Hearings and Business Meetings
October 18, 2005
SD-366 Energy Committee Hearing Room 03:30 PM
Mr. Norman Augustine
Rising Above The Gathering Storm:
Energizing and Employing America for a
Brighter Economic Future
Norman R. Augustine
Retired Chairman and Chief Executive Officer
Lockheed Martin Corporation
Chair, Committee on Prospering in the Global Economy of the 21st Century
Committee on Science, Engineering, and Public Policy
Division on Policy and Global Affairs
The National Academies
Committee on Energy and Natural Resources
October 18, 2005
Mr. Chairman and members of the Committee.
Thank you for this opportunity to appear before you on behalf of the National Academies’ Committee on Prospering in the Global Economy of the 21st Century. As you know, our effort was sponsored by the National Academy of Sciences, National Academy of Engineering and Institute of Medicine (collectively known as the National Academies). The National Academies were chartered by Congress in 1863 to advise the government on matters of science and technology.
The study had as its origin a conversation which took place at the National Academies with Senator Lamar Alexander several months ago. As a result of that discussion, the Academies were requested by Senator Alexander and Senator Jeff Bingaman, members of the Senate Committee on Energy and Natural Resources, to conduct an assessment of America’s ability to compete and prosper in the 21st century—and to propose appropriate actions to enhance the likelihood of success in that endeavor. This request was endorsed by the House Committee on Science.
To respond to that request the Academies assembled twenty individuals with diverse backgrounds, including university presidents, CEOs, Nobel Laureates and former presidential appointees. The result of our committee’s work was examined by over forty highly qualified reviewers who were also designated by the Academies. In undertaking our assignment we considered the results of a number of prior studies which were conducted on various aspects of America’s future prosperity. We also gathered sixty subject-matter experts with whom we consulted for a weekend here in Washington and who provided recommendations related to their fields of specialty.
It is the unanimous view of our committee that America today faces a serious and intensifying challenge with regard to its future competitiveness and standard of living. Further, we appear to be on a losing path. We are here today hoping both to elevate the nation’s awareness of this developing situation and to propose constructive solutions.
The thrust of our findings is straightforward. The standard of living of Americans in the years ahead will depend to a very large degree on the quality of the jobs that they are able to hold. Without quality jobs our citizens will not have the purchasing power to support the standard of living which they seek, and to which many have become accustomed; tax revenues will not be generated to provide for strong national security and healthcare; and the lack of a vibrant domestic consumer market will provide a disincentive for either U.S. or foreign companies to invest in jobs in America.
What has brought about the current situation? The answer is that the prosperity equation has a new ingredient, an ingredient that some have referred to as “The Death of Distance”. In the last century, breakthroughs in aviation created the opportunity to move people and goods rapidly and efficiently over very great distances. Bill Gates has referred to aviation as the “World Wide Web of the twentieth century”. In the early part of the present century, we are approaching the point where the communication, storage and processing of information are nearly free. That is, we can now move not only physical items efficiently over great distances, we can also transport information in large volumes and at little cost.
The consequences of these developments are profound. Soon, only those jobs that require near-physical contact among the parties to a transaction will not be opened for competition from job seekers around the world. Further, with the end of the Cold War and the evaporation of many of the political barriers that previously existed throughout the world, nearly three billion new, highly motivated, often well educated, new capitalists entered the job market.
Suddenly, Americans find themselves in competition for their jobs not just with their neighbors but with individuals around the world. The impact of this was initially felt in manufacturing, but soon extended to the development of software and the conduct of design activities. Next to be affected were administrative and support services. Today, “high end” jobs, such as professional services, research and management, are impacted. In short, few jobs seem “safe”:
• U.S. companies each morning receive software that was written in India overnight in time to be tested in the U.S. and returned to India for further production that same evening—making the 24-hour workday a practicality.
• Back-offices of U.S. firms operate in such places as Costa Rica, Ireland and Switzerland.
• Drawings for American architectural firms are produced in Brazil.
• U.S. firm’s call centers are based in India—where employees are now being taught to speak with a mid-western accent.
• U.S. hospitals have x-rays and CAT scans read by radiologists in Australia and India.
