Vermont’s Tipping Point?

Malcolm Gladwell took the concept of “The Tipping Point” out of the realm of epidemiologists and made it a must know phrase with his book by the same title.  Mr. Gladwell sought to describe the underlying factors that can make large impacts on social phenomenon; comparing fashion trends to disease epidemics in their often sudden rate of impact and ubiquitous presence.  The tipping point that Mr. Gladwell is fascinated by is not a new concept, but the depth of analysis presented in back-of-the-napkin format made his bestseller its own cultural epidemic.

In Vermont, employers have been trying to describe our current challenges as their own kind of tipping point.  The challenge is that you’re never quite sure where or when the tipping point will come into play.  For the state, we can see challenges looming: the bankrupting of our unemployment fund clearly shows a broken link in our social support system and our state deficit is currently on the frontlines as a target of concern, but whether or not (or when) one of these or the other will actually lead to a rapid decline in our socioeconomic sustainability is not known.  Within the business community, this discussion can be heard through the quiet comment of “death by a thousand cuts.”  It’s often a challenge to pinpoint that single thing that could cause a company to close its doors, either permanently or to complete a move to another state with perceived higher return on investment, however, we know that for every individual employer that limit exists.

It is often argued that small changes and tweaks to our tax rates, regulatory system, and other associated business costs have not made a dramatic impact on the number of high-wealth individuals in the state or on the overall composition of our economy.  And while this might have some historical validity, it fails to consider any sort of limit on when a slow trickle turns into a broken dam.  Yet these are things that are repeated as challenges on par with healthcare reform, economic competitiveness and power supply quality and rates.  The important thing to remember is that for each of these factors, there is an equal opportunity to effect positive change.  The movement towards a cultural epidemic should ignite a sense of opportunity as much as one of concern.

Part of the challenge is finding those factors, the “agents of change,” that can catalyze rapid restructuring.  The goal is to find and support those factors that can rapidly add value to a system that is otherwise in equilibrium.  We often think of these actions as revitalization of existing resources or in the creation of new assets with broad value.  An example might be the factors behind the expansion and renovation of the technology campus on Pine St.  The 300 person expansion is being heralded as a focal point of a growing technology community in the South End of Burlington that includes other Vermont employers such as Google analytics experts EpikOne.

Critical in the decision making process for that single employer was the value, both real and perceived, of the state’s three premier economic programs: the Vermont Employer Growth Incentive, low finance rate money from the Vermont Economic Development Authority, and the Vermont Training Program. met their positive tipping point and decided to grow employment in our state 100%.  What we need is to promote a cultural shift that sees strength in retention of employers and increased growth in the addition of new companies, both from Vermont entrepreneurs and from out of state employers looking to be a part of our economy.  Governor-Elect Shumlin has been open about the fact that he has asked every one of his appointees what they will do to create jobs under their purview.  The question is the right one to ask; what we need is the support, vision and strength of implementation to ensure that we tip the scales towards growth of our value-adding employers – without strong action, we stand to tip in the other direction.

Vermont’s Economic Challenge: Finding a recipe for Competitiveness while Maintaining our Quality of Place

As an organization chiefly concerned with aiding in economic development for Chittenden Country, GBIC often speaks with Vermont employers to figure out what helped encourage them to set up their business in our state. Our goal is that if we can find a common denominator to support, it will encourage other potential employers and entrepreneurs to choose to do the same. Yet after hearing of the many positives that make Vermont a great choice, what often comes out is that choosing to do business in Vermont sometimes is in part a decision made with the heart and not with the head (or at least not without rationalizing with your accountant). Every employer understands the cost environment in which they are establishing their business when the decision is made to take the risk of opening their doors. However, as Vermont continues to increase both real taxation rates and new areas of taxation, there is growing concern that little seems to be done to encourage the expansion of Vermont’s tax base, rather than simply drawing more from the same wells.

What is abundantly clear is many Vermont entrepreneurs and employers have such a genuine love for Vermont that initially deters them from seeking locations outside of our borders. The problem, as has been seen with some of the most successful Vermont companies, is that with success comes the pressure for further growth; boards, shareholders and continued competitive strains (that may or may not have ties to our state) force some traditionally Vermont based employers to move aspects of their operations to states or countries with more advantageous tax policies and structures. Competitiveness out-places love of place.

Vermont’s answer has tended to focus on asking more from the same pools of employers. The situation is analogous to sugaring: either extract more from the same trees, or establish an environment in which more saplings can thrive, be tapped and foster the growth of future forests. If you unsustainably overtap the productive trees, eventually they will die; in the case of our successful entrepreneurs, they just pick up their roots and move to Florida and/or other places that aggressively seek investment and job growth.

