Cost of capital and investment behavior. Jorgenson’s Presidential Address to the American Economic Association in 2001 demonstrated that investment and the cost of capital are essential for understanding economic growth. The cost of capital includes the rate of return, the rate of depreciation, and the rate of decline in the price of a capital asset. The rapid decline in prices of information technology (IT) equipment and software is the main indicator of the rate of technical progress in IT-producing industries. Massive substitutions of IT inputs for inputs of labor and other types of capital are explained by the remarkable decline in IT prices. The IT price decline is the critical component of the cost of capital in assessing the powerful impact of the resulting IT investment on economic growth.
In 2011 Jorgenson’s paper, “Capital Theory and Investment Behavior,” published in 1963, was chosen as one of the Top 20 papers published in the first 100 years of the American Economic Review. This paper introduced the important features of the cost of capital employed in the subsequent literature. The principal innovation was the derivation of investment demand and the cost of capital from a model of capital as a factor of production. In 1971 Jorgenson surveyed empirical research on investment and the cost of capital in the Journal of Economic Literature.1 In the same year he was awarded the John Bates Clark Medal of the American Economic Association for his research.
Accounting for economic growth. In 1987 Jorgenson, Frank Gollop, and Barbara Fraumeni allocated the sources of U.S. economic growth to the level of individual industries. Industry outputs are functions of capital, labor, and intermediate inputs, each defined as a constant-quality index of the corresponding inputs. The innovations of Jorgenson, Gollop, and Fraumeni drastically increased the relative importance of investments in human and non-human capital as sources of economic growth. In 2001 this approach to growth accounting was adopted as the international standard in Measuring Productivity, the OECD manual by Paul Schreyer.2
In 1966 Jorgenson took a crucial step beyond the aggregate production function employed by Robert Solow (1957) in accounting for economic growth. He allowed for joint production of consumption and investment goods from capital and labor services. This provided the key channel for incorporating the cost of capital into the accounts for U.S. economic growth. Jorgenson and Kevin Stiroh (2000) constructed constant-quality indexes of capital and labor inputs, including investments in information technology equipment and software and college-educated workers by weighting the components of each input by their marginal products. The marginal products for capital input incorporated the cost of capital.
The predominant role of investment. In 2005 Jorgenson, Mun S. Ho and Stiroh traced the American growth resurgence after 1995 to its sources in individual industries in their book, Information Technology and the American Growth Resurgence. This book employed the framework originated by Jorgenson, Gollop, and Fraumeni, but added information about investments in information technology equipment and software. Investments in human and non-human capital were the sources of more than 80 percent of U.S. economic growth over the preceding half century, while growth in total factor productivity, output per unit of capital and labor inputs, accounted for 20 percent. Jorgenson and Khuong Vu (2005) established similar results for the world economy.3
Jorgenson, Ho, and Kevin Stiroh (2005) demonstrated that the IT investment boom of 1995-2000 faded considerably after the dot-com crash of 2000. However, labor productivity growth accelerated further due to a sharp rise in productivity growth in IT-intensive industries, principally in services. The locus of innovation in the U.S. economy has shifted dramatically from IT-producing industries in manufacturing to IT-using industries in trade and services. This remarkable transition was highlighted by the successful incorporation of IT investment into the framework for growth accounting of Jorgenson, Gollop, and Fraumeni (1987).
New architecture for the national accounts. In 2006 Jorgenson and Steven Landefeld, then the Director of the U.S. Bureau of Economic Analysis, proposed a new system of national accounts. This incorporated the cost of capital for all assets, including information technology equipment and software. In March 2007 the United Nations Statistical Commission recommended Jorgenson's cost of capital for incorporation into the United Nations’ 2008 System of National Accounts. Schreyer (2009) published a new OECD Manual, Measuring Capital, to serve as a guide to practitioners. The “new architecture” was endorsed by the Advisory Committee on Measuring Innovation in the 21st Century to the Secretary of Commerce in 2008.4
Jorgenson (2009) presented an updated version of the new architecture for the U.S. national accounts in his Richard and Nancy Ruggles Memorial Lecture to the International Association for Research in Income and Wealth. Jorgenson, Jorgenson and Schreyer (2013) have shown how to integrate industry-level production accounts with the System of National Accounts 2008. Landefeld, and Scheyer (2014) extended the new architecture to include measures of sustainability and progress in their book, Measuring Economic Sustainability and Progress. Jorgenson and Daniel T. Slesnick (2014) showed how to incorporate measures of social welfare into the national accounts. Susan Fleck, Steven Rosenthal, Matthew Russell, Erich Strassner, and Lisa Usher (2014) presented a prototype industry-level production account for incorporation into the U.S. national accounts.
