Intangible Capital and U.S. Economic Growth

Abstract

and Daniel SichelFederal Reserve Board, Washington DC Published macroeconomic data traditionally exclude most intangible investment from measured GDP. This situation is beginning to change, but our estimates suggest that as much as $800 billion is still excluded from U.S. published data (as of 2003), and that this leads to the exclusion of more than $3 trillion of business intangible capital stock. To assess the importance of this omission, we add intangible capital to the standard sources-of-growth framework used by the BLS, and find that the inclusion of our list of intangible assets makes a significant difference in the observed patterns of U.S. economic growth. The rate of change of output per worker increases more rapidly when intangibles are counted as capital, and capital deepening becomes the unambiguously dominant source of growth in labor productivity. The role of multifactor productivity is correspondingly diminished, and labor's income share is found to have decreased significantly over the last 50 years. Introduction and BackgroundThe revolution in information technology is apparent in the profusion of new products available in the marketplace (goods with the acronyms PCs, PDAs, ATMs, wi-fi), as well as items like the internet, cell phones, and e-mail. These innovations are part of a broader technological revolution based on the discovery of the semiconductor, often called the "IT revolution." However, while its effects are apparent in the marketplace, its manifestation in the macroeconomic statistics on growth has been slow to materialize. Writing in 1987, Robert Solow famously remarked that "you see the computer revolution everywhere except in the productivity data" (Solow, 1987). Some ten years later, Alan Greenspan observed that the negative trends in measured productivity observed in many services industries seemed inconsistent with the fact that they ranked among the top computer-using 1 Greenspan also questioned the accuracy of the consumer price index, in part because of its failure to adequately account for the new or superior goods made possible by the IT revolution. 2 The IT revolution began to appear in the productivity data in the mid-1990s. This pickup has been linked to investment in IT capital in a series of papers (Jorgenson and Stiroh, 2000;Oliner andSichel, 2000, 2002;Jorgenson et al., 2002;Stiroh, 2002), all of which estimate the contribution of IT capital to output growth within the Solow-Jorgenson-Griliches sources-of-growth (SOG) framework. However, the productivity pickup did not remove all suspicion about the ability of official data to accurately capture the factors that affect U.S. economic growth. Both firm-level and national income accounting practice have historically treated expenditure on intangible inputs such as software and R&D as an intermediate expense and not as an investment that is part of GDP. The exclusion of intangibles obscures the role of many factors at the center of the innovation process that have, according to available evidence, played an importan...

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