With the challenge of the aging demographics that our state faces, it would seem to be a prudent moment in time to examine how we can encourage entrepreneurial Vermonters (both native and who come to our expansive college and university system) to stay in the state and generate employment. If we are unable to accomplish this goal, a shrinking tax base will be forced to shoulder the weight of increased state expenditure. No one wants to see a decrease in meaningful and supportive public expenditure, but relying on the same sources for revenue will only lead to a more dramatic budget challenge in the long run. This unsustainable approach to income generation for the state, coupled with other increased cost burdens shouldered by our employers (health care, unemployment insurance etc), will surely force the hands of some Vermonters to move their businesses, and the people they employ, out of Vermont.

The Blue Ribbon Tax Commission has begun its work to look at Vermont’s tax structure and our overall competitiveness. GBIC and LCRCC have organized business people and Vermont entrepreneurs to meet with the Commission and share some concerns and ideas about how to retain our quality of place while we seek to be a place where entrepreneurs can be globally competitive.

Common Ground

Vermont, like much of the country, is at a crossroads.  While the economic conflict that has engulfed many of the world’s economies seems to be ending and the painful process of rebuilding has begun, the need for actively preparing and delivering on actions to further our state has never been more fundamental to success.  At a time when planning appears to be the most difficult and divisive due to conflicts of theory and philosophy, it also holds the potential to unify and galvanize Vermonters’ needs and interests.  Recognizing this potential, GBIC has drafted “Common Ground,” a paper that examines areas of agreement between two of the most valuable and current reports in support of a unified economic plan.  Our hope is that Common Ground can be a part of the conversation that moves comprehensive economic planning in our state forward in a meaningful way.

The first report driving the content of Common Ground began its life at the state level; in 2006 the Vermont legislature set about defining a process for the development of an economic plan, and the Commission on the Future of Economic Development was formed.  With a public outreach process as the backbone of their research, the CFED condensed input from employers, stakeholders and public participants into a series of benchmarks and goals for analysis and action from state economists and legislators.

Nearly concurrently, in late 2007 the Vermont Council on Rural Development came to the realization that Vermonters were expressing concern about a lack of vision on a statewide level and proceeded to construct the Council on the Future of Vermont.  Charged with synthesizing the vision of what Vermont is and should be from the eyes of Vermonters, the CFV ultimately created both a vision for Vermont and a comprehensive analysis of who we are right now (“Vermont in Transition”).

GBIC has long been a proponent for the development of an economic plan that is definitive in its direction without being overbearing in its recommendations; independent in formation yet based on broad public input; measureable in success, but avoids setting goals without a means to reach them.  To this end, we have set about examining these two papers to find the clearest areas of overlap between leadership and public demand.  Rather than assessing the validity of individual recommendations, Common Ground identifies those areas of agreement between these reports; finding the areas where economic reality most clearly aligns with the vision Vermonters see as necessary to maintain the core values of our state.

For too long, we have lacked a successful unified and forward thinking economic vision and, as such, have come up short in developing a comprehensive economic plan. Part of the reason for this stems from disagreement between leaders and stakeholders. Common Ground seeks to avoid those areas of conflict by presenting the unified interests of these two reports.  By focusing not on solving disagreement, but by moving forward through areas of agreement, this document can act as a vital step in moving towards a valid, comprehensive and unified economic plan.

Bill Schubart on Planning in Vermont

Bill Schubart recently presented to the Champlain Forum on the topic of how Vermont needs to be move forward and, unsurprisingly, Mr. Schubart took the time to underscore the fact that we don’t know where we’re heading.  “Vermont reveres its past,” he began, “but has not been great at learning from it. Like many people and institutions it seems to need to relearn lessons repeatedly.”  However, the real point Mr. Schubart brought to the table is that we have no shortage of these lessons from which to develop an economic plan that will drive progress in our state.

“If the way forward in business is anything like government, the progression is study, plan, execute, measure and correct. Vermont rarely gets out of the study mode, perhaps because of the inherent tension between political durability and the pain and risk associated with actually leading an enterprise […]The cycle of study, plan, execute, measure and correct in Vermont usually ends with “study” and usually in the summer. The sheer number of printed but unexecuted “summer studies” could probably provide fuel for Vermonters’ woodstoves for next year.”

This year our state (and the rest of the country) faced considerable pressures and constraint on budget income and expenditures.  This led to the Legislature deciding to convene a committee to take a top-down examination of revenue-side budget sources (essentially a review of taxes and fees) within the next two years.  While this appears to be promising, for it to show real value it must do what so many other studies cannot: follow through on the recommendations from the committee.  And while it’s easy to place blame if we’re not satisfied with the results, Mr. Schubart points out that “We’ve become adept at blaming leaders, anyone other than ourselves, but the reality in a democracy is we are led, or not, by the leaders we ourselves choose.  In the end, we are responsible.”

