Prepared Remarks of Vice President Al Gore

Microsoft CEO Summit, Seattle, WA

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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