I S S U E N O . 7

BUSINESSHORIZONQUARTERLY

BEYONDSTEM: EDUCATING A WORKFORCE OF THINKERS AND DOERSpg. 4

CROWDFUNDING:THE EVERYMAN INVESTORpg. 22

BIG DATAAND WHAT IT MEANSpg. 32

RISKYBUSINESS: MEASURING GOVERNMENT IMPACT

pg. 10

pg. 26

TAX REFORMAND FISCALSANITY

PUBLISHERMARGARET SPELLINGS

EDITOR-IN-CHIEFRICH COOPER

ASSOCIATE EDITORMICHAEL HENDRIX

CONTRIBUTING ROLESANDREA BITELY SENIOR MANAGER, DIGITAL MEDIA

EDUARDO ARABURESEARCHER

BRIAN G. MILLERSENIOR MANAGER, PRODUCTION

DESIGN AND LAYOUT BYADFERO GROUP

A special thanks to the U.S. Chamber of Commerce Foundation and Chamber teams that made this publication possible through their creative contributions and hard work.

Letters to the editor:BHQ@USChamber.com

Copyright © 2013 U.S. CHAMBEROF COMMERCE FOUNDATION

For several years now, there has been a lot of talk in the United States about “change.” Facing sluggish economic growth, a stubborn unemployment rate, and a business community uncertain about the future, there is no doubt America needs fresh, bold new ideas. But not all change is good—and not all change benefits U.S. businesses and workers or bolsters the country’s innovative and entrepreneurial foundation.

That is why America’s national imperative must be to develop and foster the game-changing ideas, innovations, and products, as well as skilled workers who can ensure U.S. growth and success for generations to come.

In the seventh issue of the Business Horizon Quarterly (BHQ), we explore the need for and emergence of real game changers who make progress happen. These inherently disruptive, creative, and empowering actors and actions are capable of helping industries, communities, and local, state, and national leaders to rise above long-standing obstacles to new heights of success and leadership.

For example, there is great potential in the innovation clusters and other research and development partnerships arising across the country and inspiring more students in the science, technology, engineering, and mathematics (STEM) fields that will help fuel the development of new technologies and products.

The booming growth in America’s energy resources also provides enormous potential for manufacturers and other companies to discover game-changing thinkers and strategies for advancing the U.S. industry. Technological advances, such as those offering groundbreaking access to “Big Data,” for example, are helping to reveal new ways of enhancing American programs, products, and services.

Game changers can and do emerge from all corners of the public and private sectors in the United States—and they often influence more than just the way we do business but how we live our lives. Looking ahead, we must seek out the game changers who will allow us to continue building a nation where innovation, opportunity, ambition, and risk-taking are rightfully encouraged and championed. It is the American way.

Sincerely,

Margaret Spellings

A note from the publisherGO DEEPERRESEARCH FROM THE U.S. CHAMBER OF COMMERCE FOUNDATION

The Emerging Issues division of

the U.S. Chamber of Commerce

Foundation provides research and

insight into the emerging issues

impacting the free enterprise

system and the business

community. Through its Scholars

& Fellows program, the Business

Horizon Quarterly, the Business

Horizon Series, and other content

platforms and programmatic

offerings, the Foundation seeks to

inform business and government

leaders as well as proactively

drive public debate in a future-

leaning manner.

The views expressed herein are those of the author and do not necessarily state or reflect those of the U.S. Chamber of Commerce Foundation, the U.S. Chamber of Commerce, or its affiliates.

1 | Letter from the Publisher BY MARGARET SPELL INGS

4 | GAME CHANGER: 4 | BEYOND STEM: EDUCATING A WORKFORCE OF THINKERS AND DOERS BY R ICHARD V. HURLE Y, PRES IDENT, UN IVERS I T Y OF MARY WASH ING TON 10 | RISKY BUSINESS: MEASURING GOVERNMENT IMPACT BY ANTHONY COS TEL LO, B LOOMBERG GOVERNMENT 16 | INDUSTRY, ACADEMIA, AND GOVERNMENT COLLABORATION A GAME CHANGER FOR U.S. ECONOMIC FUTURE BY MICHAEL YOUNG , PRES IDENT, UN IVERS I T Y OF WASH ING TON 22 | CROWDFUNDING: THE EVERYMAN INVESTOR BY BEN JAMIN MI L L ER , CO - FOUNDER , FUNDR ISE 26 | TAX REFORM AND FISCAL SANITY BY ALEX BRILL, RESEARCH FELLOW, AMERICAN ENTERPRISE INSTITUTE (AEI)

30 | Infographic: BIG DATA 32 | BIG DATA AND WHAT IT MEANS BY LESL IE BRADSHAW, FELLOW, U.S . CHAMBER OF COMMERCE FOUNDATION 36 | EMBRACING THE ABUNDANCE MINDSET BY TAMARA CARLETON, PH.D. , FELLOW, U.S . CHAMBER OF COMMERCE FOUNDATION

ISSUE 7 // BUsiness Horizon Quarterly

1615 H St. NWWashington, DC 20062

TABLE OF CONTENTS FEATUREGAME CHANGER

game·changernoun1. A newly introduced element or factor that changes an existing situation or activity in a significant way.

40 | IMMIGRATION REFORM: FUEL FOR AN IDLE ECONOMY BY NICK SCHULZ, SCHOLAR, U.S . CHAMBER OF COMMERCE FOUNDATION 44 | NOW MADE IN AMERICA: ENERGIZING MANUFACTURING BY JAMES SLUTZ, FELLOW, U.S . CHAMBER OF COMMERCE FOUNDATION 48 | KEEP IT SIMPLE: A NEW TAKE ON REGULATION BY BRET SWANSON, SCHOLAR, U.S . CHAMBER OF COMMERCE FOUNDATION

54 | Executive Profile: HEATHER BRESCH

56 | What you should know

58 | Scholars and fellows speak!