But this is just the beginning of where we need to find opportunity in challenge.  It is not just enough to examine traditional sources of state income, but to generate new ways of broadening our employment/employer base by actively encouraging and supporting those who are driving our economy.  This shouldn’t mean simply throwing money at the problem as states such as South Carolina have done, but it does mean implementing and fully supporting programs designed to be meaningful for employers to grow, stay and possibly relocate to within our borders.  It’s not about picking winners when you make a focused economic plan, it’s about consolidating resources and delivering them through clear, responsible channels that have direct interaction with employers.

In an effort to clearly identify where Vermonters agree our state should develop, GBIC is examining two of the most complete, community driven economic reports our state has seen in recent memory published by the Commission on the Future of Economic Development and the Vermont Council on Rural development, respectively.  By examining where these reports overlap and agree, GBIC hopes to identify immediately actionable recommendations for the short term while laying groundwork to aid in a long term comprehensive economic plan for Vermont.

Dangerous Trends Require Action: David Coates Helps Define our Current Pension Challenge

Dangerous Trends Require Action
By David Coates, KPMG Managing Partner (retired) and
Member, Vermont Business Roundtable

Rising mandatory expenditures in the state of Vermont translates into less discretionary dollars to support important programs for needy Vermonters. Two such expenditures are retirement plans and other post-retirement benefits for state workers and teachers, whose costs are rising at unsustainable levels. It is time to begin talking about changing from the path we’re on.

There are essentially two types of pension plans….a defined contribution, similar to a 401 (K) plan, and a defined benefit plan which guarantees a certain lifetime benefit upon retirement. As of June 30th the state employees defined pension plan covered most of the state’s 8442 workers. Effective July 1st, workers contribute 5.1% of their pay, and the state is responsible for funding the balance of lifetime benefits paid to retirees. In 2008 the state paid approximately $23 million (projected at $40 million in 2015) from the general fund into the retirement fund. The state workers can retire after 30 years of service or age 62, and receive a lifetime benefit of 50%. For workers employed after June 30, 2008 the retirement age is 65 and they receive a lifetime benefit of 60%.

Although the wages for the teachers are determined locally, the state is required to pay their pension costs. As of June 30th there were 10,685 teachers in the plan. Teachers contribute 3.5% of their pay annually and the state is responsible for funding the balance of lifetime benefits. In 2008 the state paid approximately $40 million (projected at $52 million in 2015). Teachers can retire after 30 years of service or age 62 and receive a lifetime benefit of 50%.

As a result of the recent decline in the investment markets and the significant under-funding of the teachers plan, the state has unfunded pension liabilities of over $466 million as of June 30. This is roughly a three-fold increase in just five years. With obvious market declines since June, these liabilities are certain to be much higher; requiring the state to pay even more to assure the financial integrity of the plans.

The situation with other post-retirement benefits (i.e. medical insurance) is more alarming. Retired state workers pay 20% of the cost of the premiums, which covers the retiree and all dependents. Teachers pay 20% as well, but this covers only the retiree.

In 2008 Vermont paid in about $17 million for state workers, but nothing for the teachers. This left a liability, for 2008, of $29 million for state workers and $60 million for teachers. The state actuary has calculated the unfunded liability for both plans at June 30 to be $1.6 billion. This is projected to increase to over $4 billion in thirty years, if we continue to fund these plans as we have in the past.

Clearly, Vermont is currently on a path that is not financially sustainable. The private sector and most not-for-profit institutions have done away with those benefit plans because they are expensive to maintain and the liability will forever remain with the employer, in this case, the state.

So, what are the alternatives to avoid state bankruptcy? There are several: Fully fund the pension and benefits; reduce the work force; cut the benefits to more closely align with the private and not-for-profit sectors; freeze or eliminate some or all of the plans; or, require the local governments to fund the costs for teachers.

Not addressing the issues now will only require future generations of Vermonters (our children) to pay for the promises we have made but failed to fund. We need the leadership of the legislature, the administration and the unions to come together and identify a common solution to these vexing issues now. The current economic climate is precisely the motivation for changing current practice toward a more sustainable system.

IP Strategy and Building Company Value

On April 7th, GBIC is hosting a workshop on IP Strategy and how it can help your business today.  The event is free, but be sure to register as space is limited!

Good Ideas, Great Ideas, Valuable Information and Technology:
Have you identified and protected them?
Know how to maximize their value?

“IP Strategy and Building Company Value”
A workshop for area businesses on the subject of intellectual property and strategy.
Hosted by Greater Burlington Industrial Corporation (GBIC) for area businesses.

