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May 8, 1997
This afternoon, I want to talk to you about the new economy and the
limited but critical role that I think government should play in the 21st
century.
So here goes: Gore on the New Economy -- Version 1.0. You'll be notified
about upgrades.
You have been discussing the future of the corporation in this era of
technologically-driven change. In joining your conversation, I would like to
discuss how the very same forces are influencing government, forcing the
transformation of government, and reshaping the relationship between government
and corporations.
There are actually two changes that frame our conversation. The first
you've described explicitly as the technology revolution, which is, of course,
only the latest manifestation of the larger scientific revolution that began
reshaping the economy and society more than three and a half centuries ago. In
many fields -- the life sciences, the earth sciences, brain research and
materials development, to cite but a few examples, knowledge is increasing at
an unbelievably rapid pace. But the one field in which it's having the biggest
impact is the revolution in information technology.
It is important to recognize that the information revolution is coupled
with a second change that is implicit in the framing of today's conversation:
the globalization of the marketplace. This change has also been in the making
for quite some time. As soon as communication became electrified, it was
inevitable that the marketplace would become global. In 1851, inspired by the
telegraph invented 16 years earlier, Nathaniel Hawthorne wrote these words: "By
means of electricity, the world of matter has become a great nerve, vibrating
thousands of miles in a breathless point of time . . . the round globe is a
vast . . . brain, instinct with intelligence!"
Much as Jules Verne foresaw submarines and moon landings, Hawthorne
foresaw the "digital nervous system" that Bill Gates discussed this morning.
These two changes -- globalization and the revolution in information
technology -- have combined to create a new age with an entirely new business
reality and entirely new challenges and opportunities.
The place to begin is by asking about the impact -- not on business or
on government --but on people. What is the human impact of these changes?
Well, for starters, most of us feel we have a lot more information than
we can possibly deal with. How many times have you heard the metaphorical
question: how can you drink out of a firehose? A friend of mine in the computer
industry once made this point by saying that if you described our human brains
in computer terms, you'd have to say we have a low bit-rate but high
resolution. And what he meant by that, was that when we try to absorb
information bit by bit, it takes a long time -- and we're not really very good
at it. For example, years ago, the telephone industry conducted research to
determine that seven digits was the most we could hold in our memories -- and
then they added four more digits.
We do, however, have very high resolution, which means we can quickly
absorb the meaning of patterns containing huge quantities of data at a single
gulp, and infer the meaning of each bit by reference to its context. There are
two hundred billion stars in the Milky Way. We recognize the pattern instantly.
Bill and Melinda's daughter, Jennifer, recognized their faces within two weeks
of her birth -- a task no computer can yet replicate with speed or
accuracy.
This capacity for high resolution served us well. But the problem is
this: most of the information now becoming available to humankind about the
world around us comes to us not arrayed in recognizable patterns, but in huge
sand dunes of data. Our satellites, for example, take a complete photograph of
the earth's surface every 18 days, but 99 percent of the information collected
never fires a single neuron in a single human brain. The Clementine mission to
explore the surface of the moon contains 20 terabytes of data that no human
eyes have ever seen.
High-performing computers help us master this challenge. But there was a
mismatch between the incredible speed with which processing power expands and
the snail's pace with which new advances in transmission capability have been
made available.
I once used the old cliche with a college audience that if a car had
made the same exponential advances as the computer, a Cadillac would get
100,000 miles to the gallon and cost only 50 cents. And then one of the
students in the front row said, "Sure, Mr. Vice President, but it'd be only
this big."
The challenge was similar to the challenge we confronted after World War
II and every family bought a car, and the two-lane roads could no longer handle
the traffic. Indeed, just as in earlier eras nations gained competitive
advantage by improving the infrastructure of deep water ports, railroads and
superhighways, comparative advantage now can be enhanced by a superior national
information infrastructure built by sensible deregulation and competition
policy.
