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Good Evening and welcome to tonight's meeting of the Commonwealth Club of California, my name is Bob Saldich. I am Chair of Commonwealth Club Board of Governors. Now it is my great pleasure to introduce our distinguished speaker Laura Tyson. Dr. Tyson is currently Professor of Business Administration and Economics at the Haas School of Business at Berkeley University, California. She is formally the Dean of the London Business School and the Dean of Haas School of Business at Berkeley. Dr. Tyson served in the Clinton administration and was Chair of the Council of Economic Advisors between 1993 and 1995.She was the President's National Economic Advisor between 1995 and 1996, all under President Clinton. She has published books and articles on industrial competitiveness and trade and on the economies of Central Europe and their transition to market systems. She is a member of the Boards of the Council on Foreign Relations, The Brookings Institution, The Institute of International Economics, Bruegel, Eastman Kodak, Morgan Stanley and AT&T and she is a member of the Hamilton Project which I believe she intends to mention in tonight's talk. So, with great pleasure I introduce to you Laura Tyson. Thank you very much Bob, it's actually a great pleasure to be back at the Commonwealth Club. I have, before my very interesting and exciting five years in London serving as Dean of London Business School; I spent several years in the Bay Area and came to Commonwealth Club reasonably often. So it's very nice to home back and with this community again. I am going to talk about some of the economic challenges that are confronting the US at this point in time and I will mention the Hamilton Project. I am, as noted, on the Board of Brookings, The Brookings Institution hosts a particular research project called Hamilton Project. It started in April of 2006. A number of people came together in response to a shared feeling that the US was on the wrong track economically and that we needed to encourage the development of new public policy ideas to address future economic challenges. The model of the Hamilton Project is really a very interesting one. We have a Board of Advisors and I sit on the Board of Advisers, we really work to encourage new thinking by new scholars, new younger people coming up through the public policy pipeline to think about alternative ways to address some of the nation's challenges. So it's very much to seed interesting new research proposals. We try very hard to not be ideological; we have reached out across the spectrum to encourage scholars to come up with interesting new ideas. So its very worthwhile project and I hope that both Democrat and Republican candidates for the President, and I hope that members of the Congress, both Democrats and Republicans, will find interesting ideas in this research to tackle some of the problems that we face. So let me talk about the problems and then I will end with some of the principles that guide the Hamilton Project as we look for interesting new solutions. The challenges the country face I think are well reflected in the anxieties of the majority of Americans. Recent polls do show that the majority of Americans are worried about reaching their economic goals, they are worried about whether their children will be better off than they are or worse off than they are. And I want to start with the point that these common anxieties, your shared anxieties, actually are understandable. They are understandable and to even to a significant extent they are totally justifiable. First of all I will just start with the reality that we have had five years of economic expansion, actually in United States nearly six. We have had record growths in the global economy for the last three years, record growth. And yet many Americans families and workers are not sharing in the prosperity that is being created. And many American workers and families feel that they are subject to much more risks, so they are not sharing in the prosperity and they feel much less secure. Economists like to draw a link between the rate of growth of productivity and the rate of growth of living standards. And if you look across countries, and if you look over time within an individual country there is actually quite a strong relationship between the rate growth of productivity and the rate of growth of living standards. So the simple way to understand this is how much we can afford to pay ourselves in a competitive world depends upon how productive we are. Now between 1947 and about the mid 1970s growth in productivity and growth in median wages, the wage pay to the median worker or growth in productivity and growth in medium family incomes tracked each other quite well in the United states. So that standard theory that economists talked about was confirmed by the data. But since about the mid 1970s we have had a real situation developed that is very problematic. The gains in productivity actually have accelerated since the mid 1970s, but most of the gains have gone to the top of the income distribution. There has been a disconnect between the rate of growth of the median wage and productivity or a disconnect between the rate of growth of median family income and productivity. The only exception to this disconnect occurred between about 1996 and 2001 when the US actually enjoyed the longest and strongest economic expansion of the post World War II periods. But that was a very, very short period and it was a very, very strong expansion. If you look at what has happened in the past in this expansion, the expansion between 2001 and 2005, what you see is that median household income for the non elderly population, the working population adjusted for inflation has actually fallen, it has actually fallen. So we have had a period of prosperity expansion in the US economy were the median family headed by someone of an age to be a worker has actually seen a fall in adjusted inflation terms of about $2000 of family income. And that story appeared when aggregate national income was got up by five percent. So you can see why a large number of Americans are saying, "wait a minute, what's going on here?" The economy seems to be doing well, the global economy is doing really well and by the way we are a little worried about how well the global economy is doing, and a number of Americans aren't sharing that. A second reason why the