Oregon Presents

June 8, 2004
Rose Garden, Portland

Thank you.

My wife, Beth, and I moved to Oregon just over 10 months ago and my areas of ignorance are still fairly vast and deep.

I hesitate to assert a complete grasp of economic fundamentals or to prescribe economic strategies to people who have been so welcoming to me and who have a much firmer understanding than me of the social, economic, and political context in which we find ourselves.

But Oregon is at a critical juncture, I believe, and my observations are made in the spirit of trying to be helpful.

So I will talk today about where we are and what we have to do, to move the Oregon economy forward in a more rapid and sustained fashion.

The Oregon Economy

When I first arrived, I heard many comments about the "new" economy and the "old" economy and about the knowledge economy versus the traditional economy.

Missing from those commentaries was a recognition of the need to be globally competitive in every economic sector in the state economy.

Old versus new is meaningless against the realities of global competition.

In fact, to some extent, so called traditional industries fared better in the recent recession than some new economy industries.

There is a growing recognition in Oregon that sustained economic progress requires a diversified economy.

It requires a competitive economy.

It requires an innovative economy.

Oregon must adopt best business practices and cutting edge technology across all sectors.

Oregon State University, with its land grant heritage, has a mission to serve the people of Oregon and to make a positive difference in their lives. That includes helping the state achieve its economic goals.

As a land grant university, our success is measured in part, by our ability to contribute substantively to economic growth and social progress in Oregon and the nation.

This has to be our mission.

Strategic Plan

Our Strategic Plan at OSU addresses this challenge in noting that our graduates are the most important contribution we make to the future. We understand that we must prepare our graduates to compete with anybody, anywhere in the world.

We must maximize the value added our graduates bring to their work life, their community service, and their leadership roles in life. And we must maximize the value added we provide through our research, creative works, and collaborations with government, business, and education partners.

To do those things we will become one of the top 10 land grant universities in America.

Oregon's economic potential depends critically on its ability to take advantage of its location on the Pacific Rim by being competitive across a diversified economy.

The possibilities in international trade and economics are extraordinary.

Already, many sectors in Oregon are deeply dependent on global trade.

I recently spoke to the Salem Chamber of Commerce

.

In the greater Salem area, agriculture is a bigger industry than politics!

80% of the agricultural production from this area leaves the state; 50% of it goes overseas. Clearly, that net export position is a source of strength for the Oregon economy.

Salem's trade position is not an aberration. Oregon ranks 12th in the nation for exports as a percent of GSP, at 9%.

A number of Oregon producers are among the best in the world at what they do. Companies such as Nike, Intel, HP, and others book the majority of their sales outside of the U.S.

In short, the ability to compete in international markets is critical to economic prosperity in Oregon.

Our graduates, and Oregon's businesses in areas as diverse as grass seeds and nanotechnology need to be prepared to compete internationally.

How can OSU help?

Many OSU programs promote internationally competitive production in Oregon.

New products and marketing opportunities have emerged from our Food Innovation Center and our Seafood Lab.

Our development of wheat varieties has been primarily responsible for the growth of the Oregon wheat industry.

We are developing a tourism and outdoor recreation program at OSU-Cascades that can help us attract visitors from throughout the nation and the world.

We are supporting an international degree program, adding an international component to traditional disciplines.

The new institute for natural resources is looking at innovative ways of using resource sustainably as a competitive advantage in many areas of production.

Ideally, we will end up with new natural resource based products and production processes that we can export throughout the world.

Furthermore, Oregon must take advantage of its strength in manufacturing.

Oregon is #2 in manufacturing as a percentage of total GSP, 25.5%.

The U.S. average is 14%.

Manufacturing production is highly cyclical and, as reflected in the current economic recovery, job growth in manufacturing develops late in the recovery process. Furthermore, overall manufacturing continues to decline as a share of GNP in the United States.

Nationally, about 3 million manufacturing jobs were lost during the recent recession.

Oregon lost 45,000 jobs in the recession, representing almost 3% of employment in the state.

The U.S. lost about 1.5% of jobs during the recession.

Therefore, our unemployment rates were, and remain among the nation's highest. The latest figures reflect a 6.7% unemployment rate for Oregon compared to 5.6% for the U.S. Nationally, jobs are now growing at a 3 million/year rate and in Oregon, non-farm employment has grown by almost 30,000 jobs in the last year, which is almost half of the 65,400 jobs lost between November 2000 and June 2003.

But, many manufacturing jobs will not be coming back.

Nonetheless, Oregon has a lot going for it in the manufacturing sector.

We are entrepreneurial - we rank 11th for the number of new companies per 1,000 workers. We're also 11th for the number of patents per million residents.