But the point remains: what is the human impact? And how do we adapt our
organizations, both in business and in government, to deal with this sweeping
change? Many of you in this room have been pioneers in the transformation of
business to adapt to these new realities. Your presence here confirms our
shared view that this is a work in progress. And the underlying change which
requires adaptation is not only continuing, but accelerating in its paceand
intensity.
Businesses in the industrial age organized themselves according to the
model of the factory. So did government. Most employees were valued primarily
for their physical ability to perform repetitive tasks according to
instructions from management that rarely changed. Indeed, any communication
from the CEO to the people actually producing goods and services had to travel
through multiple layers of middle management that existed primarily for passing
information from one level to the next.
As public education empowered a larger fraction of the American
population, a few pioneering managers recognized that the most valuable asset
in the corporation was the unused brainpower of the men and women performing
repetitive physical tasks. A new theory of corporate management emerged -- and
the publication of books describing it became a major new cottage industry.
Theory Z. Participative management. In Search of Excellence. Quality circles. A
hundred different labels were fastened onto the same basic insight: employees
can think. If you can convince them to pay attention to what they're doing in
context, and share with them the larger objectives of the organization of which
they're a part, respectfully harvest their ideas about how to improve and
fine-tune the collective endeavor, and invite them to help implement the
innovations they've come up with, companies can boost the bottom line. They can
creatively encounter change at its edge, where change is first experienced, and
not wait for news of that change to wend its way through multiple, redundant,
obsolete layers of middle management to a CEO, who is insulated and isolated at
the top of the proverbial pyramid.
This morning I met with the team at Boeing producing the new 777
aircraft. Listen to the way this world leader describes its work. The people I
met with are part of an "integrated design build team system." Grouped into
small teams of 8 to 10 people, they have been assigned to refine and mesh all
aspects of the aircraft from top to bottom. The idea is to have each team
consider the aircraft as a whole, and to empower each team to act quickly on
ideas free from chain of command second-guessing.
The new information technologies make it easier for more companies to
take the Boeing approach -- to empower their employees and eliminate the
barriers between employees' ideas and corporate innovation. This wave of change
has already had an enormous impact. Many of you have led this change. All of
you have adapted to it.
And now, several of you -- along with other pioneers -- are creating yet
another new wave of change in corporate management. You're moving from an
appreciation of physicality and intellect to an appreciation of emotions,
creativity -- or if you will, heart. Perhaps the greatest challenge
facing you is attracting and retaining talented people. CEO's who have found
ways to honor and respect their employees' loyalties to their spouses and
families and communities have reduced turnover and absenteeism and have
increased creativity and productivity. Family-friendly workplaces, family and
medical leave, flex-time, and other measures to bolsteremployees' emotional
satisfaction are proving to be extremely valuable to earnings, revenues, and
profits. Companies like the First Tennessee National Bank have reconfigured
their corporate missions to take emotion into account -- and this soft-hearted
approach is showing hard-headed results. Another way to describe this
phenomenon is to say that they are getting more from their employees by
focusing more on their core capacity, and with their help, understanding their
customers' needs and desires.
In the business world, there is a new appreciation for the value of
focusing on core capacities. The so-called virtual corporation uses new
information technology to combine the core capacities of different companies
for a mutually beneficial endeavor. But what is our core capacity as human
beings? In 1872, the steam hammer has defeated John Henry. At the conclusion of
this century, at the end of four games in a six game series, Deep Blue is tied
with Gary Kasparov. Physical health and fitness continue to matter somewhat. A
well-educated mind is our key strategic asset. But in the 21st Century, as the
information revolution continues to accelerate, I am convinced that it will
become ever more apparent that our core capacity is spirit, creativity,
heart.
For example, how did the electronic communication revolution begin?
