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Information Technology and the U.S. Economy Author(S): Dale W American Economic Association Information Technology and the U.S. Economy Author(s): Dale W. Jorgenson Source: The American Economic Review, Vol. 91, No. 1 (Mar., 2001), pp. 1-32 Published by: American Economic Association Stable URL: http://www.jstor.org/stable/2677896 Accessed: 21/01/2009 13:47 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=aea. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit organization founded in 1995 to build trusted digital archives for scholarship. We work with the scholarly community to preserve their work and the materials they rely upon, and to build a common research platform that promotes the discovery and use of these resources. For more information about JSTOR, please contact [email protected]. American Economic Association is collaborating with JSTOR to digitize, preserve and extend access to The American Economic Review. http://www.jstor.org Number 102 of a series of photographsof past presidents of the Association U InformationTechnology and the U.S. Economyt By DALE W. JORGENSON* The resurgence of the American economy producingindustries has graduallyrisen in impor- since 1995 has outrunall but the most optimistic tance and a productivityrevival is now underway expectations. Economic forecasting models in the rest of the economy. Despite differencesin have been seriously off track and growth pro- methodology and data sources, a consensus is jections have been revised to reflect a more buildingthat the remarkablebehavior of IT prices sanguine outlook only recently.! It is not sur- providesthe key to the surgein economicgrowth. prising that the unusual combination of more In the following section I show that the foun- rapid growth and slower inflation in the 1990's dation for the American growth resurgence is has touched off a strenuousdebate among econ- the development and deployment of semicon- omists about whether improvementsin Ameri- ductors. The decline in IT prices is rooted in ca's economic performancecan be sustained. developmentsin semiconductortechnology that The startingpoint for the economic debate is are widely understood by technologists and the thesis that the 1990's are a mirrorimage of economists. This technology has found its the 1970's, when an unfavorableseries of "sup- broadestapplications in computingand commu- ply shocks" led to stagflation-slower growth nications equipment,but has reducedthe cost of and higher inflation.2In this view, the develop- a wide variety of other products. ment of informationtechnology (IT) is one of a A substantialacceleration in the IT price de- series of positive, but temporary, shocks. The cline occurred in 1995, triggered by a much competing perspectiveis that IT has produceda sharper acceleration in the price decline of fundamentalchange in the U.S. economy, lead- semiconductorsin 1994. Although the decline ing to a permanent improvement in growth in semiconductorprices has been projected to prospects. continue for at least anotherdecade, the recent The relentlessdecline in the prices of informa- acceleration could be temporary.This can be tion technologyequipment has steadilyenhanced traced to a shift in the product cycle for semi- the role of IT investmentas a sourceof American conductors from three years to two years that economic growth. Productivity growth in IT- took place in 1995 as the consequence of inten- sifying competitionin marketsfor semiconduc- tor products. t PresidentialAddress delivered at the one-hundredthir- In Section II I outline a frameworkfor ana- teenth meeting of the American Economic Association, lyzing the role of informationtechnology in the January6, 2001, New Orleans, LA. * Department of Economics, Harvard University, 122 American growth resurgence. Constant quality Littauer Center, Cambridge,MA 02138. I am indebted to price indexes separatethe change in the perfor- the Programon Technology and Economic Policy at Har- mance of IT equipmentfrom the change in price vard University which provided financial support.I am also for a given level of performance.Accurate and indebted to Kevin J. Stiroh for our joint research and his timely computer prices have been part of the helpful comments, Jon Samuels for excellent research as- sistance, Mun S. Ho for the labor data, as well as useful U.S. National Income and Product Accounts comments. J. Steven Landefeld, Clinton McCully, and (NIPA) since 1985. Unfortunately, important David Wasshausen of the Bureau of Economic Analysis informationgaps remain,especially on trendsin provided valuable data on information technology. Col- prices for closely related investments, such as leagues far too numerousto mention have contributeduse- ful suggestions and advice. I am grateful to all of them but software and communicationsequipment. retain sole responsibility for any remaining deficiencies. The cost of capital is an essential concept for 1 See Congressional Budget Office (2000) on official capturingthe economic impact of information forecasts and Economics and Statistics Administration technology prices. Swiftly falling prices provide (2000 p. 60) on private forecasts. powerfuleconomic incentivesfor the substitution 2 RobertJ. Gordon(1998, 2000); BarryP. Bosworth and Jack E. Triplett (2000). of IT equipmentfor otherforms of capitaland for 3 Alan GreensDan(2000). laborservices. The rateof the IT pricedecline is a 1 2 THEAMERICAN ECONOMIC REVIEW MARCH2001 key componentof the cost of capital,required for to the massive impact of IT on firms and prod- assessing the impacts of rapidly growing stocks uct markets.Highest prioritymust be given to a of computers,communications equipment, and better understandingof the markets for semi- software. conductors. Although several models of the In Section III I analyze the impactof the 1995 market for semiconductorsalready exist, none accelerationin the informationtechnology price explains the shift from a three-year to a two- decline on U.S. economic growth. I introducea year product cycle. productionpossibility frontierthat encompasses The dramaticeffects of informationtechnol- substitutions between outputs of consumption ogy on capital and labor markets have already and investment goods, as well as inputs of cap- generated a substantialand growing economic ital and labor services. This frontier treats IT literature,but many importantissues remain to equipment as part of investment goods output be resolved. For capital marketsthe relationship and the capital services from this equipmentas between equity valuationsand growth prospects a component of capital input. merits much further study. For labor markets Capital input has been the most important more researchis needed on investment in infor- source of U.S. economic growth throughoutthe mation technology and substitutionamong dif- postwar period. More rapid substitutiontoward ferent types of labor. information technology has given much addi- tional weight to components of capital input I. The Information Age with higher marginal products. The vaulting contribution of capital input since 1995 has The development and deployment of infor- boosted growth by nearly a full percentage mation technology is the foundation of the point. The contributionof IT accountsfor more American growth resurgence. A mantra of the than half of this increase. Computershave been "new economy"-faster, better, cheaper-cap- the predominantimpetus to faster growth, but tures the speed of technological change and communicationsequipment and software have product improvement in semiconductors and made importantcontributions as well. the precipitous and continuing fall in semicon- The acceleratedinformation technology price ductor prices. The price decline has been trans- decline signals faster productivity growth in mitted to the prices of productsthat rely heavily IT-producingindustries. In fact, these industries on semiconductor technology, like computers have been the source of most of aggregatepro- and telecommunicationsequipment. This tech- ductivity growth throughoutthe 1990's. Before nology has also helped to reduce the cost of 1995 this was due to the decline of productiv- aircraft,automobiles, scientific instruments,and ity growth elsewhere in the economy. The IT- a host of other products. producing industrieshave accounted for about Modem informationtechnology begins with half the surge in productivitygrowth since 1995, the invention of the transistor,a semiconductor but fastergrowth is not limitedto these industries. device that acts as an electrical switch and en- I conclude that the decline in IT prices will codes informationin binaryform. A binarydigit continue for some time. This will provide in- or bit takes the values zero and one, correspond- centives for the ongoing substitutionof IT for ing to the off and on positions of a switch. The other productive inputs. Falling IT prices also first transistor,made of the
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