Institute for Quantitative Social Science at Harvard University

by Elizabeth Gehrman, Special to the Harvard News Office September 15, 2006

Simplifying anything - from an office filing system to a walk-in closet- is hard work. Now take the attention to detail required of those small-scale projects and apply it to the U. S. economy, and you'll begin to understand the patience and persistence Dale Jorgenson's work requires.

"Even the most casual reader of the business press will notice that there are many different data sources," says Jorgenson, the Samuel W. Morris University Professor of Economics and an IQSS faculty associate in residence. "As a measure of inflation there's the consumer price index, the producer price index, the personal consumption expenditures price index. They all look at more or less the same thing, but they collect data in different ways, which leads to inconsistency."

Jorgenson, along with Bureau of Economic Analysis Director J. Steven Landefeld, decided a few years ago to reorganize the national accounts - the annual estimates of the country's income and expenditures. Coedited with Yale University's Sterling Professor of Economics William D. Nordhaus, the trio's recent book, A New Architecture for the U.S. National Accounts, lays out their plan for doing just that. Jorgenson admits the project - which is already underway and should be completed within the next five years - has been a challenge.

"It's hard conceptually," he says. "But also very difficult bureaucratically. It's not as if the U.S. government is one monolithic organization. It's made up of all kinds of agencies and quasi-agencies that are working more or less independently. We're not going to have the president sign off on a directive saying, 'Okay, you guys get together.'"

Luckily, that won't be necessary - in large part, according to Landefeld, because of Jorgenson's charm. "Dale is just a master motivator," he says. "He was the intellectual visionary of all this, and he is able to communicate to policymakers, who don't want or need to know the details, why this extremely esoteric stuff is important."

Economists have long recognized several problems with the national accounts: First, because of the use of diverse and incomplete sources, their analytic value is limited; second, since the U.S. economy constitutes almost 30 percent of the world economy, it is necessary to have a consistent framework that can then be applied internationally; and finally, the current national accounts don't take into consideration more-difficult-to-quantify nonmarket values such as the education rates, social welfare, or health of a population. But Jorgenson says many were "unwilling to take these issues seriously because they thought the problem was too hard."

In the 1980s, however, a new development changed everything. "Initially," Jorgenson says. "People didn't see the importance of the commercialization of the PC and the explosion of information technology. But by the 1990s it sort of hit them in the face. 'Hey, something's going on in the economy that's different, and isn't being very well captured by the techniques we've been using.'"

As any consumer can tell you, the prices of computer hardware and software, MP3 players, laptops, and HDTVs decrease rapidly - by about 30 percent a year - as more and more people adopt the new technology.

"When something's changing that fast," Jorgenson says, "You really need econometrics - methods of mathematical statistics applied to economic data - to capture its rapid evolution. What we've used is garden-variety econometrics, but using econometrics at all is new to the thinking of most national accountants."

In the 1980s, there began a huge dust-up between traditionalists and the new breed - which included Jorgenson at the forefront.

"Anyone who is an economist and came up in graduate school knew the name Dale Jorgenson," says Landefeld. "He invented modern capital theory, and then demonstrated its importance in part by applying the theory to econometric research on key topics such as investment behavior, productivity, and tax and energy policy."

The debate about the need for econometrics continues today.

"But now that we have these techniques," Jorgenson says, "we can broaden our perspective. Rather than just knowing whether the economy is doing well or poorly at the moment, we can also take a forward view, which is needed to make policy."

By the mid-1990s, Jorgenson had begun to "crystallize the thinking" in academic circles, while Landefeld was at work doing the same in Washington.

"I thought, 'Hey, we should get together, think this through, and put it on paper,' Jorgenson says. "Turns out Steve had been thinking the same thing and had already started work."

On November 30, 2001, Jorgenson presented a paper called "A Proposal for a New System of U.S. National Accounts," out of which the current volume grew.

The book is important and timely because Jorgenson's "new architecture" will address very pressing long-term concerns, such as the retirement of baby boomers, the viability of Medicare and Social Security, the future of the federal deficit, and the pace of future economic growth. Traditional national accounting systems, developed during the Great Depression and updated in the immediate postwar years, have focused on shorter term problems, such as the level of economic activity and the inflation rate.

" Published by the University of Chicago Press and under the aegis of the National Bureau of Economic Research, the book includes contributions from academics in the United States and Canada, as well as economists from the Federal Reserve Board, the Census Bureau, the Bureau of Economic Analysis, and the Bureau of Labor Statistics. The book attempts to answer questions regarding recent economic trends such as the apparent decline in savings and the resurgence in U.S. productivity levels. Chapters offer principles of national accounting for nonmarket accounts, international comparisons, and the integration of micro and macro data, and outline Jorgenson and Landefeld's "blueprint" for implementing the new plan - which is being used by 25 European countries in addition to the U.S. government.

People said it couldn't be done.

"Yes, a lot of people had the ideas," says Landefeld. "But without Dale's energy, intellect, and communication skills, this project, like so many others of its sort, may well have been moribund by now. I consider him one of the most important intellectual forces in economics today."