World KLEMS Initiative. Jorgenson (2012) has described the World KLEMS Initiative at Harvard University on August 19, 2010. This led to the construction of industry-level production accounts, incorporating outputs, inputs of capital (K), labor (L), energy (E), materials (M) and services (S), and productivity for more than forty countries. The landmark EU KLEMS study by Marcel P. Timmer, Robert Inklaar, Mary O’Mahony, and Bart van Ark (2010) generated industry-level growth accounts for 25 EU members. The study showed that Europe had failed to develop a knowledge economy like the U.S. with rapid growth in the numbers of college-educated workers and massive investments in information technology equipment and software.
Industry-level production accounts are now included in the official systems of national accounts for Australia, Canada, Denmark, Finland, Italy, Mexico, The Netherlands, Sweden, and the U.K., as well as the U.S. These accounts are also available for emerging and transition economies, including Argentina, Brazil, Chile, China, Columbia, India, Peru, Russia, and Taiwan. Accounts for Latin America have been developed through LA KLEMS, the regional affiliate in Latin America. Similar accounts for Asia have been generated within Asia KLEMS, the regional affiliate in Asia. The World Economy: Growth or Stagnation? edited by Jorgenson, Kyoji Fukao, and Marcel P. Timmer (2016), presents current for the countries included in the World KLEMS Initiative.
Capital income taxation. Jorgenson's cost of capital summarizes future information essential for current decisions about investment. In 1980 Jorgenson and Alan Auerbach introduced the marginal effective tax rate. This characterizes the tax consequences of investment decisions in a way that is particularly suitable for comparisons among alternative policies. The strength of the cost-of-capital approach is its ability to absorb almost unlimited detail on specific tax policies. This approach has been widely applied in international comparisons of capital income tax policies by the EU, the OECD, and the World Bank.
Jorgenson's cost-of-capital approach provides a precise instrument for achieving horizontal equity in capital income taxation. This refers to equality in the taxation of capital income from different sources and has been a guide to tax reform in the United States and around the industrialized world. The appeal of this principle is threefold. First, it achieves fairness in the sense of equitable treatment of different taxpayers. Second, under the rubric of “tax neutrality” it eliminates possibilities for increasing efficiency by redistributing the tax burden. Third, it leads to simplicity by expunging from the tax statutes the detailed specifications of transactions subject to special provisions.5
Econometric modeling. In collaboration with Laurits Christensen and Lawrence Lau, Jorgenson constructed econometric models of production based on the transcendental logarithmic (translog) price possibility frontier in 1973. Jorgenson and Jean-Jacques Laffont (1974) introduced the method of nonlinear three-stage least squares for estimating the unknown parameters. The innovations of price-quantity duality, estimation and inference in systems of nonlinear simultaneous equations, and flexible functional forms have set the standard for econometric modeling of producer behavior. In 1986 Jorgenson surveyed more than three hundred publications stemming from this approach in the Handbook of Econometrics.6 Hui Jin and Jorgenson (2010) have recently introduced state-space econometric modeling of technical change into this framework.
In 1975 Christensen, Jorgenson, and Lau introduced a parallel model of consumer behavior, based on the translog indirect utility function. This model combines flexibility in the representation of preferences with parsimony in the number of parameters. Jorgenson's cost of capital plays a critical role in modeling consumer demand for housing and consumer's durables. Investments in housing and consumers' durables are derived from the accumulation equations for these types of capital. Jorgenson and Daniel Slesnick (2008) have extended this approach to include preferences between goods and leisure. This model incorporates more than 150,000 household observations from the Consumer Expenditure Survey, as well as cross section and time series variation in prices from the Consumer Price Index, both compiled by U.S. Bureau of Labor Statistics.
