Opinion Editorial | |
| Wednesday, May 27, 1998 | |
Software's Economic Importance |
In a recent Heritage Foundation lecture, economist Larry Kudlow presented
a generally upbeat forecast for economic growth well into the next century.
When I asked him what he saw as the biggest threat to his forecast, he
replied the antitrust division of the Justice Department. By bumbling around
in matters they do not remotely comprehend, he said, the Justice Department's
lawyers are threatening to do irreparable harm to the most vibrant sector
of the American economy: computer software. (Attorney General Janet Reno
has even confessed that she is unable use a simple word-processing program
and must compose her memos and correspondence by longhand.) The consequences
could spread well beyond Redmond, Washington, where Microsoft is located,
and could seriously damage the whole U.S. economy. One problem with analyzing the potential impact of the Microsoft case
is that surprisingly little is known about the role of software in our economy.
Although it is known that computers and related hardware now account for
10 percent of the nation's nonresidential fixed investment, no similar data
exist for software. The reason is because the Commerce Department, which
calculates the gross domestic product (GDP), treats software as an intermediate
good and excludes it from GDP. GDP is calculated by adding together the dollar value of all final goods
and services produced in the United States. A final good or service is
one that is either consumed or added to the nation's capital stock. Intermediate
goods, by contrast, are those that are used up in the production process.
The value of such goods or services is assumed to be incorporated into
the value of final goods. Adding intermediate goods and services to GDP,
therefore, would involve double-counting; hence the exclusion of intermediate
goods from GDP. However, in most cases computer software is in fact an investment, not
something used up in the production of final goods and services. Therefore,
it should be added to GDP as part of gross private domestic investment.
Unfortunately, calculating the amount of software expenditures that should
be added to investment spending is hampered by lack of data. In a recent paper, "Changing the Treatment of Software Expenditures
in the National Accounts," the Congressional Budget Office (CBO) attempted
to calculate the impact on GDP of treating software as an investment, rather
than an intermediate good. The impact is dramatic.
Further evidence on the importance of software to economic growth comes
from the Census Bureau, which recently released data on receipts of computer-services
businesses -- those that provide computer programming, data processing and
related services. In 1996, receipts for such firms reached $184 billion,
an increase of 18 percent over 1995. In short, the software business is one of America's most rapidly growing
businesses; one that has a large and increasing impact on virtually every
other business in America. And as we know from the Justice Department,
Microsoft provides the operating system for virtually every personal computer
in America. Justice calls this a monopoly that violates the antitrust laws.
Others simply call it good business, one that has produced innumerable
benefits for almost every American. How the Microsoft case will ultimately end is too soon to say. But if
Microsoft is crippled, it could have a negative impact on the well-being
of every American. Home | Support Us | All Issues | Social Security Debate Central | Contact Us |