Many companies have a business strategy, fewer companies have an IP strategy, and even fewer companies integrate their IP strategy with their business strategy in a way that builds significant company value.

• The basics of an IP strategy, including consideration of how to develop and protect IP in a cost-effective manner;
• How an IP strategy can be integrated with a business strategy;
• How to make money or create value in your company using an IP strategy;
• Interesting case studies and approaches to implementing an IP strategy to enhance company value.

Larry Meier, Director and Chair of the Intellectual Property Practice at Downs, Rachlin and Martin PLLC;
Nancy Edwards Cronin, Principal Partner, ipCapital Group, Inc.; and
Mark Blanchard, Technology Development & Commercialization Advisor, Vermont Small Business Development Center.

Tuesday, April 7 2:00 to 5:00 PM at the Windjammer Conference Center, South Burlington.

Admission is free but attendance is limited and registration is required.
To register contact Curt Carter at [email protected] or call GBIC at 862-5726.

Start up the risk-takers

Tom Friedman has long been a proponent of nascent business and in a recent NY Times article he challenged convention in how we should revitalize the economy.  Whether or not he has the answer, the importance that start-ups play in driving our economy shouldn’t be overlooked.

Start Up the Risk-Takers

Reading the news that General Motors and Chrysler are now lining up for another $20 billion or so in government aid — on top of the billions they’ve already received or requested — leaves me with the sick feeling that we are subsidizing the losers and for only one reason: because they claim that their funerals would cost more than keeping them on life support. Sorry, friends, but this is not the American way. Bailing out the losers is not how we got rich as a country, and it is not how we’ll get out of this crisis.

G.M. has become a giant wealth- destruction machine — possibly the biggest in history — and it is time that it and Chrysler were put into bankruptcy so they can truly start over under new management with new labor agreements and new visions. When it comes to helping companies, precious public money should focus on start-ups, not bailouts.

You want to spend $20 billion of taxpayer money creating jobs? Fine. Call up the top 20 venture capital firms in America, which are short of cash today because their partners — university endowments and pension funds — are tapped out, and make them this offer: The U.S. Treasury will give you each up to $1 billion to fund the best venture capital ideas that have come your way. If they go bust, we all lose. If any of them turns out to be the next Microsoft or Intel, taxpayers will give you 20 percent of the investors’ upside and keep 80 percent for themselves.

If we are going to be spending billions of taxpayer dollars, it can’t only be on office-decorating bankers, over-leveraged home speculators and auto executives who year after year spent more energy resisting changes and lobbying Washington than leading change and beating Toyota.

I’ve been traveling all across the country on a book tour, and every evening I return to my hotel with my pockets full of business cards from inventors in clean energy. Our country is still bursting with innovators looking for capital. So, let’s make sure all the losers clamoring for help don’t drown out the potential winners who could lift us out of this. Some of our best companies, such as Intel, were started in recessions, when necessity makes innovators even more inventive and risk-takers even more daring.

Yes, we have to shore up the banking system, which underpins everything; and finding a fair way to prevent hardworking people, who played by the rules, from losing their homes to foreclosure is both right and essential for stability.

But beyond that, let’s think, talk and plan in more aspirational ways. We’re down, but we’re not out. As we invest taxpayer money, let’s do it with an eye to starting a new generation of biotech, info-tech, nanotech and clean-tech companies, with real innovators, real 21st-century jobs and potentially real profits for taxpayers. Our motto should be, “Start-ups, not bailouts: nurture the next Google, don’t nurse the old G.M.’s.”

To be fair, the stimulus package that the Obama team and the Democrats in Congress recently passed — with virtually no Republican help — goes some way toward doing just that. Hat’s off for that. Now let’s do more.

The renewable-energy business — wind, solar and solar thermal — was almost dead in this country. Most new projects stopped last fall because they depended for their financing on selling their renewable energy tax credits to Wall Street firms. As those Wall Street firms went bust or suffered steep losses, they had no need for tax credits because they had no profits to offset. The stimulus package created a mechanism for renewable energy innovators to bypass Wall Street and monetize their tax credits directly through the U.S. Treasury, for any project that starts between now and the end of 2010.

The wind and solar industries in America “were dead in the fourth quarter,” said John Woolard, chief executive of BrightSource Energy, which builds and operates cutting-edge solar-thermal plants in the Mojave Desert. Almost five gigawatts of new solar-thermal projects — the equivalent of five big nuclear plants — at various stages of permitting were being held up because of a lack of financing.

“All of these projects will now go ahead,” said Woolard. “You are talking about thousands of jobs … We really got something right in this legislation.”

