The Ongoing Crisis

Americans feel prosperous based largely on the performance of three key economic indicators, said Ali Velshi, chief business correspondent for CNN. Are the values of their homes rising faster than inflation? Are their investments, whether for their children’s education or their own retirement, growing? And do their incomes equal or exceed increases in the cost of living?

In recent months, two of the three indicators have shown signs of improvement after declining precipitously during the financial crisis that began in 2008. Home prices have started to stabilize, though not everywhere and usually at levels below their previous highs. The stock market, which has gone up after reaching a low point early in 2009, has helped pull up other investments as well.

However, incomes have not been increasing across the board, Velshi noted. Furthermore, unemployment remains distressingly high, especially for particular groups, such as high school dropouts and manufacturing workers. “A manufacturing worker in some places in Indiana or Illinois or Ohio is simply not looking for another manufacturing job, because they’re quite clear that [the jobs] are not there.”

The economic pain of a high unemployment rate is compounded by profound uncertainty about the future direction of the U.S. economy. Policy makers talk about businesses that could make products and provide services for alternative sources of energy. But no one knows exactly what these industries will be or how many Americans they could employ. “We do not know what people who have been displaced are actually going to do in the next five to ten years,” said Velshi. “We don’t even know enough to tell them that perhaps they should move to different areas or retrain in certain industries. And



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The Ongoing Crisis Americans feel prosperous based largely on the performance of three key economic indicators, said Ali Velshi, chief business correspondent for CNN. Are the values of their homes rising faster than inflation? Are their investments, whether for their children’s education or their own retirement, growing? And do their incomes equal or exceed increases in the cost of living? In recent months, two of the three indicators have shown signs of improvement after declining precipitously during the financial crisis that began in 2008. Home prices have started to stabilize, though not everywhere and usually at levels below their previous highs. The stock market, which has gone up after reaching a low point early in 2009, has helped pull up other investments as well. However, incomes have not been increasing across the board, Velshi noted. Furthermore, unemployment remains distressingly high, espe- cially for particular groups, such as high school dropouts and manufac- turing workers. “A manufacturing worker in some places in Indiana or Illinois or Ohio is simply not looking for another manufacturing job, because they’re quite clear that [the jobs] are not there.” The economic pain of a high unemployment rate is compounded by profound uncertainty about the future direction of the U.S. econ- omy. Policy makers talk about businesses that could make products and provide services for alternative sources of energy. But no one knows exactly what these industries will be or how many Americans they could employ. “We do not know what people who have been displaced are actually going to do in the next five to ten years,” said Velshi. “We don’t even know enough to tell them that perhaps they should move to different areas or retrain in certain industries. And 

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 REBUILDING A REAL ECONOMY Ali Velshi, chief business correspondent for CNN and forum moderator. Photo by Tom Sullivan. even if we did want to retrain them, we don’t actually have a system by which we do that.” Peter Diamandis, chairman and CEO of the X PRIZE Foundation, agreed that the United States has seen the collapse of key industries, especially in manufacturing. But he added that in recent years we also have seen the “seemingly overnight creation of billion-dollar industries.” He pointed to seven technology areas that are now or soon will be in periods of exponential growth: artificial intelligence, robotics, nano- technology, ubiquitous computing networks, medicine and the human- machine interface, biotechnology and bioinformatics, and alternative energy and production systems. The important question, Diamandis said, is where these technologies will be developed and commercial- ized. As a historical example, he cited the contrasting experiences of St. Louis and Chicago. In 1904, when St. Louis hosted a world’s fair, it was the fourth largest city in the United States, largely because it was on the Mississippi River and at the center of the riverboat industry. But as railroads began to take business away from steamboats, St. Louis did not embrace the new technology to the extent that Chicago did. Today,

