Route to Recovery

A trip through the epicenters of the recession

America’s Route to Recovery: Part Three – The Mind Factory

December 30, 2009

For the Reuters multimedia project Route to Recovery, a team of journalists toured America to examine the impact of the recession and posted their reports on reuters.com. For the last installment in the series, reporter Nick Carey has written an extended overview of the challenges and opportunities facing the country.  The third part of this three-part report is below. Click here for part one.

The idea of the “knowledge economy” is a common thread in different parts of America.
Commercializing research and leveraging highly-qualified university students, plus helping create small businesses via incubators has become a major focus in many communities.

The University of Alabama at Birmingham, for instance, has an incubator called the Innovation Depot, which provides low-cost space and resources for small startup firms. The incubator is currently home to around 70 small companies.

UAB’s annual research budget of around $400 million is 80 percent focused on biomedical research, followed by engineering and the physical sciences.

Birmingham, like Youngstown, was once a steel town. The city’s population has dropped more than 30 percent to 230,000 from 340,000 in 1960 and it has focused too frequently on trying to lure back big industry, according to Richard Marchese, vice president of research at UAB.

“The city has done its fair share of chasing smokestacks,” he said. “Birmingham has undergone an important adjustment by realizing that it needs to transform itself from an industrial based economy into an economy driven by innovation.”

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Parts of the former iron plant Sloss are seen at the new Sloss Furnaces National Historic Landmark in Birmingham, Alabama November 14, 2009. Sloss became a museum after producing iron for nearly 90 years, which gave rise to Birmingham for almost a century.  REUTERS/Carlos Barria

Youngstown, like Birmingham, is betting part of its future on an incubator, the Youngstown Business Incubator, which has 28 business-to-business software firms in its portfolio with some 300 employees. The incubator occupies three renovated buildings in downtown Youngstown — which was mostly dead a few years ago — and will move into a fourth in 2010.

“We didn’t want to have a broad range of industries that we couldn’t serve properly,” said James Cossler, the incubator’s CEO. “We wanted to pick one sector and be a world class incubator… We picked software because it is in almost everything we use.”

One condition for startups to receive benefits and resources, including deferred and reduced rent and paid utilities for furnished offices, is they must share their expertise and resources with other member companies, even after they “graduate” and move out.

Craig Zamary owns Green Energy TV, which he describes as the “YouTube of the green movement.” It takes videos from around the world on innovations in alternative energy.

Zamary said that not long after Green Energy TV moved into the incubator in early 2008 he told a fellow business owner he was having trouble with code for his website. The next day the fellow business owner turned up with the code he needed.

“I was wondering what he was going to bill me for it, but he said ‘That’s not how we do things around here,’” Zamary recounted. “Some day if he needs something from me I’ll be able to repay the favor.”

Cossler said office space in Youngstown’s incubator costs $8 per square foot compared to $200 in Silicon Valley, while “programming talent” costs about 60 percent more in California. There are also several universities within an hour’s drive, including Youngstown State University a few blocks away.

Cossler said criticism of the incubator — that it will not return Youngstown to its former size — has been misguided.

“We’re not going back to where we were,” he said. “Nothing can take us back and we have had to embrace the fact that we are going to be a smaller city.”

“But it’s absolutely realistic to expect that within a few years we could have 2,000 to 3,000 people employed here,” at the incubator or around it, he added. “This could be very powerful and very transformational for Youngstown.”

Youngstown’s Plan 2010 was developed by Youngstown State University in conjunction with the city and reflects a common thread between this city and other parts of the country like Rhode Island, Birmingham, or Austin, Texas, in that all of them have developed a strategy requiring cooperation between the authorities, local businesses and a local university.

KOWTOWING TO THE CREATIVES

Unlike Youngstown, Birmingham or Rhode Island, Austin has had a business development strategy in place since the 1980s.

“We made a very clear and conscious decision that above all we were going to kowtow to the creative classes,” said Lee Cooke, a former mayor.

From food to music and entrepreneurial opportunities, Austin has focused on attracting creative people.

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People eat at Chuy’s Tex Mex restaurant in Austin, Texas, November 5, 2009.  REUTERS/Lucy Nicholson

“It’s very simple. Creativity begets creativity,” said local state senator Kirk Watson.

Austin’s strategy has paid off. The city’s population has tripled to around 750,000 in 2009 from 250,000 in 1970. According to the U.S Bureau of Labor Statistics, the city of Austin had the highest level of job creation in America from 2003 to 2008. Private sector jobs overtook public sector ones — it is the Texas state capital — in the mid-1990s.

