Office of the President
Dr. Patrick T. Harker is the 26th president of the University of Delaware. He also serves as professor of business administration in the Alfred Lerner College of Business and Economics and professor of civil and environmental engineering in the College of Engineering.
Grand Hyatt—Mumbai, India
February 13, 2013
I thank Ganesh Natarajan for the introduction—it’s a privilege to have him lead the discussion. I haven’t been back to Mumbai for a few years now, and it’s always such a pleasure to return to the city and see so many of my friends and colleagues. I’m honored to be here.
My topic today is Greenshoots in the U.S. Economy, and I imagine the most encouraging way to begin this discussion is to say: “Yes, we really see some.”
I sit on the board of the Federal Reserve Bank of Philadelphia, one of 12 Federal Reserve Banks in the U.S. that—together with the Board of Governors—forms the Federal Reserve System, the nation’s central bank. Each Fed Bank contributes an independent assessment of the U.S. economy as the Federal Reserve seeks to formulate a monetary policy that promotes maximum employment, stable prices, and moderate long-term interest rates.
The Philadelphia Fed’s CEO Charles Plosser gave a speech less than a month ago outlining his short- and long-term perspectives. In that speech he said that U.S. economic growth “has come in fits and starts, taking two steps forward … and one step back.”
His words proved prophetic when 2012’s fourth-quarter numbers were released two weeks later. The U.S. economy had contracted for the first time in more than three years—a .1 percent dip October through December.
But most agree the contraction isn’t a harbinger of worse things to come. It’s the temporary effects of deep cuts in federal defense spending ahead of the sequestration deadline—more on that later—and declining business inventories, which could actually mean an uptick this quarter, as businesses restock. So the good news is … it isn’t an omen; the bad news is … it illustrates just how fragile this “recovery” business can be.
Charles Plosser put his projections for growth in 2013 and ‘14 at about 3 percent, on par with other projections, and stronger than 2012’s 2.2 percent growth. That rate would allow for continued improvements in labor market conditions, including a gradual decline in unemployment. Falling joblessness—from 9.5 percent in 2010 to 7.8 percent in 2012—has been an encouraging trend, and Plosser predicts a rate near 7 percent by the end of this year.
If a jobless rate falling at less than a percentage point a year doesn’t seem like quick recovery—and believe me, in the U.S., it doesn’t—then you’ll want to understand something about this recession that distinguishes it from recessions past.
The U.S. entered this crisis over-invested in the housing and financial sectors. Both sectors have shrunk as a share of the economy, and now labor and capital have to be reallocated elsewhere. Building those sectors back to pre-recession highs would be foolish, as we learned the hard way that their size was simply unsustainable.
Plus, I think we’ve finally reconciled ourselves to the fact that the U.S. labor force needs an adjustment. In sectors like manufacturing, the skill gap is problematic. Employers need more highly skilled workers to deliver better efficiencies. The training and skill sets of the people being hired right now are appreciably better than those of the people who lost their jobs as the economy began sinking.
The housing bust can also be blamed for depressed consumer spending—which accounts for more than two-thirds of the U.S. gross domestic product. Plummeting housing values destroyed the equity people had in their homes—and as the market tanked, so did their savings. It’s unsurprising that individuals and families across the country are focused on rebuilding the wealth that many of them lost so quickly. Nonetheless, consumer spending rose at a rate of 2.2 percent last quarter, accelerating from the prior quarter, and business investment rebounded after its first drop in a year-and-a-half.
If sluggish manufacturing growth is understandable given the slowdown in U.S. consumer demand, it’s virtually inevitable given the turmoil in Europe and the general slowdown in global economic growth. But there is a bright spot: The Philadelphia Fed’s latest survey of regional manufacturers—a rather accurate barometer of activity nationwide—indicates that firms expect growth over the first six months of 2013, continuing a late 2012 trend disrupted only by Hurricane Sandy.
Given the length and severity of the global recession, I doubt anyone’s surprised that consumer confidence has taken a hit—that widespread uncertainty has stunted hiring and investing. But some that uncertainty is of our own doing.
