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Rising above the Gathering Storm, Revisited: Rapidly Approaching Category 5 3.0 Changing Circumstances OVERVIEW OF THE PAST FIVE YEARS During the five years since the Gathering Storm study was published a new research university was established with a “day-one” endowment of $10 billion, equal to what it took MIT 142 years to accumulate.1 Next year over 200,000 students will study abroad, a large fraction in the fields of science, engineering, and technology.2 A new “innovation city” is being constructed, patterned after Silicon Valley, that will house 40,000 people.3 A multi-year initiative is underway to make the country a global nanotechnology hub including constructing 14 new “world-class” universities.4 A new facility was opened to collect, store, and analyze biological samples and serve as an international hub for biomedical research.5 A high-level commission with the objective of creating jobs at home has developed a long-term strategy for science and technology patterned after the National Academies study.6 1 L. Gold, Skorton and Rhodes attend groundbreaking for Saudi Arabian university, a potential Cornell partner, Cornell Chronicle, October 25, 2007 (http://www.news.cornell.edu/stories/Oct07/saudiarabia.html); and E. Prentice, MIT Endowment Has 3.2 Percent Yield, Even As U.S. Markets Slide, The Tech, October 7, 2008 (http://tech.mit.edu/V128/N45/endowment.html). 2 W. Wei, Colleges fight for Chinese students, China Daily, October 13, 2009. 3 Smart Russia, Newsweek, May 14, 2010. Available at: http://www.newsweek.com/2010/05/14/smart-rus-sia.html. 4 Nanotechnology—The New Frontier for Indian IT Power, Ministry of Foreign Affairs of Denmark, The Trade Council, India, August 8, 2010. Available at: http://www.eksporttilindien.um.dk/en/servicemenu/News/NanotechnologyTheNewFrontierForIndianITPower.htm; K. Krishnadas, India Preps Nanotechnology Policy, EE Times, December 28, 2007. Available at: http://www.eetimes.com/electronics-news/4075655/India-preps-nanotechnology-policy. 5 For information on the Integrated BioBank of Luxembourg, see: http://www.ibbl.lu/home/. 6 The Royal Society, The Scientific Century: Securing Our Future Prosperity, March 2010.
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Rising above the Gathering Storm, Revisited: Rapidly Approaching Category 5 These actions were taken by Saudi Arabia, China, Russia, India, Luxembourg, and the United Kingdom, respectively. Meanwhile, in the United States, six million more youths dropped out of high school to join a cadre of similarly situated youths—over half of whom under 25 years of age are currently without jobs.7 During the abovementioned interval, another $2 trillion was spent on K-12 public education while K-12 students remained mired near the bottom of the developed-world class.8 Labor costs in the United States continue to eclipse those in developing nations, although in some cases by narrowing margins. Over 8.4 million jobs were lost in America … and the dollar dropped 9 percent against the Euro.9 The United States share of global high-tech exports dropped from 21 percent to 14 percent while China’s share grew from 7 percent to 20 percent.10 The stock market declined 57 percent before beginning a halting recovery, and some seven trillion dollars of wealth disappeared.11 The national debt grew from $8 trillion to $13 trillion. Federal debt per citizen increased from $26,700 to $42,000.12 The nation continued to be dependent upon others for 57 percent of the oil energy it uses.13 China continued to graduate more English-trained engineers than the United States. A number of other countries, including Canada, Australia, and the United Kingdom, conducted their own competitiveness assessments, some patterned after the United States Gathering Storm study, and many moved aggressively to implement the actions that were thus identified.14 7 Alliance for Excellent Education, High School Dropouts in America, February 2009; Available at: http://www.all4ed.org/files/GraduationRates_FactSheet.pdf; A. Sum, I. Khatiwada, J. McLaughlin, and S. Palma, The Consequences of Dropping Out of High School, Northeastern University, October 2009; Available at: http://www.clms.neu.edu/publication/documents/The_Consequences_of_Dropping_Out_of_High_School.pdf. 8 U.S. Department of Education, National Center for Education Statistics, Statistics of State School Systems, 1969-70; Revenues and Expenditures for Public Elementary and Secondary Education, 1979-80 