60 | FINAL WORD BY RICH COOPER

Based on the Merriam-Webster Dictionary, © 2013 Merriam-Webster, Incorporated

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From where I sit, it feels like the study of the liberal arts and the culmination of that education—the liberal arts and sciences

degrees—are being challenged like never before. State governors, top business executives, and parents are questioning the end products that come from liberal arts institutions. In a recent Washington Post article, a managing director of a major financial management company complained that a liberal arts education mainly created “incredibly interesting, well-rounded cocktail party guests” but not graduates who are likely to find jobs.

Unfortunately, I think that a too-narrow focus on first jobs for graduates has these folks missing the bigger point—liberal arts institutions educate for employment, but they also educate for success. That’s the “plus” in our system, our game changer, and I will come back to that later.

I must say that the frustration of critics is completely understandable: unemployment rates remain high, and college education, already shockingly expensive, is growing ever more so. Students are graduating with unprecedented debt. People are concerned about the value—the return on investment of a college degree. It’s no surprise to me when high school students and their parents approach our admissions counselors asking, “So, what kind of job will Susie be able to get with her bachelor of arts degree?” or more pointedly, “Do you offer STEM education?”

Without question, STEM (science, technology, engineering, and mathematics) is the new buzzword for those anxious about post-graduation employment. These are all disciplines in which America must

excel if it is to retain its industrial and economic strength. In his February 2013 State of the Union address, President Obama urged that we double-down on science and technology education starting in our secondary schools. To give the argument even more traction, some would widen the list of STEM professions to include educators, technicians, managers, social scientists, and health care professionals. Indeed, the talk these days in my state of Virginia is about STEM-H (for healthcare).

According to the U.S. Department of Commerce, the STEM job sector is growing at twice the rate of non-STEM occupations, but we should note some caveats. First, let’s remember that STEM workers, as identified by the Commerce Department, comprise only 5.5% of the workforce. Second, while STEM workers overall may earn 26% more than their counterparts, the greatest differential is seen in the lowest-level jobs; the higher the terminal degree, the less the earnings difference.1

Moreover, it is not a given that the only path to STEM job success is to obtain a STEM degree. About one-third of college-educated workers in STEM professions do not hold degrees in STEM. Two-thirds of people holding STEM undergraduate degrees work in non-STEM jobs. One-fifth of math majors, for instance, end up working in education. (That is a good thing, I would argue.)2 Nearly 40% of STEM managers hold non-STEM degrees.3 This data points to one of the realities of college and career: the workplace is flexible, vibrant, and often unpredictable—a moving target, if you will. It is a place where, over a lifetime, a college graduate will hold multiple jobs and may even see multiple careers.4

B Y R I C H A R D V . H U R L E Y, P R E S I D E N T , U N I V E R S I T Y O F M A R Y W A S H I N G T O N

GAME CHANGER BUsiness Horizon Quarterly FUTURE WORKFORCE

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Take Stephen Northcutt, a graduate of my university, Mary Washington in Fredericksburg, Virginia, who is now the president and CEO of The Escal Institute of Advanced Technologies. Before he began working in computer security, before he even went to college, Stephen was a Navy helicopter rescue crewman. Later, he became a whitewater raft guide, a chef, an instructor in the martial arts, a cartographer, and a network designer. Stephen came to Mary Washington to study geology, but then he became intrigued by geodetics, or global

mapping. His real strength, it turns out, was not in the technical arena. As one of Stephen’s professors said, “Stephen’s real strong point was being able to analyze the situation and know what to do.”

That’s important: numerous biographies and résumés of technology executives illustrate that even in the tech fields, the rise to the top is facilitated by non-tech degrees. A study of technology company startups by researchers at Harvard and Duke found that 47% of their CEOs and CTOs had terminal degrees in STEM subjects, but 53% had degrees in a variety of other fields—including finance, arts and humanities, business, law, and health care.5

Moreover, the CEOs of Dell, JP Morgan Chase, Walt Disney, IBM, and FedEx all have liberal arts educations.6 It’s also worth noting that Gen. Martin Dempsey, the chairman of the Joint Chiefs of Staff, and Harold Varmus, the director of the National Cancer Institute, both were English majors.7 Even Admiral William McRaven, the Commander of U.S. Special Operations Command, has a degree in journalism.

Why is this? We think it’s because the people who run things—whether divisions, departments, companies, or

state governments—are integrators and synthesizers. New York Times columnist Thomas Friedman recently updated his book, The World is Flat. He said, “I added a whole section on why liberal arts are more important than ever. It’s not that I don’t think math and science are important. They still are. But more than ever our secret sauce comes from our ability to integrate art, science, music, and literature with the hard sciences. That’s what produces an iPod revolution or a Google.”8

Virginia Governor Bob McDonnell recently invited a group of higher education leaders throughout the state to meet with five CEOs of major businesses. The idea was to have the CEOs tell us what they were looking for in college graduates. Not surprisingly, there was a chorus of approval for STEM education. The last CEO who spoke was, to my mind, a bit more strategic in her presentation. She told us that specific STEM degrees are impressive, but what her company needs most are the skills and abilities that STEM graduates learn in those disciplines, such as the ability to think critically, how to work in teams, how to communicate effectively, and how to retrieve and analyze data. In other words, this employer is

GAME CHANGER BUsiness Horizon Quarterly FUTURE WORKFORCE

looking for the types of graduates we produce in our arts and sciences institutions.

Her presentation mirrored what we have been hearing for years: CEOs and recruiters say they value occupational skills secondarily; what they value more is broader intelligence. A survey by the Association of American Colleges and Universities found that business recruiters value critical thinking, analytical ability, teamwork, and communications ability, as well as job skills, in their new hires.9

To this list I would add the ability to innovate, assimilate, and integrate across disciplines. In my own hiring, I look for creativity, optimism, and interpersonal skills as well.