And that means we have the power to turn it around. The most immediate stop-gap is one that every research university in America is anxiously advocating: a bipartisan agreement to solve the nation’s long-term deficit and avoid sequestration—an across-the-board, draconian cut of domestic discretionary spending; what Delaware Sen. Chris Coons called “an awful solution to an urgent problem.” The U.S. Congressional Budget Office halved its 2013 growth projection to 1.4 percent based on the prospect of these automatic cuts.
If the mandatory 5.1 percent cut goes through in two weeks—March 1—our biggest granting agencies will feel significant pain: The National Institutes of Health loses $1.5 billion. The Department of Energy loses $562 million. The National Science Foundation loses $286 million. And that means my University—the University of Delaware—loses $5.5 million in federal research expenditures over the last seven months of this federal fiscal year, March through September, with even deeper cuts in outlying years. That means there’s less money for our research assistants and postdocs who are paid from federal grants & contracts—and therefore less capacity to do the science that drives strong and sustained economic growth.
Ever since an emergency year-end deal obviated significant tax increases, there seems to be less political will in DC to avoid the sequestration—the so-called “fiscal cliff.” But our tolerance for inaction—for stalemates and brinksmanship—will hurt us in the end. Decimating investment in education and research isn’t the way to fiscal health and prosperity. We can enact discriminating deficit-reduction solutions—solutions that don’t cripple the country’s job-creating, economy-growing research and development enterprise.
As we look at labor productivity over the longer term, there’s always a balance to be struck between riskier strategies that yield greater economic volatility and, potentially, greater growth—and safer strategies that tend to limit both. I think we have to choose policies that improve education and innovation. I think we have to choose tax and government spending policies that put us on a sustainable fiscal path, and stimulate private capital investment, R&D, and training. I think we can simplify our tax code, and eliminate loopholes that distort incentives and resource allocation. I think we can enact financial regulations that make our markets more transparent and enhance market discipline.
There is optimism in America. Some have even used the word “sanguine.” We’re certainly not out of the woods—but it’s a lot easier now to see the clearing. And I think there are a couple of sectors where “sanguine” really does apply.
The first sector is energy—which surprises even me a bit, given that until maybe six months ago, I’d have said that the energy outlook in America was static. Steven Koonin, former undersecretary for science at the U.S. Dept. of Energy, used to say that our energy picture shifted on a decadal timeframe. Look at yesterday’s energy portfolio and I’ll show you tomorrow’s.
No longer. Increased domestic production and lower gas consumption have shrunk our crude oil imports. By 2014, the U.S. Energy Information Administration forecasts we’ll be down to 6 million imported barrels a day, about one-third of what we use. Compare that to 2005, when 12.5 million barrels a day accounted for 60 percent of our consumption. A couple of years ago, we bemoaned a billion dollars a day spent on foreign oil. We asked what would be possible if that money were spent at home. And now suddenly, people are predicting U.S. energy independence. People are plucking at dates by which America will be a net energy exporter.
New drilling techniques—for oil and for shale—change the energy game in the U.S. Natural gas changes the game. Natural gas isn’t clean, but it’s cleaner. It’s not green, but it’s greener. U.S. CO2 emissions in the first quarter of last year were the lowest on record since 1992. There were a few reasons—a warm winter; the recession-induced drop in gasoline usage. But the most significant was the drop in coal-fired electricity given historically low natural gas prices. Coal emits more than twice the CO2 per megawatt hour of electricity as natural gas.
And while it’s not renewable, it is plentiful. Plentiful enough for, conservatively, a hundred-year supply—enough to offer a bridge to the next breakout technology. Natural gas isn’t a transient resource. To the extent that any industry in America is permanent, natural gas is a big, permanent industry. And given that we have to participate in a carbon-based world—at least for now—it’s an industry with huge potential.
And not just for domestic use. The U.S. Department of Energy has recommended easing restrictions on natural gas exports, as huge reserves have driven our domestic price down to about one-quarter the cost of natural gas in Europe and Asia.
The government estimates that liquefied natural gas exports could inject $47 billion into the U.S. economy by 2020. So it’s hardly surprising that the liquefied natural gas industry has proposed 15 new terminals, three more than currently exist in the U.S.