General equilibrium modeling. In 1986 Jorgenson imbedded his model of investment demand into a general equilibrium model of U.S. economic growth in collaboration with Kun-Young Yun. The Jorgenson-Yun model incorporated a price of capital services for each class of assets distinguished in the U.S. tax system. Jorgenson and Yun developed a model of producer behavior based on the translog price possibility frontier. They also included a model of consumer behavior based on the translog indirect utility function. Jorgenson and Yun (2001, 2012) employed the resulting model to evaluate the impact of alternative tax policies on U.S. economic growth.7
Jorgenson has constructed highly detailed models of U.S. economic growth in collaboration with Peter Wilcoxen in 1993 and Ho in 1994. These models are based on the industry-level growth accounts of Jorgenson, Ho and Stiroh, including a price of capital services for each industry that incorporates the cost of capital. The models of Jorgenson, Ho, and Wilcoxen include econometric representations of technology for individual industries constructed by Jorgenson and Fraumeni in 1983 and an econometric representation of preferences for individual households constructed by Jorgenson, Lau, and Thomas Stoker in 1982. Both industry and household models are based on translog functional forms and use prices of capital services that include the cost of capital.8
Welfare measurement. The econometric model of Jorgenson, Lau, and Stoker successfully integrated the two principal streams of empirical research on consumer behavior by pooling aggregate time series data with cross section data for individual households. This model permitted an exact decomposition of aggregate demand functions into individual demand functions. The aggregate model captured price and income effects as well as demographic determinants of consumer behavior. In 1983 Jorgenson and Slesnick recovered measures of welfare for each household from systems of individual demand functions and combined these into a single indicator of social welfare that incorporated both efficiency and equity.
In 1990 Jorgenson presented econometric methods for welfare measurement in his Presidential Address to the Econometric Society. These methods have led to a new approach to cost of living measurement and new measures of the standard of living, inequality, and poverty. This required replacing ordinal measures of individual welfare that are not comparable among individuals by cardinal measures that are fully comparable among individuals. The critical role of information about preferences was persuasively analyzed by Amartya Sen in 1977. In 1989 Arthur Lewbel showed how household equivalence scales proposed by Jorgenson and Slesnick (1987) can be used for this purpose.9
Evaluation of economic policies. In 1993 Jorgenson and Wilcoxen surveyed the evaluation of economic policies by means of Intertermporal General Equilibrium Models. (IGEM). These econometric models incorporate an intertemporal price system as the unifying framework. This price system balances current demands and supplies for products and factors of production. Asset prices are linked to the present values of future capital services. The long-run dynamics of economic growth are captured through linkages among capital services, capital stocks, and past investments. Alternative policies are compared in terms of the impact of changes in policy on individual and social welfare. This approach was incorporated into the official guidelines for preparing economic analyses by the U.S. Environmental Protection Agency in 2000 and 2010.10
Jorgenson's approach to policy evaluation through IGEM has transformed the economics of ¬environmental policy by linking environmental regulations to the cost of capital. These regulations can raise the price of new capital goods, slow the rate of capital formation, and reduce the rate of economic growth. By contrast market-based environmental policies, such as emission taxes and tradable permits, may raise sufficient revenue to reduce capital income taxes and reduce the cost of capital, thereby stimulating growth. The most recent version of IGEM is presented in Jorgenson, Richard Goettle, Ho, and Wilcoxen (2013), Double Dividend. This book shows how to construct environmental policies that improve environmental performance and increase economic growth at the same time. For example, revenues from a carbon tax to reduce emissions of greenhouse gases can be used to reduce the cost of capital and stimulate investment and economic growth.
Advisory Committee on Measuring Innovation in the 21st Century to the U.S. Secretary of Commerce (2008), “Final Report,” January 18.
Kenneth J. Arrow, B. Douglas Bernheim, Martin S. Feldstein, Daniel L. McFadden, James M. Poterba, and Robert M. Solow (2011), “100 Years of the American Economic Review: The Top Twenty Articles,” American Economic Review, Vol. 101, February, pp. 1-10.
Alan J. Auerbach and Dale W. Jorgenson (1980), “Inflation-Proof Depreciation of Assets,” Chapter 8 in Dale W. Jorgenson (1996b), pp. 223-234.
Richard Blundell and Thomas M. Stoker (2005), “Heterogeneity and Aggregation,” Journal of Economic Literature, Vol. 43, No. 2, June, pp. 347-391.
Laurits R. Christensen and Dale W. Jorgenson (1973), “Measuring Economic Performance in the Private Sector,” Chapter 5 in Dale W. Jorgenson (1995a), pp. 175-272.
Laurits R. Christensen, Dale W. Jorgenson, and Lawrence J. Lau (1973),“Transcendental Logarithmic Utility Functions,” Chapter 1 in Dale W. Jorgenson (1997a), pp. 1-28.