anxieties of many American families are understandable is risk. So the first point was that they are not sharing in the prosperity as one would expect. The second point is that families are facing greater risk and they are facing greater risk for two reasons really. One is that the probability scholars have worked on this, the probability that a family will experience a drop in family income of 50 percent or more has actually doubled in the past 20 years or so. So basically the volatility of family income has gotten greater. The risk that you fall of a cliff has actually increased. And this is very bizarre because at the same time there is what economists call a great moderation going on and that is that if you look at national income figures, national income has become less volatile. So the economy is actually subject to less extreme ups and downs, that's really good news, with less volatility we know how to control the ups and downs of the aggregate economy much better than we used to know had to do. But the individual family is actually subject to more individual risks of family income. That has to do with the fact that every thing is changing fast, so that there is a lot of churn, people are facing more change in the kinds of jobs that opportunities they might have. The second kind of risk or the second kind of greater risk that families are experiencing is that a lot of risk which used to be taken care of by employers or by society are being imposed on the individual. One need only think of health insurance and pension coverage. One could also think of unemployment compensation. On health insurance, I think we all know the situation. As the cost of health insurance premiums have increased fewer firms are offering health insurance. Those firms who are offering insurance are imposing a larger burden on sharing the cost on their workers or they are cutting back on the coverage of the family members or they are cutting back on the coverage of those things that are insured. Now, combine that with the fact that workers are very worried about the fact that they may have to change jobs because a firm or an industry in which they are currently employed is going to be slowing down. Well, you leave a job with insurance; the probability you are going to get another job with insurance is actually going down because the percentage of employer based health insurance coverage is going down. So people are very concerned about health insurance and that's a reasonable risk to be concerned about, it's real. They are concerned about pensions because we have gone from defined benefit to defined contribution. Defined contribution is good in the sense that it potentially provides a higher rate of return, it provides more choice to the individual worker, it provides more ownership control, we talk a lot about the ownership, society people should own their their pension choices. But defined contribution plans do have drawbacks. Higher return always comes with higher risk. The individual workers bearing the risk associated with higher returns. A second thing is and this is one of the very first things looked at by the Hamilton Project, is that most defined contribution plans that the employer offers are voluntary. And sadly a very large percentage of workers do not sign up. One of the interesting things that we discovered in Hamilton Project was that if you do the default option of a worker when you to sign on to a firm, the default option is you are automatically signed up unless you ask to be dropped, most workers will stay enrolled. If you ask a worker who is newly employed, are you interested in signing up, many of them won't sign up. So all you have to do is sort of say here, we are signing you up unless you say no, seems to work. But pension pension security is a huge issue and of course that's the source that has combined now with uncertainty about social security going forward. So basically there is a whole risk associated with retirement security. Less form of risk unemployment compensation, the unemployment system that we developed in the United States has really not been modernized to deal with the actuality of how long people are unemployed between jobs. So that if you actually look at the number of unemployed Americans at any point of time, only about a third of them are eligible for unemployment compensation. So we are not actually helping families in an unemployed situation with income support that's adequate. So we have not sharing in prosperity, bearing more risk from health insurance coverage lapses, bearing more risk on pension, bearing more risk from unemployment and then of course there are the anxieties about globalization. You can hear about these any night by turning on Lou Dobbs. You can note that a recent survey, this is really quite an amazing number, a recent survey of American workers said that 90 percent of them are worried about losing their jobs to off shoring. Off shoring so far has been a relatively small factor in the US economy but the anxiety associated with it is huge. I think even more telling, in terms of a number on a survey, is over take college educated workers and college educated workers and beyond so at least a college education. Ask them do you think globalization is good for the US economy. Now this is the group most likely to benefit from globalization, right, because we can tell that what globalization does for many high skilled individuals who creates a bigger market in which to play, it actually increases the demand for your skills. Only a third of workers with that skill set say globalization is good for the American economy. That means two thirds say globalization is harming the American economy. That is a very disturbing fact because those anxieties which I think in this case are misplaced to some extent, are going to feed very much into the policy agendas of what candidates can do. I mean what can they say about globalization if they are being told by the American worker, "we don't think it's working for us". Now therefore I think it's important to understand the real issues around globalization and there are some real ones. First of all, labors share in national income has fallen in the US and the other advanced industrial economies the rich economies of Europe and Japan. It has been falling as a share of GDP on a trend basis for a long time. And actually right now, labor shares in national income are pretty much near historic lows. In