THE FORUM ON TECHNOLOGY & INNOVATION

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IS THE TECH BOOM OVER?

THE REAL STORY OF THE U.S. ECONOMY

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WEDNESDAY,

FEBRUARY 7, 2001

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This transcript was produced from a tape provided by the Council on Competitiveness.

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PRESENTERS . . . . . . . . . . . . . . . . . . .PAGE

Dr. Michael Porter . . . . . . . . . . . . . . . 3

Dr. Lawrence Mishel . . . . . . . . . . . . . . 11

Dr. Allan Mendelowitz . . . . . . . . . . . . . 16

QUESTION & ANSWER . . . . . . . . . . . . . . . 22

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MR. ROONEY: My name is Peter Rooney and I direct the Forum for Senator Rockefeller, Senator Frist, and the Council on Competitiveness. It’s my pleasure to welcome you back to another Tech Forum briefing. I think the senators have brought you a great program today. For you folks standing, we have a few seats up front here if you could force your way through the crowds and sit down-- that would be terrific.

I just want to briefing tell you about our program and our format. These briefings are made possible by generous grants from the W. K. Kellogg Foundation, the Alfred P. Sloan Foundation, the David and Lucile Packard Foundation, and the Samueli Foundation. We couldn't do it without their support and we're very grateful to them.

In your briefing packets the first item on the back page is the agenda for today's briefing. The senators will make introductions, we'll have presentations from our excellent speakers, and then the senators are going to open the floor to your questions. We have microphones. We very much prefer that you come to the microphones if you can. I know it's tight. If you could make your way there that would be great. To our public audience, we're delighted that you're here, but please give Congressional Staff priority at the microphones. The senators are here and we're here for the Congressional staff.

The second item in your briefing packet is these green question cards. For those of you who are shy go ahead and fill our your questions on these cards, hold them up, we'll do our best to snake through these tables and pick them up from you, and Senator Rockefeller and Senator Frist will ask questions on your behalf, National Press Club Style. Finally, we have blue evaluation cards. It's the third item in your packet. We care very much about what you half to say. Please tell us what you think about what we're doing. We pay attention to your feedback and we use it to continuously improve our events. Now I will turn it over to Senator Frist.

SEN. FRIST: Well let me thank everyone for being here. Exciting program today and we're delighted to have everyone here for the inauguration of the Tech Forum's third year now here on Capital Hill. Many of you have been with us over the last two years and seen, what I think, are a wonderful set of programs were we systematically address issues in a very current, contemporary, contemporaneous way-- in a contemporary way-- that is really hard to do in any other form. So this is the third year and this is the first of our series for this year. We do set out to design these forums like today, with your interests-- with our interests as senators but your interests as participants, as policy makers on the Hill-- in mind. We try to bring together-- and today it is well represented-- the whole thrust of bringing together dynamic speakers, speakers who are experts in the field, so that we can transfer this information, stimulate discussion in a focused way, a responsive way, interactive way, and thus the encouragement of having questions and being able to ask questions directly. Your job, obviously, is to do just that, to participate, to come to the meetings, to enjoy yourselves, but also ask the pointed questions that draw the sharp distinctions and really get to the heart of the matter in ways that you might just not be able to otherwise by reading an article, or watching a show, or picking it up directly through the media.

Today we're going to be focusing on the extraordinary economic boom over the last ten years, the longest economic expansion in US history during which the average American standard of living has reached the highest in the past forty years. We all know that technology was a key driver in the investment and growth of our national economy. We've seen the recent demise of some of the most prominent dot-com companies. We've seen the end of an IPO frenzy on Wall Street. We've seen what is just beginning to be some layoffs in America's manufacturing sector. And the whole question comes down to, "Is this high tech boom over?"

The sort of questions, which we will be addressing, is, "is technology's impact on productivity and economic growth a permanent change in the economic landscape? Was the tech boom just a bubble? Or, is the story of the New Economy much more complex them we ever initially imagines a year ago, or two years ago, or three years ago when we started using these words, the New Economy?" We are fortunate today to have with us three experts, and I'll turn to Senator Rockefeller for their introduction.

SEN. ROCKEFELLER: Michael Porter, when he was a graduate student, was studying strip mining in West Virginia, and his career has been going down ever since then. (Laughter) With the exception that he's the Bishop William Lawrence University Professor of Business Administration at Harvard Business School-- and there are only four professors of that category in the Harvard Business School History-- he's an expert on competitive strategy. I think we've all read some of his books: "International Competitiveness." His seminal works in the field are used by business schools throughout the world. He's going to take a little bit more time them usual to give us some overlay. Michael.

DR. PORTER: I'm going to use this microphone just to make sure that everyone can hear me. We have a large group here today. I'm very honored by that and I hope that this session is going to be an interesting one, if I can untangle my cord and get started.

It's a special privilege to be part of this form because I think that it's fair to say, Senator Frist and Rockefeller, that I was around when we were discussing this idea of having this forum and the notion was that we needed a way to talk about the often complicated issues of technology that was a little bit more thoughtful then kind of the sound bit model that tends to get practiced in Washington. And the thought was that through partnership with the Council on Competitiveness, we could start a process by which all of us could educate ourselves in very much of a two way process about the impact of science and technology on the economy.

The Council on Competitiveness, of which I am a member of the executive committee, has recently completed what I consider a very significant new study. I'm just going to hold it up here today. It's called, "US Competitiveness 2001," in which we try to take a really fresh and long-term look at what happened in the United States in the nineties. What was this remarkable economic boom all about? How do we interpret where we stand today? What are the vulnerabilities facing the US, both in technology and in the economy overall?

This study did not set out to look specifically at the Internet or the IT boom but obviously, the IT boom, as you'll see in a minute, figured very prominently in this remarkable period of economic prosperity that we've had. And that raises the question of, what is the future of the IT boom? What is the future of the Internet? And that is something that, although it is covered briefly in this study, it's something that I've really have looked more in other work that I've done. So I'd like to make a few comments on the Internet. I have an article on the Internet and kind of it's fundamental impact on strategy and competition that is going to be in the next issue of the Harvard Business Review, the March issue. They wouldn't let me bring a copy of it today because it's not yet published. But I'll make a few comments about that article and about my take on what's happening with the Internet and the dot-com bubble. And I'd be happy to also respond to questions.

But I'd like to not focus on the narrow issue of the Internet because I think that the Internet is just one piece of a mosaic of the US economy and of the prosperity that we have enjoyed, that we really should reflect on a little bit because, I think if we're not careful, we're going to focus too much on the short-term economic growth or downturn, or slowdown, or whatever it's going to be. We're going to focus too much on fiscal and monetary policy, and we're going to miss some very, very fundamental challenges facing the US that have been masked by what's been happening in the last ten years. So, I'd like to look at more broadly, the role of technology in our recent economic prosperity. But again, I want to emphasis that I'm happy to talk about the Internet if that's what others would want to do as we get later into the discussion.

I'm going to go very quickly here. I'm going to show you a fair amount of data in a small period of time. You'll be able to ponder some of this data when this report is released, which will be one week from today at a press conference. But I want to get you kind of the gestalt of what's going on out there. What are the major challenges facing the US in the area of technology and what should we do? What are some of the fundamental priorities? And we have some terrific commentators who I think are going to be able to add a tremendous amount of value to the discussion and probably correct all of the mistakes that I'll make in my presentation.

