The High-Tech Investment Boom and Economic Growth in the 1990s: Accounting for Quality

Purchases of computers, software, and communications equipment grew rapidly during the 1990s, representing an increasing share of total U.S. investment spending over the course of the decade. Using official statistics from the U.S. Bureau of Economic Analysis (BEA), nominal investment expenditures for three categories—computers and peripheral equipment, software, and communications equipment—rose to account for over onethird of total business fixed investment by the year 2000, up from only one-fifth a decade earlier. In real, price-adjusted terms, the dramatic rise in spending on these information and communications technologies (ICT) has been even more pronounced: the ratio of real ICT expenditures to real business fixed investment rose from about 15 percent in 1990 to nearly 50 percent in 2000.1 This surge in ICT spending was, in turn, a notable feature of the investment boom and rapid economic growth of the late 1990s. From 1995 through 2000, business fixed investment accounted for nearly 32 percent of the total growth of real gross domestic product (GDP). In contrast, investment spending had accounted for only 15 percent of growth during the 1970s and 1980s. One factor that is potentially important for interpreting the rapid growth of ICT spending in the 1990s is the use of improved methods for measuring quality change, particularly for components of ICT investment spending. As a result of these quality adjustments, the growth rate of reported ICT spending is much higher than the growth rate of the number of unit sales. This is entirely appropriate. A typical personal computer purchased in 2002, for example, is clearly not directly comparable to one purchased a decade ago without some adjustment for advances in the computing power of newer models. In addition to computers and peripheral equipment, the BEA explicitly accounts for quality improvement in calculating the growth rates of some components of computer software and for telephone switching equipment.2 Hence, in calculating the measured real growth rate of ICT investment spending, official statistics are carefully constructed to account for quality improvement. The fact that ongoing quality improvement is explicitly measured for these ICT sectors—but not so for many other components of investment spending—raises the question of whether the quality adjustment itself might be responsible for the observed prominence of high-tech investment during the 1990s: Is the higher economic growth associated with high-tech investment an artifact of the methodology used to construct recent data, or does it truly represent a departure from the past?3 One way to address this question would be to consider adjusted measures of investment that abstract from quality change in the ICT components. However, given the evident recent advances in computing and communications technologies, quality adjustment for these categories is clearly appropriate. Using fixed prices to evaluate growth in the ICT sectors would drastically understate true economic growth. An alternative approach to evaluating the role of quality improvement would be to adjust nonICT investment data for quality improvement that might not be reflected in the official statistics, creating aggregate measures of investment that account for quality improvements across the board. This paper undertakes such an exercise. Specifically, I extrapolate data from Gordon’s (1990) detailed study, The Measurement of Durable Goods Prices, to