Samuel Morse was a portrait painter. In fact, his painting of James Monroe
hangs in the White House today. While Morse was working on a portrait of
General Lafayette in Washington, his wife -- who lived about 300 miles away --
grew ill and died. But it took seven days for the news to reach him. In his
grief and remorse, he began to wonder whether it was possible to erase barriers
of time and space -- so no one would be able to reach a loved one in time of
need. Pursuing this thought, he came to discover how to use electricity to
convey messages -- and so he invented the telegraph. Emotion led to
innovation.
Over the past 50 years, technological innovation has been responsible
for more than half of the nation's growth in productivity. Our approach to the
new economy must include a new appreciation for the key role of innovation and
those factors which tend to promote it In the old economy, growth depended
largely on capital and labor. The task of policy makers was to keep those
factors of production in sync. When the phasing was poor, we got a downturn in
growth or an upturn in inflation, which continued until capital and labor were
restored to their proper balance. The new economy is different. As the
economist Paul Romer has argued, the true engines of growth may be ideas and
the technologies those ideas create. The only way to produce more economic
value -- and thereby boost economic growth -- is to find ever more valuable
ways to use the objects available to us. We first used sand in an hourglass to
measure time. Now we use it to form the silicon chip that powers personal
computers. Same object, more creative use. Paul Romer and others are teaching
us that innovation is not something that happens outside the economy, as
traditional economic theory had held. Innovation occurs inside the
economy -- and it is essential for economies to grow.
Innovation is reshaping the very way we think about the economy -- the
vocabulary weuse to describe it. To discuss the economy, we once employed the
metaphor of a machine. Policy makers slowed things down, or sped them up --
stepped on the gas, hit the brakes, shifted gears. But the new economy is more
like an ecosystem -- which depends for its health on diversity, nutrients, and
its ability to change and evolve. In the old economy, the key to growth was in
individual sectors. In the new economy, the key to growth may be in economic
webs and the diversity those webs both require and create. Invent the personal
computer, and you inevitably spawn a web of products and services that move
outward from that advance. Mousepads. Computer repair shops. Windows 95. And so
it goes. The economic web is itself the generator of the next novel growth
opportunities. Innovation sparks innovation. And establishing the proper
conditions for innovation to flourish is the policy maker's highest
obligation.
But the larger move from hard to soft is affecting every one of your
companies. In the old economy, the value of a company was mostly in its hard
assets -- its buildings, machines, and physical equipment. In the new economy,
the value of a company derives
more from its intangibles -- its human capital, intellectual property,
brainpower, and heart.
In a market economy, it's no surprise that markets themselves have begun
to recognize the potent power of intangibles. It's one reason net asset values
of companies are often well below their market capitalization. Baruch Lev, an
accounting professor at the NYU Business School, says that nearly 40 percent of
the market valuation of the average company was "missing from the balance
sheet." For high tech firms, the percentage was more than 50 percent. And
recent research by Ernst & Young's Center for Business Innovation suggests
that securities analysts are basing about 35 percent of their portfolio
decisions on intangibles -- and that the more an analyst relies on these
factors, the more accurate her predictions are.
The importance of intangibles underscores the importance of the question
I posed earlier: what about people? What kinds of policies should we follow to
promote our success in the new economy in ways that enhance the quality of our
lives? Just as the process of corporate transformation has moved from a focus
on muscle power to brain power and is now beginning to move to a focus on
innovation, creativity and heart, our approach to national policy is doing the
same. But not without controversy. We have an ongoing national debate that
sometimes features arguments that sound like they originated in Land of Oz. You
remember the famous Frank Baum story and then the Judy Garland movie about
Dorothy and her companions who went off to see the Wizard.
Incidentally, speaking of magic kingdoms, I'm looking forward to
boarding the Emerald Star right after this session and going to see your house,
Bill.
In any event, there are many in this period of technological change and
globalization who feel like Dorothy -- suddenly placed in an unfamiliar
landscape -- unable to go back home. And they are tempted to listen to advisors
whose economic philosophies mirror the personalattributes of Dorothy's
companions.