If we look at the recent economic boom in the US we see, basically, that what happened was that the US enjoyed a remarkable period of firing on all cylinders. Economic growth really is driven by three different things. Number one is the growth in the work force. Number two is the growth in the capital stock. And number three is the growth in multifactor productivity, or the technology that is employed to use that labor and capital to produce output. What you see here is that the remarkable period that we've had, which is principally in the post '95 period of 4.3 percent GDP growth, is really significantly impacted by progress in all three of those areas. We got a lot more people into the workforce. We had a boom in capital investment. And our capital-to-worker rates started to approach that of the other high investment nations. But the real kind of star of this particular show was the significant pick-up in multifactor productivity. But I think it's important that all three of these things, all improved. And they led to this kind of remarkable confluence of prosperity that we've been able to enjoy.

Now, in terms of the work force, the growth of the workforce was not primarily lots of new workers entering the workforce. The growth of the workforce was really absorbing the pool of workers that were largely already there. And you see that virtually every group in America increased its participation in the workforce. This is very, very good news and a very positive development. And for reasons that I'll talk about later we should see-- I'm having terrible problems with my cords today, I'm getting totally caught. It must be the Capital Hill Syndrome, tangled up in red tape. (Laughter)-- Hispanics increased their participation in the workforce, African Americans, females; all groups have made a substantial move into the workforce. Right now of course, we have very, very low unemployment rates, and we'll talk later about how that's likely to change over time.

On the capital side, we have a very robust growth in capital investment but what you aught to notice on this chart is this red line. Really, the boom in capital investment was driven by investment in IT equipment. You see that it started out at 10 percent or private non-residential investment in 1980, which is the first year of this chart-- it's a little hard to read-- and really moves steadily upward over the period. You see that it sort of inflected up a little bit in the last part of the nineties, but I think in the context of looking at this chart we see that this growth in IT spending is a long-term phenomenon. It's not a bubble in that since. It's something that's been proceeding quite dramatically as the information intensity of competition has gone up and the technology is improved, companies have been steadily raising their investment. And they're going to continue to raise it over time, although the character of that investment may be somewhat different.

Just to put the productivity growth numbers in context, between 1974 and 1990, the multifactor productivity growth rate was only 0.7 percent; the early part of the nineties, 0.9. We have a doubling in the second half of the nineties, an extraordinary impact. Why did that happen? Part of it was clearly IT investment. If you correlate productivity growth, or improvement in productivity growth with IT penetration, you see that the nations that had high levels of IT penetration and penetration of the Internet have done better in improving their multifactor productivity growth rates then those nations that were lagging in IT penetration. Japan, for example, has not enjoyed nearly the up-tick in multifactor productivity growth. In fact, theirs has gone down in terms of the rate of growth. So, IT was clearly part of this upsurge in productivity, but as one who works a lot with firms, a lot of it also had to do with really a decade of restructuring and reengineering, and outsourcing. It's more then just IT. There is a whole lot of things that companies have been doing to become leaner and meaner and more cost effective, that have been going on for a decade, and we are enjoying the fruits of this as well as, on top of that, the kind of up-tick in productivity do to the usage of information technology.

We have had a recent explosion of patenting. Patenting is the best single measure of innovative output in the economy that we can come up with. The rest of the world has picked up in patenting as well. We'll come back to that later. And we've also come to realize that in understanding our technology assets in the United States and understanding innovation-- innovation in America is quite focused on a regional level. We can't think of innovation only by thinking of the US as a whole. What we see is that there are pockets of innovation in particular fields in particular locations within the US. We call these clusters. So, you see that the patenting activity in biotechnology and pharmaceuticals is very focused on just a few locations: New Jersey, Philadelphia, Boston, and California. If I put up Automotive, you'd see different locations being the sources of innovations. If I put up oil and gas, you'd see yet different locations. So, one of the big lessons from this boom is the importance of the region and the local assets, not just national policy. And this is a theme I'd like to come back to as we go forward. A lot of what drives innovation in an economy is sadly not under your control in Washington. It's things that are happening in the states, it's things that are happening at the city, at the regional level. And increasingly, as we think about innovation policy, we're going to have to add that dimension to our equation.

Now, at the same time as we had this tremendous progress, we've also seen this stark data that we're all familiar with. Forty percent of Americans did not progress although on average the economy was progression; forty percent. And this actually even makes it even starker. This is the lowers fifth of the income group and the highest fifth, and we see here this tremendous divergence. And we know that inequality in the United States is higher substantial then it was at the beginning of this process and is very high compared to other nations. So although there has been enormous prosperity there's been this bifurcation between the bottom forty percent and the top sixty percent. Why did that happen? Well, the evidence on that is overwhelming. It has to do with education. If somebody had less then a high school degree, they have more then a fourteen percent chance of being in poverty. If somebody has a bachelor's degree, they have a one percent chance of being in poverty. If somebody has less then a high school degree, they have seven percent chance of being unemployed. If they have a bachelor's degree, they have less then a two percent chance of being unemployed.

The differences in outcomes seem heavily correlated, if not totally explained by differences in educational attainment. Those who were educated did well. Those who weren't educated didn't do well. This just shows it another way. The folks with less then a high school diploma did worse-- or actually lost in terms of relative position-- high school diploma even lost a little bit, some college even lost a little bit. You got to get to the college graduates to see the people that are gaining. This says that the threshold for education has risen. It used to be that if you had a high school degree you're ok. Now, you need college. What this says is that even a college degree, to be gaining in the kind of economic competition that we now face. As we look forward we see that the jobs that are going to be created are going to be growing more rapidly among the areas with some skill. Of all the job growth, there's going to be still growth in jobs with minimal skill requirements but competence and a BA or higher is going to be increasingly prerequisite for many jobs, and this raises some real challenges when we have some many of our citizens really not equipped. We see very great differences in the percentage of people with bachelor's degrees or higher based on race and ethnicity. Whites and Asians well ahead of Blacks and Hispanics. This has to change. We have to address this issue. It's fundamental to the future of our economy.

Why do we have some of these disparities in education among racial and income groups, there's a lot of literature on that. But, just things like teacher shortages in schools serving minority groups goes a long way to helping to understand the problem. There's a wide set of issues here. But the cold, hard, truth is that we are not educating and skilling a chunk of our populations. That's the chunk of our population that isn't moving ahead. Also, and this should be of keen interest here in Washington, part of the problem is that the amount of support for low income people to go and get higher education has been declining in relative terms. The price of higher education is going up. The support is going down. And we know that low-income families have a real hard time addressing the cost of higher education. And yet, at a time when that's happening and at a time that higher education is increasingly necessary, we're not delivering on the kind of support that people and families need.

So one challenge has to do with our basic skills in the workforce; our average level of workforce skill. A second issue we find facing the US has to do with our commitment to research and development as a nation. You've probably seen these statistics before, but between 1995 and the year 2000, the research and knowledge intensity of competition has gone up dramatically. But, although we've had the usual cyclical upturn, recently in R&D spending in the United States, we're still below where we were in '85 in terms of the percentage of GDP. Although, there has been a growth in research during this economic expansion, if you look at periods of economic expansion, the growth in R&D during this economic expansion is lower then it was in previous periods of economic expansion. So, although our industry has been very productive, although we've had a spurt in patenting activity, it appears that some of the fundamental investment underlying that is slowing down and companies may be better at commercialization, but the seed corn-- if you will-- may or may not be present.

One of the big problems there has been the role of the federal government. The federal government used to be the place where basic R&D was funded. And that makes since because no company is going to fund basic R&D. And the companies that used to fund it, like the Bell Labs, don't fund it anymore. So if anything, the vacuum to be filled by government in basic R&D has been open, but yet the federal government has been committing less and less. It's particularly worrisome to see this declining line in basic research over time.

Is basic research important to the economy? Can't firms just do it themselves? I hear this over and over again. The answer is no. This is a stunning slide. Every one of you should take this slide to work every day. This slide looks at the percent of US, in industry patents, that sight publicly funded research papers. And it shows that more then 70 percent of every patent taken out by Motorola or IBM sites a federally funded paper. The reason that we're so successful today in Genomics, in IT, the Internet, and virtually every other field you name is because twenty or thirty years ago we build infrastructure. We invested in basic science. And our commitment has been waning.

