Remarks of Harold McGraw III

By Harold McGraw III - 05/01/2007

MONTANA ECONOMIC DEVELOPMENT SUMMIT 2007 MONTANA TECH BUTTE MONTANA APRIL 30, 2007 Thanks, Senator Baucus, for that kind introduction. I’d also like to say a word of thanks to both Senator Baucus and Chancellor Gilmore for hosting this remarkable event.

• Throughout his career, Senator Baucus has been a leader in promoting the expansion of international trade.

• He has also done a great job of introducing the world’s consumers to the products of this wonderful state.

• And he has always demonstrated leadership by taking a bipartisan approach to trade issues. He stands squarely in the tradition of one of our nation’s and Montana’s greatest Senators, Mike Mansfield.

Chancellor Gilmore also has a Mike Mansfield connection.

• The late Senator studied for a time at Montana School of Mines, a college which evolved into the dynamic institution where we meet today, Montana Tech.

• Under Chancellor Gilmore’s forward-looking leadership, Montana Tech is doing a tremendous job of helping promote innovation and economic growth through research and by providing the training students need for 21st Century careers.

• You are setting an example I hope other institutions will follow.

The themes of this conference are innovation, entrepreneurship and trade.

The McGraw-Hill Companies is a global information services provider that serves markets worldwide in business information, financial information, and education, with 20,000 employees around the world. That gives us a unique vantage point on these issues. Like many companies in these markets, our success depends on our ability to develop new products and services that serve the rapidly changing needs of our customers; in short, our success is a function of our ability to adapt and innovate.

As I see it, innovation, entrepreneurship and trade are tightly linked. And the close connections among them explain why globalization and the emergence of new overseas markets offer huge opportunities for growth n for companies small and large across the country, and opportunities for growth right here in Montana.

Let’s start with innovation. What spurs innovation? One essential factor is competition. To compete successfully, you have to innovate.

And in my experience, most of the best innovators are entrepreneurs, like so many of the people in this room. You live and breathe competition.

A big reason why Americans have always had an advantage when it comes to innovation: We live in the world’s most competitive economy, where businesses operate in open and transparent markets. New entrepreneurs emerge every day adding 500,000 new businesses a month. This vibrant capitalism rewards risk-takers and penalizes complacency, and is responsible for the dynamic economy that our country continues to benefit from.

There’s something else critically important to innovation: our ability to view change as opportunity rather than a threat.

Today, we are seeing great changes in the global economy. In fact, we are seeing tectonic shifts.

American companies used to compete mostly with each other, paying far more attention to the competitor down the street than the one across the globe.

We now have major competitors outside our borders. India’s booming economy is now growing at more than 8 percent a year. China done even better, with an annual GDP growth of more than 10 percent.

That kind of competition is part of the “challenge,” of global trade. What about the “opportunity”?

For starters: emerging and developing countries mean new markets for U.S. goods and services n new consumers to serve. In fact, 95 percent of the world’s consumers are outside of the U.S. That’s a tremendous opportunity. Many American companies have entered these new markets. They are competing, innovating, and growing.

Some facts and figures tell more of this story.

• Fact number one: Thirty-one million jobs. That’s the number of jobs for America’s working families attributable to international trade. It’s nearly one in five jobs in the U.S; that number was only one in ten jobs in 1992, by the way. In fact, a decade of trade liberalization has more than doubled the number of U.S. jobs related to trade. And contrary to popular opinion, trade has had a net positive impact on U.S. manufacturing jobs n far from the “giant sucking sound” myth that we heard when the NAFTA debate was raging back in the early ‘90s.

• Fact number two: A trillion dollar boost. According to one estimate [The Institute for International Economics (IIE)], trade liberalization generates $800 billion to $1.45 trillion dollars per year in added U.S. output.

Huge numbers like that are hard to absorb. But they mean an added $7,000 to $13,000 every year for every single American household.

