For a while I have been wondering about the role of the chief financial officer in the innovation initiatives of a business. The text below summarizes my thoughts on that issue. It it is based on an interview of me by Curt Olsen and published in the Armanino Mckenna CFO Evolution Newsletter in September 2012.

( Armanino Mckenna is a leading San Francisco Bay Area accounting firm).

 

 

CFOs can and should lead innovation revolution

Do CFOs see themselves as innovators? They should according to Tapan Munroe, a veteran economist, prolific author and thought leader on innovation. Munroe, who served as chief economist at Pacific Gas & Electric Company, has written more than 100 articles and four books on the topics of innovation, research and development, business process improvement, the Silicon Valley phenomenon and American competitiveness.

 “The CFO is uniquely positioned to lead the change to an innovation culture in their company,” Munroe says. “Who understands risk better than a CFO?  And who better than the top financial expert in a company canunderstand where investment will have the most positive impact? The skill set and the power to lead innovation come together in the CFO position.”

His latest book, “Innovation: Key to America’s Prosperity and Job Growth,” promotes innovation as the core activity that distinguishes the United States as the world’s leading economic power. Munroe believes that if the U.S. is to maintain its position of economic and competitive leadership, it must emphasize innovation in both the private and public sectors. He also says that CFOs are a crucial professional community for promoting innovation and that they can and in many cases should lead the innovation revolution in their companies.

 

With American companies like Google, Apple and many others sitting on hundreds of billions of retained earnings, Munroe says that CFOs could play a key role in advocating for investment of that stockpile in research and development activities which would make their own companies and the U.S. economy, much more productive and competitive.

 

But not just any type of innovation will do, says Munroe. In fact, CFOs need to embrace what is known as “frugal innovation,” which is, at its heart, about being resourceful. “Frugal innovation is also smart innovation,” he says. “Throwing money at a project is not being smart. Resources must be applied very strategically and with surgical precision.”

 

Elaborating further on the term, Munroe says it essentially means “clever improvisation.” It could entail bringing a product to market despite limited resources of producers as well as of consumers. “Resource scarcity and the desire to save money drive frugal innovation,” Munroe writes in his book, citing cloud computing as a good example of frugal innovation. “(Cloud computing) does not need expensive local storage on computers (because it) leverages and optimizes the use of remote data servers” which deliver “economy of scale benefits.”

 

The days of expensive, proprietary or on-premises IT systems are numbered, Munroe says. “There’s concern that the effectiveness of cloud technology and its extreme affordability will have a negative impact on the expensive technology market in the U.S. as well as Europe and Asia, and the truth is, it might,” he says. “But I suggest we accept the inevitable, embrace frugal innovation and the cloud and use them to increase U.S. productivity.”

 

Munroe concedes that because of the perceived and actual risks of innovation, integrating CFOs into the “innovation ecology” of a company might be challenging. But times are changing fast and so for him, it’s not a question of whether a CFO should lead innovation, but of how. “The influence of CFOs continues to grow and that would include profound influence on how funding is applied to innovation and R&D,” he says.

 

Here are some guidelines that Munroe suggests for CFOs who want to foster innovation:

 

Use numbers – You speak the language of numbers. Focus strongly on the use of numbers as you develop metrics for innovative projects or ideas.

 

Learn about innovation – Increase your knowledge of innovation techniques to build innovation capabilities. Tap into the knowledge and experience of your Chief Technology Officer or top research executive.

 

Link innovation to corporate strategy – If an innovative idea is closely linked to company strategy and objectives, it has a better chance of acceptance.

 

Keep an open mind – As CFO you may not always be the idea generator but you are the “venture capitalist” of your company and the gatekeeper of the budget and of investment. So when requests for funding new ideas come to you, don’t dismiss them because they refer to a future beyond the next quarter. Reasonable investments that are aligned with future strategy should be given a serious hearing. Remember: the future is not vague; it will be here before you know it.