• At some McDonald’s drive-in windows orders are transmitted to a processing center a thousand miles away (currently in the U.S.), where they are processed and returned to the worker who actually prepares the order.
• Accounting firms in the U.S. have clients tax returns prepared by experts in India.
• Visitors to an office not far from the White House are greeted by a receptionist on a flat screen display who controls access to the building and arranges contacts—she is in Pakistan.
• Surgeons sit on the opposite side of the operating room and control robots which perform the procedures. It is not a huge leap of imagination to have highly-specialized, world-class surgeons located not just across the operating room but across the ocean.
As Tom Friedman concluded it in The World is Flat, globalization has “accidentally made Beijing, Bangalore and Bethesda next door neighbors”. And the neighborhood is one wherein candidates for many jobs which currently reside in the U.S. are now just a “mouse-click” away.
How will America compete in this rough and tumble global environment that is approaching faster than many had expected? The answer appears to be, “not very well”—unless we do a number of things differently from the way we have been doing them in the past.
Why do we reach this conclusion? One need only examine the principal ingredients of competitiveness to discern that not only is the world flat, but in fact it may be tipping against us.
One major element of competitiveness is, of course, the cost of labor. I recently traveled to Vietnam, where the wrap rate for low-skilled workers is about twenty-five cents per hour, about one-twentieth of the U.S. minimum wage. And the problem is not confined to the so-called “lower-end” of the employment spectrum. For example, five qualified chemists can be hired in India for the cost of just one in America. Given such enormous disadvantages in labor cost, we cannot be satisfied merely to match other economies in those other areas where we do enjoy strength; rather we must excel . . . markedly.
The existence of a vibrant domestic market for products and services is another important factor in determining our nation’s competitiveness, since such a market helps attract business to our shores. But here, too, there are warning signs: Goldman Sachs analysts project that within about a decade, fully 80% of the world’s middle-income consumers will live in nations outside the currently industrialized world.
The availability of financial capital has in the past represented a significant competitive advantage for America. But the mobility of financial capital is legion, as evidenced by the willingness of U.S. firms to move factories to Mexico, Vietnam and China if a competitive advantage can be derived by doing so. Capital, as we have observed, crosses geopolitical borders at the speed of light.
Human capital—the quality of our work force—is a particularly important factor in our competitiveness. Our public school system comprises the foundation of this asset. But as it exists today, that system compares, in the aggregate, abysmally with those of other developed—and even developing—nations . . . particularly in the fields which underpin most innovation: science, mathematics and technology.
Of the utmost importance to competitiveness is the availability of knowledge capital—“ideas”. And once again, scientific research and engineering applications are crucial. But knowledge capital, like financial capital, is highly mobile. There is one major difference: being first-to-market, by virtue of access to new knowledge, can be immensely valuable, even if by only a few months. Craig Barrett, a member of our committee and Chairman of Intel, points out that ninety percent of the products his company delivers on December 31st did not even exist on January 1st of that same year. Such is the dependence of hi-tech firms on being at the leading edge of scientific and technological progress.
There are of course many other factors influencing our nation’s competitiveness. These include patent processes, tax policy and overhead costs—such as healthcare, regulation and litigation—all of which tend to work against us today. On the other hand, America’s version of the Free Enterprise System has proven to be a powerful asset, with its inherent aggressiveness and discipline in introducing new ideas and flushing out the obsolescent. But others have now recognized these virtues and are seeking to emulate our system.
But is it not a good thing that others are prospering? Our committee’s answer to that question is a resounding “yes”. Broadly based prosperity can make the world more stable and safer for all; it can make less costly products available for American consumers; it can provide new customers for the products we produce here. Yet it is inevitable that there will be relative winners and relative losers—and as the world prospers, we should seek to assure that America does not fall behind in the race.
The enigma is that in spite of all these factors, America seems to be doing quite well just now. Our nation has the highest R&D investment intensity in the world. We have indisputably the finest research universities in the world. California alone has more venture capital than any nation in the world other than the United States. Two million jobs were created in America in the past year alone, and citizens of other nations continue to invest their savings in America at a remarkable rate. Total household net worth is now approaching $50 trillion.