some countries they are at historic lows and other countries they are near historic lows. And profits are at historic highs. So again, workers look at this and say, some how or the other if there are benefits to globalization the distribution of these benefits is actually going towards to labor or going towards capital and away from labor. There is actually some basis for that concern. A number of labor economists have pointed out that what's going on in the past nearly 20 years is a number of major parts of the world India, China, the former Soviet Union have taken down the borders, the barriers between their economies and the global economy. And what that means is that their workers are now effectively able to compete for many of the jobs which American workers previously did. There are just more people out there in the global labor market. This has been estimated, by one estimate the global labor supply has doubled, by another estimate the global labor supply has quadrupled. It's big it's big. And when you think about that you don't have to go much beyond introductory economics to conclude that if a particular good or service, or in this case a particular supply of something that is labor, increases very substantially in a relatively short period of time it's likely to put downward pressure on the price of that thing. So we would expect downward pressure on the wages of workers, particularly in high wage countries. They have to compete for jobs with workers who are reasonably well qualified and in some cases very well qualified, to do the same job. So there is some reason for the concern about wages. It's gotten worse over time because of the effectiveness of technology to break up the supply chain into production all around the world so that basically, if you want to move your call center to India, the Philippines fine, if you want to move your research I am doing class, just finished a class on emerging markets and I was and last night one of the students who works at Goldman Sachs, I said who does who has a direct personal experience with off shoring, out sourcing, they want to talk about it and she said you know, we do these very sophisticated proposals for mergers and acquisitions and she said frankly we use some very we have built a major capability to do this in India, using Indian talent and she said it's great because we work all day and then we go to sleep and they work all night and then we get up and they will send us back the proposal and she said frankly they could do much more. She said I can just see over time much more of what we do in the research and document analysis you know, the preparation of a proposal will be done there. So technology is allowing all of this to occur. Indeed now, in principle any routine cognitive analytical service ask yourself if you do a routine cognitive analytical service; can be moved as a result of technology. So that means a tradable or outsourcable job is one that requires very little face to face interaction. You don't have to have the person in your presence and one that is IT intensive with IT transmittable output. So you again can ask yourself, am I in the category of where I might be in danger. So the truth is the anxiety that American workers feel is rooted in reality. It's rooted in reality. There is a very good labor economist at Harvard who worked with us at in during the Clinton administration, his name is Larry (Katson), his work suggest that when you look at both information technology and information technology enabled globalization, because its enabling this migration of jobs, you can draw the following conclusion. For certain kinds of skills and certain kinds of education, particularly for PhD level education, the technology and globalization actually enhance the demand for such workers and enhance the returns to such workers. So basically if you have those features you can expect that so far things are working relatively in your favor. If you at the bottom of skill distribution and you are doing something very labor intensive which requires personal interaction, face to face interaction, you are pretty safe. Okay, so retail jobs, health sector jobs, hair dressing, a very good one actually, any personal service well, actually the reason I said hair dressing, is because my colleague Alan Blinder is now involved in a very elaborate research project to figure out which jobs are not going fall into this category and one of the the one that obviously jumps right out is hair dressing. So low skill workers doing those kinds of jobs will not actually be effective, but that leaves a whole middle section, middle America, where essentially the technology and globalization are acting in a such a way as to you could either say reduce the demand for American workers or make them compete with a much larger global supply of alternative suppliers. So this is a big policy problem. So then you get what I have done so far is lay out some of the policy issues that led to the formation of the Hamilton project. There are other ones I am not going to discuss today. There is a whole set of policy issues around the government budget and the level of taxation and the level of government spending. I am going to talk about these policies as it relate to how we handle these anxieties and how to enhance the US position as the attractive place to do business. Because one of the things that you can then think of is we are in this competition with other parts of the world for where production will locate, and where services will be done. So why do them here, why not do in some place else. So let me talk first about policies to enhance the security of the work force, to deal with this insecurity problem I talked about and then talk a little bit about making the US as competitive place to do business as possible. Basically there are those who would say that if you we try to do more to deal with making the US worker more secure, we will actually fall quickly into the trap of Europe or Europe as it has been in our imagination, which is traditional social welfare policies that protect individual jobs that makes it very difficult for firms to hire and fire, that make it very difficult for firms to reorganize around IT and that therefore are a barrier to productivity and to growth. This is a big issue right now in the French campaign. I mean, if you listen to what the two candidates are debating, it's this issue of how flexible to make the