• Fact number three: Price competition attributable to imports also plays an important role in dampening inflationary pressures and, in turn, keeping U.S. interest rates low. This, in turn, has enabled the Federal Reserve to employ a more accommodative interest rate policy than it had previously without increasing inflationary pressures, helping propel our country’s remarkable record of economic growth.

And what about here in Montana?

• In 2005, more than $520 million in Montana agriculture exports helped boost farm prices and income while supporting almost 7,000 jobs.

• Between 2002 and 2006, Montana’s overall exports increased by 130 percent, to $887 million. Only two states had larger increases during that period.

And it’s important to remember that companies of every size benefited.

• Almost 900 companies exported goods from Montana locations in 2004. More than 80 percent were small and medium-sized enterprises, like many of you operate.

• Smaller firms like yours accounted for 41 percent of Montana’s exports of merchandise in 2004.

In short, the evidence is clear that expansion of trade promotes economic growth.

Removing barriers to trade and opening markets encourages entrepreneurs. It produces remarkable growth and adds jobs for people in Montana, and across the nation.

I would love to be able to say “that’s the end of the story, and let’s move on to a different topic.” But, of course, we all know there is a lot more to it.

Some people are very worried about the expansion of trade, and, more broadly, globalization. It appears that concern is growing, as seen through the statements that are coming out of Washington with our new Congress.

Senator Baucus has been steadfast in pursuing a bipartisan approach to trade policy. That’s an approach our nation enjoyed for seven decades. Support for open markets and a flexible economy that fosters innovation is something we need to sustain.

Sadly, however, there is a growing sentiment for protectionism and retreat. Public opinion polls indicate people are skeptical about expanding trade. They view globalization not as a means to propel our country’s economic growth, but as a threat to their jobs and way of life.

Right here in Montana, in fact, the Montana state Senate overwhelmingly passed a resolution calling on the Congress in Washington not to renew the President's "Fast Track" trade promotion authority. And last month, Congressional Democrats issued their new policy statement that imposes conditions on future trade deals that some have characterized as protectionist.

At a time when trade is producing such clear economic benefits, why are people so worried? One reason was identified by Treasury Secretary Paulson recently who said, “The benefits of [global] competition, while significant, are not spread evenly and competition can create losers as well as winners. The short-term problems are more immediately visible in the form of job losses that are very real and painful.” I think the other reason people are worried is that globalization is occurring at the same time another other fundamental change—the revolutionary impact of technology--is transforming our economy.

Taken together, global trade and technological change are very good for our economy in the long term. But like other fundamental economic shifts of the past, like the Industrial Revolution, they can create dislocation and distress in the short term.

There is no question that our economy produces job churn.

• We’re creating 17 million new jobs each year. The economy also eliminates 15 million jobs each year.

• The good news we are steadily gaining jobs overall. During this decade, we’ll create 22 million net new jobs.

• At the same time, there is no getting around it: Losing a job, even if it’s temporary, is frightening.

I would imagine that economic dislocations have a special resonance for people of Butte, or elsewhere in Montana.

Seventy years ago, Butte was a boomtown, with a population close to 90,000, making it one of biggest and wealthiest cities in the West. Then economic change came. Copper production in Butte mines peaked in 1917 and steadily declined. Mining companies shifted their operations overseas. While the nation’s economy benefited, this city paid the price.

Across the state, many of your counties in the west are doing very well, fueled by tourism and new service industries. But, as you know, some, mainly in the east, lag far behind. They lack the West’s urban centers and tourist attractions, and their arid flatlands make farming hard. In fact, some eastern counties are among the poorest in the nation and are steadily losing population.

Having paid such a high price for economic change in the past, some Montanans worry that they won’t share in the benefits of what is going on now. It’s no wonder so many are skeptical of trade expansion and the benefits of technological change.

We must take concerns about job losses seriously. But here, where you have such a wonderful view of the big sky, let’s not lose sight of the big picture.

The world is growing up. The answer to increasing competition arising from globalization is not retreat. We must not wall ourselves off from the global economy. We must be engaged.

What happens if we cut ourselves off from international trade?