Southern California’s Remarkable Life Sciences Industry

When we envision Southern California, we usually think about sun-drenched beaches, surfing, Hollywood, Beverley Hills, Rodeo Drive, and the seaside resorts of La Jolla and Newport Beach. It may surprise many to know that the region also has one of the largest life sciences industry clusters in the world. The region stretches south from Orange County with its innovation hubs centered in the cities of Irvine and Mission Viejo down to San Diego County’s Torrey Pines Mesa, Carlsbad and UC San Diego. ( Biocom 2012; Southern California Economic Impact Report)

The region’s first biotech company, Hybritech, was established by scientists from UC San Diego. Hybritech’s renowned product, the PSA test, is a revolutionary diagnostic test for prostate cancer. The company was subsequently acquired by the pharmaceutical giant Eli Lilly for $400 million in 1986. This sizeable infusion of cash helped the early entrepreneur’s of Southern California to start the first generation of biosciences firms in the region. San Diego’s biggest biotech drug success story was Idec. The company is now part of Biogen-Idec.

The story of creation of the medical devices industry in Orange County, mostly concentrated in the cities of Irvine, Mission Viejo and Santa Ana, is akin to the development of the life sciences industry in San Diego County. Engineers and scientists initially attracted to the county for work on military research and manufacturing transferred their knowledge and know-how into developing medical devices with considerable support from scientists and engineers at UC Irvine. Founded in the 1950s, Edwards Life Sciences of Santa Ana became the medical devices anchor firm in the county. At about the same time, an eye drug company, Allergan, entered the emerging field of cosmetic biotechnology with the acquisition of rights to Botox.

Over the last several years, the life sciences industry is beginning to take root in neighboring Riverside County. Attraction factors include affordable housing, the presence of UC Riverside, and access to a well-trained workforce. Abbot Vascular and several other medical devices companies form the core of the life sciences hub in the county. The completion of the UC Riverside School of Medicine in 2013 will provide an added boost to the advancement the county’s Life Sciences Industry. Nearby Imperial County, known for agriculture and agribusiness for decades is also beginning to develop a life sciences industry cluster comprising industrial biotechnology and biofuels.

Job growth in life sciences has been impressive in the four-county region. In 2011, this sector employed a total of nearly 97,000 people with average salaries ranging between $54,142 and $116,462 – well above the national average. The medical devices and diagnostics sector with 33,871 workers had the dominant share of jobs followed by research and lab services with 31,394 jobs. The remaining jobs were in Biopharmaceuticals and foreign trade. The counties of San Diego and Orange lead the region each with 41,000 jobs. In addition, nearly 31,000 jobs were created in supporting industries. These include accounting, Insurance, legal services, recruitment and administrative services, financial services, marketing, advertising and communications services.

The economic resilience of the life sciences industry in Southern California has been impressive. The industry weathered the Great Recession of 2007-2009 relatively well. Job growth in the industry continued while employment declined in most industries in the region and the nation.

Underlying the impressive economic performance of the Southern California life sciences industry lies a healthy innovation ecosystem. (Mary Walshok, Tapan Munroe, Henry Devries, Closing America’s Job Gap ,W Business Books,2011;Tapan Munroe with Mark Westwind, What makes Silicon Valley Tick? Nova Vista Publications, 2009) Like most living ecosystems, survival is the outcome of the interplay of a number of key elements of the ecosystem. An innovation ecosystem is a dynamic and adaptive “organism” that creates, consumes, and transforms ideas into products via the formation of new firms. The foundational element in the innovation ecosystem is research universities – the primary source of knowledge, ideas, and innovation. Research universities also provide education and training for the region’s workforce. In addition, they provide access to sophisticated labs and equipment as well as to faculty expertise. University faculty members, and their talented graduate students, often help in the formation of startup businesses. Increasingly the Major research universities in California are becoming entrepreneurial. They include the ten campus UC system, Stanford University, and Cal Tech in Pasadena.

With knowledge and innovation as the primary drivers of economic growth and job creation, world-class centers of knowledge and discovery are key elements of an innovation economy. The four-county Southern California region is well-endowed with these vital assets. The region is host to three University of California campuses: UC San Diego, UC Irvine, and UC Riverside. San Diego County is the flagship of the region and continues to flourish primarily because of the presence of its world-class research university and fifty-three free-standing research institutes such as the Salk Institute of Biological Studies.

Another key element of the innovation ecosystem is investment capital. If ideas and solutions are the soul of innovation, then money is the life blood. Access to seed capital from angel investors at the start-up stage and follow-up financing from venture capital firms for expansion are both critical success factors for today’s technology firms. Angel and venture capital is private investment money crucial for transforming basic research into commercial products that drives the commercial growth of the life sciences industry. An important source of capital for the life sciences is the taxpayer-supported National Institute of Health (NIH) funding, primarily devoted to basic research. Other uses of NIH grants include training and teaching programs.