Laurits R. Christensen, Dale W. Jorgenson, and Lawrence J. Lau (1975), “Transcendental Logarithmic Production Frontiers,” Chapter 4 in Dale W. Jorgenson (2000), pp. 125-158.
Michael S. Christian (2014), “Human Capital Accounting in the United States: Context, Measurement, and Application,” Chapter 14 in Dale W. Jorgenson, J. Steven Landefeld, and Paul Schreyer (2014), eds., pp. 461-491.
Peter B. Dixon and Dale W. Jorgenson, eds. (2012), Handbook of Computable General Equilibrium Modeling, Amsterdam, Elsevier, two volumes. Susan Fleck, Steven Rosenthal, Matthew Russell, Erich H. Strassner, and Lisa Usher (2014), Chapter 11 in Dale W. Jorgenson, J. Steven Landefeld, and Paul Schreyer, eds. (2014), pp. 323-372.
Barbara M. Fraumeni (2000), “The Jorgenson System of National Accounting,” Chapter 6 in Lawrence J. Lau (2000a), pp. 111-142.
Fumio Hayashi (2000), “The Cost of Capital, Q, and the Theory of Investment Demand,” Chapter 4 in Lawrence J. Lau (2000a), pp. 55-84.
Mun S. Ho (2000), “Modeling Trade Policies and U.S. Growth: Some Methodological Issues,” Chapter 12 in Lawrence J. Lau (2000a), pp. 327-378.
Mun S. Ho and Dale W. Jorgenson (1994), “Trade Policy and U.S. Economic Growth,” Chapter 8 in Dale W. Jorgenson (1998b), pp. 303-330.
Hui Jin and Dale W. Jorgenson (2010), “Econometric Modeling of Technical Change,” Journal of Econometrics, Vol. 157, No. 2, August, pp. 205-210.
Dale W. Jorgenson (1963), “Capital Theory and Investment Behavior,” Chapter 1 in Dale W. Jorgenson (1996a), pp. 1-16.
Dale W. Jorgenson (1966), “The Embodiment Hypothesis,” Chapter 2 in Dale W. Jorgenson (1995a), pp. 25-50.
Dale W. Jorgenson (1971), “Econometric Studies of Investment Behavior: A Review,” Chapter 13 in Dale W. Jorgenson (1996a), pp. 423-478.
Dale W. Jorgenson (1986), “Econometric Methods for Modeling Producer Behavior,” Chapter 1 in Dale W. Jorgenson (2000), pp. 1-72.
Dale W. Jorgenson (1990), “Aggregate Consumer Behavior and the Measurement of Social Welfare,” Chapter 1 in Dale W. Jorgenson (1997b), pp. 1-38.
Dale W. Jorgenson (1993), “Tax Reform and the Cost of Capital,” Chapter 6 in Dale W. Jorgenson (2001a), pp. 211-258.
Dale W. Jorgenson (1995a), Postwar U.S. Economic Growth, Cambridge, The MIT Press.
Dale W. Jorgenson (1995b), International Comparisons of Economic Growth, Cambridge, the MIT Press.
Dale W. Jorgenson (1996a), Capital Theory and Investment Behavior, Cambridge, The MIT Press.
Dale W. Jorgenson (1996b), Tax Policy and the Cost of Capital, Cambridge , The MIT Press.
Dale W. Jorgenson (1997a), Aggregate Consumer Behavior , Cambridge, The MIT Press.
Dale W. Jorgenson (1997b), Measuring Social Welfare, Cambridge, The MIT Press.
Dale W. Jorgenson (1998a), Econometric General Equilibrium Modeling, Cambridge, The MIT Press.
Dale W. Jorgenson (1998b), Energy, the Environment, and Economic Growth, Cambridge, The MIT Press.
Dale W. Jorgenson (2000), Econometrics and Producer Behavior, Cambridge, The MIT Press.
Dale W. Jorgenson (2001a), Economic Growth in the Information Age, Cambridge, The MIT Press.
Dale W. Jorgenson (2001b), “Information Technology and the U.S. Economy,” Chapter 1 in Dale W. Jorgenson (2001a), pp. 1-42.
Dale W. Jorgenson (2009a), ed., The Economics of Productivity, Northampton, Edward Elgar.
Dale W. Jorgenson (2009b), “A New Architecture for the U.S. National Accounts,” Review of Income and Wealth, Series 55, No. 1, March, pp. 1-42.