and 1980-81; and Common Core of Data (CCD), “National Public Education Financial Survey,” 1989-90 through 2006-07, May 2009. Available at: http://nces.ed.gov/programs/digest/d09/tables/xls/tabn177.xls. 9 U.S. Bureau of Labor Statistics, Employees on nonfarm payrolls by industry sector and selected industry detail, August 2010. Available at: http://www.bls.gov/news.release/empsit.t17.htm and ftp://ftp.bls.gov/pub/suppl/empsit.compaes.txt; Euro-dollar rate was 1.1714 in October 2005, and 1.2703 in August 2010, calculated at http://finance.yahoo.com. 10 National Science Board (NSB), Science and Engineering Indicators 2010. Arlington, VA: National Science Foundation (NSB 10-01), Table 6-19. 11 S&P 500 1565.15 all-time high in October 2007, reached a low of 676.53 in March 2009. $7.1 trillion in wealth based on peak to trough fall in the Wilshire Total Market index, see: http://www.gurufocus.com/stock-market-valuations.php. 12 For national debt, see Table 7.1, Federal Debt at the End of the Year: 1940:2015 at: http://www.whitehouse.gov/omb/budget/Historicals/ (accessed August 23, 2010); for U.S. population, see http://factfinder.census.gov/. 13 U.S. Energy Information Administration, Petroleum Statistics 2008, Available at: http://www.eia.doe.gov/basics/quickoil.html. 14 The Royal Society, 2010; Panel to Review the National Innovation System, Venturous Australia, 2008, see: http://www.innovation.gov.au/innovationreview/Documents/NIS_review_Web3.pdf; Science, Technology
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Rising above the Gathering Storm, Revisited: Rapidly Approaching Category 5 Even given these and other recent events, the United States remains relatively strong in comparative economic terms, based in large part on investments made in decades past—such as the GI Bill, post-Sputnik actions to strengthen science and technology, and investments in the Apollo lunar program—the latter of which motivated many young people to pursue careers in science and engineering. U.S. research in the life sciences has produced many life-extending and life-improving medical technologies.15 Today, with less than five percent of the world’s population, the United States still produces 25 percent of global output.16 It devotes a fraction of GDP to research and development that ranks it among the higher investor nations (although well behind Japan and South Korea).17 It has a predominant share of the world’s finest universities.18 It maintains the world’s strongest conventional and strategic military force. It is the world’s largest source of financial capital. It is home to a disproportionate share of the globe’s innovators, particularly in high-tech, many of whom immigrated from abroad. Its economic system generally permits weak companies to fail and strong companies to prosper. Other strengths include a unique ability to assimilate immigrants, a research funding allocation system that is largely merit-based (e.g. peer-reviewed competition for nearly all grants), respect for a spirit of adventure and non-conformity, and a willingness to give the best talent independence at an early age. And, stated rather sardonically by Daniel Gross writing in Newsweek, “America still leads the world at processing failure.”19 All of the above is backed by a government characterized by a remarkable degree of stability and operating under the rule of law. But the continued existence of such assets is not guaranteed—and many, as is becoming increasingly apparent, are subject to atrophy. Indeed, in recent years most competitiveness measures have trended in a flat or negative direction insofar as the United States ability to compete for jobs is concerned. In addition, three new factors have evidenced themselves during the half-decade that and Innovation Council, State of the Nation: Canada’s Science, Technology and Innovation System, 2008, see: http://www.stic-csti.ca/eic/site/stic-csti.nsf/eng/h_00011.html. 15 Joint Economic Committee. The Benefits of Medical Research and the Role of the NIH, May 2000. Available at: http://www.faseb.org/portals/0/pdfs/opa/2008/nih_research_benefits.pdf. 16 U.S. Census Population Clock (http://www.census.gov/main/www/popclock.html); NSB, 2010, Appendix Table 6-2. 17 NSB, 2010, Table 4-11. 18 Top 200 World Universities, Times Higher Education. Available at: http://www.timeshighereducation.co.uk/Rankings2009-Top200.html; Academic Ranking of World Universities, http://www.arwu.org/ARWU2009.jsp. 19 D. Gross, The Comeback Country, Newsweek, April 9, 2010.