I’m in an interesting position as president of a university with such a robust research enterprise in clean, renewable energies—and talking about one that some probably consider morally net neutral. After all, hydrogen from natural gas can refine biomass for fuel production, but it can also help leaven heavy oil. It reduces our carbon emissions, but opens the door to methane leakage. It holds promise for transportation fuels, but is stymied by a U.S. infrastructure—refineries, pipes, vehicles, filling stations—that can’t (or won’t) accommodate it.
I don’t think natural gas is the future, but I think it’s part of it. Pres. Obama says his energy policy is an “all-of-the-above” strategy, and the pragmatist in me is on board. Our entire energy portfolio will be in play for a very long time—oil, wind, solar, biofuels, natural gas. It’s just that the co-efficients will change.
Until we’re really ready to go green, until technology innovation can deliver a competitive 100% clean-energy future, we need options. What we do know—what natural gas has proved—is that cost is king; we’ll do what the market dictates.
That’s where an interesting concept hatched by a University of Delaware professor comes into play.
John Byrne was on the Nobel Prize-winning Intergovernmental Panel on Climate Change. He outlines the risks for staying on our current energy path. There’s the technological risk, which we’ve recently seen play out catastrophically in America’s Gulf Coast and in Fukushima. There’s the economic risk: The U.S. is spending a higher share of its income on energy than at any time over the past quarter-century. Because—natural gas reserves notwithstanding—we’re still dependent on sources that are being depleted. And, of course, there’s the environmental risk: We’re storing too many greenhouse gases in the atmosphere, and 80 percent of them are from energy.
Fortunately, there’s a complement to these three risks—the three ways out of our energy dilemma.
- There’s energy productivity: Making energy-usage devices smarter, making buildings smarter, making vehicles smarter. About half the carbon reduction we need will come from energy productivity because it’s the lowest cost/highest yield option.
- There’s renewable energy: Solar’s still expensive, but it boasts the fastest cost decrease of any energy technology in the last decade. Even shale gas doesn’t compare.
- And then there’s fuel cells—electrochemical devices that combine hydrogen and oxygen to produce electricity, with only water and heat as by-products.
Just an aside about fuel cells: I really believe we’re on the cusp of a revolution here, and Delaware is at the center of it. Our Center for Fuel Cell Research is doing amazing R&D on fuel cell components and systems to make them cheaper and more durable so we can scale up widespread manufacture and implementation. Our Catalysis Center for Energy Innovation is looking at direct carbon fuel cells for converting biomass to electricity. We’re in the running for a major federally funded electrochemical energy center that will work on coupling fuel cells with hydrogen generators for clean power to vehicles and buildings, and on redox flow batteries, which enable scalable storage of solar and wind power. By the end of the year, we’ll even have our fourth hydrogen fuel cell bus on campus, making ours the country’s largest university fleet.
It’s this swirling activity that’s luring industry to us. Bloom Energy, a U.S. leader in high-temperature fuel cells for stationary power applications, is building its first-ever East Coast manufacturing plant on the University of Delaware’s science and technology campus—a 200,000-square-foot factory, employing 900 people. (If you could conceive how very tiny Delaware is, you’d be impressed.)
The goal is sustained social transformation from fossil fuel combustion to electrochemical conversion. And the only way you can do that is if you do it cheaply.
There’s another technology innovating on an electrochemical platform—photovoltaic or solar electric cells, which I know are very popular in India. The University of Delaware is a federally recognized center of excellence in this technology. Our biggest sports facility hosts one of the largest building installations of solar electricity on the East Coast, and we’ve trained the bulk of industry and academic scientists leading this field. We’re now working on photo-electro-chemical processes—building solar cells into a process that produces hydrogen from water or biomass feedstocks.
We need to get these exciting technologies into our energy mix more quickly.
Sustainable Energy Utility
… Which takes us right back to energy economics: What we need to do is direct investment to these three sustainability efforts—energy productivity, renewables, and fuel cells. This is what Prof. Byrne’s Sustainable Energy Utility does. The SEU model, used in Delaware and in cities, counties, and states across the U.S., creates a market for this three-part solution.