Dale W. Jorgenson (2010), “Human Capital and the National Accounts,” Survey of Current Business, Vol. 90, No. 6, pp. 54-56.
Dale W. Jorgenson (2012), “The World KLEMS Initiative,” International Productivity Monitor, Fall, pp. 5-19.
Dale W. Jorgenson and Barbara M. Fraumeni (1983), “Relative Prices and Technical Change,” Chapter 12 in Dale W. Jorgenson (2000), pp. 341-372.
Dale W. Jorgenson and Barbara M. Fraumeni (1989), “The Accumulation of Human and Non-Human Capital, 1948-84,” Chapter 6 in Dale W. Jorgenson (1995a), pp. 273-332.
Jorgenson, Dale W., Kyoji Fukao, and Marcel P. Timmer, eds., The World Economy: Growth or Stagnation? Cambridge, UK, Cambridge University Press, 2016.
Dale W. Jorgenson, Richard J. Goettle, Mun S. Ho, and Peter J. Wilcoxen (2012), “Energy, the Environment, and U.S. Economic Growth,” Chapter 8 in Peter B. Dixon and Dale W. Jorgenson, eds. (2012), pp. 477-552.
Dale W. Jorgenson, Richard J. Goettle, Mun S. Ho, and Peter J. Wilcoxen (2013), Double Dividend: Environmental Taxes and Fiscal Reform in the United States, Cambridge, The MIT Press.
Dale W. Jorgenson, Frank M. Gollop, and Barbara M. Fraumeni (1987), Productivity and U.S. Economic Growth , Cambridge , Harvard University Press.
Dale W. Jorgenson, Mun S. Ho, Jon D. Samuels, and Kevin J. Stiroh (2007), “Industry Origins of the American Productivity Resurgence,” Chapter 18 in Dale W. Jorgenson (2009a), pp. 544-567.
Dale W. Jorgenson, Mun S. Ho, and Kevin J. Stiroh (2005), Information Technology and the American Growth Resurgence, Cambridge, The MIT Press.
Dale W. Jorgenson, Hui Jin, Daniel T. Slesnick, and Peter J. Wilcoxen (2012), “An Econometric Approach to General Equilibrium Modeling,” in Peter B. Dixon and Dale W. Jorgenson (2012), Vol, 1B, pp. 1133-1112.
Dale W. Jorgenson and Jean-Jacques Laffont (1974), “Efficient Estimation of Nonlinear Simultaneous Equations with Additive Disturbances,” Chapter 7 in Dale W. Jorgenson (2000), pp. 209-240.
Dale W. Jorgenson and J. Steven Landefeld (2006), “Blueprint for Expanded and Integrated U.S. National Accounts: Review, Assessment, and Next Steps,” in Dale W. Jorgenson, J. Steven Landefeld, and William D. Nordhaus, eds., A New Architecture for the U.S. National Accounts , Chicago, University of Chicago Press, pp. 13-132.
Dale W. Jorgenson, J. Steven Landefeld, and Paul Schreyer (2014), eds., Measuring Economic Sustainability and Progress, Chicago, University of Chicago Press.
Dale W. Jorgenson, Lawrence J. Lau, and Thomas M. Stoker (1982), “Transcendental Logarithmic Model of Aggregate Consumer Behavior,” Chapter 8 in Dale W. Jorgenson (1997a), pp. 203-356.
Dale W. Jorgenson and Paul Schreyer (2013), “Industry-Level Productivity Measurement and the 2008 System of National Accounts,” Review of Income and Wealth, Series 59, No. 2, May, pp. 185-211.
Dale W. Jorgenson and Daniel T. Slesnick (1983), “Individual and Social Cost of Living Indexes,” Chapter 2 in Dale W. Jorgenson (1997b), pp. 39-98.
Dale W. Jorgenson and Daniel T. Slesnick (1987), “Aggregate Consumer Behavior and Household Equivalence Scales,” Chapter 5 in Dale W. Jorgenson (1997b), pp. 219-252.
Dale W. Jorgenson and Daniel T. Slesnick (2008), “Consumption and Labor Supply,” Journal of Econometrics, Vol. 127, No. 1, September, pp. 326-325.
Dale W. Jorgenson and Daniel T. Slesnick (2014), “Measuring Social Welfare in the National Accounts,” Chapter 3 in Jorgenson, Landefeld and Schreyer (2014), pp. 43-88.