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Rising above the Gathering Storm, Revisited: Rapidly Approaching Category 5 has elapsed since the Gathering Storm report was prepared that are particularly significant. Each of these is discussed below. (1) Decreased Financial Wherewithal to Address the Competitiveness Challenge. While the Gathering Storm report warned of an impending financial crisis, it was not addressing the type of crisis that subsequently occurred. It appears that the latter was relatively unique—triggered by government policy that encouraged excessive mortgage borrowing; poor judgment in assessing risk on the parts of both borrowers and lenders; overly aggressive practices by investment banks when creating new financial instruments; and a lack of diligence on the part of regulators. This produced what has been a severe downturn. But it is not the long-term crisis of which the Gathering Storm committee sought to warn and avert. The Gathering Storm report sought to call attention to the likelihood of a far more serious and much more enduring financial reversal attributable to fundamental flaws in the nation’s process of generating quality jobs for which its citizens can be competitive. This failure includes such practices as tolerating a K-12 educational system that functions poorly in many areas, prolonged underinvestment in basic research, and discouraging talented individuals from other parts of the world, particularly, in science and technology, from remaining in America after having successfully completed their education here. Although of an altogether different causal character, the recent financial collapse nonetheless impacts the far more profound economic downturn addressed in the Gathering Storm report. For example, the funds needed over the long-term to implement and sustain the Gathering Storm recommendations will now be substantially more difficult to obtain and sustain with the deficit running at nine percent of GDP and a national debt officially projected to reach $16 trillion by 2020.20 The current budget plan, if unchanged, is estimated to result in a 70 percent debt-to-GDP ratio in ten years. Further, the trend towards chronic unemployment has been accelerated by the downturn … with approximately 10 percent of the nation’s workforce currently categorized as “unemployed.” Infrequently noted, this figure does not include another seven percent that has simply dropped out of the workforce or is “underemployed,” which includes those marginally attached to the labor force and those employed part-time for economic reasons.21 In fact, as the economy eventually recovers from the recent financial market’s freeze-up, many of the latter seven 20 Congressional Budget Office, Budget and Economic Outlook: An Update, August 2010. Available at: http://www.cbo.gov/ftpdocs/117xx/doc11705/2010_08_19_SummaryforWeb.pdf. 21 U.S. Bureau of Labor Statistics, Alternative measures of labor underutilization, August 2010. Available at: http://www.bls.gov/news.release/empsit.t15.htm.
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Rising above the Gathering Storm, Revisited: Rapidly Approaching Category 5 percent are likely to re-enter the job market—thus making the current true unemployment rate more nearly equal to 17 percent than 10 percent—further prolonging recovery from the current episode. In June, 2010 there were 32 unemployed individuals competing for each job opening in the construction industry and 7 in manufacturing.22 Over half the nation’s workforce has had its work hours reduced, had its pay cut, been forced to take unpaid leave, or been forced to work part-time during some period since the economic reversal began. A total of 8 million jobs were lost in the downturn, and although the economy has made a substantial turnaround in financial terms, only a small fraction of the lost jobs have been recovered.23 In recent decades most new jobs have been generated by smaller firms, many of which only a short time earlier would have been classified as entrepreneurial start-ups. Of the new jobs created in the fifteen-year period prior to the recent economic collapse, 64 percent were produced by small- and medium-sized firms.24 As those firms revive, unburdened by large prior fixed investments, they will possess much more flexibility than large, established firms to locate new facilities wherever a competitive advantage is to be found. During the years since the Gathering Storm report was produced there has been another change in the character of job creation in America that presumably cannot sustain itself over the longer term. In particular, during