The reason for this prosperity is that we are reaping the benefits of past investments—many of them in the fields of science and technology. But the early indicators of future prosperity are generally heading in the wrong direction. Consider the following:
• For the cost of one engineer in the United States, a company can hire eleven in India.
• America has been depending heavily on foreign-born talent. Thirty-eight percent of the scientists and engineers in America holding doctorates were born abroad. Yet, when asked in the spring of 2005, what are the most attractive places in the world in which to live, respondents in only one of the countries polled indicated the U.S.A.
• Chemical companies closed seventy facilities in the U.S. in 2004, and have tagged forty more for shutdown. Of 120 new chemical plants being built around the world with price tags of $1 billion or more, one is in the U.S. Fifty are in China.
• In 1997 China had fewer than fifty research centers managed by multinational corporations. By 2004 there were over six-hundred.
• Two years from now, for the first time, the most capable high-energy particle accelerator on earth will reside outside the United States.
• The United States today is a net importer of high technology products. The U.S. share of global high tech exports has fallen in the last two decades from 30% to 17%, while America’s trade balance in high tech manufactured goods shifted from a positive $33B in 1990 to a negative $24B in 2004.
• In a recent international test involving mathematical understanding, U.S. students finished in 27th place among the nations participating.
• About two-thirds of the students studying chemistry and physics in U.S. high schools are taught by teachers with no major or certificate in the subject. In the case of math taught in grades five through twelve, the fraction is one-half. Many such students are being taught math by graduates in physical education.
• In one recent period, low-wage employers like Wal-Mart (now the nation’s largest employer) and McDonald’s created 44% of all new jobs. High-wage employers created only 29%.
• In 2003 foreign students earned 59% of the engineering doctorates awarded in U.S. universities.
• In 2003 only three American companies ranked among the top ten recipients of patents granted by the U.S. Patent Office.
• In Germany, 36% of undergraduates receive their degrees in science and engineering. In China, the corresponding figure is 59%, and in Japan it is 66%. In the U.S., the share is 32%. In the case of engineering, the U.S. share is 5%, as compared with 50% in China.
• The United States is said to have over ten million illegal immigrants, but the number of legal visas set-aside annually for “highly qualified foreign workers” was recently dropped from 195,000 per year down to 65,000.
• In 2001 (the most recent year for which data are available), U.S. industry spent more on tort litigation and related costs than on research and development.
As important as jobs are, the impact of these circumstances on our nation’s security could be even more profound. In the view of the bipartisan Hart-Rudman Commission on National Security, “. . . the inadequacies of our system of research and education pose a greater threat to U.S. national security over the next quarter century than any potential conventional war that we might imagine.”
The good news is that there are things we can do to assure that America does in fact share in the prosperity that science and technology are bringing the world. In this regard, our committee has made four broad recommendations as the basis of a prosperity initiative—and offers 20 specific actions to make these recommendations a reality. They include:
o “Ten Thousand Teachers, Ten Million Minds”—which addresses America’s K-12 education system. We recommend that America’s talent pool in science, math and technology be increased by vastly improving K-12 education. Among the specific steps we propose are:
? Recruitment of 10,000 new science and math teachers each year through the award of competitive scholarships in math, science and engineering that lead to a bachelor’s degree accompanied by a teaching certificate—and a 5-year commitment to teach in a public school.
? Strengthening the skills of 250,000 current teachers through funded training and education in part-time master’s programs, summer institutes and Advanced Placement training programs.
? Increasing the number of students who take Advanced Placement science and mathematics courses.
o “Sowing the Seeds”—which addresses America’s research base. We recommend strengthening the nation’s traditional commitment to long-term basic research through:
? Increasing federal investment in research by 10% per year over the next seven years, with primary attention devoted to the physical sciences, engineering, mathematics, and information sciences—without disinvesting in the health and biological sciences.
? Providing research grants to early career researchers
? Instituting a National Coordination Office for Research Infrastructure to oversee the investment of an additional $500M per year for five years for advanced research facilities and equipment.
? Allocating at least 8% of the existing budgets of federal research agencies to discretionary funding under the control of local laboratory directors.
? Creation of an Advanced Research Projects Agency—Energy (ARPA-E), modeled after DARPA in the Department of Defense, reporting to the Department of Energy Undersecretary for Science. The purpose is to support the conduct of out-of-the-box, transformational, generic, energy research by universities, industry and government laboratories.