These jobs will be in engineering, constructing and operating huge solar systems and wind farms and manufacturing new photovoltaics. Together they will drive innovation in all these areas — and move wind and solar technology down the cost-volume learning curve so they can compete against fossil fuels and become export industries at the “ChinIndia price,” that is the price at which they can scale in China and India.

That is how taxpayer money should be used to stimulate: limited financing, for a limited time, targeted on an industry bristling with new technology start-ups that, with a little push from Uncle Sam, won’t just survive this crisis but help us thrive when it is over. We need, and the world needs, an America that is thriving not just surviving.

Government Efficiency and a Strategic Tax Code for Vermont

Our friend Bill Schubart shares his views on some of the ills facing our state:

Government Efficiency and a Strategic Tax Code for Vermont

by:   Bill Schubart

Nothing works for ever. Things run down and need repair. Aspects lose their utility. Sometimes they must be overhauled.

Vermont has reached that point in two critical areas. One is the architecture of government agencies and two is our tax code.

Let me express my bias from the outset so you can either continue or go shovel snow. I’m a proponent of both government and taxation. I believe in the capacity of government to benefit society and the economy. I believe in taxation. I just want both to function efficiently and accountably. In Vermont today neither do.

As a rule, Vermonters know where they’re going and what they believe in. We see it every day in the vibrant work done by citizens at the community level. And we need more of that dynamic in Montpelier, where the scale is greater and the risks are higher. We need our leadership in the legislature and executive branches to focus on the ailing machinery of government and less on running for office.

Nor do we need to study this further. We could re-insulate all our state buildings with the thoughtful, un-deployed studies done by Vermonters on efficiency in government and other strategies. We just need the legislature and executive branches to join forces and do the work.

From a vision for what we wish to become, we must set economic and social objectives, we must monitor and communicate our progress with data that holds us accountable. We cant tweak our way to success anymore.

Our willy-nilly tax code is an accumulation of temporal revenue imperatives built up over time that now discourage growth and initiative. Don’t for a minute think it’s just rich Vermonters who exile themselves for six months and a day to save on taxes as “part-time residents.” Many pensioners must do the same to call Vermont home. But apart from the arbitrary way they’re assessed, taxes are a necessary and appropriate investment in social, economic and environmental wellbeing – unless they’re spent inefficiently. We need a strategic redesign of the tax code that’s consistent with Vermont’s values and future. Taxation should encourage personal and business behaviors that strengthen us and dissuade those that weaken us. Today’s tax code does more to weaken us.

Likewise, the architecture of government agencies reflects what we have been rather than what were becoming. It is time for an overhaul that asks why we do this this way, or better, why we do it all. For example, do we need to put so many people in jail? And we must review again what services for-profit or not-for-profit entities might do more efficiently. We need to look at what efficiencies could be achieved online.

We can no longer afford to study and tweak. We must begin the hard work of redesign with transparency and accountability and, make no mistake, it’ll be hard and painful, but by doing nothing, we recede into our own fading past and will have to live on it rather than creating and living off a bright future.

Microsoft CEO Steve Ballmer’s Technology Speech

All across the country the development (or lack thereof) of STEM education is a topic of much discussion, and in Vermont it has been the same.  Microsoft CEO Steve Ballmer delivered a great speech February 6th that addressed a number of issues surrounding the topic.  It’s a little long, but the message is an important one.  The following is his speech in full:

Well, I want to thank Jay, I want to thank the speaker and all of you for the opportunity to be here today and chat with you. It’s a real honor to have a chance to share some thoughts on the economy and on innovation, and hopefully spur some thoughts on how we all participate in restarting long term economic growth.

As Jay was telling my story, so to speak, I thought I’d put in one parenthetic that might be of interest. When I got to Microsoft and we were this tiny little company, we didn’t have the budget to put people up in hotels, so I lived with Bill. And every time I sat down, in every corner, nook and cranny of couches, tables, I’d find these little yellow pieces of paper with Bill’s writing that had a bunch of people’s names and companies’ names and numbers.

So, finally–I think of myself as pretty good pattern matching. Actually I was sitting next to Congressman Frank, and we were both trying to see which of the six states that are going to be still bigger than North Carolina by 2015. So, we’re going through the pattern matching game, and I just couldn’t figure out what these numbers were.

So, finally I said to Bill, what is this? He says, Steve, I’m really always worried about whether we’re going to have enough cash to pay people. So, every night I write down everybody who works for us and how much we pay them, and every contract we have and how much it’s worth. I’ve got to count the pennies tightly and that’s why you’re here now.

In this economic climate, whether you’re talking about businesses or consumers, everybody I think is having the little yellow sheets of paper out, and counting pennies pretty tightly.