Austin has become known as a city of entrepreneurs — Michael Dell founded computer maker Dell Inc while studying at the University of Texas in 1984 — and has grown as people have flocked here looking for jobs.

While the inflow has slowed during the recession, the city is still a magnet for people like Norbert Wangnick.

An entrepreneur who sold his niche recruitment firm in Germany at the peak of the market in 2007, Wangnick, 45, moved to Austin late in 2008. After a year off, he is looking to either invest in a company or start a new one.

“Austin has so much energy,” he said. “It’s a great place to be if you want to start a business.”

The city, which hosts the annual SXSW live music festival and considers itself a cultural oasis in Texas, is a strongly Democratic city in a Republican state. Former mayor Cooke, a Republican, said Austin’s political leanings are not in line with his own or the more conservative business establishment. But he added that this fact is irrelevant.

“The choices we have made concerning the economic future of this city transcend politics,” he said. “This is about everyone pulling together.”

Cooperating for the good of the community is something Cooke said is lacking at the national level in America.

“I’d like to get rid of all 535 politicians in Washington and get rid of all the politics of the last 75 years,” he said. “Washington is all about the politics of self-perpetuation, not doing what is right for the country.”

The cornerstone of Austin’s strategy is coordination among the city, businesses and its biggest asset — the University of Texas at Austin. With 50,000 students, it is one of the country’s largest universities and a research powerhouse — biomedical science, engineering, math, physical sciences. UT vice president for research Juan Sanchez estimates some 10 companies graduate from the university’s incubator every year.
Senator Watson said Austin’s fortunes have been a mixture of luck and the sense to capitalize on its “enterprise value.”

“We were lucky in that we weren’t like Detroit, we didn’t have an old industrial factory to protect,” he said. “In places like Detroit it’s understandable spending a lot of energy trying to save the old factory because it means jobs for local people. What we have here is UT.

“UT is our mind factory.”

Watson describes that “mind factory” in largely industrial terms, even referring to students as “natural resources.”

Watson and Gary Farmer, chairman of Opportunity Austin — a regional economic development strategy — recall visiting Samsung Electronics Co Ltd in South Korea in 2005 with UT’s Sanchez to persuade the world’s top maker of memory chips to choose Austin for a new semiconductor plant.

Watson and Farmer say a critical moment came when Sanchez informed Samsung executives that there were hundreds of Korean students at UT. In April 2006 Samsung said it would invest $3.5 billion in a plant here creating nearly 1,000 jobs.

“The authorities in Austin, the business community and the university have marched in step for a long time,” Sanchez said. “Much of this has been based on the recognition of UT’s potential.”

Sanchez said such recognition is growing in America.

“There is a growing understanding that intellectual capital is going to be at least as important as manufacturing and natural resources,” he said.

FIXING ‘K THROUGH 12′
Conversations with civic and business leaders around the country support that statement.

In Evansville, Indiana, while Mayor Jonathan Weinzapfel laments Whirlpool’s decision to move production abroad, the company’s decision to keep its research and development facility here is something he says the city can build on.

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A worker walks out of the Whirlpool plant at the end of his shift in Evansville, Indiana November 23, 2009.  REUTERS/Brian Snyder

In cooperation with colleges like the University of Southern Indiana, Weinzapfel argues Evansville may be able to attract other R&D operations. “You have to find what your strengths are,” he said. “And you have play to those strengths.”

Locals around Bentonville, Arkansas — home to America’s biggest private employer Wal-Mart Stores Inc — say it is no coincidence that while Arkansas has one of America’s worst education systems, this local area’s school system is among the better performers.

“Walmart has provided a lot of support for the local school system,” said Jonathan Watson, pastor at the Bella Vista Assembly of God in nearby Bella Vista. “This is no accident, as Walmart uses the schools as a feeder system for providing well-educated future employees for its headquarters.”

According to Andreas Schleicher, the Paris-based head of the indicators and analysis division of the Organization for Economic Cooperation and Development (OECD) — a group of 30 mostly high-income, democratic nations — the problem with primary and secondary education in the United States, known as K through 12, is that it has been in suspended animation.

“For decades America has mostly been treading water while the rest of the world has been working hard to get ahead,” he said.

In 2007, some 78 percent of U.S. high school students graduated, slightly below the OECD average of 82 percent.

OECD data from the 1960s shows that 80 percent of American children graduated from high school then, compared to just 37 percent in South Korea. Now some 97 percent of South Korean children complete high school.