Moreover, partly because of politics, our portfolio has become very skewed. It's easy to get support for life sciences. We pump money into life sciences. We starve mechanical engineering; declines in physics; declines in chemistry, declines in mathematics, computer science, you know, sort of a tepid increase. You know why life sciences is doing so well right now? Because, they're drawing off of fundamental breakthroughs in physics and chemistry that happened twenty years ago. If we don't make those fundamental investments in the basic sciences, we are not going to improve life sciences at the same rate we have in the past. Companies can't do it alone. They're drawing off of a common pool. That pool can't be left to the private sector. And the evidence is growing that we are starting to create some very, very strong imbalances that are going to affect our future prosperity.

Now as we thing about competitiveness it's always interesting to look at other country. Not that it's a zero sum game. All nations can become competitive at the same time. But what we see is that other nations are getting better and better. This has to do with the percent of a nation's patents that are highly sited. That means that they are important patents. And what we see here is that the US is still a little bit ahead on important patents as the percentage of total patents but other countries are moving ahead and are looking better and better. In particular, I would site Finland, Sweden, and Israel as making particularly rapid progress. Taiwan has become a major innovative power. So, others are not standing still. We don't have any birthright to be a leader in science and technology. We're not smarter then people in Taiwan or Israel. The reason we're good at it is because we had a system that invested in the components of a science and technology system. It all hung together around the Cold War. You all could get the legislation passed by blaming it on the Russians. But the system has started to crumble around the edges. It's not that we're in a crisis but we have some real issues.

Other nations are also steaming rapidly ahead on information technology. It used to be that we ran and they walked. But nation after nation is rapidly deploying information technology. I was in Japan, even last week, and they boast about how they're going to introduce 3G wireless before we do. We're still debating whether or not to go to third generation wireless, and they're introducing it. So we don't have any birthright to leading information technology. Go to Sweden, go to Finland, you'll see more use of IT there than we see in the United States. You'll see citizens that, on average, are much more literate in IT then we have in the United States. We have no birthright to our competitiveness and our prosperity. We have to put in place the underpinnings.

Now, let me make you even slightly more concerned. Look at what's happening to the number of scientists and engineers in the United States. How are we going to be an innovative nation if we have a shrinking number of scientists and engineers graduating at the undergraduate and graduate level? Explain that one. And other nations are growing, or at least not shrinking as fast. Again, life sciences is the exception. Lots of people go into biology and biomedical technology. But outside of that, in math and physics and so forth, we have a real issue. This is a fundamental national priority. We have no program like the GI Bill in place to address this issue. This, I would commend to you as a central, important priority. There's been some significant progress in boosting R&D spending in America in the last few years. Literally nothing, as far as I can tell, really seriously addressed to this issue of personal shortages among our technical workforce.

If we're going to address those shortages, we're going to have to get women and minorities on the playing field. Huge problem. If we could just get women and minority's participation up to average, we would have a growth in scientists and engineers. And that's going to have to happen. So, we're going to have to figure out how to do that. There's some interesting articles about that recently. There's a bubbling of discussion about this issue, but it's really fundamental to dealing with the S&T workforce.

The final issue I would bring to your attention is one that again, we still can't really take seriously in America. And that is the demographics. The American workforce is rapidly on its way to not growing. Remember our 1990's economic boom? About a third of it was driven by absorbing new workers into the workforce. Not going to happen in the future. There are no new workers. The growth rate in the workforce is going to go to zero. These could be optimistic projections. Not only are we going to have the workforce growth go down, but who's going to be retiring: lots of PhD's, lots of engineers, lots of highly trained people and highly educated people. Where as our education system today compared to our education system forty of fifty years ago isn't performing as well. So we have a real issue. How are we going to deal with this demographic issue when we have no particularly new workers around to tap into that we haven't already accessed, except for a small number? What this says is that we simply must find a way to assimilate and make productive all the people in America that are not now part of the workforce and that want to be. Many of them are minorities. It is time were that challenge becomes not just a challenge of equity and fairness, but it becomes a challenge of our economic growth. If we can't assimilate the minority workforces and bring people from underemployed to productively employed, the US economy's growth will be moderate to low.

The last thing I think we have to do is, we have to-- we're going to have to figure out some new ways of thinking about retirement and what people do at what ages. Kind of some stunning data here-- percent of men fifty-five to sixty-four, and sixty-five and older in the workforce. Between 1950 and 1999, we started retiring earlier, and we've had this whole process by which, "retire early, retire early," that's the thing you aspire to. And if these trends continue, the demographic impact on the US economy is going to be even worse than it's already going to be. So we have to think about new ways of viewing our older Americans, ways of keeping them in the workforce, and I think that has many, many ramifications, not only for social security and things like that, but also for many other policy areas that we have to systematically look at one by one and see if we can address these issues.

What about the Internet? Is the demise of the dot-coms going to mean that the US economy goes into the tank? I don't think so. The dot-coms, think of the dot-coms as phase one of the Internet Revolution. The vast majority of the dot-coms had no strategy, deployed the technology in ways that had no potential to ever make a profit. The first stage of deployment of the Internet is where, hopefully, we've made all our mistakes. What's happening is that the leadership in the deployment of the Internet has already shifted away from dot-coms to established companies. And it turns out that the Internet doesn't make established companies obsolete. The Internet actually allows established companies to leverage their advantages. There's no conflict between the Internet and the conventional way of doing things. They compliment each other. Who's the leader in Internet brokerage? Schwab, not E-Trade. E-Trade is madly trying to recreate the physical assets and traditional assets that Schwab has. So the next stage of the Internet is going to be established companies deploying this technology. And that established companies are going to have to make money at it. And therefore, if anything, the next stage of the Internet will have a greater impact on productivity because a lot of what the dot-coms were doing was not productive at all. They were doing a lot of cool things, but nothing that anybody was willing to pay for. (Laughter)

Now if you all will stop artificially subsidizing the Internet that will help. One of the reasons that the dot-com thing has gotten so out of kilter is that the Internet companies were artificially subsidized in terms of not having to pay sales taxes and things like that. So therefore, people that that it was a better technology. But it wasn't really better from a fundamental point of view. So, we shouldn't be skewing commerce towards e-commerce. We should let market forces and fundamental productivity determine how companies do things. But all my corporate friends tell me that we are in the first-- we're still in the first chapter of the Internet. There is going to be a long-term boom in IT. There will be lots more investment in IT. The productivity benefits are going to be there. So I don't think that it's going to be the IT bust that brings down the US economy. I think that if anything brings down the US economy, it's going to be these time bombs that I've been talking about. I don't think the US is anywhere near an analogy to Japan. The Internet bubble isn't anything like the real estate buddle in Japan. So I wouldn't worry about any of those issues. I would worry about the stuff we talked about today. Workforce skills. How do we deal with that fact that we're out of workers? How do we renew our science and technology base? How do we renew our science and engineering cadre so that we can continue to be the leading innovative nation in the world, which is the only way we're going to support that highest standard of living in the world. With that, let me stop and we'll open it for co-panelist. Thank you. (applause)

SEN. ROCKEFELLER: Thank you Michael very much. It's interesting that we, I didn't say to Michael, or to our other two panelists that we have a rule in here, that only staff are allowed, the folks that we're lucky enough to work with. If you didn't notice, for the second time, Ted Stevens from Alaska, slipped in-- was standing against that wall during Michael Porter's presentation. And that should be noted. But the reason we do that, I would say to our three panelists, is because; it's not that we've given up on senators. (laughter)

It's that we think the best way to get them to do what they need to do is the people who are sitting in front of you and listening to you.

