October 1, 2009 | Speeches and Testimony
This is a pivotal time in our country. We are fighting two wars, one in Iraq and one in Afghanistan; debates over health care reform continue to be rancorous and nasty, dividing our country into screaming clusters of individuals and further polarizing institutions and interest groups; a fast-moving and deep recession that started two years ago (and thankfully is now abating) has resulted in the collapse and disappearance of some of this country’s most venerable companies; high unemployment is having a chilling effect on the lives of so many Americans; and mounting federal debt is projected to accumulate to approximately $9 trillion over the next decade—all of which, combined, is creating shock waves not seen since the 1930s.
We also continue to see slippage in the performance of our schools and unrelenting achievement gaps in middle and high schools on the basis on race and ethnicity; our planet is heating up and being choked from the unchecked expansion of gases spewing into the atmosphere from burning fossil fuels; and topping it off is the continuing momentum of rogue states acquiring skills and materials that can seriously threaten their neighbors’ very existence. In fact, recent disclosures from Iran show firsthand that we may be very near a tipping point in our relations with this theocracy. How this plays out will determine whether the West and China can halt another unstable regime from acquiring nuclear weapons.
Have I gotten your attention? Well, I hope so. But dwelling on the dark side of things is not—nor should it be—our task this afternoon. I only mention these serious problems, which at times seem beyond our grasp, in order to place our economic challenges in a larger context. It bears stating that the deep and difficult financial environment that we are in will take some time to work through. Ours is an economy that is huge, complex, and highly dependent on interlocking relationships and structures reaching around the globe. And while most economists believe that we are in the early stages of a recovery, there is little doubt that systemic changes are needed. Without bold and courageous leadership and political compromise, there is limited likelihood that the bad habits of yesterday will not be repeated going forward. For without addressing the massive unregulated economic world order that created, for example, credit default swaps, which were at the heart of the recent meltdown, we will have limited options to secure a better future for all of us.
This means looking carefully at a particular hallmark of this recession: the intoxicating effect of increased risk. This intoxication was manifested in specific ways through the housing market:
• lenders approved mortgages with little due diligence about buyers’ ability to meet required payments;
• homeowners refinanced their mortgages to increase their equity and, when property values stopped ascending, found their debt higher than their actual equity;
• and some of our largest financial institutions purchased these mortgages, created new financial instruments backed by them, and then sold them widely in the marketplace, even though the risks were little understood or measured.
We were intoxicated by the belief that assets would continue to rise. Others didn’t believe in these suspect securities, and, for just pennies on the dollar, purchased insurance bets in the form of credit default swaps. Instead, the ground shook, jobs were lost to the economy with lightning speed, banks failed—and those that didn’t, stopped lending to individuals and small businesses—and the government was forced to pump in liquidity at levels never experienced before (with the exception, of course, of World War II, which was largely responsible for getting us out of the Great Depression). The intoxication of increased risk resulted in quite a hangover.
When we speak of this recession, it is also worth noting that what was once primarily a manufacturing economy is now moving aggressively toward being an innovation-based economy, one based on high skills. As competition from across the globe increases, we now rely more and more on talented, entrepreneurial workers contributing to an economy that changes and evolves more quickly—and is therefore more difficult to predict.
This leads to an inescapable conclusion: right now, in New York, it’s time for serious dialogue about what is really needed to stimulate, stabilize, and redefine our economy.
In fact, around the world, cities and countries are trying to figure out not simply how to survive in the immediate but how to build resilient economies and societies in a world market that is simply not the same as it once was. I’d like to share two examples that recently caught my attention and that are particularly relevant to our situation in New York State.
You may have seen a New York Times story this summer about the debate currently occurring in Dresden, Germany. In this traditionally manufacturing city, many are questioning where the future of the city lies: is it in manufacturing, or is it in research and design? Should the city’s focus be on building fabrication plants for microprocessors, or on designing chips for the next generation of wireless technology? In this area called “Silicon Saxony,” some entrepreneurs believe that the focus should shift from developing manufacturing plants to developing smart people—that is, that “knowledge beats production.”
In fact, Germany’s manufacturing sector has declined in this recent downturn. (Interestingly, one Dresden-based manufacturing business [Global Foundries] recently built a fabrication plant in New York’s Saratoga County.) China may soon replace Germany as the world’s largest exporter of goods. In an economy driven by innovation, many in Germany believe that this movement away from factories and toward think tanks is a very positive economic development.