Dale W. Jorgenson and Kevin J. Stiroh (2000), “Raising the Speed Limit: U.S. Economic Growth in the Information Age,” Chapter 3 in Dale W. Jorgenson (2001a), pp. 71-150.
Dale W. Jorgenson and Khuong Vu (2005), “Information Technology and the World Growth Resurgence,” Chapter 15 in Dale W. Jorgenson (2009a), pp. 482-502.
Dale W. Jorgenson and Peter J. Wilcoxen (1993a), “Energy, the Environment, and Economic Growth,” Chapter 1 in Dale W. Jorgenson (1998b), pp. 1-88.
Dale W. Jorgenson and Peter J. Wilcoxen (1993b), “Reducing U.S. Carbon Dioxide Emissions: An Econometric General Equilibrium Assessment,” Chapter 6 in Dale W. Jorgenson (1998b), pp. 253-274.
Dale W. Jorgenson and Kun-Young Yun (1986a), “The Efficiency of Capital Allocation,” Chapter 10 in Dale W. Jorgenson (1996b), pp. 299-320.
Dale W. Jorgenson and Kun-Young Yun (1986b), “Tax Policy and Capital Allocation,” Chapter 11 in Dale W. Jorgenson (1996b), pp. 321-364.
Dale W. Jorgenson and Kun-Young Yun (2001), Lifting the Burden: Tax Reform, the Cost of Capital, and U.S. Economic Growth, Cambridge, The MIT Press.
Dale W. Jorgenson and Kun-Young Yun (2012), “Taxation, Efficiency, and Economic Growth,” Chapter 10 in Peter B. Dixon and Dale W. Jorgenson (2012), eds., Vol. 1A, pp. 659-742.
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1Prior to Jorgenson's work, modeling of investment behavior had been based on various ad hoc principles, such as the capacity principle, the profits principle, and the like. His research initiated the cumulative progress in modeling investment that has continued to the present. In 2000 Fumio Hayashi demonstrated the essential role of Jorgenson's cost of capital in all later models of investment. Hayashi also showed that the cost of capital is the sole channel through which tax parameters exert incentive effects, accounting for the importance of this concept in capital income taxation. In 2000 Lawrence Lau summarized Jorgenson's research on the cost of capital in modeling investment behavior, producer behavior and productivity measurement, consumer behavior and welfare measurement, and inter-temporal general equilibrium modeling.
2Jorgenson (2009a) has surveyed the literature on growth accounting. As a consequence of the international standards established by the OECD, many of the most familiar concepts in growth economics have been superseded. The aggregate production function has been displaced by the production possibility frontier. Accurate modeling of substitution among different types of capital services is essential for capturing the massive substitution of IT equipment and software for other forms of capital. The capital stock measure used in conventional growth accounting obscures the wholesale restructuring of capital input that is the wellspring of the growth resurgence. Similarly, hours worked has been superseded by a measure of labor input that captures substitution among workers in response to shifts in the demands for different skills as a consequence of advances in IT.
3Jorgenson, Ho and Stiroh (2005) showed that the contribution of capital input was the most important source of the U.S. growth resurgence that began in 1995, total factor productivity next, and the contribution of labor input almost negligible. The acceleration of capital input growth was due primarily to the flood of IT investment after 1995. Virtually all industries responded to the accelerated IT price decline after 1995 by substituting IT for Non-IT-capital and labor inputs. Nearly half of U.S. industries actually showed a decline in contribution of Non-IT-capital input. Four IT-producing industries contributed more to the growth of total factor productivity than all other industries combined over the period 1977-2000. All of these findings are based on capital services, rather than capital stock, as a measure of capital input. The price of capital input incorporates Jorgenson’s cost of capital.
4In Chapter 20 of the United Nations (2009), 2008 System of National Accounts (page 415), estimates of capital services are described as follows: “By associating these estimates with the standard breakdown of value added, the contribution of labor and capital to production can be portrayed in a form ready for use in the analysis of productivity in a way entirely consistent with the accounts of the System.” Jorgenson's contributions to national accounting were surveyed by Fraumeni in 2000. These contributions include the system of accounts for the private sector of the U.S. economy proposed by Jorgenson and Christensen in 1973. In 1989 Jorgenson and Fraumeni extended the system to investment, stocks, and services of human capital and the associated market and non-market activities. Jorgenson (2010) has described the role of human capital in the “new architecture” for the U.S. national accounts.
