broadband can serve as an engine for the nation's future growth and competitiveness, as emphasized by several participants at the conference, a lack of an adequate access to the broadband network may lead to a loss of this economic opportunity.132 Assessing the impact of the broadband gap, Charles Ferguson noted that the "local bandwidth bottleneck" is having a substantial negative effect on the growth of the computer industry and of various other portions of the information technology hardware and software sectors. While conceding that computing an estimate of this impact in a rigorous way would be extremely difficult, he nevertheless asserted that "you can convince yourself easily that this effect is something on the order of one-half of one percent -- or even up to one percent-per year in lost productivity growth and GNP [Gross National Product]
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The same was true of the cable system: It provided video services that could easily be provided over a sufficiently high-performance Internet Protocol network. · Consequences of Unbundling Network Elements: In the discussion following the second panel, Kenneth Flamm noted that more than one speaker had spoken of a tendency to dismantle some of the opening up of the local loop that had been the centerpiece of the 1996 Telecommunications Reform Act.
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Even so, one of the authors of the Telecommunications Act of 1996, Charles Thompson, conceded that the concept of unbundled network elements, introduced in that legislation was moribund -- that he "would be the first to put flowers on the grave of unbundled network elements." · Outdated Standards and Regulatory Uncertainty: Outdated standards and a regulatory uncertainty may be retarding progress in addressing the broadband gap, according to some conference presenters. On the issue of standards, Peter Tenhula of the Federal Communications Commission (FCC)
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Lisa Hook, recently of AOL-Broadband, noted in this respect that firms in the broadband industry were struggling at the service layer to find business models and revenue streams based on new technologies that would justify the investment needed to make nearly unlimited bandwidth widely available. some alternatie solutions to Close the Broadband Gap According to IBM's Nelson, the Internet revolution is less than 8 percent complete, with many new applications still to be enabled by future technologies like the Grid.
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The situation was similar in Japan and Korea, adding that government encouragement in Canada and the Scandinavian countries had also enabled those countries to surge ahead of the United States in high-bandwidth broadband penetration.135 For the United States, Ferguson recommended a variety of policy measures to bridge the broadband gap. Initiatives could include subsidizing the deployment of municipal networks and offering investment incentives to public and private providers.
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Wireless broadband access can be a third tier that competes with cable and DSL, according to David Lippke of HighSpeed America.138 In this way, wireless broadband can help overcome the limitations associated with traditional wired They argue that net neutrality protection is critical for the Internet to continue to meet its innovative promise. Others argue that recouping all new network construction costs from consumers alone could drive up prices or discourage investment, exacerbating the broadband gap.
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The prospect of reaching gigabit speeds was now being mentioned, and other quality-of-service issues as well as lower costs of installation are being addressed. To the extent that these predictions are realized, the WiMAX protocol may well offer an effective wireless solution to the broadband gap, especially for smaller towns and communities across the United States.
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At present, the physical network can only support movies and other applications at low bit volumes and is often not cost-effective -- although this can be expected to change as technology improves and the broadband gap is overcome. The significance of the Internet Protocol, he said, is that it makes all networks look the same and allows interoperability.
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Intellectual Property in the Era of Digital Distribution In addition to disruption in the business models of firms that deliver a digital signal is the disruption to business models of firms that provide the content. Indeed, the music and entertainment industries are among those that are also undergoing a fundamental shift in the digital age.
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Acknowledging that piracy will continue to be a problem, he added that the challenge for the future of broadband is to achieve a relatively low level of piracy and a very high level of legitimate products. Addressing this challenge requires: · developing legitimate markets for copyrighted materials over broadband, · providing greater security for delivering content to an end-user including measures to ensure that the income-generating potential of material going into the pipe did not vanish forever, · creating a usable legal framework to protect the technological measures used to control access to copyrighted material in the network environment, · focusing enforcement of piracy problems on organized criminal groups as well as dedicated amateurs who play a role in making the system insecure, and · improving public education to make consumers aware that certain types of file sharing are illegal and of the need to secure permission to avoid copyright infringements.
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Jorgenson noted that the New Economy had witnessed a huge shift from a vertical model to a horizontal model in the computer, semiconductor, and communications industries. In this new model, he said, most of the interesting innovations were disruptive.
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NOTES: Productivity series are normalized to equal 1.0 at the beginning of each recession. The 1973-2000 line represents average productivity growth over the four recessions dur fig12 ing that period; the 1947-2000 line represents average productivity growth over the nine recessions during that period.
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From page 128... ...
That conference brought to light that the industries that manufacture computers and computer components are also driven by a Moore's Law phenomenon and that they have developed internal metrics to gauge rapid technological developments. The fourth conference of the series examined developments in software measurement, the vulnerabilities affecting the nations' complex software infrastructure, as well as implications of the offshoring of software production abroad.
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tHe nRC ConFeRenCes on tHe neW eConoMY 29 the most detailed and comprehensive picture available to date of what is known as the New Economy. This undertaking provides the basis for further research on the dimensions of the New Economy and policies that can enhance the benefits of the New Economy.
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