MR. BILL GATES: We're pleased to have the vice president here. He has certainly promoted the information super highway since he first used that term over 20 years ago. In 1992, he was the author of the High Performance Computing and Communications Act, and he's certainly been at the forefront of science and technology for the Clinton administration. He's one of the first policy makers who really understood the potential of technology and the new information age. And he's really continuing to help shape that debate. I've had the privilege of meeting with him many times and sharing ideas. I've drawn on his wisdom and quoted him in many speeches.
A little while ago, I had to go on the Letterman show, and so I said, "Well, I know what I'll do; I'll get the videotape of what the Vice President did when he went on the show." I would just do the same thing he did. And it turns out, what he did, he took some government ashtrays, and had a hammer and proved that, when they broke, they broke into the specified number of pieces. So, unfortunately, I didn't think I could duplicate that. But it was helpful.
So let's give a warm welcome to the Vice President, Al Gore. (Applause.)
VICE PRESIDENT GORE: Thank you very much. Thank you very much, ladies and gentlemen. And, Bill, thank you for your very kind words of introduction. I remember that Letterman show. I didn't know you were going to bring that up. I gave a Top 10 list on that show of the most enjoyable things about being Vice President, and I remember number five on the list; it has to do with the Great Seal of the Vice President. If you look at that seal and close your left eye and turn your head just right, it says "President of the United States of America." (Laughter.)
Anyway -- and incidentally, of course, this is a sobering time for me, living with the awareness that I'm only one kneecap away from the Presidency. (Laughter.)
Some of you may not have seen the Legal Times article about the inauguration January 20th. In the Constitution, the president's term expires precisely at noon on January 20th. And by custom, I was sworn in at 11:58. And then the opera singer Jesse Norman sang, and sang too long. She was great, don't get me wrong, but the President did not take his oath to begin his second term until 12:05. (Laughter.)
You've anticipated me. It was an important five minutes for me, for my family. And if I may be so bold for America. (Laughter.) It wasn't exactly a morning in America, but it was pretty close at 12:01 p.m., and historians will record that during the Gore administration our country was at peace at home and abroad. Our economy was booming with low inflation. We created 3.1 jobs, 1.2 of them here in Seattle.
History will also record, with all due respect to President Clinton, that in my administration we had fewer crimes committed than in any other Presidency, Democratic or Republican, in history. And it's because we put two new community police officers on the beat, Eddie and Duane. (Laughter)
But what's most important to me is that partisan bickering, so frequently the bane of Washington, gave way to bipartisan harmony the entirety of my administration with patriotic hymns bursting forth from the steps of the Capitol. I think it's for that reason the chant began there on the steps and swept westward all the way to the Pacific: "Five more minutes! Five more minutes!"
Anyway, it's really great to be here, and I want to acknowledge the other distinguished guests who were here. I want to thank Steve Forbes for being a co-host of this remarkable event, and I want to thank you, again, Bill Gates, for conceiving it and bringing it off so well. I wish that I had been able to be here personally for every session, but I've gotten some reports from some of the other presentations, and they sounded really fascinating.
I want to acknowledge my friend and a tremendous leader of this state of Washington the Governor Gary Locke, who is off to such a fantastic start and one of my allies in the move to reinvent government. We call it REGO -- that's "Gore" spelled sideways, so I've worked hard on that.
And it's great to be here with a person who I am a little biased because he's a personal friend of 30-some-odd years, but our chairman of the FCC, Reed Hundt, who I personally believe is by far the best chairman of the FCC we've ever had, and I really appreciate the hard work that you're doing, Reed.
And to the other government leaders who are my colleagues: the Postmaster General, Marvin Runyon, and the head of the National Security Agency, General Kenneth Minihan and General Edmonds and Richard Danzig, and the others, and the distinguished guests and the CEOs and others who ought to be singled out.
