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"We need to talk up education as a continuing national priority. More immediately, we should back up that talk with money."

December 14, 1995

National Press Club Restructuring is not over, and what to do about it

My topic today is the economic transformation in our nation and world so dramatically affecting us all: millions of jobs lost, significant and sustained widenings in distributions of income and wealth, the losses of senses of permanency and predictability in our lives, and a consequently big increase in the stridency of our political rhetoric.

I have some views about what causes this; some opinions on what not to do about it, and some suggestions on what to do about it.

The challenge before us is education and, specifically, dramatically increased investments in mid-career education for a large percentage of the 120 million Americans presently working full-time.

I am not speaking here of the usual on-the-job training, or employee outplacement assistance programs offered by all of us in corporate America; instead, I mean the wholesale elevation of the American work force to a society that creates rather than makes things, and that manages networks of organizations staffed by others who make things.

These transformations of job loss and change, increased globalization and competition, higher technology content and, above all, opened information flows among nations and institutions are truly reshaping our world.

Today, 80% of the world's wealth belongs to the 15% of the world's population living in Europe, Japan, and the U.S. This leaves 4.8 billion people outside advanced economies with their attendant benefits of education, health care, leisure, and retirement income security. But don't expect me, for even a minute today, to embark on a foreign aid theme. This speech is flatly about self-interest.

The truth of the next three decades is that more, much more, of the world's population will enter advanced economic status. It will go from the 15% today to a likely 40% by the year 2025, more than an additional 2½ billion people worldwide. And even if we set China aside as a special situation, the total is still more than a billion newly advantaged and productive people.

This is also a markedly different situation than the last 50 years. While everyone talks about globalization today, the fact remains that only one nation in the post-War period has crossed the threshold from a pre-capitalist to an economically and technically advanced society, and that is of course Japan. In contrast, the next 3 decades are going to see 20 times the number of people cross that threshold, and that is globalization.

Some hold the view that this globalization will bring pauperization: the notion that others will get rich on our backs, that there will always be some qualified person somewhere willing to do the same job for less, thereby depressing our own incomes, and that the solutions therefore are Fortress America, Fortress Europe, fortresses that keep the wealth in and the poverty out.

Nothing could be further from the truth and, understanding that there may be alternative views in the audience today, I recognize my burden to be persuasive.

Let's look at the downsides of these transformations first. Since 1990, our company alone has eliminated 33,000 jobs in the United States, about one in three. During that same period, we have added 15,000 jobs outside the United States. We have no reason to believe this trend for corporate America will change soon. If anything, it will accelerate. And as this data might seem at the outset to play clearly to the Fortress America theme, please be patient.

More broadly, and according to our Government, some 9 million Americans lost their jobs between 1991 and 1993. In 1994, amidst our strongest domestic economy in a decade, our largest manufacturing companies still laid off about a half a million employees; two-thirds again more jobs than in the recession year of 1990. In most cases, these jobs are gone forever. And again, this may seem like Fortress America is the answer.

We know the lost jobs were replaced in the aggregate, because employment nationwide went up, but we also know the problems with replacement jobs, which are that they all too often trade down materially in skill and wage content, in job security and continuity.

I received a letter from a former employee recently that highlights this tough situation. The writer, a 49 year old salaried employee with three children, no college education and with thirty years of service with our company, said being laid off can only be compared to losing a body limb. This employee had had three job offers since his layoff, all at a starting wage between six and eight dollars an hour.

Now there is job creation in the U.S., but the new jobs are generally no rivals to the old ones. Over the next decade the leading job increase categories, again according to our Government, will be retail salespeople, cashiers, nursing aides, and orderlies. We will hire more security guards in the next ten years than elementary school teachers. We will add 200,000 new lawyers and judges, and another 200,000 new corrections officers to sustain an ever higher prison population.

There isn't anything wrong with creating these jobs per se. What is alarming is that these are the primary job categories that we are creating, as our diversified economy begins to look more like one built around the three institutions of hospital, prison and shopping mall. These are not the jobs that build international competitiveness, create wealth, or leave a better world for our children.

My three decades of steady travel across the world bring me to the source of the problem: the American economy is losing and will continue to lose dominion over world markets. All over the world, people want the investments and technologies to manufacture their own products, and very often they can, and not even rarely at world-class levels.

But what is equally clear is that American ideas, and ideals, are not losing leadership, and will not, especially if we practice intelligent economic globalism.

One of our subsidiaries, the Otis Elevator Company, demonstrates well this approach. Otis has impeccable American lineage, founded in Yonkers, New York in 1853 by Elisha Graves Otis, a real Yankee inventor, and as recently as the 1950's an export-driven company staffed more than half by Americans.

Otis today has 66,000 employees, and fewer than one in ten of today's employees is American. Otis leads the elevator market worldwide, and in every region of the world with the single exception of Japan, and even in that toughest market in the world we have tripled our share of market in the last 20 years. Otis has employees globally in 1,900 cities, twice as many as the ubiquitous American Express, and six times more than even the United States Department of State.

