Remarks, Policy Roundtable Advancing Knowledge and the Knowledge Economy Carol Corrado, Federal Reserve January 11, 2005

2 A Broader Perspective on Capacity: Knowledge Capital (Intangibles) Do conventional measures fully capture capital investments and capacity? In 1999, BEA started capitalizing software in the NIPAs. What about other intangibles? Corrado, Hulten, and Sichel (2004) quantified a broad list of intangibles as business capital spending (this paper is available in the Federal Reserve working paper series).

3 Types of Intangible Business Spending –Computerized information Computer software Computerized databases –Scientific and creative property R&D Mineral exploration Copyright and license costs Other product development –Economic competencies Brand equity Firm-specific human capital Organizational structure

4 Measurement of Nominal Intangible Investment Criteria: Intangible business spending is investment if it boosts output in the future. Intangible business investment amounted to about $1 trillion in late 1990s.

5 Implications Intangible and tangible business investments are roughly the same size. Nominal GDP would be about 10 percent higher in late 1990s. The saving rate would be higher; more capital accumulation.

6 Growth Accounting with Intangibles Nominal investment converted to reals. With assumed depreciation rates, real investment translated to real capital stocks. Extend growth accounting with these data. Heroic assumptions used. Want order of magnitude, not a precise measure.

7 Labor Productivity, nonfarm business sector (pct change, annual rate)

8 Labor Productivity Including New Intangibles, nfb sector (pct chg, ann rate)

9 Implications for Thinking about Capacity Growth rate of labor productivity higher with intangibles. Role of capital in growth significantly larger with intangibles. Intangibles contribute a bit to mid-1990s acceleration in labor productivity.

Implications for thinking about the Knowledge Economy

“It’s the knowledge economy …”

Years of Productivity Growth

13 Lessons from 100+ Years Faster periods followed by slower periods. Faster periods lasted years. 100-year trend about 2 percent. Most analysts remain optimistic, expect better than 100-year trend.

14 Key Analytical Issues Pace of technical advance in the tech sector (mfp IT ). Is Moore’s Law finished? Non tech-sector developments (mfp O ). Will diminishing returns to computing power set in (saturation)?

15 Will Demand for IT be Saturated? In past, no saturation across successive generations of IT-powered devices. –Military apps, tracking space flights, etc. –Back-office calculations –Real-time database access –Desk-top computers –Hand-held devices, communications

16 Recap IT was key to mid-1990s pickup. MFP outside of IT was key to pickup. Fuller accounting for intangibles boosts measured capital accumulation. Many analysts are optimistic going forward. Range of uncertainty is very large.