labor market or how much to protect the individual worker. So we don't want to go to the European social welfare inflexible model. But on the other hand what the US has right now is a essentially a model were the risk falls pretty much squarely on the individual. Society is doing very little to mitigate to the risk and risk is getting worse for all the reasons I said. So isn't there some place we can be in the middle and that's sort of what we were asking our researchers. Lets come up with some new policies, new ways of thinking about it. Now one of the interesting models out there is a European model and it's the model of Denmark. Now one can learn a bit about the Danish model. It's obviously when you think about Denmark and you think about how small and homogenous it is and how powerful the unions are and right away you could say there is nothing to learn, there is nothing we could possibly apply in the United States. But I actually think it's useful to look at what they are trying to do, and actually seemed to have done and to say well, is there any place we could be in this middle place. This is gotten some publicity in the last 12 months under the term "Flexicurity." So the Danish model is called the "Flexicurity" model. We are flexible, but we also give workers a lot of security. Now what does that mean, Danish firms unlike French firms or German firms or Italian firms can lay people off as they see fit. They have no they don't have any difference in the kind of freedom to layoff or reorganize from what US firms can do. So the flexibility is certainly there and indeed about 20 percent of Danish workers lose their jobs each year and most of them find new jobs. Moreover, I can go through a lot of statistics about it, you know the wage growth in Denmark has been strong, productivity growth has been strong, they had a lot of they had a lot of success even with the high tax rate but I actually just want to talk about one part of what they do. What they have said is we have got to emphasize two things. We have got emphasize giving people adequate income support and health support and education support during periods of transition from one job to another. We don't want that risk to fall on them. On the other hand these people to whom we are giving all those support have to bear responsibility for the change, in the sense of making the change. So what have they done? They have very generous unemployment compensation. I just mention that we basically have only about a third of workers covered, they are not covered for the full duration of their unemployment period. In Denmark unemployment benefits can be available for as long as four years. They are the most generous to those at the bottom of the income distribution. The view is that if you are a low skill worker or low income family you are going need more income support than a high skill, high income family. But, in order to get this support you have to go through the training, you have to go through interviewing for employment and ultimately you have to accept certain kinds of employment offers or no longer be eligible for support. Now, some one said to me in my class last night well, how do they enforce this? This is where you get to the community level of Denmark. I mean basically you are working with your local labor organization, your local union, your local community; your firm in many respects because the firms get involved in helping workers make this transition. So my point here is that a place the US has the look is to combine income support with incentives for job seeking. And one of the interesting ideas that is now getting a lot of attention is this concept of wage insurance. We do have a small program of wage insurance in the United States. The concept here is quite similar in some ways to Flexicurity. If you lose a job in the United States through trade related pressure, about 69 percent of those who lose a job like that are re employed with in a year. But a significant number of those are reemployed at less than the wage they had and indeed about a third of them I think are employed at a wage which is substantially less than the wage they had. So how about a little wage insurance? How does the wage insurance work? It says we are going to encourage you, if you are laid off, to take to look very aggressive here for a job and if you have to take another job which actually is significantly lower than the pays a wage significantly lower than the one you had, we will provide you with a payment over two years, capped at a certain amount, to help you make that transition. And by the way if you start out at a low wage new job with the opportunity of training during that period of two years your income support will allow you to get trained, so you can move up again. So wage insurance is a very interesting idea, and it's one that I think you are hear a lot about. The other one, obviously that's very important in all of these for the US is health insurance, because you cannot in any way deal with the issues of what the un employed or the worker in transition is going through from a risk point of view until you come up with serious ways to handle how would you maintain health coverage during transition. And not a problem in Denmark because that's part of the Danish system, certainly a problem for us. Okay let me let me, I see that I am close to ending my time. I want to talk a little bit about one other area that Hamilton is generating research in. So you could say one thing we need to do is help workers deal with getting larger share of the pie and also dealing with transition's risk. Another thing we need to continue to think about is how to make sure that nationally at the national level, we have a very strong economy so we have more pie, more output to share. So there is the issue of how to share it, there is the issue of maintaining and even strengthening our global position. And here, I just want to talk a little bit about education and research. You know rich countries like the United States; basically the way we compete now is pushing out the frontier, new things, new knowledge, new products, new services. The rest of the world is catching up to where we are. Its actually easier for them it's easy. Basically we have a lot of countries taking the technology, organization, management, all the skills we have invested in for years and they are catching up. So we got to keep running ahead. How do we do that? Through