William J. Holstein

Something very profound has changed in the American economy. Building casinos in the Las Vegas desert, erecting deluxe housing complexes and luxury condominiums on speculation and creating vast strip malls where people borrow money to buy things they don’t really need—none of that is ultmately as sustainable as we once thought. Nor are investment bankers creating real wealth when they use more financial leverage to create ever more exotic investment instruments.

Now that the easy money has been choked off, we are recognizing that it’s not smart to have consumer spending representing 67 percent of our total economy.

In short, America finds itself in a structural crisis. Some economists believe that it’s simply a question of waiting for the American economy to bounce back to the status quo ante. They argue that borrowing will rev back up and consumers will once again buy cars and houses and big screen televisions just like they did in the old days. There will be a silver bullet solution to our current predicament. If you believe that, you don’t need to read this book.

If you’re worried that something deeper has changed, and that we face huge challenges in how to create jobs for the 7 million Americans who have been thrown out of work in the past two years, then you have to read this book. I believe that even if we are able to stage a “recovery” and achieve economic growth again, we need to address the very structure of the U.S. economy to repair the damage that has been done. Our nearly 10 percent unemployment rate may prove very stubborn unless we create new industries and continue to transform old ones.

I believe our future will have to be based more on research, innovation, manufacturing, new company formation, successful international strategies, and improved education, particularly of workers already in the work force. These are the building blocks of sustainable international wealth generation.

I am a big believer in studying wealth creation on a local or regional basis, which I began in earnest with the 1992 Business Week cover story entitled Hot Spots. So in this book, I will take on case studies where I believe Americans are getting it right. I also believe that it is critical for Americans to work across traditional institutional boundaries to create climates of cooperation. I’m particularly fascinated by the role of “idea factories,” whether they are universities, corporate laboratories or national weapons labs, as places where Americans create world-class ideas. The challenge is to commercialize those technologies, and that requires the right climate and the right social infrastructure.

I’m also interested in Americans working across other boundaries—labor and management have to strike a new stance in working together; the educational system has to be better aligned with creating the skills that businesses need now; and in all cases, politicians play a key role in setting the policy climate for real economic growth to occur.

From these case studies, I will extract tangible lessons, with practical take-aways. Here are the case studies, organized in two parts:

PART ONE: INVENTING THE NEW (back to top)

1. AUSTIN, TEXAS AND THE PECAN STREET PROJECT. The city government, the local utility called Austin Energy, environmentalists, the University of Texas and a raft of large corporations such as Cisco and Applied Materials are supporting this effort to create a “smart grid.” The heart of the idea is to use more solar and wind energy, much of it generated by homes or businesses or warehouses that would be able to sell their energy back into the city’s energy grid. This is not just an environmental project—the participants hope that it will have a huge impact on creating jobs and on identifying the ways that major companies can develop the energy generation equipment, computers, power-switching devices and other gear that could reap billions of dollars in sales.

One key institution supporting the project bears particular examination. The IC 2 Institute, at the University of Texas, operates the Austin Technology Incubator.

2. ORLANDO’S SIMULATION INDUSTRY. Consciously imitating the Research Triangle of North Carolina, civic and industry leaders have created a simulation industry with more than 100 companies and thousands of jobs. Stimulation is a key tool in training. The origins of Orlando’s simulation industry lie partly with the U.S. military, which buys simulation equipment to train its forces to operate weapons systems. But other contributors are the Disney and Universal entertainment complexes, whose alumni possess key skills in video games and other forms of online entertainment.

3. PITTSBURGH: CREATING THE AUTONOMOUS DRIVING INDUSTRY. Carnegie Melon is attempting to create an industry built around vehicles that drive themselves. The School of Engineering has overseen development of a vehicle that drove 55 miles without human intervention. Using funding from the U.S. government’s Defense Advanced Research Projects Agency and General Motors, a team of researchers use cameras, radar and lasers to guide vehicles. Thousands of algorithms in computers onboard the vehicles help make decisions for whether the vehicle should, for example, pass another vehicle or not. Ironically, they are testing the vehicles on land that used to be dominated by steel mills, now torn down. The Carnegie Mellon researchers are quite literally inventing the future of the automobile. The potential is that a raft of new companies will commercialize their research.

4. DAYTON: NEW MATERIALS. Dayton, Ohio, is one of the cities in the Midwest that has been hit hardest by the decline in the automotive and aerospace industries. But city fathers are attempting to create a new industry based on new space-age composite materials and advanced manufacturing techniques. And they are trying to use the presence of the giant Write-Patterson Air Force Base as a means of jumpstarting those efforts. Another crucial piece of their strategy: using a local community college, Sinclair Community College, to retrain workers laid off in other industries. This is an example of how cities and regions consciously use “industrial policy” to create jobs and growth.

5. SILICON VALLEY: THE NEXT WAVE IS SOLAR. After decades concentrating on semiconductors and related technologies, Silicon Valley, one of the oldest technology hotspots in the United States, is turning to solar. I will concentrate on entrepreneurs who have taken technology from the Lawrence Berkeley National Laboratory to start building a factory that could transform the economics of solar power. The technology is nanocrystal solar cells, and it is revolutionary because it allows the manufacturing of very high volumes of photovoltaic cells.

6. BOSTON: THE FUTURE IS LITHIUM. There is a global race underway to determine how vehicles will be powered in the future and a leading contender is lithium ion batteries. The making of these batteries, in and of itself, could be a $150 billion a year industry, according to reliable estimates. Both GM and Ford Motor are building factories in Michigan to produce these batteries, but the core technology in each case is foreign. A South Korean company is making the crucial battery cells for GM; and Ford Motor’s technology comes from France. So can America play a leading role in this industry?