this period the private sector eliminated 4,755,000 jobs while government (at all levels) added 676,000 jobs.25 The difficulty of reversing this trend is exacerbated by yet another development wherein, according to the Bureau of Labor Statistics, federal jobs now pay wages and benefits that on average exceed those in the private sector by 55 percent for similar occupations.26 (2) Progress … Abroad. While all nations have suffered from the recent financial meltdown, not all have suffered equally. China’s GDP grew at an average annual rate of 11 percent between 2005 and 2008; India’s by 8.6 percent; Brazil’s by 4.5 percent. In contrast, the United States growth rate has averaged 2 percent, albeit from a much larger base but with a much higher standard of living to support.27 22 Bureau of Labor Statistics unemployment data available at: http://www.bls.gov/news.release/archives/empsit_07022010.pdf; and job openings data at: http://www.bls.gov/news.release/pdf/jolts.pdf. 23 S. Condon, Biden: We Can’t Recover All the Jobs Lost, CBS News, July 25, 2010, available at: http://www.cbsnews.com/8301-503544_162-20008924-503544.html. 24 Small Business Administration, Office of Advocacy Frequently Asked Questions, available at: http://www.sba.gov/advo/stats/sbfaq.pdf. 25 Calculated from October 2005 to July 2010, at: http://www.bls.gov/webapps/legacy/cesbtab1.htm. 26 D. Cauchon, Federal Pay Ahead of Private Industry, USA Today, March 8, 2010. 27 World Bank data available at: http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG.
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Rising above the Gathering Storm, Revisited: Rapidly Approaching Category 5 The above circumstance permitted China to increase its R&D investment as a fraction of GDP at an annual rate of 5.7 percent between 2001 and 2007, while the United States investment declined at an annual rate of 0.5 percent.28 Similarly, the number of first university degrees received in the natural sciences and engineering in China increased at a rate of 42 percent per year whereas the production of such degrees in the United States has increased just 3 percent per year—with part of the increase attributable to growth in the number of non-citizen students receiving degrees.29 During the most recent decade China increased its number of higher education institutions from 1,022 to 2,263.30 During this period the number of students enrolled in degree courses in China increased from about one million to over five million. Tsinghua University, Peking University and Shanghai Jiao Tong University in China and the Indian Institutes of Technology are now considered to be among the world’s foremost academic institutions.31 Perhaps the most innovative of the newly created institutions is KAUST, in Saudi Arabia. KAUST has no departments, no tenure, no undergraduates, no tuition, and a broadly international faculty and student body, heavily focused on research … and a very large endowment. It is led by an individual born in Singapore and educated in the United States.32 The Information Technology and Innovation Foundation recently analyzed 16 innovation competitiveness indicators and found that the United States now ranks 40th out of the 40 countries and regions considered in “making progress on innovation and competitiveness.”33 (3) The United States Higher Education Outlook. America is still blessed with a disproportionate share of the world’s finest universities—particularly research universities. A recent ranking by The Times of London shows six United States universities among the world’s top ten. Another ranking by Shanghai Jiao Tong University in China assigns the United States eight of the top ten positions.34 It is noteworthy that the ranking of institutions of higher education has historically been very resistant to change. 28 NSB, 2010, Appendix Table 4-27. 29 NSB, 2010, Appendix Table 2-36. 30 R. Levin, Top of the Class, Foreign Affairs, May/June 2010. 31 Top 200 World Universities, Times Higher Education. Available at: http://www.timeshighereducation.co.uk/Rankings2009-Top200.html; Academic Ranking of World Universities, http://www.arwu.org/ARWU2009.jsp 32 See: http://www.kaust.edu.sa/about/admin/president/presidentoffice.html. 33 Information Technology and Innovation Foundation, The Atlantic Century: Benchmarking EU & U.S. Innovation and Competitiveness, February 2009. See: http://www.itif.org/files/2009-atlantic-century.pdf. 34 Top 200 World Universities, Times Higher Education. Available at: http://www.timeshighereducation.co.uk/Rankings2009-Top200.html; Academic Ranking of World Universities, http://www.arwu.org/ARWU2009.jsp.