Lawrence Mishel is Vice President of the Economic Policy Institute. He is an authority on labor economics and an expert on the impact of technology on the workplace. He is co-author of, "The State of Working America," one of the best sources for wage trends and income distribution. He's also written a lot, spoken a lot on how workers have faired in the high tech economy. Please.

DR. MISHEL: If I can stay untangled too. Can you hear me? The topic today is the New Economy. Now, the New Economy is not a term I learned in graduate school, is not a term in any economics textbook that has recently been written. It's a term of art that I think is best used to describe that starting in 1996, there was a pick-up in productivity growth and some better prosperity. Before that, there was a lot of discussion about the New Economy. There was a lot of hype about it. It's going to lead the stock market to ever rise. We know that that's not true. We've repealed the business cycle. We know that's not true. It's going to deliver unparalleled prosperity. I think that's probably not true. But I have, now that there's a little bit of a slump in tech and a slowdown in the economy, I find myself in the unusual position of coming to the defense of the New Economy to say that there is actually something there once you remove all that fog which says there's a whole new world, therefore follow my policy recommendations, whatever they may be. And that comes from both sides. I think we had prosperity in the late 90's, and jus to be bi-partisan, I don't think it really had much to do with the Clinton budget agreements. I know it didn't have anything to do with the Reagan tax cuts in 1981, despite what everyone says. But there is an underlying thing going on. The underlying thing is what Michael talked about which is that there is faster productivity growth. And we don't really know all about what caused that, but I think it is fair to state that around half of it, forty to fifty percent of it is due to IT related phenomena, Ok, high tech. So there is something about a high tech boom that's been going on.

Now, I want to step back and look at this from the perspective of a labor market economist, from the point of view of what's happening to workers, and then talk a little bit about the current situation.

Let's start with the really, really good news of the late 1990's. And I just want to point out that I'm saying this from the perspective of somebody who wrote papers for more then a decade, and books, that said things have been bad, things are bad, things will be bad. (Laughter) And I was right. You know, until 1995. So this is just a look in the 1990's what happened to wage growth, among men: low, middle, and high. And all you need to get out of this is that in the early 90's wages were actually falling really across the board for men, even high wage men. The wage growth was pretty pitiful. And in the late 1990's, wage growth accelerated. This is a reflection of a number of different things, including-- this is roughly two percent wage growth beyond inflation. The whole period in the early 90's and the period from 1973 to 1989 was a period of declining wages; wages not keeping up with inflation for most of the workforce. Ok, so this is a really remarkable thing.

Just so you know that I'm modern, I'll show you that this happened among women too. We don't have to just talk about men. And women's big acceleration, wage declines for really the bottom 60 percent of women in the early nineties, and across the board, real wage growth. Now that's very important. And on the labor market side, what it really allowed us to do was to lower the unemployment rate. This is unemployment rate by education, the overall unemployment rate. You know this is for 1999, 2000 would be here, around 4 percent. But as the unemployment rate fell overall, what it really fell dramatically for was the people wit the least education which is the group of around 15 percent of the workforce that don't have a high school degree, who's unemployment rate fell from roughly 12, to under 7 percent. You might just know that we would call that a recession if it weren't for the economy as a whole. So in the best of times, they had a 7 percent unemployment rate. Even those with just a high school degree had unemployment around 3 and a half percent around 1999, and that's pretty darn good.

Along with this faster productivity growth, faster wage growth, lower unemployment, which are all related, we saw a lot of improvements of people moving from part-time to full-time work; from temporary and contingent work to more permanent types of jobs. We saw a decline of poverity. We saw overall inequality kind of stall out and not grow as it did in the past. That is somewhat of an accomplishment but it's a backhanded accomplishment in the sense that economists expect inequality to actually decline in a strong recovering. So the fact that it was flat is better then it growing but in my view, for someone who takes those issues very seriously, it's a back-handed compliment to say that we kept it flat.

So there were a lot of real good things happening in the late 1990's, which I want to motivate that I fear may not continue it it's full breadth. But just because I want us to have a bit of humility in somewhat the same spirit as Professor Porter, we have not had unparalleled prosperity. I mean this is a phrase that they must have a button at the Washington Post, you know the place where they just punch it and it goes "unparalleled prosperity" into articles. It's not unparalleled relative to what's happened in other countries in the post-war period, or what happened to the United States in the 50's and 60's. I mean it's darn good. I like things getting better. But I'm not impressed that it's otherworldly. And just to have that humility I want to use information from a radical organization called the Conference Board (laughter) in New York City, that is a business organization, and this is a comparison of the productivity levels that different countries have. That is output of goods and services per hour worked. So here's the thing, everyone is indexed to the United States, which is 100. And what you should observe is that in 1989, which is these lines, people were behind the United States. And by 1999, essentially, this is the major countries, the Netherlands were at a little bit above the United States, Germany was substantially above, France was above the United States level, and Belgium was at the United States level. Now, I don't believe these numbers within around 5 percentage points, Ok. But I don't think it really matters. Basically, we think we did this big high-tech thing, and we're way ahead of everyone else. But in reality, European productivity has been growing double that of the United States for decades, including pretty much in the 1990's. And the reason why economists expect that that would be the case-- and this explains a lot of what happened over the last three decades-- is that we have been the technology leader and they've been able to catch up. It's easy to copy somebody. It's hard to invent new ways of doing things, right. That's the way economists explain this. But the fact is that now that they've caught up, it can't be this kind of catch-up phase. I think this has a lot of implications, for instance, we know that European unemployment is higher then ours, in many countries. Not in some of these countries like the Netherlands. And there's this assumption that they're broke and we're gold, and that the welfare state, and strong unions, and labor protections somehow prevents people from prosperity. But whatever those policies have done, they have not prevented these other countries from actually catching up to be as productive as we are.

Let me say a couple things about-- let me first comment on Professor Porter's presentation, which I rather enjoyed, which is basically arguing that we need to improve workforce skills, bring more people into the labor force, and we have to worry about our public investment in R&D. Those are the two big messages I got. I believe the first one very much. We need to improve our workforce skills. And I believe in the second one too. I think that it's wrong thought to think that there was some problem in our workforce skills that explains the growth of inequality over the last two decades.

There's a paper in your packet, which goes into that argument, but I just want to present a couple of graphs. This is what economists call the 50-10-wage gap, the fiftieth percentile to the tenth percentile. It's a description of the wage gap between the middle-wage worker and the low-wage worker. And what you'll see is that in the 1980's there was a big growth in the wage gap at the bottom. I want you also to note that since 1987-88 it's actually been flat or falling. So that meaning that low-wage workers have been doing somewhat as good, if not better then middle-wage workers. Ok, I'm going to give you some trends and then give you the story that I tell that goes with them. On the upper half of the wage distribution, we have the gap between someone at the 95th percentile, who makes better then 95 percent of all workers, and the middle-wage worker. And here you see the wage inequality just goes up and up and up and up. Now, I study wage trends, inequality trends, on a monthly basis with the data. And I just want to draw off some of the implications of this. One, it doesn't fit a skills technology story to me that what happened to people at the bottom end, unless you were to believe that somehow in the 1990's there was a skills explosion, that we rapidly improved the schools in the 80's that brought workers better skills and education in the 1990's. Or else why is it that all of the sudden the wages at the bottom started catching up and doing as well as the middle. It's also the case that if you look in the boom period of 1995 to the year 2000, overall wage inequality did not really grow at all. There's a number of different elements of wage inequality. The one that gets the most attention is the gap between people by education. And we actually find that the people who went to college did somewhat better then those who didn't go to college. But people who went to high school didn't do much better, didn't do better then the people who didn't go to high school. We find that younger workers did better then middle-aged workers, and so experience differentials actually shrank, including other experience differentials. And most important of all, most of wage inequality is explained by what happens among people of particular types of education and age. So let's say young college graduates, middle-aged high school workers. We call it, "within group wage inequality in the profession." That explains that most of the growth inequality is not between groups, it's actually among various groups. And that type of inequality has actually fallen the high tech boom. So, my point is, if in the late 1990's, when we've had a huge increase in technological change, computer investment-- and if that is what is suppose to be leading to a big increase for the demand for skills-- if we didn't see wage inequality then-- and assuming that we didn't have a big growth in skills and the supply of college graduates, which I think that we should specify is the case-- then technology does not seem to be leading to wage inequality. And I would also doubt that it actually happened in the 1980's as well.