education and through research. And here I would say just to just to share some disturbing the numbers with you, between 1970 and 2000 the U.S Global share of PhDs in science and engineering declined from 40 percent to 20 percent. The absolute number of those with engineering degree in the United States also declined. The United States rank 17th in the proportion of 24 year olds holding bachelors degrees in natural sciences and in engineering. In 2002 only 17 percent of U.S under-graduate earned degrees in these fields natural sciences and engineering and that's compared to 53 percent of under-graduates in China. When I taught my class on emerging markets, which has just finished, one of the things that I was most disturbed by, seriously, was the extent to which major U.S. firms are opening major research facilities in India and China. And if you ask them why they are doing this, they do not say because it's so cheap. And they do not say because the market is so big. They say because the talent pool is so deep. That's what they say. And I actually heard it this morning from someone I was at a meeting thing, there is no way that we could there is no place in United States where we could open this operation because there is just not the scale of engineering talents that we need, doesn't have the scale, doesn't have the number. So this is a huge issue for the United States and we are looking at a variety of things in the Hamilton project, such things as basically how you train more teachers for advanced placement classes in math and science to generating a whole lot more National Science Fellowships for PhD's in science and engineering. Because truthfully, there is a lot of evidence that if you have more PhD supports in such fields you'll get more people taking those fields, it does happen. I am here today because I I guess the only reason but the National Defense Education Act which was formed by the United State response to this Sputnik challenge decided they wanted more PhDs in science and someone convinced them that economics was a science, that was bit, but - but any way. All right, so we have got to do something serious about education. The second thing is just funding of basic research. The U.S has basically Federal spending on research is about basic research is about 21 percent of Federal R&D spending. But it has been going down in the last six years in real terms. And essentially we know that reasonably businesses are going to do applied research. They are only spending about five percent of their R&D on basic research. Where do the great ideas of the future start? They start with basic research and then they move out. So we've got to invest more in basic research. A number of people, both Democrats and Republicans are now proposing that we double the R&D-spend in basic research by the Federal Government and I would support that. I would support also the idea which a number of candidates are talking about, that we take some of that money and target it in particular to development of alternative energies. So you can, both fund basic research, but we could take some which we used to focus so heavily on health, take part of that and focus it on alternative energy. You know we did have the great project to develop a man on the moon in response to Sputnik. We did have the Manhattan project. We have had very large projects of science in our history to handle a major goal. We do need to handle the issue of alternative energy development. Now let me just end with the principles of the Hamilton project. I talked about how we work, we have defined a set of problems, we go out, we get individuals to kind of do the work. We say we have three basic principles. One is we believe that broad based economic growth is the key way to go. We want to make the sharing of growth, the sharing of returns growth more broad based both because you want more people involved in the production process, you maximize the potential for innovation and productivity by getting more people involved and also because if we don't get people feeling like they are involved, then the economic, the political support for things like globalization will disappear. So we really do have to worry about getting people involved. The second point is that economic security and economic growth are mutually reinforcing. You know there is a quote we use for Martin Feldstein Martin Feldstein was the economic advisor to Reagan, he said that social insurance programs like unemployment compensation, health insurance for workers, pension insurance, he says they have a substantial undesirable effects on incentives because unemployment insurance programs encourage people to become unemployed, because retirement pensions support encourages people not to save and because health insurance programs encourage people to increase their spending on health. So that view is don't do any of things that I was talking about because you are going to give people the wrong incentives. To which we say is no. no those were you can form the policies correctly is a question of policy formation, it's not a question of whether you need the policy. And we make the arguments that providing more security will actually increase growth because people will be willing to more risk because they will be willing to support globalization and innovation, there won't there won't be a political protection as backlash. And then the last principle we have is that effective government can enhance economic growth. We are not of the persuasion that government is the source of the problem. We certainly know that there can be bad policy and there has been a lot of bad policy around the world including here, but we are motivated or inspired by Alexander Hamilton, so let me end with his quote, he wrote "in matters of industry, human enterprise, ought doubtless, to be left free in the main, not fettered by too much regulation". But practical politicians know that it may be beneficially stimulated by prudent aid and encouragements on the part of governments. So what Hamilton Project is trying to do is to work with some outstanding minds, to develop prudent aids and encouragement on the side of governments, to enhance you as competitiveness and to get, to reduce the risk on American workers and to make the sharing of our prosperity a little more even. So I am delighted to be associated with the project and delighted to be back home with the Commonwealth Club, Thank you.