• Innovation will wane, not only from the lack of competition, but from rigidities in the economy and barriers that prevent the exchange of new technologies.

• We will lose out to our foreign competitors.

• We will stagnate economically; prices will increase, talent will no longer want to be here; and we will lose our competitive edge.

Consider what happened to Japan.

In the 1980s Japan was the world’s most dynamic economy. Remember how afraid we all were of Japan back then?

But in the 1990s the Japanese tried building walls to protect their own companies and workers. The result: Japan got stuck in a decade of recession, from which it has only recently started to emerge.

What can be done, then, to deal with legitimate concerns about economic change while still promoting innovation, entrepreneurship, and growth through trade?

I believe it’s time for a new approach. It’s one that will require innovative policies and new forms of cooperation.

I would like to see those on all sides of the globalization debate join together in what I call the American Trade and Competitiveness Compact.

The compact would be a new kind of agreement on trade n one that is not between nations, but, rather, one that brings together U.S. leaders from • government, • business, • education, • labor, and • public interest organizations to commit to a common set of goals.

• These goals would stop polarization on trade issues, and • Bring the benefits of global trade to every company, consumer, worker, and community.

Let’s address the polarization. The first thing the leaders from opposing sides in the trade debate should agree to do is to stop demonizing one another.

• People who are worried about globalization are not anti-progress Luddites.

• People who support globalization do not care more about profits than people.

I would hope we could return to the kind of civil discourse that was so typical of Senator Mike Mansfield. Senator Mansfield was known for his bi-partisan approach.

So, rather than engage in divisive rhetoric in trade, we all need to agree to a plan that promotes innovation, entrepreneurship, and growth through trade. The plan’s targets: • Provide Americans the tools they need to survive short term economic dislocations caused by globalization, and • Through expanded educational opportunity, provide Americans the skills, knowledge, and capabilities they need to seize the opportunities presented by expanded trade.

• Boost innovation and economic growth by giving American workers and businesses the support they need to compete effectively in the new global economy.

• And level the playing field for workers, businesses, and farmers.

There is much to say about each of these, but in my remaining time with you, let me focus on a few specifics.

First, in dealing with economic dislocations from globalization n government agencies clearly should play a role in providing a safety net to people who are temporarily without jobs. But a safety net is just the start.

As the economy changes we need to provide people with “networks of opportunity” n sets of tools and resources they can use to make the most of the possibilities globalization offers. Public private partnerships are the key.

Let me give you an example n an example concerning another U.S. city: Dubuque, Iowa. I know the story firsthand because The McGraw-Hill Companies has operations there.

In the late 1980s, Dubuque, Iowa suffered massive losses of manufacturing jobs. In fact, things got so bad that a local bar was selling tee shirts that said “Will the last person in Dubuque please shut out the lights?” Then a group of business people got together with government leaders as well as leaders from local colleges and universities. They created the Greater Dubuque Development Corporation to attract investment and new businesses.

Over the last five years, they generated $200 million in commercial development, and The McGraw-Hill Companies is proud to be a part of it. We are building a new facility there that will house almost 400 employees.

Dubuque’s growth rate has been about 6 percent, versus 1 percent for the rest of Iowa.

In the next five years, Dubuque is aiming to create 5,500 new jobs and another $300 million in commercial development.

The Trade and Competitiveness Compact I am recommending could help promote these kinds of innovative growth programs across the country.

The Compact would also focus on education and training. I mentioned earlier that competition spurs innovation. Let me now add that education and training support and sustain it.

To give every American the chance to thrive in the new global economy, we must ensure they are prepared for the jobs of the future. Many of these jobs require education in the fields of technology, engineering, math, and science.

Business Roundtable and fourteen other national business associations have joined together to support a very crucial goal: doubling the number of American science, technology, engineering, and mathematics graduates with bachelor's degrees by 2015. I know Montana Tech will be glad to do its part.

Training the next generation is only part of the solution. We also have to enhance learning opportunities for U.S. workers.

As our economy changes, our workers need new skills and knowledge.