This shift in Otis' center of gravity, and similar but less dramatic ones in our other business units, is flatly not in pursuit of lower labor costs and import substitution. I hate that cheap labor argument because it is bogus and it is false. By the way, lest my comments so far lead you to conclude otherwise, our company exported $3.1 billion in total last year, and $2.3 billion net of imports. We are in the top ten in the nation on this latter measure, and our export driven jobs are great, high tech, high wage, high benefit jobs.

Instead, we and others create jobs overseas fundamentally for market access, to extend our global market leadership and thereby to make our company stronger and to assure employment at home.

Our presence in China makes the point. We employ 8,000 people in the People's Republic, principally manufacturing air conditioning equipment and elevators. We make money in China, and lots of it. Our company globally is a stronger and better competitor, and better able to fund investments like research and development, three quarters of which we do here in America, consequent on our investments in China and on employing 8,000 Chinese people.

We would not do that work with 8,000 Americans, or even a small fraction of that number, not in a million years, because elevators and air conditioners for China are going to be built in China, not the United States. We can choose to be in the market or out of it, but if we want to be in it, we're going to be in it with 8,000 Chinese.

So I reject emphatically this business of chasing cheap labor, and invite you to reject Fortress America with me. No one denies the real pain Americans feel as we struggle to compete in global markets, but turning inward to America brings us only transitional benefits, and real losses long term.

The contrary argument is protectionism and regulation, bumper stickered down to "Save Your Job, Save Our Country," and we know what this leads to. In fact, let's talk about protected economies for a moment. A good and simple measure of protectionism is foreign content, or lack of it, in an economy.

In the advanced economic world, this figure is about 40%. In the former Soviet Union, the percentage was zero for decades and is still less than a percent today. And there are comparable experiences in the traditionally more closed economies all over the world: India, the Latin American economies and, for entirely different reasons, South Africa.

Long the leading overseas investor, our nation is now the leading host country for investments by others in us. Our trade content has also increased dramatically over the past decade, with exports (measured in constant dollars) having more than doubled to $650 billion last year, or about 12% of our economy. And our export jobs are about as high tech employment as found anywhere.

The world is globalizing, whether we like it or not. And we should like it because we are positioned to be big winners if only we embrace these forces and shape them to benefit both others and ourselves.

But we must alter the character of our corporations and their employees as this transformation occurs. We must change ourselves from entities that make things to entities that create things, and from organizations that make things to organizations that manage others who make things. We will move to knowledge work and to managerial work and away from actual, physical production.

What must concern us is that we are not preparing ourselves rapidly or effectively. While our research and development, both public and private, have been the dominant economic force globally in the post-War period, we are today reducing our expenditures when measured in constant dollars. And we have not even begun to deal with most of the American work force, the upgrading of whose skills is the precondition to the newly productive America.

Everyone talks about fixing public and higher education, and that is a necessary task. But this is by no means the only solution. Even if we had perfect schooling across America today, the young men and women leaving those educational systems will not hit their peak productivity at work for twenty or more years, past the time we can really leverage America's leadership in the world's economic transformation.

The immediate answer is a significant investment in education for the millions of Americans already in the workplace.

Return to that 49 year old laid off after 30 years of experience. His loss, multiplied by millions, is devastating for the nation. It is also the result of a behavior that loads education into the first 21 years of life, and then leaves the classroom essentially forever.

By rough estimates, young Americans enrolled in schools and colleges spend about 71 billion hours in the classroom each year. By contrast, employed Americans, far greater in number, spend less than 2 billion hours a year in traditional collegiate or advanced education.

This pattern no longer works for an economy with the rates of change we experience and where employment may be restructured, easily, several times during a career. When we experience restructuring, we need knowledge that is current, not the knowledge acquired two or three decades ago.

There are about 120 million Americans working today. As many as 30 million of these will be at risk: 18 million people in administrative support jobs prone to automation, 10 million in manufacturing jobs susceptible to foreign competition, and 2 million in additional white-collar jobs that medium and large companies like ours, under the pressure of competition, will learn to live without.

While no one of us as an individual caused this crisis, it falls to us as individuals and companies to respond. I do have some suggestions.

As a private employer, we cannot guarantee anyone a job, but we are nonetheless obliged to provide employees reasonable opportunities to reestablish themselves, ideally on more favorable conditions, in the event of job loss.

One effort we have as UTC is tuition and associated expense reimbursement for study toward undergraduate or advanced degrees. It costs us $11 million a year, and it's open to substantially all of our U.S. employees. We currently have about 4,500 people, or 6% of the eligible group, take advantage of this opportunity. That result is about average for large American corporations, but the very best ones, and the best divisions within our own company, have 20% of employees enrolled in such degree programs.

We might inquire why these percentages are as low as they are. Part may be our fault, and employees themselves after all have to take the initiative. What we can do, and are doing now, is to work harder to generate program awareness, to provide inducements to participate, and importantly, to provide time off from work.