5The principle of horizontal equity for capital income taxation was embodied in the Tax Reform Act of 1986 in the United States. This legislation reversed decades of piecemeal creation of specific incentives for special classes of taxpayers. The cost of capital and the marginal effective tax rate were employed in the design of similar reforms around the world in the 1980's and 1990's, broadening the base for capital income taxes and reducing tax rates. In 1993 Jorgenson analyzed these reforms for nine countries – the G7 plus Australia and Sweden. These reforms have contributed greatly to more efficient allocation of capital within market economies. Horizontal equity in capital income taxation has received a powerful new impetus from the adoption of “flat” income taxes in economies undergoing a transition from socialism to capitalism during the 1990's and continuing into the present century.
6In the price possibility frontier presented by Christensen, Jorgenson, and Lau the economy supplies outputs of investment and consumption goods and demands inputs of capital and labor services. The supplies and demands are functions of the prices of the outputs and inputs. Myopic decision rules for this model of production are derived by utilizing prices of capital inputs that incorporate Jorgenson's cost of capital. An increase in the output of investment goods requires foregoing a part of the output of consumption goods, so that adjusting the rate of investment is costly. However, the costs of adjustment are fully reflected in the market prices of investment goods, which incorporate forward-looking expectations of the prices of future capital services.
7In the Jorgenson-Yun model producers and consumers optimize, subject to an intertemporal price system. Macroeconometric models used to analyze the short-run impact of tax policies and applied general equilibrium models employed to analyze the long-run impact of these policies are subject to the critique by Robert Lucas (1976). According to the Lucas critique, these models fail to account for the effect of changes in tax policies on expectations of future prices. Jorgenson and Yun have overcome the Lucas critique by associating each tax policy with a rational expectations equilibrium. Asset prices are based on rational expectations of the future prices of capital services. Jorgenson and Yun provide a money metric of the difference between the level of social welfare resulting from each tax reform with welfare in the absence of reform. Jorgenson's contributions to modeling the impact of tax policy were surveyed by Yun in 2000.
8The models of Jorgenson, Ho, and Wilcoxen incorporate econometric representations of technology and preferences as basic building blocks. Earlier approaches to general equilibrium modeling, beginning with Leontief in 1941, had “calibrated” the behavioral responses of producers and consumers to a single data point. While the calibration approach economizes radically on the use of empirical data, this requires highly restrictive assumptions, such as fixed input-output coefficients. This assumption is contradicted by the massive evidence of energy conservation in response to changes in world energy prices, beginning in 1973. More recently, it is contradicted by the evidence of widespread substitutions of IT equipment and software for labor input and other types of capital input in response to changes in IT prices. Econometric methods for general equilibrium modeling are surveyed by Jorgenson, Jin, Slesnick, and Wilcoxen (2012).
9Jorgenson's contributions to modeling consumer behavior were surveyed by Stoker in 2000. This approach has provided the foundation for subsequent developments in modeling consumer behavior surveyed by Stoker in 1993 and, more recently, by Richard Blundell and Stoker in 2005. Slesnick (2001) surveyed empirical applications of the new approach to normative economics emanating from his research with Jorgenson in 2001. Slesnick compares the results of the econometric approach, based on consumption, with the official measures published by the U.S. Bureau of the Census that are based on income. Similar income-based measures are published by statistical agencies in many other countries. Differences between the two approaches are mainly due to differences between the distribution of consumption and the distribution of income described by Slesnick (2001).
10Jorgenson's contributions to modeling the impact of environmental policies were surveyed by Wilcoxen in 2000. As an illustration of the new approach to environmental policy analysis, Wilcoxen analyzed the hypothesis that market-based instruments for environmental policy have the potential for stimulating economic growth. Jorgenson and Wilcoxen (1993b) had shown that revenue from market-based instruments of environmental policy can be used to reduce pre-existing distortions associated with taxes on incomes from labor and capital. This can improve economic welfare even before environmental benefits are considered, generating the “double dividend” analyzed by Jorgenson, Goettle, Ho, and Wilcoxen (2013) in their book, Double Dividend. The current version of the model of energy, the environment, and U.S. economic growth that Jorgenson developed with Ho and Wilcoxen is employed for the evaluation of legislation on climate policy by the U.S. Environmental Protection Agency (2011). General equilibrium models for energy and environmental policy are surveyed by Jorgenson, Goettle, Ho, and Wilcoxen (2012).