The rise of the knowledge-based economy can be seen in Israel, as well. We know that Jewish and Israeli talent has often been welcomed by the United States and has been crucial to this country’s success. But that talent had not been fully utilized within Israel. Today, however, as a City Journal article noted, Israel “is launching far more high-tech companies per year than any country in Europe.” So how did Israel—a relatively small and young country—become an innovation leader? Two things are notable. First is an influx of immigrants from the Soviet Union in the 1980s and 1990s, many of whom were highly talented scientists, engineers, and mathematicians. Second was the availability of capital from American retirees in Israel. The mix led to momentous change: a flow of bold new ideas, along with the financing to develop them. Half of Israel’s high-tech workers are now Soviet immigrants. And, as the article points out, “On a per-capita basis, Israel far leads the world in research and technological creativity.” Just as in Dresden, knowledge—in the form of a highly-skilled and entrepreneurial workforce—begat innovation and, ultimately, a place of leadership in the global economy.
These global developments are instructive for New York. How can the state build the infrastructure for its own knowledge-based economy? In the panic of 1907, when the Knickerbocker Bank failed, J.P. Morgan stepped in, underwriting municipal bonds and bringing in wealthy industrialists. I believe that today, in a different economy, new possibilities exist.
First, I would argue that one of New York’s great asset classes is its large number of universities, some of which are world class. They are the state’s best economic recovery vehicle. University research is the originator of new ideas, the spur for new industries, and the catalyst for economic development and high-skill jobs.
Second, in addition to research, New York’s universities prepare tomorrow’s workforce and entrepreneurs. Today, however, the sad reality is that often the jobs our thousands of graduates have trained for aren’t here. As a recent New York Times article pointed out, “Job retraining is…ineffective without job creation.” For university degree and training programs to work, small businesses must get the financing they need. This recession has largely been a credit recession—which has had a devastating effect on small businesses. The city’s 220,000 small businesses employ half of the city’s private-sector workforce, or about 1.5 million people. Without access to working capital, they can’t rent space, buy supplies, or hire workers.
This is why I’ve been calling for a triangular compact, a collaborative effort among government, business, and universities, all working in partnership to build the infrastructure for innovation on which the future of New York State depends. Government must take the lead by creating a climate conducive to attracting private investment opportunities around industry segments, while working with lenders to make access to capital more predictable and creating incentives for colleges and universities to develop the needed programs.
Of course, new kinds of partnerships are already under way, ones that take advantage of new ways of doing business. In one instance, the New York Times profiled corporate research and development labs that have moved away from a traditionally centralized in-house model to a more open model, one that draws on work being done at universities, government labs, and business start-ups. For example, in the last couple of years, Hewlett-Packard has reduced its in-house R & D projects while simultaneously developing an online process of soliciting grant proposals from universities around the world. Ideas that would have once come solely from its R & D lab are now generated by academics from across the globe.
The new partnerships HP is forming are made possible by information technology that allows for faster communication and electronic networking. As a result, companies are starting to rethink their relationships to the educational, business, and government communities. As one expert said, it’s a move from “proprietary innovation to populist innovation.”
We need to continue to find new ways to use our world-class universities to increase the research and workforce development efforts that lead to new industries and the educated workers who can sustain them. Government must serve as a catalyst to ensure access to capital—working capital and risk capital—and a continuing flow of able workers. Good examples are the initiatives created by the city’s Economic Development Corporation to encourage entrepreneurial and small business activity in key sectors: the financial industry, retailing, and media. In media, a bond program helps companies purchase facilities, retrofit existing buildings, and make large IT purchases, while a media lab partners companies advancing new media technologies with academic institutions doing related research. This is the kind of nimble and aggressive collaboration New York needs.
Today, we face the most serious economic downturn since the Great Depression. And our universities can be a key to our recovery. Smart universities encourage innovation in research, in degree and training programs, and in new educational delivery technologies. They maintain longstanding relationships with government, industry, and local communities. They advance the skills and creativity of thousands of new workers, at a time when our future has never been more dependent on those talents. Let’s put our universities to use, in partnership with government and business, and get New York back on track to prosper in this innovation economy.