We have many high skill jobs. We rank 5th in average investment per employee in manufacturing. The skill requirements of our remaining manufacturing jobs are increasing.

We continue to attract talented people. We rank 5th in the nation in the net inflow of college educated people in their mid 20's and late 30's. Overall, we rank 18th for the percentage of people over 25 with a B.A.

Low end manufacturing will never again be a large source of new jobs. Foreign competition, reflected by foreign low wages will continue to capture low skilled labor intensive production line jobs.

Tomorrow's jobs for Oregon in manufacturing and elsewhere will come from innovation: new ideas, new products, new clusters of industries, and bright, educated people.

Oregon's concentration of high skill jobs gives us a fertile area in which to innovate.

To do this, we need more homegrown talent. We rank 30th in the country for Ph.D. level scientists and engineers per million residents. Not good enough.

We can't let the manufacturing sector just wither away, because we will lose much more than just jobs - we'll lose the potential for sustainable economic growth.

How can OSU help?

We are creating a top 25 engineering college at OSU.

We are exploring the feasibility of a research park adjacent to the campus in Corvallis. We intend to grow our federal grants and contracts from $137 million per year to $170 million per year in the next few years.

The nanotechnology initiative, ONAMI, is a collaboration of Oregon State University, the University of Oregon, Portland State University, Hewlett-Packard, and Pacific Northwest National Laboratories that is intended to push Oregon to the forefront of a new industry. To me, this is the poster child for how higher education in Oregon, through collaboration among universities, government, and business can serve as an engine of economic growth for Oregon.

The establishment of a one of a kind program in student entrepreneurship, thanks to a gift from Ken and Joan Austin will help us at OSU to develop the next generation of business innovators through our new Austin Entrepreneurship Program.

OSU scientists are active in bioengineering and other fields from which new industries will emerge. I am working with presidents of other universities in Oregon to facilitate faculty collaborations across universities to accelerate and magnify the impact of university research on the competitiveness of the Oregon economy.

We live within a broader society and it is worth noting that national policies can have a profound effect on the Oregon economy. For example, U.S. trade policy can enhance or limit the growth potential of the Oregon economy. Current understandable concern with outsourcing nationally could lead to trade policies and tax policies that do more harm than good. Some would argue for increased trade barriers to keep jobs from going abroad.

But restricting trade will compound our economic problems. It creates a downward spiral in the global economy. It accelerates the loss of jobs at home and abroad.

Some would argue for tax law changes to discourage outsourcing and other U.S. multinational corporation activities abroad. Both policies threaten the "in-sourcing" of jobs through foreign direct investment in the United States.

Toyota now makes its popular pick-up trucks here. Honda also creates jobs in America.

During the 1980s there was a great deal of hand wringing about the Japanese takeover of U.S. corporations.

My own research during that period found that Japan's foreign direct investment in the U.S. occurred primarily in manufacturing and that a good case could be made that such investment was associated with transfers of technology into U.S. manufacturing.

On balance, it created jobs in the U.S. much the same occurred in Oregon through the influx of foreign chip manufacturers.

International trade and investment is not a zero sum game. It is a win-win situation that creates jobs and income at home and abroad.

Did foreign investment and trade fully make up for manufacturing job losses?

No, because as I noted earlier, the manufacturing sector in the U.S. economy has been declining as a share of GDP for the last 30 years.

Is outsourcing good or bad? This reminds me of the discussion in 1981 on whether we were in a recession or a depression. One shred observation was that a recession is when someone else loses their job and a depression is when you lose your job. Outsourcing is bad when it is your job that disappears. As a nation we need job training through trade adjustment assistance and other programs to help those who lose their jobs to outsourcing. But we do not need trade restrictions or tax penalties for U.S. multinational corporation activities abroad that undercut the competitiveness of U.S. national in foreign markets.

Also, we should keep the magnitude of the outsourcing problem in perspective. Outsourcing is expected to send 150,000-300,000 jobs abroad per year for each of the next 10 years in a U.S. economy with almost 140 million workers. We need to provide job training assistance to workers who lose their jobs to outsourcing and not restrict trade.

Again, it's tough for the worker who loses his or her job - but we must focus on job creation.

For me, the biggest economic surprise over the last twelve years or so is that the United States has done as well as it has given the economic realities facing all of our major trading partners.

Europe, especially France and Germany, is saddled with slow or no growth and double digit unemployment rates.

Many Pacific Rim countries are still rebounding from the collapse of Asian financial markets in the late 1990s.

Yet there is a lot of dynamism and momentum in our economy.

Why is the U.S. doing as well as it is?

We are still benefiting from the momentum associated with a history of producing high skill, high technology goods and services throughout many sectors of our economy.