You can probably see where I am heading as I circle back to the idea that liberal arts institutions are being challenged. By inference, at least, the institution that I lead, the University of Mary Washington, is one of them. First, let’s not forget that these schools are properly colleges of the liberal arts and sciences. Far too often in casual writing and conversation, the “sciences” part is left off of that phrase.

Like most liberal arts and sciences universities, Mary Washington offers a vigorous STEM curriculum. We offer degrees in math and science, including biology, chemistry, computer science, geographic information systems, environmental science, geology, physics, as well as the social sciences, business, and education (teaching). We are also pre-law and pre-med.

To those high school students and parents who ask, “Do you offer STEM,” I tell them, “Better yet, we offer STEM-Plus.”

Our STEM education is built on a broad foundation that exposes students to the arts, humanities, and social sciences. Our pure and applied science and math disciplines are all built upon our core liberal arts foundation. That’s the plus part, and it makes the ultimate difference.

We all know that the liberal arts and sciences prepare us to be better citizens, to help us understand ourselves and others. They also prepare us for business and careers. We see our university shaping the workforce of the nation and the world, providing America with graduates who have specific expertise in whatever field they choose. If it is science or technology, they will possess the ability—

numerous biographies and Résumé of technology executives illustrate that even in the tech fields, the rise to the top is facilitated by non-tech degrees.

“I added a whole section on why liberal arts are more important than ever. It’s not that I don’t think math and science are important. They still are. But more than ever our secret sauce comes from our ability to integrate art, science, music, and literature with the hard sciences. That’s what produces an iPod revolution or a Google.” - Thomas friedman, THE NEW YORK TIMES

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GAME CHANGER BUsiness Horizon Quarterly FUTURE WORKFORCE

and I am quoting from our academic catalog here—to “understand, evaluate, articulate, and advance their ideas and the ideas of others.”10 This comes from the foundation of our general education program.

The value of marrying a broad liberal foundation to the specific scientific or technical one is not lost on others. For many years, a registered nurse (RN) license was achievable through two years of specialized study at a community college or hospital setting. Recent reports from the Institute of Medicine and the Carnegie Foundation for the Advancement of Teaching have linked the education level of nurses to improved patient outcomes. As a result, the Bachelor of Science in Nursing is becoming the must-have degree. Nearly 40% of hospitals and clinics are setting requirements that new hires have a bachelor’s degree in nursing, while 77% express a strong

preference for this level of education, according to the American Association of Colleges of Nursing.11

In Virginia, the University of Virginia and Virginia Commonwealth University are accepting RNs, allowing them to take additional coursework—much of it in the core liberal arts—and rewarding their work with a Bachelor of Science in Nursing degree. Mary Washington plans to join them.

Elsewhere, Louisiana Tech and the University of Kentucky have created new programs to help math and science students move into teaching science and math. Georgia Tech, well known for its exemplary engineering programs, has taken a somewhat different tack. Its president became worried that his graduates were too narrowly focused, so he asked that admissions policies be altered to invite more students who had played musical instruments, sung in a chorus, or played on a sports team. He reorganized the computer science curriculum to combine it with nine other fields to create an “orchestra” of synthesis.12 One might say that Georgia Tech is “liberalizing” its engineering degree.

Georgia Tech’s president could have taken his direction from Steve Jobs, perhaps the ultimate techno-geek. Here’s what Jobs told us when he rolled out the iPad 2: “It is in Apple’s DNA that technology alone is not enough. It’s technology married with liberal arts, married with humanities, that yields the results that make our hearts sing.”

Jobs never got a college degree. He dropped out of Reed College his freshman year, but his interest in the liberal arts did not wane. He audited classes in calligraphy, and the sense of design he learned there found its way into the Mac. Even more important, Jobs became convinced that the greatest achievements of his businesses would take place when computer scientists worked alongside artists and designers, and he designed his workplaces so that people with these diverse intellects would be forced to rub shoulders. “One of the greatest achievements at Pixar was that we brought these two cultures together and got them working side by side,” Jobs said in 2003.13

So who brings together the scientists, the engineers, the designers, and humanists? I think you know by now what I believe. Not every one of our graduates will go on to be a Steve Jobs, but we know that they will be bigger, broader, and more creative and fearless thinkers and doers. That’s what America needs most. n

Richard V. Hurley is the ninth president of

the University of Mary Washington (UMW),

a public liberal arts and sciences university

in Fredericksburg, VA. His career in higher

education spans more than three decades,

including roles as chief financial officer,

executive vice president, and director of administration. As

president at UMW, he is an active partner in the business

community through the local Chamber of Commerce and regional

business alliances.

A survey by the Association of American Colleges and Universities found that business recruiters value critical thinking, analytical ability, teamwork, and communications ability, as well as job skills, in their new hires.

REFERENCES

1 STEM: Good Jobs Now and for the Future, U.S. Department of Commerce, http://www.esa.doc.gov/sites/default/files/reports/documents/stemfinalyjuly14_1.pdf

2, 3 Ibid.