It turns the conventional utility proposition upside down. Instead of siphoning off a portion of utility customers’ payments for investment in mega-power plants and upgrades, the SEU uses that money to invest in efforts that reduce energy consumption and increase the role of renewables and fuel cells. Savings achieved through conservation and renewablization techniques pay back the initial investment for the sustainable energy devices needed to make the equation work. There’s no subsidy, no tax or price hikes; there’s no need. This is the kind of policy and market model that can drive these technologies into wide use—quickly and with little, if any, popular pushback.
Prof. Byrne and a group of students from Delaware and Korea University just wrapped up a 12-day trip to India—to Mumbai, Thane, and the Narmada Valley—to examine India’s prospects for sustainable energy, environment, and development. Sanjay Gopal, a PhD student at Delaware—and a mechanical engineering professor at VJTI here in Mumbai—is looking at Thane as a site for the Sustainable Energy Utility as part of the International Solar Cities Initiative. Thane’s a fast-growing city whose population will ultimately approximate the world average, and it’s adopted some pioneering strategies for conserving its resources. It’ll be interesting to see whether Thane has the potential and the public will for large-scale renewablization, and how the SEU model could innovate energy consumption there.
This afternoon, Delaware Gov. Jack Markell and I are having a Google Hangout with Sanjay and some of the students in our Center for Energy and Environmental Policy, and I’m looking forward to hearing about their work.
The next sector I want to talk about is less directly—or, perhaps, less obviously—tied to the markets. It’s the sector I’ve been a part of, in one way or another, for more than 35 years. Higher education is absolutely central to how well—and how profitably—the U.S. functions. Americans tend to romanticize the university—we prize the principled disinterestedness of the academy—but that view sometimes obscures the fact that higher education is an industry—a big one.
The U.S. has 4,600 colleges and universities providing an education to 21.6 million students. Enrollment from 2006 to 2012 jumped 30 percent. Those colleges and universities employ 1.8 million faculty, and last year’s revenues and expenditures totaled $254 billion.
Of course, the research university’s value to the U.S. economy isn’t contained to employment, or stimulated spending, or even the jobs obtained by a more highly educated workforce. There’s been a significant shift over the last 30 years in the country’s academic enterprise, an acknowledgement that economic relevance doesn’t irrevocably prejudice the American university—that, by and large, academic purity is possible even when money’s on the line.
In truth, money’s always been on the line: U.S. universities have long been considered economic developers, though economy-building was derived less from effort than from an organic consequence of the academic and research enterprises.
But now universities are squarely in the center of driving economic growth. Applied research, incubation, and tech transfer have expanded dramatically. Universities are connecting their innovations with industry, and their faculty with entrepreneurs. We’re developing the ideas, technologies, products, and processes that transform state, regional, and even national economies—and, now more than ever, we’re exploiting them, too.
In 2011, the top 150+ U.S. research universities executed 5,400 licenses and options, and drew licensing income of $1.8 billion They spent $55 billion in research. They applied for 12,000 patents, and were granted nearly 4,300. They launched more than 600 startups.
Pressure on Revenue Streams
Scholarly productivity has never been higher. But it’s set against a backdrop that’s become ever more challenging.
As U.S. states face terrific pressure on their budgets, public colleges and universities can’t help but suffer. Since 2007, the country’s four-year public universities saw state appropriations fall $15.2 billion—17.4 percent. Philanthropic giving, climbing anemically in the recession’s wake, isn’t enough to make up for historic lows. And I’ve already mentioned the carpet that the U.S. Congress is threatening to pull out from under us in terms of federal research expenditures.
When you depress all of these critical levers—state appropriations, gifts, endowment, grants and contracts—there’s one remaining lever that has nowhere to go but up: student tuition. In 10 years, tuition at public four-year colleges has more than doubled; at private colleges, it’s jumped 60 percent. Last year’s average net price hike for an in-state student at a public university (the best value proposition in higher education) was 4.6 percent—more than double the rate of inflation. After scholarships, grants, and federal tax benefits, these students shell out, on average, $16,500 a year to attend their own home-state universities.
And now with total outstanding student debt in America nearing $1 trillion, and as many as one in four student borrowers behind on loan payments, some are calling higher education the next bubble.
It’s not the only one. With nearly 80 million babies born in the U.S. between 1982 and 1995—the largest generation since the baby boom—the demographic bubble that’s long benefited American colleges is bursting. The youngest members of what’s called “the echo boom” will enroll as freshmen this fall.