The top ten recipients of NIH grants in 2011 included the following institutions: UC San Diego, Scripps Research Institute, UC Irvine, Sanford-Burnham Medical Research Institute, and the Salk Institute for Biological Sciences, San Diego State University, La Jolla Institute of Allergy and Immunology, Loma Linda University, Veterans Medical Research Foundation-San Diego, and the Ludwig Institute for Cancer Research. Together, they received 94% of the NIH grants in 2011.

Between 2007 and 2010, venture capital investments in the Southern California life sciences industry declined from $1.1 billion to $535 million as a result of the Great Recession of 2007-2009. This trend continued into 2011 because of market and regulatory uncertainties. On the other hand, NIH grants made to the region’s universities, hospitals, and small businesses for basic research in 2011 increased to $977 million compared to $966 million in 2010. San Diego County received the largest share – 85% of the NIH grants. San Diego remains the number one recipient of funding for biotechnology in the US. However, the declining trend in VC funding for life sciences is a matter of concern for future growth of life sciences startups in the region.

The conclusions from an examination of the Southern California’s innovation ecosystem analysis include:

1. The Southern California life sciences industry is well-diversified ranging from biopharmaceuticals to medical devices and diagnostics.
2. The region has an extraordinary concentration of research institutes anchored by world-class entrepreneurial research universities. This is an unbeatable asset for the life sciences innovation economy of Southern California. It provides nimbleness and resilience – fast response to emerging scientific and technological developments such as gene sequencing as well as rapidly changing market force. Throughout the Great Recession of 2007-2009, the region’s life sciences industry continued to add jobs while the rest of the nation shed jobs.
3. The region’s life sciences industry has a large positive economic impact on the region by creating large number of well paying jobs in supporting industries.
4. The BIOCOM 12 report forecasts that by the year 2013 there will be 70% more jobs in the life sciences industry in the region than the national average. It also concluded that 94% of the job growth in the past two years can be attributed to the region’s competitive advantage in several factors that include the presence of world-class research universities, financial support for research and development and business startups, a well-trained work force with strong science, technology, engineering and math (STEM) skills, and a high-quality of life in the coastal regions of Orange and San Diego counties.

Tapan Munroe. June 19, 2012

Contribution of Asian Americans to the Economy

A recent nationwide study, The Rise of Asian Americans, (June 2012) published by the nationally known Pew Research Center concludes:

Asian Americans are the highest-income, best-educated and fastest-growing racial group in the United States. They are more satisfied than the general public with their lives, finances and the direction of the country, and they place more value than other Americans do on marriage, parenthood, hard work and career success.

This is an extraordinary transformation for an ethnic group in America. A hundred years ago, Asian Americans (mostly men) worked in low-skill low-wage jobs in mining, farming and railroad building.

In recent years the percentage of Asians in the US has increased dramatically. Between 1965 and 2011, the number of Asian Americans grew from 1percent to 6.2 percent (18.2 million) of the US population. Most Asians in America trace their roots to China, India, Japan, Korea, the Philippines and Vietnam.

Asian Americans earn a whole lot more than other groups—an average of $66,000 compared to an average of $49,000 for all Americans. The disparity in incomes is correlated with higher levels of education among Asian Americans. Within this group, incomes vary widely according to level of education and training. Not all Asian Americans are rich, and they do not all have PhD’s

The modern wave of Asian immigration to the U.S. is about five decades old. In recent years, Asian immigration into the U.S. has risen faster than Hispanic immigration. In 2010 Asian immigration accounted for nearly 36 percent of total immigration in the U.S. compared to 31 percent for Hispanics.

The entrepreneurial talent and the educational attainment of Asians has been a boon to the US economy. The success of Asians in America as entrepreneurs in high-tech and knowledge based industries in world class innovation hubs like Silicon Valley has been remarkable. In her 1999 research paper entitled “Silicon valley’s New Immigrant Entrepreneurs,“ UC Berkeley Professor AnnaLee Saxenian, covering data for the period between 1980 and 1998, found that immigrants accounted for roughly a third of the scientific and engineering workforce in Silicon Valley, and that Indian or Chinese CEOs were running a quarter of its high-technology firms. What is more impressive is that 17 percent of the Valley’s tech firms were run by Chinese immigrants, including Taiwanese, and 7 percent were run by Indians.