4 Robert Burke, “Problem Solver Tackles Network Security,” UMW Magazine, fall/winter 2012, http://magazine.umw.edu/fallwinter2012/departments/alumni-profiles/problem-solver-tackles-network-security/

5 Daniel DeWise, citing Jeffrey B. Trammelll, “Thomas Jefferson’s Liberal Arts Education, The Washington Post, June 5, 2012, http://www.washingtonpost.com/blogs/college-inc/post/thomas-jeffersons-liberal-arts-education/2012/06/05/gJQA5Gt1FV_blog.html

6 Daniel de Vise, “Six tips for liberal arts colleges to produce employable grads,” The Washington Post, blog, April 1, 2012, http://www.washingtonpost.com/blogs/college-inc

7 Danielle Allen, The humanities are just as important as STEM classes, The Washington Post, Feb. 14, 2013

8 Daniel Pink, “Tom Friedman on Education in the ‘Flat World’,” The School Administrator, February 2008.

9 James H. Mittelman, “AACU survey says recruiters want critical thinkers,” letter to The Washington Post, January 6, 2013, http://js.washingtonpost.com/opinions/university-mission-and-tuition/2013/01/06/c29233f0-5359-11e2-abc4-3d33329b6128_story.html

10 University of Mary Washington, Undergraduate Academic Catalog 2012-2013, page 76.

11 American Association of Colleges of Nursing, Expectations for Practice Experiences in the RN to Baccalaureate Curriculum, http://www.aacn.nche.edu/aacn-publications/white-papers/RN-BSN-White-Paper.pdf

12 Online book summary for The World is Flat, TheBestNotes.com, http://thebestnotes.com/booknotes/World_Is_Flat_Friedman/World_Is_Flat_Study_Guide07.html

13 The New Yorker, http://www.newyorker.com/online/blogs/newsdesk/2011/10/steve-jobs-pixar.html

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At first glance, few people would describe government involvement in private business activities as a game changer. After all, the

government for more than two centuries has played a part in business activity. The Commerce Clause in the U.S. Constitution granted the federal government authority to regulate certain types of commerce.

Yet what if government’s role in business operations is increasing and even at an all-time high? That might prompt astute observers to call the government-business relationship a game changer.

One way to answer that question would be to find a smart way to measure the magnitude and impact of government actions on business.

Government Impact from a Company Perspective

Some people have already tried to measure the magnitude of the government-business nexus. They’ve counted the number of regulations enacted, tried to assess the rules’ monetary impact, or tracked legislation cleared by Congress. Yet none of these measures, together or alone, provide an absolute answer to the question of magnitude, and all of them focus solely on the government side of the relationship.

A better measurement would reflect the business perspective and might provide a deeper understanding of the effect. One way to do that is to evaluate what companies actually say about the impact of federal government actions on their business models.

In 2005, the Securities and Exchange Commission (SEC) implemented a rule for publicly traded companies to report “risk factors” in their 10-K filings, which are annual reports required by the SEC that give a comprehensive summary of a company’s performance.

Any risk factors that are known and material to the company or its industry must be cited in a specific section of the document, which ensures a more complete disclosure of risks to investors.

While a multitude of risk factors are typically mentioned—such as the macroeconomic environment, litigation, the competitive landscape, customer or supplier concentration, and reliance on key personnel—the single risk factor that appears in almost every company’s 10-K is government or political risk.

These carefully considered words, shared with investors and the public, have meaning. Bloomberg Government (BGOV) decided to evaluate and analyze these10-K risk factors across 60 companies.

These businesses are split evenly among the defense, energy, finance, health care, industrial, and technology industries, as well as between large and small companies. BGOV reviewed the risk factors listed from 2005 to 2011 and paid special attention to:

• HowmuchofthesectionisdevotedtoU.S.

federalgovernmentrisk;

• Thecomparativelocationofthefirsttime

governmentriskismentioned;and,

• Thespecificityofthegovernmentrisklanguage.

The analysis showed that company perception of government risk is growing, and that the magnitude of the relationship is significant. That means government action is a game changer.

In particular, the close study of the 10-K filings revealed five primary findings.

GAME CHANGER BUsiness Horizon Quarterly

B Y A N T H O N Y C O S T E L L O , B L O O M B E R G G O V E R N M E N T

GOVERNMENT RISK

GAME CHANGER BUsiness Horizon Quarterly GOVERNMENT RISK

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1 Government action has a material effect on business

In 2011, for five of the six industries evaluated, 25% or more of the risk factor section was devoted to government risk. When one considers that there are often at least 20 risk factors listed in each 10-K filing, having over a quarter of the section devoted to just one factor highlights its importance. No other discrete risk factor garnered as much attention as government risk.

2 Government risk is growing relative to other factors

Apple Inc. devoted more than five times the number of words to government risk in 2011 filing than it did in 2005. MetLife used more than 8,000 words in 2011 compared to only about 2,000 words in 2005. Even more telling than absolute growth, however, is the relative growth of government-related risk compared to the total risk factor section. For the 60 companies in aggregate, U.S.

government-related risk words accounted for 25% of the section’s words in 2011, an increase from 17% in 2005.

3 Government risk is growing relative to other risk factors in every industry

In 2011, 47 of the 60 companies allocated more words to government risk, relative to total words, than they did in 2005. That trend was observed across all six industries and company sizes. On average, all industries showed a material increase in allocation of government risk words relative to overall risk-related words.

4 Addressing government risk is a higher priority

Almost 75% of the 60 companies moved government risk higher, or kept it as the first item, in the risk factor section in 2011 compared with 2005. The more material risks are generally listed toward the beginning of the section.

5 Government risk is real threat

Companies over time are using more targeted government risk language in filings by citing specific pieces of legislation and regulations that pose risk. For example, in ExxonMobil’s 2005 10-K, only three general government-related risks were discussed, and no discrete threats were cited. In ExxonMobil’s 2011 10-K, seven regulations or pieces of legislation were discussed in terms of each one’s potential impact on the company’s operations.

Government Actions and Business Impacts

These findings show the magnitude of the government-business relationship is growing. That trend is easy to understand for a company such as Lockheed Martin, which derived 82% of its 2011 sales from the U.S.

government and faces the threat of shrinking contract spending. It’s not as clear for Schlumberger, an oil and gas services company, which in 2011 sold nothing to the U.S. government and derived 68% of its sales from non-U.S. operations. Yet that year Schlumberger dedicated half its risk factor section to U.S. government risk, a dramatic increase from about 30% in 2005. The two main drivers the company cited: the overall political landscape and market events.