Just sort of further intuition for that, you might just note that it's not true that college graduates have done all that well. If you look at men, the wages of college people with just a bachelor's degree, the wages were actually fairly flat over the whole 1980's and early 90's. If you look at people who were coming out of college with a new degree, the wages they would get when they came into the labor market in the early 1990's plummeted. For young men and young women with a college degree, they were earning around ten percent less in 1995 then '89. There was a big decline. So it's not that there basically was some kind of process that was benefiting everybody, including those with a college degree. We were, essentially, in a problematic place. And I think other things explain what has gone on to increase wage inequality. I'll just say that it has to do with the shift to service sector industries, which are lower wage then manufacturing goods producing, especially in our country relative to other countries. We had a decline in the real value of the minimum wage in the 80's, which led to the growth in the wage gap at the bottom. We corrected that somewhat in the 1990's. There is a continuing disempowerment of workers in terms of their ability to organize unions and bargain collectively. There are the persistent effects of globalization, and there's deregulation. A lot of other things that have made the market more open, but I think has weakened the position of most workers.

What does that mean for policy now? I think that we will continue to see somewhat higher productivity growth in the next few years compared to the bad old days of '73 to '95. But maybe not as good as we have over the last four years. It's all going to depend upon the continuing growth of investment in information technology. I think it's encouraging that productivity growth was still fast in the last six months of 2000 even though we were going into a slowdown. I think we need to watch very carefully what is happening with the continued investment in that area. I'm fearful that as we go into a slowdown we're going to see a reemergence of all times of inequality. I think this is particularly problematic for the low-wage workforce, especially the women who used to be able to get welfare and now may or may not be able to get it in the next downturn. And when they lose their jobs there won't be any safety net for them. They don't really have access to unemployment insurance. People in the low-wage end, the unemployment rates there are somewhere between 10 and 20 percent depending on your race and ethnicity now, at the best of times. So in a year or two, if there's a recession, they'll really be in trouble.

In terms of the policies that people here debate all the time-- tax and budget-- I think that it's a mistake to take the argument that there's a slowdown, which I believe there is, and a possible recession coming, to think that that has to do with a need for a tax cut. I mean, a permanent tax cut that's back-loaded seven, eight years from now, that's kind of an odd Keynesianism for me. You know, the Keynesian argument it, "we need to get stimulus now," and not permanently. I think that if we wanted to do something, we could do something on the order of what my colleague Eileen Applebaum and Richard Freeman from Harvard recommended last weekend in an op-ed of the New York Times, which was a prosperity dividend. Let's just write a check for five hundred dollars to every man, woman, and child of the United States that will last one year. Let's get some money now. That doesn't mean we have to have tax cuts that are going to be coming into effect seven years from now. We can think about, people can argue about what do we do with the surplus? I think the surplus is somewhat exaggerate, but I think there's money there. I think it's useful to talk about-- if we want to have tax cuts-- who can get it and why we go that. I think there's a lot of unmet social needs that have to be addressed as well. And I can imagine some package, which lowers the surplus and helps stimulate the economy over the next few years, but I think it aught to be some balance measure of tax cuts that disproportionately go to the middle class and low income, and something that meets our unmet social needs. Thank you very much. (Applause)

SEN. ROCKEFELLER: Thank you very much. Allan Mendelowitz is our last speaker and he's an expert on the impact of communications and information technology on the economy. And he is now chairman of the Federal Housing Finance Board. He's also an expert on technology and trade having served as director of the Congressional Trade Deficit Commission. Vice president of the Economic Strategy Institute, executive vice president of the U.S. Import, Export Bank. Allan, you notice that you were greeted silently. (Laughter) Don't worry about that.

DR. MENDELOWITZ: Thank you, thank you for that introduction. I have to say that it was really an honor to be invited to join this forum, especially because I have particularly fond memories of having testifying before Senator Rockefeller some years back. On one occasion there were a lot of roll call votes. The members got called out. There was a long list of witnesses. And by the time I got to the stand as befitting my role in the pecking order, I was the last witness. And it was about five o'clock, and there was only one member of the committee left, and it was the chairman. And the room was empty, and I looked at my watch and I figured, "well I'll be out of here by five after five." And I proceeded to make the quickest summary of a statement that I've ever made in my life, and started to get up, and the senator said, "Well I have a question." An hour later. . . (Laughter) So it's always a pleasure. Thank you.

I have to say that I really jumped at the opportunity to talk a little about the impact of the Internet on the economy because I think that there's a lot of misunderstanding about what's going on. All the attention of the press, everybody's focus, has been on the stock market. And the Internet has had kind of two big impacts. One was on the stock market, which got lots of attentions. The second was on the real economy, which I think has had far less attention then the stock market. Everybody looked at the stock market. Everybody thought that they were going to get rich. You had these unbelievable, unrealistic prices spiking up daily. It took your breath away. We're in the midst of a classic bubble. And then the bubble collapses and everyone says, "well is this the end of the technology boom." As if the stock market bubble was a reflection of anything other then sheer greed and the unanchoring of the stock market from underlying, fundamental value, which everyone knows is always, at the end of the day, a function of present discounted value of future profits. Eyeballs don't count.

Now, a little more then a decade ago, Robert Solo, a very distinguished economics professor at MIT and Nobel Laureate, observed that he could see the impact of the computer revolution everywhere accept in the productivity figures. Now, was he right? Well, I'm not a Nobel Laureate, so I tend generally to agree with Nobel Laureates, and I think at the time he was absolutely right. The computer, when it first came along, while enabling tremendous productivity increases in manufacturing, had virtually no impact at all on the service functions throughout the economy. And given the fact that service functions represent over 80 percent of the economy, no matter how much productivity you get in manufacturing, your overall productivity figures are not going to be very good if the 80 percent of your economy represented by service functions isn't improving very much year over year.

And so, when Solo made that observation the computer had not had a dramatic impact on productivity in most of the economy. Basically, paper processes were taken, moved onto machines; you could work will bigger data set. You could slice them and dice them faster, and better, and in more ways. You could do it more accurately, but at the same time fundamental business processes did not change.

It's only in the middle of the 1990's that there was a fundamental change unleashed on the US economy. And that fundamental change was unleashed because of the coming together of several key technologies. One was the computer, but the others were the ubiquitous, low-cost, digital communications represented by networking technologies, and the easy-to-use graphical user interface web browser. And it was the coming together of these technologies that enabled a dramatic transformation of the US economy.

Secondly, anybody that knows anything about the business world knows that, businessmen like competition and change for everybody but themselves. People don't glom on willingly to change. Change is tough. Change is tough on everybody. Just because there's something out there that holds out promise for you: more efficiencies, greater profitability, greater sales-- doesn't mean that you're going to seize it, unless you're forced to seize it. And serendipitously at the same time that this technology came along, a number of major changes to the fundamental level of competition in the US economy were also coming into play. One was, the Globalization, or internationalization of the US economy. Over the past 20-25 years, exports plus imports have gone from an insignificant share of the economy to the circumstance today where whatever you produce, you're going to face best in class competition to the US market from wherever that best in class competition comes from.