In 2006, Vivek Wadhwa, Director of Research at the Entrepreneurship Center at Duke University, and his research team collaborated with Saxenian to update her work. Their conclusion was that the Silicon Valley trend had become a nationwide phenomenon. For U.S. high tech companies founded between 1995 and 2005, nearly a quarter had a chief executive or lead technologist who was foreign-born. These companies generated over $50 billion in revenue and created 450,000 jobs in 2005. In Silicon Valley, the share of immigrant-founded startups had risen to more than half of all startups.

In a January 2012 Inc. magazine article, Vivek Wadhwa concludes that “Indians were the most numerous of the high tech company founders. They had founded more startups than the next four groups (from Britain, China, Taiwan, and Japan) combined. The proportion of Indian-founded startups in Silicon Valley startups had increased from 7 percent to 15.5 percent, even though Indians make up just 6 percent of the Valley’s working population.”

For the past decade or so, businesses and employers in the U.S. have been facing a critical challenge finding the right people with the right skills to fill jobs in order to retain their competitive positions in the global economy. (Mary Walshok, Tapan Munroe, Henry Devries, Closing America’s Job Gap, WBusiness Books,2011) According to the US Bureau of Labor Statistics in May 2012 more than three million jobs were vacant despite an unemployment level of more than 8 percent in the US economy. Most of these jobs required STEM (science, technology, engineering, and mathematics) background.

 Asian Americans have been particularly successful in bridging this gap. Without this group, America’s serious skills gap problem would be a whole lot worse. Forty nine percent of Asians have completed college compared to 28 percent of all Americans. They are particularly focused on STEM subjects. In 2010, US universities awarded 45 percent of all science and engineering degrees to Asians.

As Wadhwa’s paper points out, Asians in America comprise a highly educated and skilled 21st century workforce. Overall, the data clearly shows that the growth of the Asian American population has been a boon to the US economy via their entrepreneurial contributions as well as by helping to bridge the skills gap.

 

Jobs Outlook Improving

Jobs are a very important determinant of our personal quality of life. Thus, it is not a surprise that I continue to emphasize new job creation in my economic writings and discussions.

According to the US Bureau of Labor Statistics (BLS), the nation’s businesses added 243,000 new jobs in January 2012 in a broad array of industries. The biggest job creators were in manufacturing, transportation, warehousing, professional and business services, and leisure and hospitality sectors of the economy. On the other hand Government agencies at all levels—federal, state, and local–laid off workers because of budget deficits. This was the fastest pace of monthly job growth since April 2011. The best news is that businesses remained the engine of job growth.

The U.S. unemployment rate now is at 8.3 percent compared to 8.5 percent in January 2012. (In August 2011 it was at 9.1 percent). The good news is that according to the BLS the unemployment rate is falling because people are actually securing new jobs rather than leaving the work force. However, the unemployment picture still remains troubling despite recent improvements. The number of unemployed workers has been declining because of recent job gains in past several months, but the total jobless number remains a painful 12.8 million people. This is the most painful legacy of the great recession of 2007-2009, the worst since the great depression of the 1930’s.

The current long-term unemployment problem involving 5.5 million workers, representing over 40 percent of the jobless, who have been unemployed for more than six months is serious and is unlikely to be solved via increases in demand for workers alone. It involves major structural problems in the American economy.

The biggest structural issue is the skills gap, and the gap is particularly severe in the STEM (Science, Technology, Engineering, and Mathematics) area. Other structural issues include disappearance of many jobs as a result of continued improvements in productivity as well as off-shoring of jobs to booming emerging economies that in many cases have lower labor costs as well as well skilled labor force, e.g. China and India. (For details see my book with coauthors Mary Walshok and Henry Devries—Closing Ameica’s Job Gap.)

Many who have lost their jobs in the recent economic disaster do not have the skills and training required for the openings. In addition, those who have the skills do not move to a new area because of reduced mobility. They either cannot sell their homes in a down real estate market or do not want to move to another location because of family and other personal reasons such as loss of friends and community.

There is a serious mismatch in our labor market and it is not easy to solve. The labor force is having great difficulty in adapting to the rapid structural changes in the economy brought on by rapid technological changes and the rapid demise of old jobs. There are also unrealistic expectations of many who have taken for granted that even in a rapidly changing world they will hold on to a specific job for their lifetimes. Today many skilled workers refuse to accept slightly lower paying jobs and prefer to remain unemployed in this tight labor market.