For instance, there is a group that makes up what we might call the
Scarecrows. They have hearts and sweet disposition, but they don't always make
good use of their brains. The scarecrows are frightened of imports, fearful of
more open trade, scared of competition and the challenge it represents. They
are resentful of immigrants, and want to punish them. And they are extremely
apprehensive about new technology. But they fail to analyze the true nature of
our condition.
The Scarecrows believe that the forces of the new economy are
destructive, and that government's job is to throw up walls, slow down the pace
of change, and keep intact the jobs and industries of today. They call for
protecting corporate welfare -- and, similarly, for propping up companies that
can't compete.
Now, in many ways, the Scarecrows have a point. Take international
trade. On any trade agreement, the terms must be fair. The United States cannot
harmonize downward on labor and the environment. Or take immigration. Illegal
immigration has to be stopped, and we need an orderly process for admitting
legal immigrants. And, of course, middle-income families must have the
opportunities to acquire the tools and the education to make the most of all
these changes.
But ultimately, the Scarecrows' good intentions lead them to unwise
conclusions. On trade, scarecrows ignore the fact that America's tariffs are
relatively small compared to other nations, and that most trade agreements
therefore reduce our entry into other markets -- not the reverse.
And jobs dependent on exports pay well better than average. Besides, history
teaches us that isolation -- holing up behind impenetrable barriers -- is not
the way economies grow. We've tried this approach and it's been a dismal
failure. And if you don't believe me, I have two words for you:
Smoot-Hawley.
The Scarecrows are also dangerously pessimistic. Their philosophy
assumes that American workers and American companies can't compete, that they
aren't as good as the rest of the world. And that's just plain wrong.
Holding back change may reduce anxieties in the short-term, but it
stifles progress in the long-term. We know that prosperity in the new economy
depends on innovation. The Scarecrows offer only a prescription for stagnation.
You have to have a heart, but you also have to use your head.
If you don't like that straw man, here's another one: the Tinman. The
Tinmen have a cold, calculating bead on the facts and figures and theories that
measure the rise and fall of markets and the latest currency exchange rates. It
is intimately familiar with the metal and plastic and silicon from which our
new technologies are made. Like Oscar Wilde's cynic, theyknow the price of
everything, but the value of nothing. These Tinmen appear to have a
well-developed intellect. But their ideas are squeaky and rusty. Metallic
standards provide the answer to every social problem. They have a brain, but
like the Tinman of the tale, they lack a heart.
Their philosophy holds that the way to get the most out of the new
economy is to slash taxes, and get the government out of the way. Cut taxes in
half -- no, cut taxes by a factor of four, some say -- and just sit back and
watch the results wash in. The central plank of this platform is that America
would enjoy unimaginable prosperity if government merely packed up and went
home.
But this approach is flawed for at least two reasons. First, we tried it
and it didn't work. And much of the President's economic policies have been
directed at repairing the damage this approach unleashed -- in particular, the
massive budget deficit. Second, and more important for our purposes, this
philosophy ignores what's new about the new economy. After all, Bill Gates
didn't start Microsoft because Congress cut the capital gains tax. He did it
because he had an idea and he worked very hard.
The Tinmen offer no prescription for upgrading the skills of workers or
for sparking innovation. It preserves the status quo by draining funds from
public investments and widening the gap between the rich and poor. And it
threatens to worsen the prospects of working people through its resistance to
worker protections and hostility toward collective bargaining. Some people may
benefit from the heartless policies of the Tinmen. But many would not. Some
would suffer. That result is morally unacceptable, of course. But it is also
economically unwise. A rising tide that lifts only some boats will eventually
capsize every boat.
Some of you, I know, are drawn to the Tinmen Party. And I know who you
are. But every time you feel lured by their siren call -- no more government,
no more government -- take a walk around your companies. Look at the people who
are writing code or developing drugs or figuring a way to improve just-in-time
deliveries, and ask yourself: how many of these talented people went to college
on a student loan -- a government initiative? And then ask yourself where your
company would be if these people didn't have a college education? It's not a
pretty thought.