Second was, massive deregulation of the US economy. If you go back 25 years ago and look at how much the US economy was regulated, where the government controlled who entered the industry, what price you charged, what services provided, you get a feel for the fact that there has been an unleashing of competitive forces in communications and civil aviations, service transportation, energy, finance. We used to joke about the banking industries as being the 9-3-6-3 industry. You came into the office at nine. You took in deposits and paid three percent interest on them. You loaned it to your triple A customers at six percent, and you're on the links at three. Nobody who lived in that era would recognize what finance is like today. So you had this tremendous increase in competition in the US economy, and businesses-- because of the intense level of competition-- are forced today to be constantly lowering cost, constantly improving efficiency, constantly improving the quality of the products they produce, and constantly striving to meet consumer demands and exceed consumer expectations every day. You cannot rest on your laurels. That's one of the reasons why we see in this economy that even when times are good, companies who are profitable, companies who are doing well, are constantly restructuring and announcing layoffs.

And so this technology, the coming together of computers, digital, low-cost, ubiquitous digital communications, graphic user interface, and in 1994, the opening of the Internet to commerce is what, in this intensely competitive environment of the US economy, opened the way for the dramatic changes that we're seeing. And the dramatic changes that we're seeing on the real side of the economy, as opposed to what we're seeing on the stock market side of the economy, are really profound. Everything is changing. Markets are changing. I've got to tell you, as an economist, it's absolutely extraordinary to see.

When I was a graduate student back in the sixties studying economics, we talked about competition, markets, supply and demand, and prices, but when you really got into what was going on, you read about things like monopoly power; administered prices. We exist today in a world in which Economics 101, because of the advent of networking technology and the roles it plays in equalizing access to information, we're living in a world where Economics 101 is moving into the real world. The market sets the price. And if you're a competitor you have to figure out how to be profitable at the market set price. That's a phenomenal change when you look at the US economy today compared to what it was like 25 years ago.

Rents in this economy are being squeezed out. The only major rents that are left are the rents to innovation. And when I say rents, I'm talking about economic rents, which means, how much money you can make above and beyond sort of normal profit, average profit that everybody gets squeezed down to when everybody is producing a commodity product.

Corporate structures are changing. If you studied the literature of corporate structures back in the fifties and the sixties and the seventies, the one that everybody turned to was Alfred Chandler who described the competitive industry or the competitive firm as the firm that was vertically integrated because of its ability to acquire and process information in the context of a complex production process. You were competitive because of what you were able to do in integrating a production process within the boundaries of the firm. That has entirely changed. This access to ubiquitous low-cost communication means that you can engage in deep and intense information exchange beyond the boundaries of the firm which, means that today, every step of the value change has to be world class if at the end of the day you are going to sell a product that can compete in today's market.

In the old days, ever step in the value chain didn't have to be competitive because the competitive advantage was the integration of the chain. Today, firms recognize and realize the reality of this, and therefore, the watch word of industry today is, "do what you do best, and outsource the rest." And you outsource it because you need to have every stop of the process produced efficiently, and the availability of this new communication technology makes it possible for you to acquire it, and use it, and integrate it efficiently beyond the boundaries of your firm.

I'll just give you one example, Cisco. Cisco is in the news because they missed their profit targets this year. They were down in after-hours trading yesterday. I didn't check the market today. Cisco is a company that sort of lives on the net. It sort of lives the product that it sells. And it's really quite phenomenal. Most of what it produces, over half of what it produces, it doesn't produce. Some subcontractor produces it. Cisco never sees it. Cisco never touches it. The order comes into Cisco, goes through the company, goes to the outsource supplier. The supplier produces it, puts it on a test stand, gets it tested for quality assurance. The results of the quality test go on a wire to Cisco. Cisco approves it. It gets packaged. It gets shipped out. Cisco sends the customer the bill. That's the reality of doing business today in an environment in which the integration of the value chain outside of the firm makes achievement of efficiencies that were previously considered not possible to achieve.

Every business process is changing. And I can't stress the importance of this because what this technology has made possible is significant improvements in labor productivity and what had been service functions that were immune to productivity improvement. And it means a whole host of things in the customer relations area: ordering, information about products, post sale support. I already described how these orders go through the system. Almost everything that gets bought from Cisco goes through the Internet. But let me just give you one example of how the access to this technology changes the economics of ordering.

A couple years back, if you went to Cisco, and you wanted to place an order, you faxed in something. And Cisco's products are a mix of hardware and software. They don't all work together. You have to have this right mix of hardware and software to even get a network from them. And somebody would send there, read the fax-in order, realize that it didn't work, make changes to it, fax it back to the customer. The customer would fax in something else. It would be fixed. Two weeks later they would finally get their order in. Today, if you want to buy something from Cisco, you go to their website, you build the system you want to buy. An artificial agent in the system checks to see that all the components are compatible. If they're not, it tells you. You fix it on the spot, place your order; you're done. And then it goes right through the system to the subcontractor who makes it and ships it.

Travel arrangements; the average cost of doing a voucher in the business world is about 50 bucks. At Cisco, if you want to do travel, you go online, your travel arrangements all get done automated. You take your trip. Ever trip you make gets fed into the computer. You come home. You push a button. Your travel voucher comes up. It gets populated with the information that you put into your travel order, and it gets populated with the information from all the charges that you made. An artificial agent tests to make sure that everything is in bounds of what's acceptable, you know per diem, all that kind of stuff, you know the government-- per diem. And then if the artificial agent determines you're ok, within 48 hours there's an electronic funds transfer put into your account. The average cost of processing a travel voucher at Cisco is 5 bucks rather then fifty bucks.

Customer support. The average cost of an event at a call center is five dollars. Anybody here call up and get one of those automated telephones. Those are horrible right: press one, press two, press three. Takes you half an hour of pressing buttons before you can get through to somebody live and then they don't know what you need anyway. Those are frustrating. Businesses use those because they're cheap. The average cost of an event using one of those automated phones is 50 cents. If you go to the website to access the information, you have more robust, quicker, faster, deeper access to information. The average cost per event is five cents. Five bucks versus five cents, and you have a happier consumer.

Products are changing. Think about the things that are being produced in the digital again: software, music, movies. These are things that have starkly been sold in this economy as atoms. We're moving into a world in which all of these things are going to be sold as bits or bites. Why? Because these are products where the first unit of production is phenomenally expensive. It costs millions and millions of dollars to produce a new version of Microsoft Office. You know how much it costs to produce a CD-ROM to put it on? You know that big office suite that you spend about four hundred bucks for. The cost of the CD-ROM with the software on it-- the marginal cost-- about a dime. It costs more to put it in a box, and provide a manual. Which is why, by the way you notice, nobody gives you manuals anymore. (Laughter) There's a little card that says quick start, go to the CD-ROM and print out manual. 500 pages later you know, something comes of your printer and you've run out of toner for your laser. But, these are all products that have something in common. One, they cost a lot to make the first unit. They cost nothing to make all the subsequent units. The cost of packaging, marketing, delivering, is the real cost. You move that into the world of bits and bites, and you just download it off of a wire, and you tremendously improve the efficiency of the system.

