Foundation research

The Legacy of Harvard Economist Dale Jorgenson

Famed economist Dale W. Jorgenson, a Samuel W. Morris University professor at Harvard University, died June 8. He was 89 years old.

Mr. Jorgenson’s insights and analytical approach have significantly improved the economic community’s understanding of the effect of taxation on capital formation. He developed the concept of the cost of capital, the rate of return a business would expect and demand from a prospective investment after taxes to make the case for cost and risk. He showed how to measure the cost using readily available economic data and how to estimate its effect on GDP. The concepts and formulas of Jorgenson’s work informed the development of the series of analytical models that led to the Taxes and Growth model currently used by the Tax Foundation, and we are indebted to him.

Dr. Jorgenson received his Ph.D. in economics from Harvard in 1959. He taught at the University of California, Berkeley before joining the Harvard School of Economics in 1969. Dr. Jorgenson served as chairman of the economics department at Harvard from 1994 to 1997.

In 1971 Professor Jorgenson was awarded the American Economic Association’s John Bates Clark Medal, awarded for excellence in economic research by an economist under the age of forty. The award recognized his outstanding work in applied economics involving both economic theory and statistical expertise, including his investigation of the factors determining investment expenditure and capital formation. He served as President of the Association in 2000 and was named Member Emeritus of the Association in 2001.

Dr. Jorgenson was a Fellow of the American Philosophical Society, the Royal Swedish Academy of Sciences, the US National Academy of Sciences, and the American Academy of Arts and Sciences. He was a member of the American Association for the Advancement of Science, the American Statistical Association, and the Econometric Society, and the recipient of several honorary doctorates. He has been active in the National Research Council and the National Academy of Sciences, and he was president of the Econometric Society in 1987.

Prior to Jorgenson, many models of economic growth and performance assumed that capital investment was determined by capacity utilization and the level of interest rates set by the Federal Reserve, leading to weak predictions of behavior. investment and little advice for decision makers on how to improve productivity. Jorgenson’s approach to measuring the overall cost of capital or the economy-wide “price of services” is much more consistent with the calculations made by real businesses to determine whether to increase or decrease their stocks of physical capital. (equipment, industrial structures, and residential and commercial buildings).

Jorgenson’s work has helped convince many in the tax policy community to take seriously the need to take into account the economic effects of taxation on capital formation, productivity, wages and employment in forecasting the welfare and federal budget implications of changes in tax policy. Taking these effects into account is called “dynamic scoring”. Jorgenson participated in a study and symposium on the subject sponsored by the Joint Tax Committee of Congress in 1969. (See Joint Committee on Taxation Tax Modeling Project and 1997 Tax Symposium Papers, November 20, 1997, available at JCS-21-97 | Joint Commission on Taxation (jct.gov).)

During discussions at the JCT Symposium, some participants suggested that the dynamic economic and fiscal effects of capital taxation were not large enough and too difficult to estimate to be included in the information provided to Congress as part of the federal budget process. Professor Jorgenson said he could not support such a conclusion because the effects of tax policy on investment and output were large and he had easily calculated them for 20 years.

Dr. Jorgenson has also advised Congress and the tax policy community on the benefits of more rational and income-neutral taxation of various types of capital, factors affecting productivity growth, corporate taxation, and the economy, and how to improve national income accounts to address leisure and quality of life issues. His work will continue to influence many areas of economic theory and fiscal policy for generations.