When certain conditions surrounding one or both of these factors exist, there is a high probability of government action which often leads to significant business impacts.

The groundbreaking Dodd-Frank Act is a perfect example. This law, passed by a Democrat Party controlled Congress and White House in the wake of the recent

GAME CHANGER BUsiness Horizon Quarterly GOVERNMENT RISK

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financial crisis, certainly affected that industry and altered the way it conducted its business. The Act’s business impact goes well beyond the financial industry though. For example, a Dodd-Frank provision requires energy companies doing business overseas to disclose detailed competitive information about payments made to foreign governments for the right to explore and produce oil or natural gas. That’s a major unanticipated business impact of government action. In addition, the landmark Affordable Care Act of 2010 has also had wide-ranging effects on companies outside the health care industry.

While these laws targeted the financial and health care industries (which together accounted for 25% of U.S. gross domestic product in 2011), they also clearly demonstrated the trend that recent government action

has been far reaching, frequently posing risks across multiple industries.

What the Future May Hold

While Dodd-Frank and the Affordable Care laws were enacted when Democrats controlled Congress and the White House, the impact of government actions on business can be significant even under a divided federal government. That’s important, particularly with the current hyper-divisive atmosphere in Washington. Sometimes a significant market event alone can drive government action. For example, the Sarbanes-Oxley Act, a response to the accounting fraud at Enron and WorldCom more than a decade ago, cleared a divided Congress in 2002.

Other market-driven and political events will continue to affect corporate risk. Continued globalization, for example, leads to increased interdependencies and higher systemic risk of a market event occurring that will drive government action. Additionally, the introduction of new technologically-driven external threats, such as cybersecurity breaches, may lead to more government action. Further, with near certainty, unanticipated market events, like the 2010 Gulf of Mexico oil spill, which led to a moratorium in offshore drilling permits, will arise and result in government actions with corresponding business impacts. Two major issues that are currently high on the agenda of both Democrats and Republicans—an immigration overhaul and corporate tax changes—will have far-reaching business impacts across nearly every industry.

At one time, perusing risk factors in a 10-K filing was a task for equity investors. Today, those same words can be used to measure the critical relationship between government and business, an acknowledgement of the fact that government action has become a true game changer for corporate America. n

As Bloomberg Government’s senior

managing analyst, Anthony Costello is in

charge of overseeing analytical content.

BGOV is a comprehensive Web-based

information service, providing data,

analytical tools, timely news, and in-depth

analysis on the business impacts of government actions.

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GAME CHANGER BUsiness Horizon Quarterly EDUCATION COLLABORATION

Investments that spawn new industries, products, and services are among the smartest and, ultimately, most frugal uses of our tax dollars.

At the University of Washington (UW), it is our obligation as a public university to serve the community. Among the many important ways that we do this is by bringing to market innovations that can improve lives and change our communities for the better. Therefore, we set a goal a year ago to double the number of startup companies spun out from UW research over the next three years. We met our goal in one year. Achieving this goal brings economic benefits, to be sure, but much more important is the impact it has on the lives of real people—an impact that would only grow with improved collaboration among innovation stakeholders.

Late last year, two provocative reports examining the industry-university-government partnership in supporting U.S. research showed that, factored for inflation, the budgets for basic research through federal agencies (such as the National Institutes of Health and the National Science Foundation) have fallen by 25% over the past 20 years, relative to the U.S. GDP. These reports—the President’s Council of Advisors on Science and Technology released Transformation and Opportunity: the Future of the U.S. Research Enterprise and the National Research Council published Research Universities and the Future of America—also revealed that industry has increasingly concentrated its research on late-stage technology development and incremental improvement. The vanguard of game-changing research and innovation rests with the universities that can succeed in navigating the complex challenges of collaboration with industry and government.

In an innovation-driven economy, our economic vitality requires a significant increase in research and development. Here are primary considerations for the government, university, and industry collaboration that can make this possible.

FEDERAL GOVERNMENTIncrease investment in basic research:

If we did not understand the nature of the electron, we would not have been able to create the transistor. Investments that spawn new industries, products, and services are among the smartest and, ultimately, most frugal uses of our tax dollars. Moreover, investment in basic research should not only be through NIH and NSF funding, but also through the Department of Energy and the Department of Defense.

Innovation is vital to a U.S. economy desperately in need of job creation. University researchers are making breakthroughs across a range of subject

areas, like renewable energy, material science, medical technologies, and Big Data. To ensure these innovations grow into job-creating commercial products and services, government, industry, and academia must collaborate throughout the innovation process. Doing so will be a game changer for the country.

The federal government has a central role in funding basic research and aligning it with the public need, while universities and private industry share primary responsibility for delivering on the federal investment. For universities, moving the discoveries and ideas germinating on our campuses into the real world where they can do real good is critical to fulfilling our mission.

BY MICHAEL YOUNG, PRESIDENT, UNIVERSIT Y OF WASHING T ON

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GAME CHANGER BUsiness Horizon Quarterly EDUCATION COLLABORATION

Increase investment in translational research:

The government must work with industry to better understand the scientific and technical gates to next-generation solutions, and fund research that directly relates to solving America’s most essential needs.

Invest in affordable education by strengthening federal investment in financial aid:

Innovation comes from people. The student component of university research programs is essential. At the UW, we have nearly 6,000 undergraduates who participate in a significant amount of research each year, translating to a million hours of creating knowledge and learning to create. A unique strength of research universities is our graduates who understand the innovations of today so well that they will continue developing the innovations of tomorrow.

Invest in commercialization: The government’s Small Business Innovation

Research and Small Business Technology Transfer programs are a start, but they are underfunded. Federal grants don’t cover patent costs, nor do they provide support for university tech transfer operations and programs that foster nascent spin-out companies. In the absence of some allocation toward

technology commercialization, universities have to find alternative funding sources. Consequently, we often see a large disparity in tech transfer budgets between well-endowed private universities and state-supplemented public ones, as well as the universities that have had a big hit in their licensing portfolio and those that have not.