It is quite possible that some of the unemployed who are unwilling to move to another location may do so by the inducement of higher compensation. But higher pay is not always the answer, as there are clear-cut skill gaps in many cases.

The long term issue of structural unemployment, particularly in the STEM area, can be solved if we face up to this serious challenge instead of avoiding it or pretending that it does not exist. If we continue to avoid this issue we will continue to experience higher levels of unemployment than necessary for quite some time. We deserve better. I have discussed this issue at length in my forthcoming book – —Innovation:Key to America’s Prosperity & Job Growth.

Let me conclude this column by saying that the jobs data for the last six months has been encouraging.We still have a long ways to go lower the unemployment level.

Economy Should Be Brighter in 2012

The good news is that the 2012 economy looks relatively brighter than the economy of 2011.

Let me put on my economist hat and talk about what lies ahead:

• Consumer confidence skyrocketed to its highest levels in eight months in December, 2011; a positive sign for us heading into the New Year. The Conference Board’s latest news release (December 27, 2011) announced that its monthly Consumer Confidence Index exceeded expectations by jumping by nearly 10 points to 64.5 percent, up from a revised 55.2 percent in November.
• Consumer confidence matters a great deal since consumption amounts to nearly 70% of the economy.
• Jobs have been the most serious concern in the last several years. The good news is that the year 2012 is ending on an upswing – five consecutive months of net new job growth of 100,000 per month – the longest streak since 2006.
• There is more good news in the jobs area. The number of people applying for unemployment benefits in December 2011 is at the lowest level since April 2008 which suggests that layoffs may have nearly ended and hiring is most likely on the rise in 2012. Hopefully this is not just a seasonal quirk.
• The December 20, 2011 Associated Press survey of leading economists concluded that net monthly job growth in the next 12 months will be 177,000 jobs compared to an average of 132,000 jobs a month in 2011.
• Unemployment in 2012 will most likely be around 8.6 percent compared to 9 percent in 2011.
• The overall economy will grow faster in 2012 than in 2011. Expect the real GDP, the broadest measure of economic activity, next year to be at 2.4 percent compared to nearly 2 percent in 2011. This is a significant uptick but not enough to make a major dent in the ranks of the unemployed.
• Inflation and interest rates will remain low in 2012. This bit of very good news has not been noticed by analysts much in 2011.
• Recent housing data such as new home starts and existing home sales have shown improvement. The mortgage rate is at a long time low. Home prices have steadily come down according to the Case Schiller Index of 20 Metro areas. One would think that this is a great buyer’s market. But the housing industry has remained in the doldrums despite the economic recovery. Why? A major reason is high unemployment. The other reason is the continuing problems in the housing finance system. As long as the foundational problem of housing finance is not fixed, the industry will remain a lukewarm sector of the economy.
• Despite the nerve-wracking gyrations in 2011, the American stock market has remained a safe haven for the rest of the world as the S&P 500 Index heads toward a flat finish by the end of the year. The S&P index is ending the year significantly ahead of the stock market indices of Paris, Frankfurt, Tokyo, Shanghai, and Hong Kong. Why? There are several reasons. They include: 1) strong financial performance (profits) by American companies; 2) the Fed’s policies of low interest rate as well as injection of money into the economy; 3) the move by US investors to bring funds home in light of turbulence overseas.

The major downside risk facing the economy in 2012 is an external shock such as worsening of the debt crisis in Europe followed by a recession there. This may drag down the US economy as it is closely linked to the European economy. Other sources of external shocks could be centered in the Middle East.

The other major risk to the economy is the political gridlock in Washington that has continued to seriously hamper much-needed legislative progress relating to the US economy.

My conclusion: Things will be better in 2012—Guarded Optimism.

Can you Believe: A Shortage of Skilled Manufacturing Workers?

A recent Deloitte Consulting study concludes that nearly 83 % of manufacturers surveyed  report serious shortage of skilled production workers. In addition nearly three-quarters of the manufacturers report  that shortage of skilled production workers translates into adverse impact on productivity as well as plant expansion .It means passing up of new business opportunities .