This afternoon, I would like to talk to you about the new economy and the limited but critical role that I think government has to 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 here the future of the corporation in this era of technologically driven change. In joining in your conversation, I would like to discuss also how the very same sources 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 have 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, and of course now, in our lifetime, in many fields -- the life sciences, the earth sciences, brain research, materials development to cite but a few examples -- knowledge is increasing at an unbelievably rapid pace. But the one field in which it is having the biggest impact is really the revolution in information technology.
It's important also to recognize that the information revolution is peppered with a second change 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 a matter of fact, 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 sort of saw 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 talking about it is by asking about the impacts, not on business or 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 that metaphorical question, how can you drink out of a fire hose? A friend of mine in the computer industry once made this point by saying that, if you tried to describe our human brains in computer terms, you'd 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 and found that seven digits were the most we could retain in our memories, and then they went and added four more digits.
But we do have very high resolution. Meaning we can quickly absorb the meaning of patterns containing huge quantities of data at a single gulp, and then infer the meaning of each bit by reference to its context. For example, there are 200 billion stars in the Milky Way. We recognize that pattern instantly. Bill and Melinda's daughter Jennifer recognized their faces within two weeks of her birth, a task that no computer can yet replicate with speed or accuracy.
This capacity for high resolution has served us very well. But the problem is this: most of the voluminous new 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.
For example, our satellites 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 division of NASA to explore the surface of the moon contains 20 terra bytes of data that no human eyes have ever seen.
High-performing computers help us to master this challenge, but there as a mismatch between the incredible speeds with which processing power expands and the snail's pace with which new advances in transmission capacity have been made available. I once used the old cliche with a college audience that if a -- you've probably -- many of you have probably used this, too, if a car had made the same exponential advances as a computer, a Cadillac would get 100,000 miles to the gallon and cost only 50 cents. And one of the students in the front row raised his hand and said, "Yes, Mr. Vice President, but it would only be about this big."
The challenge we face was similar to the challenge we confronted after World War II when 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 transportation, deep water ports, railroads and super highways. 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 these sweeping changes?
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 pace and intensity.
Businesses in the industrial age organize themselves according to the model of the factory, and so did government. Most employees were valued primarily for their physical ability to perform repetitive tasks according to instructions from management that infrequently change. Indeed, any communication from the CEO to the people actually producing goods and services had to travel through multiple layers of middle management, existing primarily for the purpose of 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 to the same basic insights: Employees can think. They're smart. 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, then respectfully harvest their ideas about how to improve and fine-tune the collective endeavor and then invite them to help implement the innovations they've come up with, companies can boost the bottom line. They can creatively encounter change at the company's edge, where change is first experienced, and not wait for news of that change to wind its way through multiple redundant, obsolete layers up 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 his work, the people I met with are part of an integrated design/build team system. Grouped into small teams of eight to ten 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 empower each team to act quickly on their own on ideas free from chain of command second guessing.
The new information technologies make it easier for more companies to take this approach, to empower their employees, and eliminate the barriers between employees' ideas and resulting corporate innovation. This wave of change has already had an enormous impact. Many of you here 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. 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. CEOs who have found ways to honor and respect their employees' loyalties to their spouses and families and communities have reduced turnover and reduced absenteeism, and increased creativity and productivity. Family-friendly work places, family and medical leave, flex-time, and other measures to bolster employees' 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-headed approach is showing hardheaded results.
Another way to describe this phenomenon might be to say they're getting more from their employees by focusing more on their core capacity, and with the help of their employees, understanding better 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. The phrase that you're using here, rich and free capitalism describes a very similar overlapping phenomenon.
But what is our core capacity as human beings? In 1872, the steam hammer defeated John Henry. At the conclusion of this century, at the end of four games in a six game series, Big Blue is tied with Gary Kasparov. Physical health and fitness continues to matter a great deal. A well educated mind is our key strategic asset. But in the 21st century, as the information revolution continues to accelerate, I'm convinced that it will become ever more apparent that our core capacity is spirit, creativity, heart.
