The continued strength and vitality of the U.S. economy continue to astonish economic forecasters.1 A consensus is now emerging that something fundamental has changed, with "new economy" proponents pointing to information technology (IT) as the causal factor behind the strong performance. In this view, technology is profoundly altering the nature of business, leading to permanently higher productivity growth throughout the economy. Skeptics remain, however, arguing that the recent success reflects a series of favorable, but temporary, shocks. This argument is buttressed by the view that the U.S. economy [End Page 125] behaves rather differently than envisioned by the "new economy" advocates.2
Productivity growth, capital accumulation, and the impact of technology were topics once reserved for academic debates, but the recent success of the U.S. economy has moved them into popular discussion. This paper employs well-tested and familiar methods to analyze important new information made available by the recent benchmark revision of the U.S. national income and product accounts (NIPAs). We document the case for raising the speed limit: for an upward revision of intermediate-term projections of future growth to reflect the latest data and trends.
The late 1990s were exceptional in comparison with the growth experience of the U.S. economy over the past quarter century as a whole. Although growth rates have not yet returned to those of the golden age of the U.S. economy in the 1960s, the data nonetheless clearly reveal a remarkable transformation. Rapid declines in the prices of computers and semiconductors are well known and carefully documented, and evidence is accumulating that similar declines are taking place in the prices of software and communications equipment. Unfortunately, the empirical record is seriously incomplete, and therefore much remains to be done before definitive quantitative assessments can be made about the complete role of these high-technology assets.
Despite the limitations of the available data, the mechanisms underlying the structural transformation of the U.S. economy are readily apparent. As an illustration, consider the increasing role that computer hardware plays as a source of economic growth.3 For the period 1959-73, computer inputs contributed less than 0.1 percentage point to annual U.S. economic growth. Since 1973, however, the price of computers has fallen at a historically unprecedented rate, and firms and households, following a basic principle of economics, have substituted toward these relatively cheaper [End Page 126] inputs. Since 1995 the price decline for computers has accelerated, reaching nearly 28 percent per year from 1995 to 1998. In response, investment in computers has exploded, and the growth contribution of computer hardware has increased more than fivefold, to 0.46 percentage point per year in the late 1990s.4 Software and communications equipment, two other types of IT assets, contributed an additional 0.30 percentage point per year for 1995-98. Preliminary estimates through 1999 reveal further increases in these contributions for all three high-technology assets.
Next, consider the acceleration of average labor productivity (ALP) growth in the 1990s. After a twenty-year slowdown dating from the early 1970s, ALP grew 2.4 percent per year during 1995-98, more than a percentage point faster than during 1990-95.5 A detailed decomposition shows that capital deepening, the direct consequence of price-induced substitution and rapid investment, added 0.49 percentage point to ALP growth. Faster total factor productivity (TFP) growth contributed an additional 0.63 percentage point, partly reflecting technical change in the production of computers and the resulting acceleration in their price decline. Meanwhile, slowing growth in labor quality retarded ALP growth by 0.12 percentage point relative to the early 1990s, as employers exhausted the pool of available workers.
TFP growth had been an anemic 0.34 percent per year for 1973-95 but accelerated to 0.99 percent for 1995-98. After more than twenty years of sluggish TFP growth, four of the five years ending in 1998 saw growth rates near 1 percent. It could be argued that this represents a new paradigm. In this view, the diffusion of IT improves business...