According to the Wall Street Journal (Nov 26-27,2011), AAR Corporation,a Chicago based aviation-parts manufacturer has currently 600 job openings in welding and maintenance mechanics.These jobs do not require college diplomas but require mechanical skills and pay well.The company is unable to start a third shift but can’t do it because of shortage of skilled workers.

Skilled worker shortage has ripple effects.When businesses can’t expand because of lack of skilled workers means fewer opportunities for less skilled workers such as security personnel,forklift drivers, maintenance and janitorial staff.It also adversely affects those who work in the supply chain such as parts suppliers.

In most economic recoveries there is the problem of mismatch of skills between available jobs and job seekers. In the aftermath of the great recession of 2007-2009 the mismatch has been huge.Why? Partly it is because of demographics.Manufacturing employment peaked in the 1980’s and those who were hired then are nearing retirement now and replacing them has been a great challenge because of disappearance of vocational education at the high school level.In addition in-company training via labor unions has eroded.

Another reason for the lack of supply of trained workers in manufacturing has been the declining attractiveness of  blue-collar jobs  to young people.In addition parents have not encouraged their children to seek work in manufacturing because of lack of societal status and perceived instability of the manufacturing sector. According to another Deloitte study this attitude has  existed despite the fact that a large majority of Americans think that a strong manufacturing sector is important for America.Only one out of three would support their children to have a career in manufacturing.

Finally some companies themselves are a factor underlying the problem as they have become fussy in their hiring because of a weak economy.Acording to Manpower Inc,a worldwide staffing company, with weak demand for their products businesses have become pickier in choosing candidates.They only hire those who fit the job description completely.If they can’t find such candidates they postpone hiring and leave the job unfilled and hope for better times to fill the vacancy.

Dana Saporta, economist with Credit Suisse,estimates that economy wide  structural factors such as lack of skilled workers enhance the rate of unemployment by 1.5%. (WSJ,Nov.26-27,2011) .Without the structural problems in the economy the unemployment level  today in America will be 7.5% intead of 9% .

Are Technological Advances Always Good for Jobs?

The conventional view for a long time has been that technological advances displace jobs in the short term but creates more jobs in the long term. I have also shared this view over the years as an economist.

In a  recent book  two well known MIT scholars, Erik Brynjolfsson and Andrew McAfee, question this view. They  suggest that rapid advances in information technology is enabling business leaders and company founders to reap rich financial rewards by replacing people with software in services businesses and by replacing workers via automation in factories.

They ask the question: why did sixty percent of the wealth created in the US, between 2002 and 2007, go to one percent of the population? Their answer: it did not happen just because of financial deregulation, or Bush era tax breaks; it happened because information technology (IT)  has made  possible far ranging sale of digital products and record expansion of software-aided management.

In an October 2011, article in MIT Technology Review,author David Talbot quotes Eric Brynjolfsson–“Technology lets  superstars—whether Mark Zuckerberg or Lady Gaga or a hedge fund manager—leverage their skills and talents across far more assets than they could have done previously. You can distribute bits—costlessly,globally, instantly—in ways you can’t distribute atoms. Anything that is digital from software to music can reach a much broader global audience. This is also true for the business processes that you embed in software. CEOs and others are leveraging that.”

The salient point in the book is that the dynamics stated above explains how productivity and economy can grow  while employment shrinks. In other words, technology can grow the economic pie, but it does not mean that everyone is better off.

Nobel prize winning economist Robert Solow’s view is that advances in technology always eliminates jobs, but American economic history shows that total employment and wages  always rises over time. He suggests that it may be too soon to tell if that will not happen again.

In 1800, ninety percent of Americans worked in farms, and by 1900 that number had dwindled to forty-one percent as a result of new technology and opening up of fertile farmlands in the Midwest.Workers adapted to this massive structural change, but it took a century. This time around the speed of  IT change  is so fast that our workforce , education and training systems are  not able to keep up with it. The result is the current job crisis that may last several years.

Coping with this massive structural change is one of the great challenges America faces in the second decade of the 21st century.

Schools Need to Offer Many Pathways

 

According to the California Department of Education, nearly a third of our ninth-graders drop out before graduation. A third finish high school but lack the academic training and technical skills to succeed in college or in a career. According to the National Center for Public Policy and Higher Education, the remaining third graduate on time and move on to post-secondary education.