All of these pressures together are serious enough that, last month, the American credit-rating agency Moody’s said that U.S. colleges and universities “are at a critical juncture in the evolution of their business model,” and need to fundamentally change how they operate. Moody’s is right.
To understand how right they are, you need to know that the rise in college cost isn’t a post-crisis phenomenon. In truth, the cost of college has been rising steadily and quickly for decades. And that’s because higher education is a service industry with a service economy. And labor-intensive service economies have always been laggards in productivity. Technological advancements notwithstanding, doctors still have to log face-time treating their patients, and professors still have to put in so many class hours teaching their students. You could skimp minutes on both, but then you’re slashing quality in service of productivity.
The comparison is fitting in another way, too: Healthcare and higher education aren’t just service industries—they’re service industries employing a huge share of highly educated workers, workers whose wages are insulated from the effects of low productivity because market demand for them is so high.
So that’s the dilemma: How do you optimize the cost/value proposition of an industry so reliant on the dedicated hours of such highly skilled practitioners? As Baumol would say: How do you increase the productivity of a string quartet?
The Digital Platform
The answer is using technology to maximize impact, just as we’ve long used technology to maximize quality. Everyone in this room knows better than everyone else that we’re in the middle of another digital revolution. IT can transform how we approach the service industries and service productivity. We’ve already seen electronic medical records attack the fundamental drivers of healthcare costs. Higher education is just now figuring out how to use its exploding bandwidth.
Of course, some universities have been exploiting this wide-open platform for a couple of years now. Faculty at the country’s very best universities pioneered the MOOC—the massive open online course. MIT launched MITx and then teamed up with Harvard in edX. Udacity came out of Stanford, as did the biggest commercial MOOC operator, Coursera—with its 2.5 million registered users over 217 classes.
You’re all here to talk about disruptive technologies. This is disruptive education—a tech-forward model whose business plan is just catching up now. And despite some hiccups, it’s gaining legitimacy in an industry often reluctant to confer it. The American Council on Education just recommended that colleges grant credit for the successful completion of some of its free classes. And now some U.S. public university systems are offering free online courses—for credit—in a bid to lure paying students into their degree programs.
There’s undeniable value in the fast-crowding MOOC marketplace. Low-cost or no-cost access to high-quality college courses can do more to democratize higher education than anything we’ve seen in a long time. There’s a lot of talent and drive in America not being tapped because affordability and access are inhibited. And as the middle class emerges globally, we can serve this booming population in a way we never even conceived was possible.
It’s heady stuff. But what I see as maybe the greatest effect of education’s open-source platform is its potential to transform how traditional higher education works. There’s still incredible value in bricks-and-mortar colleges. An online community—no matter how good—isn’t the same as a classroom. An interface can’t take the place of a real one. And so if we’re going to have a traditional campus—one where students live and socialize and go to class—there better be a good reason for it. Students better get something from us—in person—that they can’t get online.
The future of higher education isn’t a MOOC and it isn’t an offline lecture. It’s a hybrid model that uses high-tech and high-touch. The dean of Delaware’s College of Agriculture and Natural Resources was working at the University of Florida when the U.S. Dept. of Agriculture slashed its funding to Ag schools by 30 percent. So Florida got together with its fellow conference schools across the southeast. One school offered this introductory course; another school offered a different one. They formed a consortium across states, linking up digitally to offer their students the full breadth of critical courses at a fraction of the price.
It’s these options and decisions that will form the basis of our discussions going forward.
- Do open, online courses for introductory material make sense? Is this how we leverage economies of scale—by adopting the online equivalent of putting more students into our lecture halls?
- How do we maximize faculty time? Can we split up course material, so that a faculty expert in one area teaches this course module, and then a different expert rotates in for the next?
- How do we orient offline instruction around high-value, problem-based learning?
- Do advanced courses come to look more like medical education—small-group clinicals with high-faculty and high-public interaction?
The great thing is that while many of you are figuring out how to put education online, it’s my job to figure out how to make the university experience better than a virtual one. It’s in this creative tension that we’ll find the true answer. And that’s when we really begin to tap the power of higher education.