For example, how did the electronic communications revolution begin? Samuel Morris was a portrait painter. In fact, his painting of James Monroe hangs in the White House today. While Morris 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 might be possible to erase barriers of time and space so no one would be unable to reach a loved one in time of need. Pursuing this thought, he came to discovery how to use electricity to convey messages at the speed of light, and invented the telegraph. Emotion led to innovation.
Over the past 50 years, technological innovation has been responsible in the view of many 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 for 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 down turn in growth or an upturn in inflation, which continued until capital and labor were restored to their proper balance. These factors are still crucial. But the new economy is different.
As the economist Paul Romer has argued, the true engines of growth may be ideas and the technologies created from those ideas. The only way to produce more economic value and thereby boost economic growth rates 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, of course, we use it to form the silicon chips that power the 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 if economies are to grow. Innovation is reshaping the very way we think about the economy and the vocabulary we use to describe it. To discuss the economy, we once resorted to the metaphor of a machine. Policy makers slowed things down or sped them up, stepped on the gas or hit the brakes, or 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 and learn and grow.
In the old economy, the key to growth was an individual sector. In the new economy, the key to growth may be an economic web and the diversity of 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 event -- mouse pads, computer repair shops, Windows 95, and so it goes. The economic web is, itself, the generator of the next novel growth opportunity, innovation sparks innovations. And establishing the proper conditions for innovations to flourish is one of the policy maker's highest obligations.
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, brain power and heart. In a market economy, it's no surprise that markets themselves have begun to recognize the potent power of these intangibles. It's one reason that net asset values of companies are so 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 is missing from the balance sheet. For high-tech firms, the percentage is 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 his or her predictions seem to be.
The importance of intangibles underscores the importance of the questions that I return to again. What about people? What kinds of policies should we follow to promote out success in the new economy in ways that enhance the quality of our lives? Well, 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 the Land of Oz. You remember the famous Frank Baum story and 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 and going to see this magnificent house a little bit later on, 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 personal attributes of Dorothy's companions.
For instance, there is a group that makes up what we might call the scarecrows. They have hearts and a sweet disposition, but don't always make good use of their brain. 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 technologies. But they fail to analyze the true nature of our condition. Scarecrows believe that the forces of the new economy are fundamentally destructive, and that government's job is to throw up walls and slow down the pace of change. They also call for protecting corporate welfare, and similarly for propping up companies that cannot compete.
Now, in some ways, the scarecrows sometimes have a point. On any trade agreement, the terms must be fair, and the United States cannot harmonize downward on important issues like labor and the environment. But fundamentally, our commitment to open trade is crucial to our economic future. Or take immigration, it's certainly true that illegal immigration has to be stopped, and we need an orderly process for admitting legal immigrants. And middle-income families must have the opportunities to acquire the tools and the education to make the most of all these changes. But immigration is good for the United States, and always has been.
Ultimately, the scarecrows' good intentions lead them to unwise conclusions. On trade, they ignore the fact that America's tariffs are relatively small compared to those of other nations, and that most trade agreements, therefore, increase our entry into other markets, not the reverse, and jobs depending on exports pay well better than the average. Besides, history teaches us that isolation, holing up behind impenetrable barriers is not the way economies grow. We've tried this approach; it has 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 and aren't as good as the rest of the world. And that is just plain manifestly 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 innovations. The scarecrows offer only a prescription for stagnation. You have to have a heart, but you also have to use your head.
Now, if you don't like that straw man, here's another one. Remember the tin man. The tin men 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. They are intimately familiar with the metal and plastic and silicon from which our new technologies are made. Like Oscar Wilde cynics, they know the price of everything but the value of nothing. These tin men do appear to have a well developed intellect, but they're ideas are squeaky and rusty. Metallic standards provide the answer to every social problem. They have brains, but like the tin man of the tale, they lack a heart.