The shocking data indicates serious problems with our high schools. However, there is little consensus about what to do. Many solutions have been proposed over the years. They include ratcheting up of academic standards, college prep curriculum, smaller schools, charter schools, greater program accountability and performance-based fiscal incentives.

With sound implementation, most of these policies can yield good results. The problem has been that each of these solutions is offered in piecemeal fashion and, therefore, falls short of improving high schools.

A February 2011 Harvard report – “Pathways to Prosperity” – states that America’s high schools are wedded to a single pathway to college. The report suggests it makes better sense to provide diverse high school options for America’s youth. Gary Hoachlander, president of ConnectEd, has defined several principles underlying the implementation of multiple pathways for our high school students:

• A pathway should prepare students for the full range of post-secondary opportunities ranging from universities, four-year colleges, community colleges, apprenticeships, to formal employment training.
• A pathway should connect challenging academic courses to real-world experiences.
• A pathway must exhibit significant student accomplishments in academics, critical thinking, problem solving, communications, technological literacy, and cross-disciplinary fields necessary for success in the highly competitive global economy of the 21st century.

These principles have been adapted by ConnectEd (CEd) in their high-school improvement program known as Linked Learning: Pathways to College and Career Success. It acts as a hub for the Linked Learning field in California. It develops tools, supports demonstration projects, provides technical assistance, leads collaborations, and promotes pathways for preparing students for college and career success. The CEd Linked Learning pathway offers a multiyear program of study that has four key components. They include:

1. An academic core required for admission to the CSU system – English, mathematics, science, social studies, and foreign language;
2. Four or more technical courses;
3. Work-based learning via mentoring, job shadowing and internships;
4. Counseling and academic instruction supporting project-based learning.

CEd provides financial support, technical assistance and coaching for school districts in implementing Linked Learning pathway projects. They are currently working intensively with nine large California school districts: Antioch, Long Beach, Los Angeles, Montebello, Oakland, Pasadena, Porterville, Sacramento and West Contra Costa. The organization has awarded nearly $12 million in grants to school districts in California with support from The James Irvine Foundation. The school districts mentioned above have received implementation grants of more than $1 million each.

While Linked Learning is not the norm in California, it is a success in existing state-supported career academies in terms of higher passing rates in high school exit exams in the sophomore year, higher completion rates for challenging courses that prepare students for entry into the state college system, higher high school graduation rates, and higher income eight years after completing high school relative to their peers.

The good news is that Linked Learning has gained broad-based support in California. Linked Learning Alliance – a statewide coalition of a large number of education, business and community organizations – brings together a collective voice and effort to enhance access to Linked Learning.

In a recent conversation Gary Hoachlander said: “Within the next seven to 10 years, CEd’s goal is to make Linked Learning pathways available to at least half of the high school students in California. Precise numbers are hard to come by, but probably no more than 10 percent of California high school students are currently participating in high-quality pathways that meet the certification criteria we and our partners have developed for Linked Learning.”

With so much at stake for California we must be willing to implement successful models such as the one described above throughout our educational system quickly and effectively. Our high school students can’t wait – their future is at stake, too.

Bi-weekly “Global Village” Column Wraps Up

I have written bi-weekly “Global Village” columns on the economy for the Contra Costa Times (and associated papers) for the past 22 years. It is now coming to an end. I will miss the column but I am glad that it will free me up to do many other things that I have missed doing – including keeping my blog up to date. No more deadlines every other week. I am happy to report to you that I have never missed deadline in all these years.

I am working on a book that will be a collection of approximately 100 of my columns my readers and I have liked best. I hope to publish it by the beginning of 2012. I will let you know more about it as we complete the project.

Thank you for your helpful comments over the years. I appreciate it. I encourage you to follow my blog as I will be more actively writing going forward. Please comment and subscribe!

Plenty of Reasons for Economic Optimism

The recent downward revision of 2010 second quarter economic growth rate from 2.4 percent to 1.6 percent has once again heightened the buzz about a double dip recession. I think that it is premature to talk about the reversal of the economic recovery that started middle of 2009 based on data for one quarter.

The Fed’s official forecast of economic growth for 2010 is in the 3 percent to 3.5 percent range. The latest Economist magazine forecast for 2010 also stands at 3.0 percent. These by no means are stellar numbers but clearly indicate a modest recovery from the worst recession in our lifetime.