UNIVERSITIESStandardize terms in sponsored research and licensing agreements: Academics must work harder to demystify for industry how to work with universities. Wherever possible we must standardize and publicize sponsored research terms that include well-defined options to any resulting discoveries. We must do the same with licensing terms. For universities to best contribute to the public good, we need a model of IP management that addresses the needs of industry for clarity, certainty, and expeditiousness.

National efforts to standardize elements of the many interactions between U.S. universities and industry are an important step in reducing transaction costs for commercializing innovations. A good example is the University Industry Demonstration Project, which supports mutually beneficial collaborations, encouraging U.S. competitiveness.

Share expensive core facilities: Universities and industry can lower the overall

cost of innovation and product development by sharing high-tech research facilities. Universities and national labs provide stewardship for sustaining high-quality operations, for maintaining and upgrading equipment, and for providing training.

Shared core facilities are of greatest benefit to small and mid-sized companies, but we have many examples of the economics making sense for larger companies as well. U.S. facilities for nanotechnology research are at top universities and national labs, funded jointly by government, universities, and

Academics must work harder to demystify for industry how to work with universities.

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industry. They are open to industry users seeking access to this emerging technology, and over time, this and other cutting-edge equipment can mature into standard resources for the industry.

Recruit top-notch entrepreneurs-in-residence:

Entrepreneurs-in-residence identify opportunities and introduce valuable application targets that may not be considered by university innovators. The Entrepreneurs-in-Residence (EIR) program started by the UW Center for Commercialization (C4C) played a critical role in our university doubling the number of startups spun out annually. Each of our EIRs is committed to spinning out at least one company based on UW research. As they identify opportunities, this experienced leadership contributes directly to the growth of start-up companies in attracting funding, increasing efficiency, and improving the odds of success.

Provide Commercialization Postdoctoral Opportunities:

In the effort to move innovative discoveries to market, universities should find ways to retain the essential entrepreneurial contributions of graduate students after they complete their degree. New “post-docs” can help take technology the last-mile, to the point where it can be transferred. Retaining these

new graduates is often essential to sustaining the momentum of an emerging start-up. One way to do this is through such programs as the one launched last year by UW C4C. This program provides fellowships to graduates of advance degree programs so that they can remain at the University for a year in order to devote their expertise and energies to commercializing research developed in their faculty advisors’ labs.

INDUSTRYInvest in early-stage funds:

Needed are fiscally prudent funding models that make smart money available to early-stage companies. Early-stage venture funds are one example, as are private funds or public-private partnerships with a mission to invest in technology start-ups within a state. Another example is the W Fund, a $20 million fund established in 2012 in Washington State with an investment focus on spin-out companies from any research institution in the state. The funds are a combination of State Small Business Credit Initiative federal block grants and private investments. The W Fund’s investment committee is composed of volunteers or “talent philanthropists” who are among the most experienced venture capitalists and business leaders in the Seattle area.

GAME CHANGER BUsiness Horizon Quarterly EDUCATION COLLABORATION

Advise on industry needs: As Donald Stokes explained in his book, Pasteur’s

Quadrant, even in the case of basic research rooted in a quest for fundamental understanding, research may be “use-inspired.” We cannot leave awareness of the challenges faced by industry to those focused on purely applied research. Industry must work harder to see that federal agencies funding research and university researchers designing experiments and research programs are informed about the hurdles in next-generation product design and development.

Join industry consortia: It is important to work with industry to revitalize

the consortium model. Industry consortia that will share non-exclusively in innovation can justify investment in basic research alongside federal agencies, to take on grand challenges and to ask the perennial question: what technologies will be game-changers for our industry in five to ten years? When done well, consortia can sustain focused engagement between industry, universities, and government to pursue these open-ended questions. The National Science Foundation (NSF) offers guidance on best practices in establishing and administering effective industry consortia.

Substantial, nonexclusive engagement around basic research develops the collegiality that makes the transition from research to development easier. Companies that want to prepare for these emerging markets will develop working relationships with the research groups, and thereby share a working familiarity with each other’s needs, organizations, and people.

It is critical that we welcome the federal government’s renewed emphasis on technology development. This is where the American public will see the return on their investment in basic research. Yet, if we are to sustain an expansion of our innovation-based economy, industry and universities need to also cooperate in making the R&D system more seamless and efficient. This is an opportunity for all stakeholders in the innovation process to collaborate on developing the next big game-changing ideas, technologies, and other products that the country desperately needs.

Everyone sees that innovation is one of the economic currencies for the next century. This is not a secret. It is an open competition. The United States has long been a leader in this competition, but it will take industry, academia, and government working together for our country to stay there. n

Michael K. Young is the president of the

University of Washington (UW) and a tenured

professor of law. Prior to his appointment at the

UW, he served as president and distinguished

professor of law at the University of Utah. Young

was previously the dean and Lobingier Professor

of Comparative Law and Jurisprudence at the George Washington

University Law School. He was also a professor at Columbia University

for more than 20 years, and served as a law clerk to the late Chief

(then Associate) Justice William H. Rehnquist of the United States

Supreme Court. Young has held numerous government positions,

including deputy undersecretary for economic and agricultural

affairs and ambassador for trade and environmental affairs in the

Department of State during the presidency of the first President Bush.

Everyone sees that innovation is one of the economic currencies for the next century.

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While most politicians and pundits see last April’s Jumpstart Our Business Startups (JOBS) Act as only an incremental deregulation of small-scale

fundraising, it actually has the potential to transform the entire financial system. Called crowdfunding, the JOBS Act, once promulgated, will allow a company to solicit publicly for funds from individuals in return for equity or debt, which fundamentally changes the business norms of private markets. This will open up the finance industry to the ruthless, dis-intermediating power of the Internet.