“America has been falling behind,” Schleicher said. “By the age of 15 a quarter of American students have problems with math and science, which foreshadows the problem many have completing high school.”

He added that although America spends more on education than many countries, its school systems are far more uneven in quality, particularly in inner cities. The graduation rate in some inner cities in America in 2008 was 50 percent or below.

“We’ve known about problems with America’s education system for the past four decades, but we haven’t had to deal with them,” said Mesirow Financial’s Swonk. “We were able to just stick under-educated people in factories and not worry about dealing with the problem. That is no longer an option.”

Sheldon Steinbach, a senior counsel in the postsecondary education practice at Washington-based law firm Dow Lohnes, said the United States has plenty of top-quality colleges and universities, but the problem does not lie there.

“As the old saying goes, if you put garbage in you get garbage out,” he said. “America’s K through 12 system has been broken for a long time and I am not sure if can be fixed because there are too many different authorities, federal, state and above all local, involved.”

UT’s Sanchez said if more young people make it to higher education, the pieces are in place for long-term growth.

As he notes, according to the OECD America still leads the way in research and development (R&D) spending. In 2007, the latest year for which data are available, America accounted for around 41 percent of R&D spending in the OECD. Japan was next with 26 percent. China’s R&D spending was equivalent to around 11 percent of the OECD total.

“It was not so long ago that China spent nothing on R&D,” Sanchez said. “Now they are a major power.”
“America is still clearly the global leader by a long way,” he added. “But we can’t afford to rest on our laurels.”

Two of the problems with the U.S. college system, however, are that it is expensive and too little is done to prepare school children to apply. State colleges and universities charge on average close to $20,000 a year, while some private institutions charge $30,000 to $50,000, Steinbach said.

David Kyvig, a distinguished research professor in the history department at Northern Illinois University, whose specialties include the Great Depression, notes that President Franklin D. Roosevelt’s New Deal in the 1930s helped but did not solve the country’s economic ills. World War Two lifted the economy thanks to massive government spending, funded by higher taxes. The U.S. government deficit stood at $10 billion in 1939 but hit $100 billion in 1944.

“The myth today is that Americans will never accept higher taxes,” Kyvig said. “But the deficit during the war was funded by higher taxes and Americans were willing to pay more because they knew it had to be done.”

He said that a large chunk of government spending went on the GI Bill — passed in 1944, it provided returning World War Two veterans with a college or vocational education.

“The GI Bill was the backbone of a quarter of a century of American prosperity and helped create America’s middle class,” Kyvig said. “It was not cheap, it cost an awful lot of money. But it paid off.”

Former Austin mayor Cooke, a Republican, agrees something like the GI Bill could help now. “Americans will pay more in taxes if they know what they’re paying for,” he said.

In 2002 some 52 percent of high school graduates went on to tertiary education. That figure reached 62 percent in 2009 and is expected to hit 64 percent in 2010.

“We still have a long way to go,” said Opportunity Austin chairman Farmer, echoing state senator Watson’s analogy: “We need to develop a better pipeline for our mind factory.”

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A worker stands inside a freezing room at a shrimp possessing plant in Bayou La Batre, Alabama November 10, 2009. REUTERS/Carlos Barria

ATTRACTING THE BEST AND BRIGHTEST
The six-minute plus video that Mary Tribble prepared for the annual meeting of the Charlotte Chamber of Commerce is aimed at encouraging business to embrace another changing dynamic in the U.S. economy — immigration.

As technicians bustle about preparing for the meeting, Tribble plays the film, making a slightly nervous gesture that says “humor me, please.” A music video appears entitled ‘I see,’ featuring ordinary residents of Charlotte, many of them Asian, Hispanic or black.

“This is a major departure for the chamber,” said Tribble, owner of Tribble Creative Group, an event organizing firm. “The cast of this film does not reflect the composition of the audience that will see it.”

What she means is while those in the video are ethnically diverse, the audience will be almost entirely white.

“Charlotte has changed a lot over the past few decades and the people here need not just to be aware of that fact, they should embrace it,” she said. “If we embrace diversity, more people will come and keep our local economy growing.”

Charlotte saw its white, non-Hispanic population decline to 55.3 in 2008 percent from 70 percent in 1990. Its black population edged up to 28.7 percent from 26.3 percent during that period but its Asian population more than doubled to 3.9 percent and Hispanics soared to 10.2 percent from 1.3 percent.

It’s a similar story nationwide. In 1900 one in eight Americans was not white, by 2000 that number was one in four. Census Bureau projections put whites in the minority by 2050.