? Establish a Presidential Innovation Award to recognize and stimulate scientific and engineering advances in the national interest.
o “Best and Brightest”—which addresses higher education. In this area we recommend:
? Establishing 25,000 competitive science, mathematics, engineering, and technology undergraduate scholarships and 5,000 graduate fellowships in areas of national need for US citizens pursuing study at US universities.
? Providing a federal tax credit to employers to encourage their support of continuing education.
? Providing a one-year automatic visa extension to international students who receive a science or engineering doctorate at a U.S. university, and providing automatic work permits and expedited residence status if these students are offered employment in the US.
? Instituting a skill-based, preferential immigration option
? Reforming the current system of “deemed exports” so that international students and researchers have access to necessary non-classified information and research equipment while studying and working in the US.
o “Incentives for Innovation”—in which we address the innovation environment itself. We recommend:
? Enhancements to intellectual property protection, such as the adoption of a first-to-file system.
? Increasing the R&D tax credit from the current 20% to 40%, and making the credit permanent.
? Providing permanent tax incentives for US-based innovation so that the United States is one of the most attractive places in the world for long-term innovation-related investments.
? Ensuring ubiquitous broadband Internet access to enable U.S. firms and researchers to operate at the state of the art in this important technology.
It should be noted that we are not confronting a so-called “typical” crisis, in the sense that there is no 9/11, Sputnik or Pearl Harbor to alert us as a nation. Our situation is more akin to that of the proverbial frog being slowly boiled. Nonetheless, while our committee believes the problem we confront is both real and serious, the good news is that we may well have time to do something about it—if we start now.
Americans, with only 5% of the world’s population but with nearly 30% of the world’s wealth, tend to believe that scientific and technological leadership and the high standard of living it underpins is somehow the natural state of affairs. But such good fortune is not a birthright. If we wish our children and grandchildren to enjoy the standard of living most Americans have come to expect, there is only one answer: We must get out and compete.
I would like to close my remarks with a perceptive and very relevant poem. It was written by Richard Hodgetts, and eloquently summarizes the essence of innovation in the highly competitive, global environment. The poem goes as follows:
Every morning in Africa a gazelle wakes up. It knows it must outrun the fastest lion or it will be killed. Every morning in Africa a lion wakes up. It knows it must outrun the slowest gazelle or it will starve. It doesn’t matter whether you’re a lion or a gazelle – when the sun comes up, you’d better be running.
And indeed we should.
Thank you for providing me with this opportunity to testify before the committee. I would be pleased to answer any questions you have about the report.
COMMITTEE BIOGRAPHIC INFORMATION
NORMAN R. AUGUSTINE [NAE*] (Chair) is the retired chairman and CEO of the Lockheed Martin Corporation. He serves on the President’s Council of Advisors on Science and Technology and has served as undersecretary of the Army. He is a recipient of the National Medal of Technology.
CRAIG BARRETT [NAE] is chairman of the Board of the Intel Corporation.
GAIL CASSELL [IOM*] is vice president for scientific affairs and a Distinguished Lilly Research Scholar for Infectious Diseases at Eli Lilly and Company.
STEVEN CHU [NAS*] is the director of the E.O. Lawrence Berkeley National Laboratory. He was a cowinner of the Nobel prize in physics in 1997.
ROBERT GATES is the president of Texas A&M University and served as Director of Central Intelligence.
NANCY GRASMICK is the Maryland state superintendent of schools.
CHARLES HOLLIDAY JR. [NAE] is chairman of the Board and CEO of DuPont.
SHIRLEY ANN JACKSON [NAE] is president of Rensselaer Polytechnic Institute. She is the immediate past president of the American Association for the Advancement of Science and was chairman of the US Nuclear Regulatory Commission.
ANITA K. JONES [NAE] is the Lawrence R. Quarles Professor of Engineering and Applied Science at the University of Virginia. She served as director of defense research and engineering at the US Department of Defense and was vice-chair of the National Science Board.
JOSHUA LEDERBERG [NAS/IOM] is the Sackler Foundation Scholar at Rockefeller University in New York. He was a cowinner of the Nobel prize in physiology or medicine in 1958.