I’m going to make one thing clear up-front: I’m not going to claim to be an economist. On the other hand, I think it’s sort of the responsibility of every businessperson to really form a model of what’s going on in the economy, if you’re going to provide proper stewardship to your business; big company, small company, it’s important to have a model of what’s going on, and certainly have been thinking a lot about the economy in the context of how we think about and plan for the future of Microsoft.

For the past 25 years, the world has certainly enjoyed incredible, incredible global growth. Average incomes around the world grew at unprecedented rates, millions of people moved from out of poverty into the middle class for the very first time.

I think that expansion was built on three things: innovation, globalization, and debt, increasing debt.

American technology was certainly at the heart of the innovation that played the central role in the process. The PC, the Internet, fiber optics: Those things were things that continue to keep America at the forefront of technology, and really at the lead of a growing global economy.

But over time, over the last period of time, the balance has really shifted. Instead of innovation and productivity driving growth, it’s really been unsustainable levels, particularly of private debt, that have been a key driver of economic growth.

The hard truth is this, in my opinion: The private sector of our economy has borrowed too much money, businesses and consumers alike, fueled by the a lot of different things, some notion that housing prices would go up forever, that you could borrow money cheaply.

I gave a speech at Stanford Business School a few years back, and I was talking, we’re a company that has been conservative, per the yellow pieces of paper. We like to keep cash. And a very smart Ph.D. in the audience puts his hand up and said, “Why don’t you borrow money?” I said, “I don’t like to borrow money.” He said, “But it’s so cheap; you’re depriving your shareholders.” I think it reminds us that essentially consumers and businesses alike have really borrowed too much money.

The bubble has burst. We can no longer rely on consumption by refinancing our homes or inexpensive money to fuel economic growth, and that’s certainly had a huge impact.

At our own place, what we think about PC sales, they are discretionary in most home budgets, the second, the third PC. Consumer electronics has that characteristic. Fifty percent of capital spending in this country is on information technology. Less capital, less spend on information technology. No sector will be immune.

There’s a natural tendency to want to blame somebody for the economic crisis. In reality, I think you have to say we’ve all contributed to a culture of spending and private debt. And I distinguish private debt and government debt, because I think you have to be much more–the private sector has less ability to be thoughtful, and the government sector needs to be quite thoughtful. But there certainly has been too much use of debt.

At Microsoft, we’ve studied these developments. We believe this is a once-in-a-lifetime economic event, but it’s not unique frankly in U.S. history. The current situation looks a lot like several–not one but several previous cycles of long-term private sector debt.

In 1929, for example, just before the stock market crash, the private debt-to-GDP ratio was 160 percent. Last year, private sector debt as a percentage of the GDP: 300 percent; far more leverage. And you can see it’s been a steady increase basically since almost the end of World War II.

In my view, what we now have will be a fundamental economic reset. The economy is going to have to re-establish itself at a level of spending that reflects the real value of underlying assets before we can all start growing again at a healthy rate.

This may not be the thing that people really want to hear, but it’s certainly what we’re planning on, and it’s the truth on which we’re basing sort of our model, if you will, at Microsoft.

In our opinion, in order to reach the reset point, three things need to happen. First, the economy must be deleveraged. Private debt as a percentage of GDP has to be reduced. Restoring health to the nation’s financial system is a fundamental part of this.

Just for historical note, not only during the Depression, but actually in 1837 and in 1873 we had similar style resets in the economy. We actually have at least three historic periods that we can study in which similar phenomenon occurred. I think it was 1873 where even the state of Florida filed for Bankruptcy. So, we need to be thoughtful about being students I think of the history.

Second, confidence must be restored. The stimulus package, in my opinion, is vital. It will provide a cushion as we reach the reset point and it will help restart our economic engine. I certainly want to applaud the steps that the House has taken under the speaker’s leadership to quickly pass a strong stimulus package and to help shore up our financial institutions.

Third, America really has to return to growth that’s built on innovation and productivity, rather than leverage and private debt. That must happen.

The good news is that the U.S. economy is still the world leader in innovation. Our universities are the envy of the rest of the world. The American workforce is the best on the planet, and U.S. companies continue to drive technological progress in almost every industry.

But the time has come when we need to renew our innovation capacity.

We went back and studied what innovation companies did during the time of the Great Depression. One company that stands out, if you study the Depression, is RCA.

Now, the fact that RCA is not around today, this has nothing to do with their behavior during the Depression. There’s probably good learnings for a lot of technology companies in that.

But during the time of the Depression, RCA was probably the most broad-based R&D-centric company in America. And while it cut costs certainly to survive the Depression, it never retreated from its commitment to core research and development. And as a result, after the Depression had ended, it really led and the U.S. led TV technology developments for the next 25 years.

That was good for RCA; it was good for America.