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 THE ONGOING CRISIS Chicago is the third largest city in the United States and St. Louis is 52nd. It matters a great deal which technologies “a government bets on,” Diamandis said. Ultimately, economic prosperity and national security come from the blossoming of industries that drive massive efficiencies in education, knowledge creation, energy, and the production of goods, according to Diamandis. The economic boom of the 1990s can be traced in part to brilliant young entrepreneurs who initiated the dot-com revolution. The economic boom of the next two decades will originate with entre- preneurs who recognize and embrace the technologies of the future. Yet embracing these technologies can involve a “vicious struggle” between letting go of the past and siding with the new. The nation may need to let go of “labor-intensive [industries], capital-intensive industries, old-tech manufacturing, coal, oil, perhaps portions of agriculture—in other The economic boom of the words, let go of the riverboat indus- next two decades will originate tries,” Diamandis said. Instead, the with entrepreneurs who public will have to be introduced to recognize and embrace the technologies of the future. and reeducated in new paradigms and new industries that will redefine Peter Diamandis societies and determine standards of living for decades ahead. Other countries are well aware of the potential of new technologies and will pose daunting competition to the United States. Chad Holliday, former chairman and CEO of DuPont, described a dinner in Shanghai at which he met the city’s vice mayor for research and development. Holliday assumed that her job was oriented toward attracting businesses to the city, but she told him that she was in charge of four world-class laboratories. Astonished, he toured the laboratories the next day. “At seven in the morning we were touring her genomics laboratory, and it had exactly the same world-class equipment [as at DuPont], and every piece of equipment was being used.” That is the competition for the United States, he said. Other countries are not just talking about com- petitiveness, “they’re actually taking steps.” Holliday also recounted his experiences as a leader of the Council on Competitiveness, a nonpartisan and nongovernmental group of CEOs, university presidents, and labor leaders that has been working for more than two decades to improve the nation’s long-term economic competi- tiveness. In recent years, other countries have been setting up similar organizations and have been looking to the U.S. council for guidance

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 REBUILDING A REAL ECONOMY and inspiration. The week before the forum, the council organized a meeting of representatives of comparable organizations around the world who described a very large number of initiatives being taken in other countries to boost competitiveness. For example, the representa- tive from Korea told Holliday that the corporate income tax rate for research-intensive companies in Korea is effectively zero because of the R&D tax credit. “They have taken this recession [as an opportunity,] not to talk about it, not to debate it, but to actually take steps. . . . We must do exactly the same thing.” Finally, Holliday described his experience at DuPont in building a very large manufacturing plant focused on solar technology. In looking for a country in which to build the plant—which features an area of clean space the size of six football fields—both Singapore and a part- nership between China and Hong Kong immediately approached the company with very strong proposals. In the United States, said Holliday, he would not know whom to ask for help in soliciting such a proposal. Furthermore, when DuPont decided to accept the offer from China and Hong Kong but considered downsizing the plant because of the recent recession, the two countries offered to buy the output of the plant for the first several years at global market prices. Several panelists discussed whether the recession that began in 2008 has been different from past recessions. Holliday insisted that the reces- sion has been different “because in six weeks the total world collapsed together.” The tight links between supply chains and information chains caused the slowdown to spread rapidly among markets and countries, he said. Furthermore, other countries are using the recession in new ways to shift the competitive balance among nations. “What we see going on in China and India and in a lot of other places is that they want to gain competitive position” as the economy recovers, but the United States today is not responding adequately to the ways globalization has changed the competitive challenge. Judy Estrin, former CTO of Cisco and author of the book Closing the Innoation Gap: Reigniting the Spark of Creatiity in a Global Econ- omy, agreed that the world economy has become so interconnected, in part through the growth of the Internet, that the time frame in which people think about and react to new developments has shrunk consid- erably. This level of interconnectivity has both positive and negative consequences. The United States has traditionally been the world leader in building new industries based on innovation. “If we keep saying, ‘It’s the same, the system works, we just need to get back to normal,’ we will

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 THE ONGOING CRISIS Tony Tan, chairman, National Research Foundation of Singapore, executive director, Government of Singapore Investment Corporation, and former deputy prime minister of Singapore. Photo by Tom Sullivan. sabotage ourselves,” she says. “What is providing great opportunities also creates unintended consequences that I don’t think we as a country are aware enough of. We need to understand those consequences and take action to stem them.” Tony Tan Keng Yam, chairman of the National Research Foundation of Singapore, executive director, Government of Singapore Investment Corporation, and former deputy prime minister of Singapore, placed the challenges facing the United States in a global context. Many coun- tries, including Singapore, have invested heavily in the economy of the United States because of its track record of innovation and growth. But Tan worries that the United States may react to the recession by erecting trade barriers and closing its borders to the influx of talented people from elsewhere in the world. He also cited the declining attention U.S. companies are giving to investments in R&D. “So many of the great inventions in the past in the U.S. came from labs like IBM and Bell Labs and so on. They are all disappearing, and we are left with fewer and fewer corporations that devote large amounts of their revenue to R&D.” If companies do not invest in developing new ideas and new

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 REBUILDING A REAL ECONOMY inventions, they will become uncompetitive. Yet U.S. companies have become so focused on achieving short-term results that they are putting fewer resources into endeavors that may have only long-term payoffs. “The financial community is so unforgiving of one bad year that cor- porations, management, [and] boards of directors do not feel that they have the capability of putting money into endeavors that will take several years before you see any results.”