In the 1950s, our technical advantage was in the production of consumer appliances like washers and dryers, televisions, and radios.

In the 1960s, automobiles, capital equipment, and the transportation equipment were strengths in our export trade.

In the succeeding years, capital goods, computers, the airline and the transportation industries, medical and technical equipment, and the service sector took off.

The interaction of international trade, the decline of jobs in the manufacturing and even the outsourcing of white collar jobs from the U.S. is more complex than headlines that say "Jobs Leave Oregon."

The shift abroad of mostly low skill white collar service sector jobs such as call centers is partly a reflection that in an age of instantaneous communications and ubiquitous computing, some low skill service sector jobs will go abroad where wages are low.

Companies that move overseas or establish foreign subsidiaries are another popular concern.

Yet many of these foreign subsidiaries rely on their home markets for raw materials, equipment, technology, and other support.

They provide outlets for other products that the parent company can export from the United States to their subsidiaries.

Commerce department data cited by Robert Samuelson support these observations.

In 2002, American multinationals had 73.1% of their global employment in the U.S., down only about 4% since 1977.

Capital spending is still concentrated here in the United States, amounting to 75% of all spending by U.S. multinational corporations.

Global production for U.S. multinational corporations has actually risen in the U.S., to 77% in 2001 against 75.3% in 1977.

The U.S. still leads in the high end and high skill areas of the manufacturing and service sectors, including capital equipment, medical technologies, financial services, entertainment, and other areas.

The challenge is to keep this leadership through education, innovation, smart investment, and the application of cutting edge technology and best business practices throughout the economy.

Yes, there are jobs leaving the U.S.

The danger is looking at things too simplistically is that we may create some forms of protectionism - designed to keep certain jobs from going overseas - that will preserve low skill jobs but undercut our ability to expand our sales of goods and services abroad that require high skilled employees.

The United States and Oregon can stay in front by continually moving forward in the development of high skill, high tech products, services, and knowledge.

That is the good news.

The bad news, I am afraid, is that the United States is in danger of losing its dominant role as the leader in high skill/high tech products and services.

And Oregon is in danger of becoming one of the least globally competitive states in a decreasingly globally competitive nation.

Choices for the future.

We've got to make some choices, and soon, about how we respond as a state and nation to the impending decline in our competitive advantage in high skill/high tech products and services and innovations.

A primary reason the U.S. has been so successful historically is because of our best-in-the-world system of higher education.

As I mentioned at the beginning, OSU's most valuable contribution to our future is our graduates.

The same can be said of all of higher education in the United States.

But we are in danger of pricing many of our best and brightest students out of advanced education.

If we do that, we will create a permanent underclass. We will lose the contributions that bright but economically disadvantaged students can bring to our economy and our society and we will lose much of the dynamism, the economic and social mobility that have made this country great.

The threat to our economic and social progress is real.

Pricing students out of an education has local impact, as well as a global impact.

Businesses making location decisions look for cutting edge research and development and employees that can create and use the products that result.

They want tax incentives, good K-12 schools, and cost effective health benefits for their employees. They want transportation and distribution networks that are efficient, and easy access to key material resources for production. They want a regulatory environment that is navigable, a political system that is stable, economical energy supplies, and an attractive environment that provides quality of life benefits. Oregon needs to address its deficiencies in a number of those areas.

But most of all, businesses demand a highly skilled labor force that is sustainable, adaptable and university-educated.

When a state disinvests in higher education, it essentially hangs out a big sign saying "We don't want high skill/high tech business here."

It's especially tough when this announcement makes it to places such as the front page of leading newspapers and the Doonesbury comic strip.

And when high skill/high tech manufacturing and service sector jobs leave the country - or in this case, the state - there is a loss of competitive and advantage across all sectors of the economy.

A diversified economy is not sufficient if it lacks best business practices and cutting edge technology and the skilled workers to apply them.

If that occurs, every sector will be consigned to a low level of economic progress.

This bleak view of Oregon's potential economic future must not come to pass.

Many of the elements are in place here for Oregon to be attractive to high end, progressive businesses - location, environment, natural resources, and an experienced workforce. And ongoing efforts to simplify the regulatory environment and to build a political consensus on tax and spending policies in Oregon must continue.

But, we must halt this trend of pricing too many of our best and brightest students out of access to high skilled professions and disinvesting in the research and development capabilities of our universities. Governor Kulongoski is right on the mark with respect to his agenda for higher education and its importance to the future of Oregon.

OSU has a plan to become one of the nation's top 10 land grant universities. We are intent on ensuring that our graduates-whether they are in engineering, biosciences, agriculture, forestry, or liberal arts-can compete with anyone anywhere in the world.

But we must give students a chance to become graduates.