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Rising above the Gathering Storm, Revisited: Rapidly Approaching Category 5 Today, however, two forces are at work that could modify that circumstance. The first of these is that a number of other nations are placing extraordinary priority on higher education, particularly in science and engineering. The second is that as a result of the recent financial reversal many United States universities are in greater jeopardy than at any time in nearly a century. As tax revenues have declined, state support of public higher education has been curtailed—in some cases severely. While some argue that the reductions have had the effect of forcing much-needed efficiency measures, in many cases the reductions have gone well beyond improvements in efficiency. In California, home of a world-class set of universities, the state allocation to higher education has, thus far, declined by about 14 percent, triggering what some consider to be Draconian measures of economy—along with a 32 percent increase in tuition.35 Simultaneously, the endowments of public and private institutions in the United States declined during the recession, suffering an average loss of 18.7 percent during 2008 and 2009.36 Companies tend to locate R&D centers near research universities because of the talent and knowledge pools that are locally available. Reductions in America’s federal funding for research, coupled with declining state support and shrinking endowments along with the increased stature of foreign universities, can be expected to make U.S. universities less attractive as partners to both established and start-up firms. The trend towards lesser government funding for public universities in most fields is not new … only the magnitude of the decline is new. Exacerbating the problem is the long-standing practice whereby universities receiving federal research grants generally must subsidize these awards. Today, universities are in a precarious position to sustain this practice—particularly those institutions with highly capable but expensive research facilities that must be depreciated. In the words of Paul Courant, James Duderstadt and Edie Goldenberg writing in the Chronicle of Higher Education: “[current trends threaten to] cripple many leading public universities and erode their world-class quality.”37 The innovation that is so critical to our economic vitality is in jeopardy when our universities are in jeopardy. In 1975 private firms accounted for more than 70 percent of the “R&D 100” (R&D magazine’s annual list of the 100 most significant, newly introduced research 35 Legislative Analyst’s Office, California. See: http://www.lao.ca.gov/analysis/2010/highered/Highered_anl10.aspx; and J. Keller, Amid Protests, U. of California Regents Panel Approves 32% Tuition Increase, Chronicle of Higher Education, November 18, 2009. For additional information on tuition increases in other states, see I. Wojciechowska, Paying the Price, Inside Higher Ed, August 27, 2010. Available at: http://www.insidehighered. com/news/2010/08/27/tuition. 36 NACUBO-Commonfund Study of Endowments, 2009. Available at: http://www.nacubo.org/Documents/research/2009_NCSE_Press_Release.pdf. 37 P. Courant, J. Duderstadt, and E. Goldenberg, Needed: A National Strategy to Preserve Public Research Universities, The Chronicle of Higher Education, January 3, 2010.
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Rising above the Gathering Storm, Revisited: Rapidly Approaching Category 5 and development advances in multiple disciplines), but by 2006, more than 70 percent of the top 100 innovations came from “public or mixed” sources, including academia and federally-supported startups.38 Given this demanding environment, a number of other countries are seizing the opportunity to attract United States-educated faculty “superstars” from United States universities where they are now employed. Nobel Laureate Julius Axelrod reminds that “Ninety-nine percent of the discoveries are made by one percent of the scientists.”39 Attracting such individuals to other nations is made easier by political and economic developments in the past two decades that have enabled many more countries to offer reasonable lifestyles along with extraordinary research facilities (e.g., CERN in Switzerland, Biopolis in Singapore, the nuclear-fusion research facilities in China, and the high-energy particle research program in Japan). Further, in the case of engineering, over 35 percent of the faculty of United States institutions was born abroad, considerably easing the disruption of returning home.40 In this regard the head of R&D for one advanced nation has facetiously referred to himself as a “serial kidnapper.”41 United States universities, for the first time since World War II, are thus faced with a serious—and increasing—competition for talent from abroad. This has been most noticeable in the case of attracting Japanese students, where undergraduate and graduate enrollments in United States universities have dropped since 2000 by 52 and 27 percent, respectively.42 The reasons for this decline are manifold—but the result is a measure of the challenge faced as the United States seeks to attract, and keep, talent from abroad. Thus far this particularly severe trend is concentrated among Japanese students, with enrollment in United States universities by Indian, Chinese and South Korean students still increasing. The percentage of international students who receive doctorates from U.S. universities and are still in the United States two years later declined somewhat during the middle of 38 F. Block and M.R. Keller, Where Do Innovations Come From? Transformations in the U.S. National Innovation System, 1970-2006, ITIF, July 2008, available at: http://www.itif.org/files/Where_do_innovations_come_from.pdf. 39 National Academy of Sciences, National Academy of Engineering, Institute of Medicine, Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future, Washington, DC: National Academies Press, 2007, p. ix. 40 Commission on Professionals in Science and Technology, The Foreign Born in Science and Technology, STEM Workforce Data Project. Available at: https://www.cpst.org/STEM/STEM4_Report.pdf?CFID=11013613&CFTOKEN=27637341. 41 B. Walsh, Stem Cell Central, Time, July 23, 2006. 42 B. Harden, Once Drawn to U.S. Universities, More Japanese Students Staying Home, Washington Post, April 11, 2010.