In my view, American companies aren’t going to be able to weather this economic downturn just by cutting costs either. You may have heard that Microsoft, our company has decided that we need to reduce 5,000 positions. What you may not know is that at the same time we’ve decided we’ll also create two to three thousand new jobs–mostly in the U.S.–as we continue to push into new areas that require investment.

In addition, despite the tough economy–I might even say because of the tough economy–our company will continue to invest more than $9 billion a year in R&D, because we think it’s that R&D spending that will cause us to remain strong.

People ask me, are you upbeat or not, and I say, about technology I’m super upbeat. The industry that we’re in, information technology, stands at the threshold of again a new revolution.

I joined Microsoft essentially for the PC revolution. The Internet revolution, we have the revolution of what I might call pervasive computing. Computers that are as thin and light as this on which you can have access to the world’s information will be kind of expected over the next five and 10 years.

So, being optimistic and positive about what technology can accomplish is very, very important.

If you take a look at it today, there is increasing ubiquity and power in the computing platforms. A laptop today has more computer power than a mainframe did when I came to Microsoft. Mobile phones today are more powerful than the PCs that existed 10 or 12 years ago, at the start of the Internet era.

But over the next few years, we’ll continue to go into uncharted territory as many-core chipsets and devices become common, and we develop new ways to write programs to help us model the world’s climate, the world’s population, the world’s energy needs; all of that will be super possible.

This is going to lead to breakthrough applications, more intelligent, more aware of their environment, and where we can really help anticipate the information you need and the capabilities that you really want to have.

The next few years are going to see dramatic changes in the way you interact with technology: touch, gestures, handwriting, speech recognition. Instead of telling my secretary to get me ready for my trip to the House Democratic Caucus, I’ll just type it in or speak it to my computer. It can look up, it turns out, who you all are, and where you’re all from, and it’s got all–it’s all out there. We just need to automate it in ways that real people can get access to information.

Some of this I’m sure sounds a bit like science fiction, but we’re rapidly nearing a time when interacting with technology really will be like interacting with people, which will make technology more accessible and really unlock the potential of computers to individuals and communities to help solve tough problems.

A third trend, as I talked about, is screens and displays. Literally every wall, every tabletop, you’ll be able to roll up your computer, if you will, and put it in your purse or put it in your pocket. That’s what we have to look forward to.

All of these trends are going to help create a computing platform that extends from PCs and phones and TVs out into the massive storage and connectivity out in the Internet.

All of this will enable us to transcend the barriers that exist between technology today, and seamlessly connect people to the information and applications that you’re interested in, no matter where you are, no matter what kind of screen you have in front of us.

It’s very important. As the computing environment becomes richer and more pervasive, and more universally useful, it will enable citizens to be more active participants in our national economic recovery. If we do our jobs right, the computer revolution will help amplify our ability as individuals and as a nation to tackle the pressing problems of society: education, health care, energy independence; and at the same time, continue to enhance our productivity and economic competitiveness.

They say GDP is consumption plus investment, plus government spending, plus productivity growth and innovation, and I’m very bullish on what will happen in our industry.

Imagine, for example, an intelligent energy system in your home that’s linked to a smart energy grid. With that infrastructure, your dishwasher and washing machine would know to run when electricity is cheapest. That kind of intelligence and control could really have a major impact on residential power consumption, which is a very large piece of energy consumption in this country.

There are similar scenarios in healthcare, where genomic research will open the door to personalized treatment; and in education for sure, where technology will enable all teachers to use the very best teaching methods and connect with students in new ways.

The truth though, we can barely guess what is possible. With the kinds of technologies we envision, other people, many people in many fields, fields of science and social science and many, many others, will come forth with an incredible outpouring of new ideas and innovation that will continue to expand the universe of what’s possible. So, the enablement not only of information technology and the productivity it brings directly, but other new forms of innovation I think will really be important for long term growth and prosperity across many, many fields of endeavor.

To harness this potential of this transformation, I think it’s going to take a lot more than investment by the private sector. We need investment and we need leadership by government as well. I don’t understand all of the issues and interests that you have to deal with. As I was sitting listening this morning, I understand more that there are hundreds of unwritten things that citizens just don’t really know about what it takes to catalyze these things to happen. But I would at least like to offer a couple suggestions on some things I think are important.

First, we really need the federal government to invest in human capital, in the citizens of our country.

I sit here and talk, talk, talk about innovation, but it’s people who turn ideas into positive and productive innovation. And in today’s knowledge-driven world, innovation will depend on people who are actually technologically sophisticated, have strong critical thinking skills, have expertise in math and science and engineering.

This is true not only for people who live in places like Seattle and work at places like Microsoft, but live in places like Detroit, where I grew up, and work for companies like Ford Motor Company, where my father worked when I was a child. I think this is going to be true for anyone, anywhere in this country, who hopes to earn a wage that can really properly support their family.