The answer to that question lies in the hands of A123 Systems. Founded in 2001 in Watertown, Mass., this startup company uses nanophosphate technology initially developed at the Massachusetts Institute of Technology to make high-power lithium ion batteries. General Electric has recently invested in the company and it also has won major new funding from the Obama administration.

I will profile how A123 successfully transferred technology from MIT to build the company. One major question mark is whether the company’s batteries will be made in Asia—or in the United States.

7. SAN DIEGO’S GENOMIC BOOM. Once a sleepy port for the U.S. Navy right up against Mexico’s Baja California, San Diego has used the presence of the Scripps Health nonprofit community health system as an “idea factory” to generate both scientific breakthroughs and new company formation. The nonprofit was founded in 1924 by philanthropist Ellen Browning Scripps. Today, it is the lynchpin for San Diego’s efforts to emerge as the nation’s leading center for the use of supercomputers to map the genetic makeup of individual patients.

The Scripps group works with funding from the National Institutes of Health, among other sources, making it a perfect example of how Americans working across institutional lines can spur economic growth.

8. THE CORNING WAY: GORILLA CLASS. Corning, located in the city of Corning in upstate New York, is one of America’s most innovative companies and it serves as an excellent case study because of its relative geographic isolation. Its location means that the visitor can see how the economy of the region is directly tied to the company’s ability to innovate and come up with new products. The company was known for its Corning Ware dishware, for example, but sold that when it became unprofitable. Factories closed and people lost jobs. But the company next had a hit product with the glass that goes into fiber optic cables. That boom also faded and was replaced by the company’s glass used in liquid crystal display (LCD) screens that are placed on so many electronic products. Now the company is working on a new hit called “Gorilla glass,” a new kind of unbreakable glass.

9. JOHN DEERE IN DAVENPORT, IOWA. This facility makes tractors for the world. They have held off against all pressures to shut down the plant and shift the manufacturing offshore by taking a combination of moves—they have shed some lower-value added manufacturing to Mexico and India, but kept driving up the technology chain to make more sophisticated tractors. They have demonstrated flexibility in the relationship between management and the United Auto Workers in a way that the auto industry was not able to do. Deere also has pushed the research envelop by coming up with more and more sophisticated machines, including one that can go into a forest without human operators and log only the trees that have been selected by a GPS device. Once again, a group of people have come together in the American heartland to create world-class competitive advantage.

10. NEW YORK: SMALL MANUFACTURERS FIGHT BACK. It is one thing for a big company like Deere to adapt, but even smaller manufacturers can, too. Surgical device maker Conmed, based in Utica, N.Y., explored the possibility of outsourcing to China, but instead completely remade its manufacturing processes, borrowing techniques from Toyota’s vaunted lean manufacturing method. It also is using new software tools that allow it to better respond to demand from hospitals. Result: it is profitable and its jobs remain in Utica, not in China.

11. NEW JERSEY: EXPORTING TO PROSPERITY. Here I will find small and medium-sized companies engaged in successful international strategies. One candidate is Sealed Air, the New Jersey-based company that invented bubble wrap. It earns about 50 percent of its income abroad by selling plastic packaging for China’s grocery stores, for example.

I’d also examine a favorite subject of mine here—how states and the federal government need to do a better job of creating an “export infrastructure,” which means information and financial tools, for small and medium-sized exporters, much as the Germanys have done for their Mittelstand, or middle sector.

12. ATLANTA: BACKSHORING. NCR, the company once known as National Cash Register, has itself undergone a huge metamorphosis by becoming the largest manufacturer of Automated Teller Machines. But one decision, in particular, that NCR has taken recently has drawn attention. Like many other American manufacturers, NCR turned to a third-party outsourcing company, Flextronics, to make much of its equipment in cheaper offshore locations.

But recently, NCR decided to take back responsibility for making a sophisticated line of ATMs from Flextronics in Brazil and to locate that activity in Georgia, near the company’s innovation center where customers come to seek NCR’s latest technology. The reason: the company was concerned that outsourcing and offshoring the manufacturing was risking its ability to keep turning out new models fast enough to satisfy customers. I’ll dig into this to see whether American manufacturers are getting serious about “backshoring” some of the operations they moved to China, Brazil and elsewhere. If backshoring becomes a reality, it could have huge implications for American job growth.

13. CLEVELAND: COMMUNITY COLLEGES IN THE LEAD: One of the most important ingredients in America’s effort to transform its economy will be that of labor. Can we take people who are displaced from old industries and old models and redeploy them into new jobs in new industries? We have not done a good job with that challenge in recent years; many workers in their 40s and 50s who are displaced from high-paying manufacturing jobs end up working in Wal-Mart or Home Depot.

Cuyahoga Community College (Tri-C) in Cleveland, Ohio, believes it has some of the answers. It believes community colleges are better at addressing the retraining challenge than either the government or four-year universities can be. One reason Tri-C can be effective is that it has advisory committees of employers who advise it on creating the curriculum for each retraining program, so that each of them is customized to provide skills sets that the employers are looking for.

One major business partner is the Cleveland Clinic, a major medical center, which advises Tri-C on retraining workers to enter the medical and health care fields. Tri-C also has a Green Academy that retrains smokestack industrial workers for jobs in renewable energy fields. Some GM die makers, for example, are training to make photovoltaic cells for solar energy systems.

In short, community colleges may be at the heart of America’s economic transformation efforts.

CONCLUSION

From these case studies, I will extract lessons that should inform the entire national debate about how to create The Next American Economy.