Immigration has become a hot button issue, especially when it comes to low-skilled Hispanic workers from south of the border. Critics complain these immigrants steal American jobs.

But many people warn against shutting the doors to newcomers, noting that a big part of America’s success has been its ability to attract the highly educated people who can contribute to future U.S. prosperity.

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A businessman walks in downtown Charlotte, North Carolina November 16, 2009. REUTERS/Carlos Barria

“The last generation of immigrants in has a tendency to want to close the door behind them,” said Swonk. “But if we descend further into populism we risk losing that ability.”

Since the al Qaeda attacks of Sept. 11, 2001, the visa process for foreign students has become tougher, and the system also makes it hard for many to stay after they graduate.

CTS’ Singh in Alabama describes himself as the “poster child” for what America has represented to the world.

Revealing a history he says he has preferred not to divulge over the years, Singh said he came to America in the mid-1980s as a college dropout from India. While flipping burgers for a living, a chance meeting with an academic who interrogated him about the courses he had taken in India led to an invitation to enroll in an MBA course at Georgia College & State University in Milledgeville, Georgia. After his MBA , he did consulting work for some large southern corporations.

“Here I was advising the CEOs of big companies two years after flipping burgers,” Singh said. “The point being that with an education anything is possible in America.”

He said on recent visits to India he has talked to young, well-educated Indians who feel less inclined to come to America because of visa difficulties, plus growing employment opportunities closer to home as the Indian economy grows.

“America’s two biggest strengths have been its ability to reinvent itself and its ability to attract the best and brightest from around the world,” Singh said. “The moment that stops being the case, it’s over.”

DETERMINATION
There is no doubt the world’s largest economy faces a multitude of challenges. But many are convinced they can be overcome. The feeling among many Americans is that the United States must embrace what needs to be done and move forward.

In Youngstown, Congressman Tim Ryan believes that thanks to its software incubator and other local businesses, “this area could lead the recovery.”

State representative Bob Hagan — who watched this city stagger and fade as the steel mills left — is also convinced that Youngstown, and America, will emerge stronger.

“We can make a better future for our children,” he said. “But it won’t be quick, it won’t be easy and at times it will be painful.

“We will get there. But we’re not there yet.”

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Resident ride their bikes along the coastal area in Gulfport, Mississippi November 9, 2009. REUTERS/Carlos Barria

Comments

A smart person is a person who does something today so that tomorrow he has less risk. That is why one purchases food today and puts it in the kitchen for tomorrow’s meal. In doing so one knows he won’t go hungry tomorrow. One spends many years in education training to possess a marketable skill which can then be used to provide him a living, thereby reducing his risk of unemployment.
The same applies to a country. While the US government is to be congratulated for maintaining a defense system that all but eliminates the risk of military takeover, it has been lax in eliminating the risk of an economic takeover.
The present government has been asleep at the switch. Congress had to be assembled in a room and told that there was a financial problem and that fixing it required 700 billion dollars. They had/have no idea. So too they have no idea of the economic risks we now face as a nation.
The US faces challenges that never existed before. We are held hostage by countries who supply our fuel, our electronics, our wearing apparel, etc. We are outnumbered 20 to 1 by other countries in the creation of PhD’s capable of obtaining patents for new products and new technologies. We have the highest debt in the world and the highest trade imbalance. We have an intolerable unemployment rate with no light at the end of the tunnel. We have an aging population straining all social services. And, we have an “entertain me!” mindset population with a plethora of electronic aids. What a country!
Because of this, change (standard of living, political allegiance, value of the currency, quality of life and opportunities, etc) will be brought about by forces external to this nation, out of our control, and not by any proactive actions initiated by the present government. How do you think that change will affect you?

Posted by gil cerruti | Report as abusive
 

It’s not like other countries aren’t facing extreme societal, economic, government and educational problems as well. It’s so easy to criticize America – always has been, I guess it always will be. That said, we obviously have problems to deal with and things to fix. The government rarely seems to “fix” anything – it’s the people who step up to the plate. I think the stepping up has already begun. It will still be a challenging few years. I’ve researched many countries looking at options to see if I should try another place but the bottom line is that there is so much I enjoy and love about America, I just can’t easily replace it. Not to mention most countries make it difficult for Americans to relocate. For me the grass is greener right here.

Posted by Kelly | Report as abusive
 

I like the “mind factory” concept. It could help turn things around for many people in the USA, but only if the state and federal governments stay out of the way. Unfortunately, high taxes and onerous regulations will continue to stifle much creative thinking.

 

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