Pricing them out of an education doesn't make any sense.

Access, affordability, and retention through to graduation is one half of the equation and the Board of Higher Education is working hard to develop an agenda to get that job done.

The other challenge is to sustain a university system that is capable of attracting and keeping Oregon's top students.

If we can't attract them, or if they cannot afford to come, or if we do not have the resources to offer the programs they need, then neither the State of Oregon nor Oregon State University is going to prosper in a globally competitive world.

And if we cannot initiate and support the cutting-edge research that businesses need to keep ahead of the world, then the people of Oregon aren't going to prosper.

Oregon State University faculty do a phenomenal job of attracting research grants. That's true of Oregon's other universities too.

But we must do more and we must work together as never before.

The State of Oregon cannot compete nationally with areas that have powerhouse universities like Texas, the North Carolina research triangle, Michigan, Illinois, Minnesota, Wisconsin, and elsewhere for multi-million dollar grants for research and business development unless all of the universities in Oregon form a virtual mega-university that can capture the economies of scale and scope readily available in the large universities of other states.

As good as our faculty are at Oregon State University and elsewhere in the state, we must collaborate to compete with universities three times our size for the multi-million dollar, long-term, grants that are the source of new industries-just as they were the source of the computer age and the internet.

That's reality. That's how the world works, pretending it doesn't won't solve anything. And it won't build the future Oregon wants and needs.

I know this is true. I spent 33 years at a large comprehensive university, Ohio State, that had the scale and scope-and the state and business sector support-to go head to head with anyone.

No one university in Oregon has this advantage.

So we have got to be a lot smarter.

And we have got to start now.

There is a growing recognition that in key areas of potential economic development such as nanotechnology, biomedical engineering, information systems, material sciences, and public health, Oregon must create a virtual university that has the potential economies of scale and scope already available to other states. The Board of Higher Education is trying to foster that capacity through its committee on academic excellence and economic development.

Except on the athletic field, our competition is not with the University of Oregon.

Our real competition is in North Carolina, and Wisconsin, and California. And in Ireland, India, and China.

We need to bury all of the old turf issues. We need to work together.

Or we will fail to meet the needs of the people of Oregon together.

Oregon State University was created to serve the needs of the people of Oregon.

I believe we are a special place because of our land grant heritage.

But we aren't the only institution that serves Oregon. We all do.

I believe that the people of Oregon need for us at OSU to take every opportunity to work with our sister institutions throughout the state to meet the educational, research, and job creation needs of Oregon.

Can this be done? I say yes, emphatically.

As I mentioned, OSU is working with the University of Oregon, Portland State University, Pacific Northwest National Laboratories, and Hewlett-Packard on an exciting new initiative in nanoscience and microtechnology.

This is the most ambitious, most collaborative effort in the history of Oregon higher education.

No single institution in Oregon has the capacity to seize this opportunity to create jobs and products using nanoscience and microtechnologies.

But together, we have the deep reservoir of talent and expertise needed.

Last year, the legislature funded the state's first signature research center in this area. Hewlett Packard provided use of one of its research buildings in a gift equivalent to $2 million.

This isn't pie-in-the-sky research.

Last year, Congress earmarked $3.7 billion in nanotechnology funding that will provide research support for four years beginning in 2005.

Oregon Senator Ron Wyden was co-author of this important legislation and deserves credit for this bold initiative.

We all owe him a great debt of gratitude for creating this opportunity.

We also owe it to ourselves and the people of Oregon to make the most of this opportunity.

Ten national research centers are expected to be designated, we think we-and the "we" means Oregon-can be the home of one of them.

If we are successful in landing such a major national research center, this could literally transform Oregon's manufacturing outlook for decades to come. That's what is at stake here. Governor Kulongoski understands that and he is a great champion of this effort.

In summary

Yes, manufacturing jobs are leaving the state and the U.S., but the story is complex and policies that restrict international trade or undercut our competitiveness abroad will only exacerbate our economic problems.

The U.S. economy is strong despite the continuing weak economic performance of our major trading partners. And the U.S. still leads the high tech/high skill race.

This lead is in jeopardy and will be lost if we cut off student access to higher education-in the U.S., and most particularly to our discussion today, in Oregon.

We can attract and retain the best and brightest students in Oregon-and we must.

Collectively, Oregon universities and their partners have the expertise to attract significant national investment dollars, thereby serving as an engine of economic growth that can help to revitalize the state's manufacturing and diversified industry outlook for decades to come.

To do this, we have to work together. There is no other option.

The question I would leave you with today is: what are the other areas in which Oregon could compete on a national and international level by expanding cooperation among government, business, and education partners?

Let's find them and commit to work together for the sake of the citizens we have the privilege and responsibility of serving.