One inducement is straightforward, and it's also new for us: earn an undergraduate or advanced degree in our tuition reimbursement program, and with that degree comes 50 shares of UTC common stock, valued yesterday at just about $4,700.

We also share in the time commitments. We all know that time remains the single incompressible constant in our universe, and is therefore life's true scarce resource. So we now provide half of classroom time as paid time off from work: one half your time, one half our time.

In consequence, we hope to see our education participation rate more than triple, to 20% over the next five years. And I believe that this is indeed likely to happen. The result will be among the highest for companies of our size and type, and wouldn't that be nice.

Other companies will make their own judgments about mid-career education, although I do express the opinion that as a group America's corporations don't do anywhere near as much as we could or should. I refer here especially to mid-career education, distinct from the job training efforts we all engage in, and I believe more essential, much more, to our nation's future.

What about our Government? First, the president and his most senior colleagues can use the bully pulpit. I recall a conversation with Commerce Secretary Brown this past summer, where I made the comment, not entirely in jest, that our goal ought to be a Ph.D. for everyone in America. We need to talk up education as a continuing national priority.

More immediately, we should back up that talk with money. Budget negotiators should restore baseline spending on federal student loan programs. The current proposal cuts $5 billion over 7 years, and that is wrong. Federal loan programs are the majority of all available student aid, and benefit more than 5 million of our nation's 14 million undergraduate and graduate students. Cuts even of this magnitude, and larger cuts were proposed earlier, jeopardize higher education for hundreds of thousands of Americans.

Let's also stop taxing as income to employees the tuition reimbursement programs I mentioned earlier. Isn't it bizarre that we do this? The reason why is, of course, the symmetry in the federal tax code: deductible to the employer, taxable to the employee. But if there ever were a case for an exception, this is it. Beyond the societal benefit of education, let's also note that 99 percent of the people who would benefit from this tax break earn less than $50,000 annually, and a third make less than $20,000. This is, after all, America. Let's reward initiative, not punish it.

And what about tax deductibility of the cost of higher education? The idea has, of course, been around for a long time. But we need to keep clearly in front of us that college graduates earn, on average, 75% more than non-graduates over their careers. We need to keep clearly in front of us that unemployment among college graduates last year was only 3%, while it was 7% among high school graduates.

What about the rate of return on these tax deductions, recaptured in later years through higher incomes and higher taxes? The answer is an easy 15% annually, and this is just plain, basic finance, and it is persuasive.

Look at the possibility another way: we happily subsidize home ownership via interest deductions, and have since the beginning of income taxation in 1913, in the belief that this promotes a stable and civil society. Why can't we even more reasonably subsidize higher education in the belief that it promotes a better and more competitive society?

We know that even if we do all this, we won't get to that all Ph.D. society I mentioned, at least not anytime soon. But we will come a lot closer to that fantasy town Lake Wobegon, where everybody can indeed be above average.

Initiatives like this are not new to America.

The Morrill Act in 1862 created America's network of land grant colleges by encouraging states to sell public lands and use the proceeds to establish or expand colleges. Ultimately, states sold 17.4 million acres of land, an area greater than the combined states of Rhode Island, Connecticut, Massachusetts and Vermont. Seventy of the best schools of the country today are direct beneficiaries of the Morrill Act and its successors, including Cornell, Purdue, Yale, Dartmouth, MIT, Brown, and the state universities of Wisconsin, Minnesota, California, Delaware, Ohio, North Carolina and Missouri.

The G.I. Bill is more recent and as compelling. Its main benefit to higher education was a $500 annual stipend for returning veterans. Lest that not seem like so much in today's economy, realize that Harvard's annual tuition then was only $600.

The results were straightforward and powerful: U.S. college enrollments in 1948 were nearly double pre-War levels, and G.I. Bill benefits ultimately led to more than 2 million bachelor's degrees for veterans.

These remarks today are a call for more higher education, a whole lot more, and targeted at an already older work force. It's the only defense, and it's the right defense, against the risk of globalization with pauperization. And, like any good defense, it is in fact an offense. The challenge is simply to elevate ever larger portions of our population to knowledge work, to the ability to deal in, and to work with, abstractions.

We do this with education of the good old garden variety, not on-the-job training, not self-help books and videos. We do it by teaching people to manipulate ideas and abstractions, which we do in turn with language and literature and math and science. We need structures to accomplish this goal, and I have suggested some.

What we also need is will.

We need the will of individuals to better themselves, and the recognition by them that they can.

We also need the recognition by society and government of the nature and extent of the challenge.

We need the courage to look ahead; to embrace opportunity, and not to defend a past that will never return. America led the rebuilding of Europe and Japan after World War II. The world's events have again given us the opportunity to lead a mass migration of people into advanced economies, and in the course of our leadership to have our institutions and our employees benefit directly and personally from the enormous wealth generation that will occur.

The agenda is to educate ourselves, to enable ourselves to engage with the world, with confidence and with vision. We've risen to plenty of challenges before, and we'll rise to this one, too.

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