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Rising above the Gathering Storm, Revisited: Rapidly Approaching Category 5 the last decade, but the two-year stay rate moved back up to near 70 percent by 2007.43 The evidence of foreign-born members of the United States academic and industrial workforces returning to their native countries is still largely anecdotal, but focuses on particularly accomplished later-career individuals. Perhaps the most disconcerting assessment comes from a United States Conference of State Legislatures report: Transforming Higher Education, which concludes that “The American higher education system (overall) is no longer the best in the world. Other countries outrank and outperform us.”44 GLOBAL CHALLENGES IN A GLOBAL WORLD Other nations are of course not immune to many of the adverse forces addressed herein; indeed, most already had additional serious challenges of their own before the recent economic downturn. Yet, many such nations do not face the task of sustaining the lifestyle which has come to be enjoyed—and expected—by America’s citizenry. India is estimated to have 60 million children suffering from inadequate nutrition.45 The state-run China Daily reports that 150 million Chinese are internal migrant workers from rural areas, who face hardships due to being unregistered in the cities.46 Fully 2.5 billion of the world’s 6.8 billion citizens survive on two dollars per day or less.47 China’s per capita real GDP is one-twelfth that of the United States.48 As other nations begin to enjoy a higher standard of living their costs of doing business can be expected to rise as well. Indeed, labor costs in China for well educated individuals have increased sharply since the Gathering Storm report was conducted, but still fall well below those in the United States. However, due to the enormous labor surpluses in China and India it is unlikely that wages among unskilled workers in those countries will increase significantly in the foreseeable future. 43 M. Finn, Stay Rates of Foreign Doctorate Recipients from U.S. Universities, 2007. Available at: http://orise. orau.gov/files/sep/stay-rates-foreign-doctorate-recipients-2007.pdf. 44 Transforming Higher Education, Recommendations of the National Conference of State Legislatures Blue Ribbon Commission on Higher Education, October 2006. 45 M. Gragnolati, M. Shekar, M. Gupta, C. Bredenkamp and Y. Lee, India’s Undernourished Children: A Call for Reform and Action, The World Bank, August 2005. 46 X. Dingding, More help for new migrant workers, China Daily, February 2, 2010; A. Scheineson, China’s Internal Migrants, Council on Foreign Relations, May 14, 2009. 47 S. Chen and M. Ravallion, The developing world is poorer than we thought, but no less successful in the fight against poverty, World Bank, August 26, 2008. 48 U.S. Central Intelligence Agency, The World Factbook. See: https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html and https://www.cia.gov/library/publications/the-world-factbook/geos/us.html.
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Rising above the Gathering Storm, Revisited: Rapidly Approaching Category 5 We live in a time of enormous change—“creative destruction”—a time when new innovations drive out old jobs but create new ones. In the Michigan auto industry, employment plummeted from 460,000 in 1970 to 98,000 today … all while jobs derived from efforts in Silicon Valley grew.49 A nation that does not embrace innovation will soon be left behind in the 21st century economy. 49 M. Guarino, Rising Auto Sales Could Rescue Michigan, Big Three, The Christian Science Monitor, March 25, 2010.