Under current securities regulations, investment crowdfunding is essentially against the law. If you wish to raise money for your company, you cannot declare it publicly. In legal terms, such a public declaration would be a “general solicitation.” This is forbidden unless the company first files an offering with securities regulators, such as the Securities and Exchange Commission (SEC), which is an extensive, multi-month endeavor.

Alternatively, a company can raise money through pre-existing, substantive relationships, which usually are limited to a small circle of friends and family or take the form of broker-dealer networks. Since neither of these choices is terribly efficient, nor can reliably provide enough capital quickly, the senior executive or entrepreneur will usually raise money from an investment fund that spent the previous months gathering the capital.

The JOBS Act, however, effectively eliminates the ban on general solicitation, which will allow entrepreneurs to raise capital from wherever demand exists, and with the capabilities of information technologies, it will shrink financial supply chains from months to days.

The financial industry begins with the need to raise money into large pools. Most major financial players, such as the top investment banks, are not even interested in a capital pool until it has reached hundreds of millions—if not billions—of dollars. These pools may take the form of a private equity fund, venture fund, hedge fund, pension fund, asset-backed securities, or even pools of pools (e.g., a fund of funds). In each instance, however, financial managers need to aggregate enough capital to have the scale of funds on hand to capitalize on an investment opportunity when it presents itself.

Virtually every major financial company today relies on capital pooling. The primary reason is that securities laws made pools a necessity in order to finance large-scale industry. Unfortunately, the consequences of this long supply chain for capital are not just cost but also intermediation. To gather these capital pools from the real investor—teachers, doctors, small business owners, etc.—every step along the way creates one more middleman to intermediate information and decision-making. Just like carrying months of retail inventory, it becomes practically impossible to allocate capital to the right place at the right time at the right price. Not to mention it is difficult to align incentives for financial managers in an inefficient system.

In many ways, these pools of capital are a form of pre-ordered inventory to be deployed when the customer comes calling. In this case, the customer is a company, borrower, or real estate developer. This

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GAME CHANGER BUsiness Horizon Quarterly INVESTING

The Advent of “Just In Time” Financing

CROWDFUNDING:the everyman investor

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GAME CHANGER BUsiness Horizon Quarterly INVESTING

typically takes many months (and in the current economic climate, it can often take more than a year) to raise a large enough capital pool to be a viable fund in real estate, debt, or venture capital.

The parallel to the retail industry is striking. Retail stores used to carry months’ worth of inventory. Merchants had to project demand for a product, guessing at future market behavior and climate. The cost of carrying, storing, and managing all this inventory was enormous, not to mention the requirement to sell excess inventory at below market rates.

Since the 1990s, however, information technology has transformed the traditional supply chain. Major retailers have multi-billion dollar supply chain technologies to manage logistics and consumer demand data, which have shrunk inventory to what is now called “just in time” production. For instance, Apple has just five days of inventory in their supply chain, according to

Motley Fool. The same transformative power of 21st-century technology is now poised to revolutionize the financial industry.

With most innovation, the initial uses of new technology lag behind the ultimate potential. The early use of electricity in factories was simply to replace the steam power with an electric source of energy. Only later did managers realize they could power each piece of machinery separately, rather than in serial, as was necessary with steam.

When IBM invented the personal computer, consumers originally used it as an electronic typewriter.

While editing a document on a computer before putting it to paper was definitely an incremental improvement over a typewriter, it obviously underutilized the real power of desktop computing. It was not until Xerox and Apple created the graphic user interface that the computer became a wholly different and transformative technology.

And more recently, the smartphone may have initially started off as a phone with the incremental benefit of e-mail and the Internet, but the explosion of apps has reinvented the smartphone and may even make the Internet browser obsolete.

My experience running Fundrise (www.fundrise.com), one of a handful of companies currently crowdfunding equity investment online, has shown me how transformative innovation will cause this pattern to repeat in the financial industry.

Before we started our crowdfunding platform, we ran a traditional real estate development company, raising money from institutional investment funds or from high net worth individuals. Every time we had a property we wanted to acquire and develop, we prepared our marketing materials, economic projections, and legal documents in order to meet with dozens of potential investors. Raising money one person at a time or presenting to one investment company after another was time consuming and inefficient.

When we moved to the online investment platform, however, we found we could present all the investment information digitally and interact with many investors without leaving our desks (or even better, while using our iPhones). Instead of mailing thick binders full of legal documents and tracking down paper checks from investors, the investor could make the full transaction online—everything from reviewing the deal, to signing legal documents, to sending us an electronic check.

Using this type of platform to crowdfund our real estate properties, we could reach hundreds of investors in the same amount of time it used to take to reach one. The platform began merely as an incremental improvement over the existing process, using technology to leverage our existing resources for greater productivity.

With our first deals, we raised more money from more investors more efficiently, something that had not been possible before. Little did we know that the string we were pulling on tied together the web of modern finance. Because we were raising money not through intermediaries, but instead directly from people, we unknowingly cut out the brokers that dominate finance.

From the perspective of an early adopter and inventor in the crowdfunding industry, I expect that the Internet will do to capital what it did to media and commerce—completely disrupt the status quo. As newspapers, big television networks, travel agents, and big box retail stores have discovered, the Internet is merciless to intermediaries. The JOBS Act allows technology to connect investors almost instantaneously to information and opportunity, allowing entrepreneurs to raise money directly from people rather than financial institutions. This will arguably be the greatest change to fundraising since the creation of the modern day public stock market. n

Benjamin Miller is a founder of Fundrise and also co-founder of Popularise, a real estate crowdsourcing website. With 15 years of experience in real estate and finance, Miller has acquired, developed, and financed more than $500,000,000 of property in his time as managing partner

of WestMill Capital Partners and president of Western Development Corporation. He also started U.S. Nordic Ventures, a cross-Atlantic private equity and operating company. Miller has worked as an analyst for Lubert-Adler, a private equity real estate fund and was part of the founding staff of Democracy Alliance, a progressive investment collaborative.