This means investment in education is critical, and I’m really encouraged by the very heavy emphasis on education that’s in the stimulus package.

We really need to transform math and science education in America. We need to improve teacher training, teacher quality.

I was talking earlier in the day with some folks about just how many of our math and science teachers don’t have the correct training and accreditation, and that stands in the way of us really breaking through.

For those who are already in the workforce, we need programs that provide ongoing education and training, so they can be successful in this knowledge-based economy. For those who are unemployed, we need new technical skills training to give those people a start back up the economic ladder. And we are going to need lifelong learning programs to keep people fresh, as innovation and technology continues to power the economy.

The second thing we need–and I’ll tell the Speaker this was written even before our meeting this morning–we need greater government investment in our nation’s science and technology infrastructure.

I came in, flew in red eye, was a little groggy this morning when I got here. I sat down with the speaker at 8:00 AM, and she woke me right up. She said there are four things I want you to make sure you understand are a priority: science, science, science, and science. I was awake by the end of the fourth science for sure, and I couldn’t agree more wholeheartedly.

Science and technology is the backbone for productivity and innovation; has been, not always information technology, but science and technology has been a driver of economic success. Government investment in science and engineering as a percentage of GDP is half, in this country, what it was in 1970, and it would be growing rapidly, particularly in countries in Asia, off a small base albeit, but in places like India and China and Korea the trend is the other direction.

We need to pursue breakthroughs over the coming years in green technology, alternative energy, bioengineering, parallel computing, quantum computing. Without greater government investment in the basic research, there is a danger that important advances will happen in other countries. This is truly I think not only an issue of competitiveness, but also in a sense of national security. Companies like ours and others can do our fair share in terms of funding of basic research, but government needs to take the lead.

This is also a moment when government should invest, I think, in information technology to help transform healthcare. We deliver information technology that we think can help create a connected health system that delivers predictive, preventive, and personalized care, a system that I think can improve the health of Americans and reduce the cost of health care in this country.

Government support for innovative development, rapid adoption of information technology in health care is important. I was talking to Congressman McDermott this morning. Government has a big role to play, including the fact that Medicare and Medicaid pay over 50 percent of all health. If Medicare and Medicaid want to take on some issues and use its authority to push health information standards, I’m sure this industry and this area of technology innovation can move even more quickly.

There’s always broadband. My number one encouragement to you is start with government itself. Every school, every hospital, every government building, is it wired, have we funded that infrastructure; very important.

This is a once-in-a-lifetime economic crisis. There is a lot of history around that, and frankly if you stop and think about it, 1837, ‘73, ‘29, 2008, it’s almost exactly a whole lifetime between each of the major economic difficulties that we face. But I think it’s also a once-in-a-lifetime opportunity to think about our priorities again and make the investments that put us on the right foot.

In his inaugural address, President Obama said we need to assume more responsibility and make the hard decisions that have been postponed for too long.

The president’s remarks actually reminded me of something I heard a lot from my dad when I was growing up. My dad was an immigrant to this country. He came from Switzerland after World War II. He went and was an interpreter with the US military at the war trials in Nuremberg; came to Detroit with some of the soldiers he had met there, who sponsored him in this country; went to work at Ford Motor Company, was there for 30 years. Never finished high school never went to college, but he had a simple model: “If you’re going to do a job, do a job. If you’re not going to do a job, don’t do a job.”

You could say, okay, that’s probably a good thing to tell a 10-year-old, but what it really came to mean to me was that if you want to accomplish anything at all, you’ve got to be committed, you’ve got to be motivated, you’ve got to be tenacious, you’ve got to be smart. And, of course, that’s not really just my dad’s message to me and my sister as we were growing up; it’s really the essence of the American work ethic, and I think it’s been passed down to millions of American children every generation.

This country has what it takes to succeed. We have talent, we have technology, we’ve got the track record. We’ve got to be really honest about where we are. We’ve got to take the kind of bold steps that the vice president so well characterized in his remarks this morning, and we certainly have to roll up our sleeves and put ourselves back on the path of the kind of innovation that will drive the kind of economic success that I know we all want.

I thank you again for the opportunity. It’s been my pleasure.

Good Jobs in a Clean Environment

The Greater Burlington Industrial Corporation ~ GBIC is a non-profit economic development corporation serving Chittenden County, Vermont. GBIC was incorporated by 50 municipal officials, civic leaders from the Greater Burlington area and by an Act of the Vermont Legislature in 1954.

Since its founding, GBIC has served as a catalyst for economic opportunity in Chittenden County, assisting in the creation and retention of sustainable jobs and economic opportunities for thousands of Vermonters in the value-added industry sectors.