RICHARD LEVIN is president of Yale University and the Frederick William Beinecke Professor of Economics.
C. D. (DAN) MOTE JR. [NAE] is president of the University of Maryland and the Glenn L. Martin Institute Professor of Engineering.
CHERRY MURRAY [NAS/NAE] is the deputy director for science and technology at Lawrence Livermore National Laboratory. She was formerly the senior vice president at Bell Labs, Lucent Technologies.
PETER O’DONNELL JR. is president of the O'Donnell Foundation of Dallas, a private foundation that develops and funds model programs designed to strengthen engineering and science education and research.
LEE R. RAYMOND [NAE] is the chairman of the Board and CEO of Exxon Mobil Corporation.
ROBERT C. RICHARDSON [NAS] is the F. R. Newman Professor of Physics and the vice provost for research at Cornell University. He was a cowinner of the Nobel prize in physics in 1996.
P. ROY VAGELOS [NAS/IOM] is the retired chairman and CEO of Merck & Co., Inc. He serves as chairman of New Jersey's Commission on Jobs, Growth, and Economic Development.
CHARLES M. VEST [NAE] is president emeritus of MIT and a professor of mechanical engineering. He serves on the President’s Council of Advisors on Science and Technology and is the immediate past chair of the Association of American Universities.
GEORGE M. WHITESIDES [NAS/NAE] is the Woodford L. & Ann A. Flowers University Professor at Harvard University. He has served as an adviser for the National Science Foundation and the Defense Advanced Research Projects Agency.
RICHARD N. ZARE [NAS] is the Marguerite Blake Wilbur Professor of Natural Science at Stanford University. He was chair of the National Science Board from 1996 to 1998.
NORMAN R. AUGUSTINE was raised in Colorado and attended Princeton University where he graduated with a BSE in Aeronautical Engineering, magna cum laude, an MSE and was elected to Phi Beta Kappa, Tau Beta Pi and Sigma Xi.
In 1958 he joined the Douglas Aircraft Company in California where he held titles of Program Manager and Chief Engineer. Beginning in 1965, he served in the Pentagon in the Office of the Secretary of Defense as an Assistant Director of Defense Research and Engineering. Joining the LTV Missiles and Space Company in 1970, he served as Vice President, Advanced Programs and Marketing. In 1973 he returned to government as Assistant Secretary of the Army and in 1975 as Under Secretary of the Army and later as Acting Secretary of the Army. Joining Martin Marietta Corporation in 1977, he served as Chairman and CEO from 1988 and 1987, respectively, until 1995, having previously been President and Chief Operating Officer. He served as President of Lockheed Martin Corporation upon the formation of that company in 1995, and became its Chief Executive Officer on January 1, 1996, and later Chairman. Retiring as an employee of Lockheed Martin in August, 1997, he joined the faculty of the Princeton University School of Engineering and Applied Science where he served as Lecturer with the Rank of Professor until July, 1999.
Mr. Augustine served as Chairman and Principal Officer of the American Red Cross for nine years and as Chairman of the National Academy of Engineering, the Association of the United States Army, the Aerospace Industry Association, and the Defense Science Board. He is a former President of the American Institute of Aeronautics and Astronautics and the Boy Scouts of America. He is currently a member of the Board of Directors of ConocoPhillips, Black & Decker and Procter & Gamble and a member of the Board of Trustees of Colonial Williamsburg and Johns Hopkins and a former member of the Board of Trustees of Princeton and MIT. He is a member of the President’s Council of Advisors on Science and Technology and the Department of Homeland Security Advisory Board and was a member of the Hart/Rudman Commission on National Security.
Mr. Augustine has been presented the National Medal of Technology by the President of the United States and has five times been awarded the Department of Defense's highest civilian decoration, the Distinguished Service Medal and has received the Joint Chiefs of Staff Distinguished Public Service Award. He is co-author of The Defense Revolution and Shakespeare In Charge and author of Augustine's Laws and Augustine’s Travels. He holds eighteen honorary degrees and was selected by Who’s Who in America and the Library of Congress as one of the Fifty Great Americans on the occasion of Who’s Who’s fiftieth anniversary. He has traveled in nearly 100 countries and stood on both the North and South Poles.