The Tinmen appear to have brains. But their brains could actually use a
little oil -- to get rid of yesterday's squeaks. They ignore what's new about
the new economy, and offers a prescription that's been tried and failed. And
what's worse, they don't seem to care about the consequences. You've got to use
your head. But you've also got to have a heart.
There is a more sensible approach: accept change and its many benefits,
but recognize the disruption this change brings forth, and give people the
tools to thrive and prosper. But the question has been raised: is there yet
another party in this Land of Oz, the Lion Party, whose members know what to do
but lack the courage to move forward.
This past week, not in Oz but in America, we got the answer. Yes, we
have the courage. We completed a budget deal that eliminates -- eliminates --
the federal budget deficit by the year 2002. It is the first balanced budget
since 1969.
And it will help keep alive the best economy in a generation.
Unemployment at a 24-year low. Low inflation. A booming stock market that has
doubled in the last four years. Growth last quarter of a whopping 5.6 percent.
Getting rid of the deficit is only the first piece of our new policy for
the new economy. We also need open markets -- not protectionism -- but the free
and fair flow of goods, ideas, and information. And we need flexible regulation
and an open competition policy that respects the new realities of the new
economy.
We must invest in the physical infrastructure of the Information Age --
connect every classroom and library to the information superhighway. Just
yesterday, we took a big step in that direction with a discounted rate for
schools and libraries -- an e-rate, a more than $2 billion investment in our
information future. And we must create the next generation of the Internet,
with a thousand times the capacity of the current Internet. And then magnify
another thousandfold. And we should ensure that the Internet is a duty-free
zone.
In an economy powered by innovation, we must invest in education. And
our budget makes the largest increase in education investment in a long, long
time. Head Start, educational standards, charter schools, Hope Scholarships,
Pell grants, a tax credit for college tuition, Head Start -- the ideas of Bill
Clinton, the Education President and Patty Murray, the Education Senator.
We need a re-invented government -- aligned with the principles of the
information age --a government transformation that works better and costs less.
And we must maintain military adequate to meet America's unique global
leadership role.
We have to protect our environment, make the investment to keep our air
and water clean and safe. In the new economy, protecting the environment is not
a sacrifice we make by slowing the economy. It is a pre-condition for a growing
economy.
And we must reject those who take the low road of bashing immigrants and
trafficking in intolerance. In the new economy, we must provide open
opportunities for every American, because in the new economy -- a global
economy -- America's racial and ethnic diversity will be a powerful economic
strength.
And we have to listen to America's heart, strengthen our families,
nurture and respect our values, encourage and facilitate corporate
responsibility with family-friendly policies, health care coverage for workers
and their families.
And protect our values against attacks from those forces that undermine
our values -- like crime, drugs, broken homes, teen pregnancy, and barriers of
prejudice, intolerance, and discrimination. Economic growth depends on a
foundation of values. One of the untold stories of America's extraordinary
post-war economic growth was that at every layer of society, people shared a
pre-existing set of values -- in particular, a work ethic based on the
Judeo-Christian tradition. People were ready for work on day one with a certain
constellation of values and shared beliefs.
That is equally important in the new economy. Indeed, it may be one of
the more crucial intangibles on which prosperity depends. Smart people are not
enough. We need people with good brains and open hearts. Measures like
character education and community policing are not only the right thing to do.
They're the smart thing to do to ensure the new economy develops.
This is an exhilarating time. Government must transform in order to aid
the transformation of the new economy. It must understand the potency of the
information revolution and comprehend the globalization of just about
everything we do. It must understand the potent force of innovation in economic
growth, and the degree to which the new economy depends on intangibles. And it
must resist the temptation to throw up walls -- or to throw up its hands -- to
declare either that we can't compete or that we shouldn't care.
In the new economy, we need brains. We need heart. We need each other.
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