Lastly, and I'll leave you with this, mass customization, to just give you another example of how products are changing. Before I lost a little bit of weight, I had a real problem whenever I went in to buy a suit. I needed a forty-two to fit my shoulders, but I needed a thirty-eight to fit my waist. Now I could not find a suit that had a forty-two inch jacket and a thirty-eight inch waist. And the reason why was that everything held in the store was made for a statistical man. And I was not that statistical man. I was out in the tail. The reason why I couldn't find something to fit me was that producers have imperfect information. And you can't, if you're in business, stock things on the off chance that somebody's might buy them because the cost is too high. One of the major changes that the Internet is making possible in these technologies, and the aggregate are making possible, is the substitution of information for inventories. If you look at the US economy over the entire 1990's, since the advent of the Internet, you find one of the most striking things that I think, at the aggregate level, that we should be focusing in on, is that throughout the period after the advent of this technology, was a steady decline in the ratio of inventories to sales in the US economy. The more and better information you have about the marketplace, the lower inventories you need to meet consumer demands. The lower inventories you need, the less working capital you need to run your business, the less costly your operations become, and the less likely it is that you're going to have unintended inventory build-ups that are going to lead to a deep recession.

These are my views on some of the changes. These are some of the reasons why I think it's really unfortunate that everybody focused on the stock market because the boom or the bubble in the stock market is a passing phenomenon. What's really important is what's happening on the real side of the economy. And what's happening on the real side of the economy is a dramatic transformation, which I believe is every bit as significant as the Industrial Revolution. The only difference is that it took twenty or thirty years for the Industrial Revolution's major impact to be felt. But with the Internet Revolution it's being felt in Internet time. Thank you. (Applause)

SEN. ROCKEFELLER: Ladies and gentlemen, please don't leave. (Laughter) Our speaking was a little longer today for a very substantive and useful reason. But the questions aught to be just as interesting, and Bill Frist will start.

SEN. FRIST: We'll keep the questions going pretty rapid fire. We do have a lot of questions. Keep them coming. But if you really want to get your question in, go to the microphone. But we're going to start right in. Mr. Porter. Mr. Porter discussed how US competition is related to investments in basic research. How does the US compare to other countries in government support of basic science? Are there any particular countries that are investing in such ways that suggests that they may be more powerful competitions in the future?

DR. PORTER: We have traditionally had a lot of government support for basic science, substantially more. For example, Japan has had negligible government support for basic science. One of the problems facing Japan is all their R&D budget has been spent in the private sector. They're have a very weak university research system. There's been little public investment in basic research. And the limits of just improving already existing products have become apparent in Japan. Japan was pretty good when they were catching up but they're sputtering now when they're trying to forge ahead. Countries that are also very well equipped with basic scientific-- I mean the striking example is Israel. Israel is a stunning center of basic science and I think the innovative up-tick in Israel is probably the greatest of any single country but we see tremendous steps forward in Finland, in Sweden, in Taiwan. Those three countries in particular stick out as places were there is a substantial public investment in fundamental science and technology infrastructure and a corporate sector that is now able to deploy those very rapidly.

The US has cut way back on the public investment in R&D as a percentage of GDP for a variety of reasons we can talk about. But I think that our problem is that we simply had a very good formula. We just ran it all through the Cold War model. And a lot of the money was actually spent via the Defense Department. That was politically robust. It could be renewed year after year. It could be hooked to the Space Race. But we kind of lost that model. It's not that that's the only way to do it; it's just the way we learned how to do it. And now we have to come up with a new model that not only supports the federal investment but also the development of science and technology personnel. Again, a lot of those scientists and engineers were supported in a variety of ways by the Defense Department and other public support, and that again has waned at a time when the needs are greater. We also have a problem that the young people coming up, the high school system, are less capable in math and science. Therefore, they don't even attempt an engineering or science degree. So we've got a whole nest of problems there and I think we're going to have to come up with some new policy models. And I think that the senators to my left have been leading the charge here. And I hope that we can convince more and more folks on the Hill of the fundamental importance of this issue.

SEN. ROCKEFELLER: Ok, thank you. At the microphone, short questions, short answers please.

AUDIENCE MEMBER: I'm on capital hill for the year as a Congressional Science Fellow, which means that I'm a scientist and I'm working in a congressional office for the year. Now, as a woman who has a PhD in Astronomy and Space Physics, and for another woman who has a PhD in Physics, we'd like to know how you would propose attracting more women and minorities into the Physical sciences.

DR. PORTER: Well I'm not perhaps the one to lay out the details of a program. Perhaps Mr. Mishel will speak because he's a real expert in workforce issues. The Council is having a National Innovation Summit in San Diego in April. The purpose of that Summit is to get a bunch of leaders together to talk about how we would craft programs to address the various issues here. I don't have-- I think there is a kind of multi-faceted strategy. Obviously, unless we have minorities, in particular, better equipped at the K-12 level, we're not going to make much progress in moving more minorities into science and technology. But I think a lot has to do with the kind of-- I mean you've noticed recently that the universities have recently issued a report about the advance of women in science and technology. There are going to be lots of little things that are going to add up to a significant change in this area. But perhaps I'll defer to Mr. Mishel to see if he has any comments.

DR. MISHEL: Well, I hope my thirteen year old will join you. I'm doing my best. I thin that it's a very complicated process that's going to involve both equalizing access to college, as Professor Porter says, and I think that by, for racial minorities as well as lower income households, there's a big issue of getting more people to go to college. I think it's about who gets to go more than more people. I think that the workplaces have to be more friendly to woman. I think companies are going to have to change their internal cultural styles. You know, I think that there's a whole lot also that-- women are getting more opportunities in the business world, and if you want to get women into science, you're going to have to pay them competitive rates. That's part of the problem we have getting women into teaching. That for year's women could only do teaching and nursing. Now they can do a lot of different things. So I think there is just a multi-faceted-- improve the workplace, better wages; get more people who can even potentially get into those jobs.

SEN. ROCKEFELLER: Ok, we've got to move on. Bill.

SEN. FRIST: Going back to Cisco. Since companies like Cisco depend heavily on TelCos and others that purchase its equipment, and since Cisco is viewed as a bellwether for the technology industry, how will an economic downturn, slowdown, effect Cisco and other technology companies? Our Cisco expert down there. (Laughter)

DR. MENDELOWITZ: Well fortunately I'm not an investment advisor. The reality is that the pace of investment in recent years was so torrid in this technology because you're starting from zero base and you're building an infrastructure. And the importance of building this infrastructure and building it out was really significant because, I don't know if you realize how incredibly efficient this technology it, you know the IP technology is compared to traditional voice telecommunications. When I was younger I had a friend who had a girlfriend he was wooing who was living across the ocean. He'd pick up the phone; every time he coughed it cost him fifty cents. Typical analog voice communication is really inefficient. You pick up the phone, you hold the line from where you are to somebody else, and you use about two to three percent of the capacity of the line. Most of the capacity doesn't get used. What makes Internet communication so efficient is that you break up your transmission, whether it's digital, data, or whether it's voice over IP, you break it up into little packets, and it gets sent out and reassembled at the other end. It's a little like-- what was that show, you know where they put you there and they disassembled you and transported you someplace-- a transporter-- Star Trek, the transporter. That's the analogy. And so, you're building out this tremendous, efficient, infrastructure, and so demand is always going to be high when you're building basic infrastructure. That build out isn't complete yet, but it still requires a lot of money when you're building it. The economy slows down. Investments are going to go down a little bit. It' will pick up again. The Point to watch is that basically when the infrastructure is built out, then demand for this equipment is going to drop off. But that should probably be fore another four or five years.

SEN. ROCKEFELLER: yes ma'am.

AUDIENCE MEMBER:

MR. ROONEY: Hi, I'm a woman with a science background who actually decided not to go into graduate school because I was discouraged from doing so. In 1993, there were no jobs available, I got letter from all the schools saying . . .