Their philosophy holds that the way to get the most out of the new economy is simply to slash taxes and get the government entirely 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 belief here is that America would enjoy unimaginable prosperity if government merely packed up and went home. This approach is flawed deeply for at least two reasons. First, we tried it and it didn't work. And much of President Clinton's economic policies have been directed at repairing the damage that this approach unleashed. In particular the massive quadrupled budget deficit.
Second, and more important for our purposes, this philosophy ignores what's new about the new economy. Bill Gates did not start Microsoft because Congress cut the capital gains tax. He did it because he had an idea and he innovated, and he worked very hard. The tin men offer no prescription for upgrading the skills of workers or for sparking innovation. They preserve the status quo by draining funds from public investments and widening the gap between rich and poor. That approach threatens to worsen the prospect of working people through a resistance to worker protections and hostility toward collective bargaining.
Some people may benefit from the heartless policies of the tin men, but many would not, some would suffer. That result is morally unacceptable, but also economically unwise. A rising tide that lifts only some boats will eventually capsize all boats. Some of you I know are drawn to the tin men's approach. 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 company. Look at the people who are writing code or developing pharmaceuticals or figuring out a way to improve just in time delivery and ask yourselves how many of these talented people went to college on a government student loan? And then ask yourself where your company would be if these people didn't have a college education.
The tin men do certainly have brains. But, their brains could use a little oil to get rid of yesterday's squeak. They ignore what is new and offer an old prescription that has been tried and has failed. 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 disruptions this change brings forth and give people the tools to thrive and prosper. But, the question has been raised, is there yet another group in this land of Oz, the lions who 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 to move forward. We completed a bipartisan 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 at least a generation. Unemployment at a 24-year low, historically low inflation, a booming stock market that has doubled in the last four years, more new small businesses created in each of the last four years than in any other year in the history of the United States of America. Growth in the last quarter of a whopping 5.6 percent, a reinvented government, downsized by 300,000 positions, smaller than it has been since President Kennedy's administration, more flexible government with rapid approval by FDA of new drugs to fight scourges like AIDS, rapid approval by agencies like the FAA of products like the Triple Seven.
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 is critical. We need flexible regulation and an open competition policy that respects the new realities of the new economy. We also must invest in the physical infrastructure of the information age. Connect every classroom and every library to the information superhighway. Just yesterday under Chairman Hunt's leadership, we took a big step in that direction with a discounted rate for schools and libraries, an e-rate, which will pump more than $2.2 billion per year in our information infrastructure for the future.
Now we must create the next generation of the Internet, with 1,000 times the capacity of the current Internet, and then magnify it another 1,000 fold and ensure that the Internet is a duty free zone. In an economy powered by innovation, we must also invest heavily and in the right way in education. And our budget agreement 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, the ideas of Bill Clinton. We call him the Education President and may I say here in Seattle, the ideas of Patty Murray, the Education Senator.
We also need a fully reinvented government, aligned with the principles of the information age. A transformation of government to one that does work better and cost less. We must, of course, maintain a military adequate to meet America's unique global leadership role. And we have to protect our environment and make the investments necessary 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 precondition for a growing economy.
And finally, we must reject those who take the low road of bashing immigrants and trafficking in intolerance. In the new economy we must provide open opportunity for every American, because in the new economy, a global economy, America's racial and ethnic diversity is a powerful economic strength, an asset that we have that is unmatched by any other nation in the world. 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 working men and women and their families. And we need to protect our values against attacks from those forces that undermine them, like crime, drugs, broken homes, teen pregnancy and the barriers of 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 preexisting set of values. People were ready for work on day-one, with a certain constellation of shared beliefs. That is equally important in the new economy. Indeed, it may be the most crucial intangible upon which our 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 that the new economy develops.
Well, this truly 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 also resist the temptation to either throw up walls or throw its hands and to declare either that we can't compete or that we shouldn't care. In the new economy, we need brains, we need heart, and we need each other.
Thank you very much.