Part of the solution lies within a resource none of our global competitors can match n a strong, nationwide community college system.

As part of the Compact, community colleges could work closely with business to provide workers with retraining and career counseling.

More and more companies are already doing their part by supporting workers who want to receive training for tomorrow’s jobs. United Technologies Corporation, for example, pays the costs for its employees who want to go to school at community colleges or four year institutions. And they award stock, valued at up to $10,000, to those who complete their degrees.

I know that here in Montana you have an innovative mixture of two year programs — some offered at community colleges and others through your university systems.

Another part of the solution is increased funding for research and development, which nurture and sustain innovation.

The Trade and Competitiveness Compact would lead the way in increasing government and private investments in research and development.

Senator Mansfield once said, the “quality of life on earth tomorrow will be determined in large part by the measure of the scientific research undertaken today.” Senator Mansfield recognized the public sector’s responsibility to sponsor research.

Pubic sector support has resulted in some of the most significant innovations of our day, • from the development of the Internet and the “packet-switching” technology behind e-mail to • the latest generations of cancer drugs.

And the public sector has benefited from innovations created by the private sector, from • vaccines developed by drug companies that are distributed by public health agencies to prevent disease and control health care costs to • computer simulation technology that was developed commercially and then adopted by the Department of Defense.

As I said earlier, we have some clear advantages over our global rivals. But the bad news is we have some serious disadvantages as well.

Right now our economy’s performance is weighed down by burdens many of our trade rivals don’t have. It’s as if we’re trying to win a race with a foot on the brake.

Every business leader in this room is all too familiar with one of the biggest drags on our economy: health care costs.

• We spent some $2 trillion on health care last year.

• That comes out to nearly $4,900 per person.

• In Germany they spend $2,800 and in Japan, barely $2,100, and with no diminution in quality.

This cost difference strains the budgets of American households and leaves millions without any health care at all.

It also puts American goods and services at a significant competitive disadvantage. The Compact could work with Congress and the Administration to attack this festering problem.

One promising step would be to digitize health care by passing legislation to bring information technology to this industry. This one step would save our health care delivery system an estimated $165 billion annually, meaning an extra $2,200 in the pockets of the average family.

By the way, one of the sponsors of this event, The National Center for Health Care Informatics (NCHCI), is doing great work in this area.

The Compact could also work on other significant issues we face including: • overcoming America’s energy challenge by decreasing the country’s dependence on foreign sources of energy; • revising the U.S. international tax rules to make our companies more competitive; and • eliminating disincentives to U.S. trade and investment.

I realize, of course, that I’ve outlined an ambitious agenda. It will not be easy to bring diverse groups together in a new Trade and Competitiveness Compact.

But Americans have always been able to find common ground, when faced with serious challenges to our national well being.

I serve as the chairman of Business Roundtable, which is comprised of chief executive officers of 160 of the largest companies in the nation.

We recently joined with two very different organization n the AARP and the Service Employees International Union (SEIU) n to announce a partnership on health care and retirement security.

Some may call us “strange bedfellows” n but mutual interests and common cause bring us together. The point is, we can build bridges among diverse groups to achieve a Trade and Competitiveness Compact. After all, the stakes couldn’t be much higher — our future in the global economy of the 21st Century.

I’ve already quoted one famous Montanan, Senator Mansfield. Let me close by quoting another.

He’s a native son of Butte, named Robert Craig Knievel [ken-EVIL]. He’s better known, of course, as the world famous daredevil Evel Knievel.

His fame came at least as much from his spectacular crashes as for his spectacular jumps. Evel once said, “I did everything by the seat of my pants. That's why I got hurt so much.” Now, Evel’s bravado was entertaining. But when it comes to our economic future, we can’t afford to crash. And in a world of global competition, the stakes are much too high to risk a seat-of-the-pants approach.

We need to bring our leaders and organizations together to develop an innovation and competitiveness strategy… to work together to provide every American worker and every community the opportunity to succeed in this exciting, AND challenging new economy.