SEN. ROCKEFELLER: Did Senator Frist do that? (Laughter)

AUDIENCE MEMBER: The Universities discouraged me from going in. I decided to become a congressional staffer, which I'm glad I did. (Laughter)

Instead, actually I enjoy policy more. I'm concerned about the Universities being prepared to train an increased number of scientists and engineering to go into the industrial workforce. At least a few years ago when I was applying the universities that I was applying to thought that if you didn't get an NSF grant, if you weren't going to be an academician, they really didn't want you to apply. They weren't really interested in that. You're talking about-- I know that industry, left to it's own devises, will invest less then the optimal amount in R&D, but you're talking about the laboratory to market cycles also changing and getting smaller and smaller so that industry won't support basic research but the universities need to be able to train people to be able to handle that for industry. I don't know, do you think that the universities are prepared to handle the shrinking laboratory to marketplace cycle, and do you think that you have some advise for them, to help them be able to handle that?

DR. PORTER: Well, again, that's getting to a level of granularity that's going to be hard to come up with a definitive answer. I think a lot of the basic research in America is going to be done in universities by academics or one sort of another: labs, centers, centers of excellent, and the graduate students that work with them. And what's happening is that we've kind of cut back on the nation's investment in that so universities don't have as many places, so they can't hire as many people, so they don't think they have the need to train any students.

Now a certain amount of science and technology personnel need to go out into companies and into the corporate sector. But that tends to be more in the engineering side and not the basic research side. So I think that the universities are starting to understand that there is an issue of how many students that they are able to generate, but when I talk university leaders, they're telling me that a lot of the issue is on the intake side and how many people apply. There is a very heavy waiting of non-US citizens in the upper science and engineering programs. How are we going to get more Americans interested in science and engineering? How are we going to get them to apply? How are we going to get them to a level of skill that they'll be able to succeed in these programs? So I don't think that it's just a supply issue at the university. I think it's a demand issue on the part of the students. I would just emphasize what has already been said. This is a multifaceted issue. We need to start soon in talking about what our nation's response to this is going to be.

SEN. ROCKEFELLER: Ok, three more questions. You'll be the first and then Ok.

AUDIENCE MEMBER: Jeff Brown with Senator Jeffords. My question has to do with the overall efficiency of the Internet economy. If you look at sort of a lifecycle approach, if you were to buy a shirt, and you went to Target, and everybody goes and buys their shirts at Target, that might be more efficient then actually ordering online, and then having an individual UPS driver drive fifty miles to your house in Vermont. I'm just curious. We have this vision of Internet efficiency. Really, how efficient is it?

DR. MENDELOWITZ: I think it's a great question. I think the first thing is that I want to distinguish between the Internet and the application that gets put on the network. We're at the status now were the cost of the Internet is a baseline cost. That's the ticket for entry. Just as nobody questions whether you're going to have a telephone on your desk when you open a business. You're going to have Internet access whatever you choose to do on it. What we are doing is, through trial and error, we're finding out what really is efficient. Those companies that find a way of adding value, and of being profitable are the ones that are going to survive, and those are by definition the ones that are efficient. The ones that blow up or crash and burn are the ones that are not efficient. But I do want to make one final cautionary comment in response to your question and that is, just because something shows up in the statistics, doesn't mean that is the ultimate measure of efficiency because, there are important things of efficiency that don't get counted. For example, if I want to by a book, that's a different experience for me them going to a book store. I'd go to a bookstore because I enjoy browsing. But if all I want to do is to buy a book, it's worth it to me to pay the three dollars in shipping charges to avoid having to get in my car, spend gasoline, drive to the mall, add to the pollution, endure the congestion, et cetera, et cetera. So, certainly, in a metropolitan area, there is no question, if all you want to do is buy something that you know what you want to buy, buying it online will beat going to the mall any day.

SEN. ROCKEFELLER: Yes sir.

AUDIENCE MEMBER: Seems like when we're discussing the tech boom we spend a lot of time talking about the technologies that allow us to collect information and make decisions faster. We don't talk about the technology that allows us to collect parts and make products faster. If we're going to continue to be competitive and be productive, doesn't that subcontractor to Cisco who has got to be infinitely flexible now using staff that we've said haven't been trained any more in the last ten years-- shouldn't we be investing a chuck of that R&D in the technologies that allow us to make better products and make them more effectively so that we can charge more then their commodity price.

DR MENDELOWITZ: Let me give a quick answer. The contribution to efficiency in production is spectacular. If you look at the automobile industry in the 1980's, there was tremendous efficiency achieved between assemblers of cars and first year suppliers because they used very expensive electronic data interchange, EDG. What the advent of the Internet means is that you can capture the efficiencies in the production process that formerly occurred only between the assembler and the first year suppliers, all the way through the supply chain because you now have this really cheap, deep, information exchange made possible by the Internet. So that, in effect, the second, third, forth tier suppliers can be part of that same efficient operation that the first tier suppliers were in the 80's during the era of EDI.

SEN. ROCKEFELLER: Final question from Bill Frist.

SEN. BILL FRIST: There are several questions here and we didn't have a chance to get through all of them. But Doctor Porter, one of the questions had to do with your bar charts, which had the three categories, going back to workforce. As we look to the future and we look at a diminishing workforce for the reasons that you said, diminishing skilled workforce, several questions had this whole implication of, "If we don't have the skilled workforce to work in the areas like microprocessors, information technology, the big areas, can we reverse the curves-- which I guess you would predict in the future-- can you reverse those by allowing people from other countries or people trained in our universities from other countries to work here for a longer period of time.

DR. PORTER: Another part of my professional life I spent working on inner cities in America and trying to address the problems of economically disadvantaged citizens in America and I guess, one side of me is saying that, "No, no, no, let's not take the cop-out of immigration increases to solve the fundamental issues of how well equipped our citizens are to prosper in the economy." And so, although I feel that immigration is a good thing, and I think that it's been a good thing of America, I think that it would be a real mistake if the quick fix was to just kind of open the boarders and absorb lots and lots of people rather then to tackle these issues of equipping Americans, today's Americans to prosper. So, that's one really personal comment.

But we do have an equation that is going to be balanced in a very different way. In a lot of the post-war period we've had ample supply of workers, and that's been one of the key drivers of economic growth. And that's going to change. So, my hope is that we will solve that problem by boosting the skills and productivity of a smaller number of workers. And that will allow us to continue to grow an economy at a very robust rate. Another way that the sums might balance though is that if we can't address the skills issue and if we can't address bringing more women and minorities into the more productive parts of the workforce, another way that the sums might be balanced would be slow economic growth in the future. The countries that have resorted to massive amounts of immigration to solve short-term workforce shortages are, I think, almost universally unhappy about having done that. Yes you can bring in lots and lots of workers to do the menial jobs and you can bring in lots and lots of workers that have the specialized skills, but that creates other issue in the society that often, in the long run, are very difficult to deal with. I would hope that we would take this message not as a justification for a discontinuity in immigration policy, but we would take it as a mandate to address some very important fundamentals.

Let me say it again, something I said earlier. This is no longer an equity issue. It used to be that we had to believe in social justice to think that we should bring women and minorities into science and technology, and upgrade the quality of basic education. We used to think that was a justice issue. Now I think we have to understand that that is right in the bull's-eye of the future of the American economy. And, I think, now we have an opportunity to mobilize all the parts of our society around this common goal. The business community new is riveted on the question of high school education, and math and science skills, and the number of engineers that they can find. Let's mobilize this possible new consensus to kind of have another tremendous step forward in American society. I think we can reverse these inequality trends.

SEN. FRIST: In this great new spirit in Washington, DC where we start on time, and finish on time-- something we've done for the last two and a half year here-- we're going to cut things off. First of all, your evaluation forms are absolutely critical to us. Hand then as you go out the door to someone at the door. We'll be talking about, announcing our March event shortly. Join me in thanking our three outstanding panelists today.

(Whereupon, the proceedings were concluded.)