My concern is that continued cynicism and pessimism about the future of the economy may become a self fulfilling prophecy. It is one thing to describe a situation as a glass half empty but to deny the fact that the glass is half full is a highly risky state of mind.

A recent study by the Milliken Institute of Los Angeles concludes that the American economy remains flexible and resilient and will continue to perform modestly and remain sustainable. The study forecasts real economic growth for 2010, 2011, and 2012 at3.3 percent, 3.7 percent, and 3.8 percent respectively.

To me the all important numbers are job growth as that is our fundamental personal connection to the economy. The Milliken Institute forecast on job growth for 2010, 2011, and 2012, respectively are1.5 million, 3.1 million, and 2.6 million. This is welcome news but still does not make up for the more than 8 million lost jobs in the recession. Job growth will continue to be America’s number one challenge in the coming years. It is now a serious structural problem and not just a traditional cyclical issue. It will be a while before we return to a new “normal” in the level of employment.

There are several factors that bolster the conclusions of the Milliken Institute forecast. These include:

1 – Strong uptick in US exports because of rapid growth in Asian economies such as China and India with 2010 economic growth at 9.9 percent, and 8.0 percent respectively. Other Asian economies with strong economic performance in 2010 include Indonesia (5.9 percent), Malaysia (8.8 percent), Singapore (12.3 percent), and South Korea (6.3 percent).

2 – The European sovereign debt crisis, which several months ago triggered the initial buzz about a US double dip recession has abated considerably as indicated by a recent business and consumer survey of the Euro countries that suggests widely felt optimism about the region’s improving economic situation. The 16 member Euro Zone expanded at an annual rate of 3.9% with Germany leading the pack with an economic growth rate of 9 percent in the second quarter of 2010 (WSJ, August 31,2010). Steady job market and declining unemployment in Germany, Austria, Finland, and Italy will give a boost to the consumer goods industry. Stronger economic performance in Euro Zone will soften the adverse economic impact of budgetary austerity currently being pursued by the Euro economies.

3 – Beyond the 16 country Euro Zone, the United Kingdom has outperformed the US economy in recent months, and Sweden expects a healthy economic growth of 4.5 percent this year.

4 – The US Conference Board’s Confidence Index for August 2010 rose 2.5 points to 53.5 from 51.3 in August beating analysts’ expectations. This is good news for the sale of consumer goods.

5 – In addition rising US business confidence is resulting in robust spending on software and equipment.

6 – The US manufacturing industry has continued to expand for the last thirteen months. The Institute of Supply Management‘s (ISM) manufacturing index rose to 56.3 percent in August 2010 from 55.5 percent in July 2010.(A number above 50 indicates expansion).Key factors driving manufacturing in recent months include the rise in exports as well as business spending on capital equipment and supplies. I think that the steady rise in the manufacturing sector has been a key driver of the current recovery.

7 – The latest job data from the US Department of Labor reports that private employees added 67,000 new jobs in August 2010.This was more than the 41,000 expected by a poll of professional economists taken by the well known Thomson Reuters firm. The other positive jobs news from the Labor Department included upward revisions to June and July jobs numbers.

8 – Interest rates have been at record low with the core CPI at 0.9 percent. With inflation for 2010 expected to be around 1.7%, the Fed has been able to keep short term interest rate (Fed Funds rate) slightly above zero, which translates into a negative interest rate if we figure in inflation. This has encouraged economy wide borrowing. There is a good chance that the Fed Funds rate will remain low well into 2011 as inflation is not likely to be a threat at least in the next 16 months.

Finally, let me suggest that a double dip recession now is unlikely. History is on our side. Robert Shiller of Yale University in a May 2010 New York Times article stated that in the past when a recovering economy has recorded three consecutive quarters’ of real GDP growth, it has never slumped back into a recession after a short interval. This has been the case since 1947 when quarterly economic data series were initiated.

The good news is that so far in this recovery we have had four consecutive quarters of real economic growth (GDP) and the economy continues to grow at a modest rate. There is sound basis for Shiller’s observation. Giant economies are like freight trains; they do not stop suddenly on their tracks.

If we have a double dip recession I think it will probably happen because of self fulfilling prophecy based on fear and pessimism.

Economic recoveries such as the current one that is following a brutal recession triggered by the bust of two of our major economic sectors – housing and finance – do not proceed smoothly. Encountering potholes and road bumps should not surprise us as we continue on the road to recovery.