Transformative—Not Incremental Innovation

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GAME CHANGER BUsiness Horizon Quarterly TAXES

Federal policymakers have been

consumed lately with various efforts—productive and foolish alike—to reduce the federal deficit and tame long-run debt projections. After the severe recession and a large amount of stimulus spending drove the deficit to $1.4 trillion in 2009, many lawmakers, economists, and concerned voters began a renewed effort to curb the size of government and put the federal budget on a sustainable path. Substantive, structural changes to federal health and retirement policies are necessary to achieve this goal.

Yet, such entitlement reforms are not the only changes necessary to improve the fiscal outlook and secure the well-being of future generations. A vigorous pursuit of strategies geared towards promoting economic growth is an important complement to any reforms to Medicare, Social Security, and other mandatory spending programs.

This article analyzes the economic growth prospects for tax reform in particular, offering a brief sketch of where we are today and an assessment of the potential impact that plausible, pro-growth tax reform could have on the federal fiscal outlook.

The near-term fiscal outlook has improved. The near-term budget outlook has modestly improved due to budgetary spending

caps enacted in 2011, a significant tax increase enacted in January 2013, and the sequestration provisions that took effect in March 2013. Taken together, these provisions are likely to keep the debt burden roughly constant as a share of GDP a decade from now. In other words, the debt as a share of the economy is now forecast

to remain steady for the coming decade instead of rising, as had been predicted. However, this is a fairly precarious forecast as it assumes:

1) Nonewspendinginitiativeswithout offsettingcuts;

2) Nocontinuationofvarioustaxprovisionsthatregularlyexpire,suchastheR&Dtaxcredit;and

3) Theeconomywillcontinuetogrowwithoutinterruption.

In short, the future is far from certain; more must be done.

Recent deficit reductions were generally ill-designed. While the near-term fiscal outlook has improved, it is likely at the expense of long-term growth. First, the American Taxpayer Relief Act of 2013 raised the highest effective marginal income tax rates by 7 points. Capital gains and dividend tax rates are now also 7 percentage points higher than last year. Higher tax rates make the myriad deductions in the tax code even more distortionary.

IN SHORT, THE FUTURE IS FAR FROM CERTAIN;

MORE MUST BE DONE.

BY ALEX BRILL, FELLOW, U.S. CHAMBER OF COMMERCE FOUNDATIONRESEARCH FELLOW, AMERICAN ENTERPRISE INSTITUTE (AEI)

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GAME CHANGER BUsiness Horizon Quarterly TAXES

potential growth effects of tax reform. Some models predict that certain “idealized” tax reforms could boost the U.S. economy by up to 10%, or $1.5 trillion based on the size of the U.S. economy today. In my view, though, a more realistic high-end prediction would be perhaps a 5% boost in GDP realized over ten years or more, given that these “idealized” reforms face almost zero political prospect.

Based on figures made available by the Office of Management and Budget (OMB), even accelerating the growth rate of the U.S. economy by just 0.1 percentage point per year has a substantial impact on the deficit. OMB estimates that such a boost in GDP growth would reduce the cumulative 10-year deficit by about $300 billion. Put differently, the deficit reduction achieved by the American Taxpayer Relief Act could have been realized by boosting the economy’s potential growth rate over the coming decade from 2.2% to 2.4%. Tax reform can serve that goal by removing the disincentive to save and eliminating distortionary provisions in the tax code.

Prospects for tax reform. The last fundamental overhaul of the U.S. tax code occurred in 1986, when marginal tax rates were reduced and many tax deductions, credits, and preferences were eliminated. During the 1990s, the tax reform debate shifted toward the economic advantages of a consumption tax over an income tax. In 2001 and 2003, tax rates and tax burdens were reduced significantly but without offsetting changes to eliminate existing preferences. More recently, the tax reform focus has returned to the 1986 framework: broadening the base and lowering the rates. The President’s Fiscal Commission, chaired by former Senator Alan Simpson and former White House Chief of Staff Erskine Bowles,

strongly advocated for this approach, and many in Congress have been investigating the prospects for such a reform.

Could realistic tax reform really boost the economy? Like so many policy matters, the devil is in the details. As my colleague Alan Viard and I point out in a recent article, “The Benefits and Limitations of Income Tax Reform,” revenue-neutral tax reform is unlikely to encourage more labor supply, but that’s not to say that beneficial growth effects are not within reach. As Viard and I note, “When different goods are taxed at different rates, efficiency is impeded because the allocation of resources is based partly on tax considerations, rather than costs and preferences.”

In other words, cleaning up the tax code and creating tax neutrality across classes of investments, types of goods, and forms of compensation will allow the freemarket to allocate resources based on the fundamental tenets of supply and demand, instead of the preferences imposed by government policy. If tax reform pursues those goals, a tangible boost to economic growth can be realized. n

Alex Brill is a fellow at the U.S. Chamber of

Commerce Foundation and a research fellow at

the American Enterprise Institute (AEI). A former

policy director and chief economist of the House

Ways and Means Committee, Brill also served on

the staff of the President’s Council of Economic

Advisers (CEA). Brill is also the founder of Matrix Global Advisors,

a boutique consulting firm that provides legislative and strategic

analysis of public policy matters to Fortune 500 companies engaged

in Washington strategies and financial services clients making

investment decisions.

Second, the sequester, which is scheduled to reduce outlays by $1.2 trillion over the decade, forces proportional cuts across virtually every defense department budget and equal (but smaller) proportional cuts across virtually every non-defense discretionary program. The net cut in spending is affordable and is unlikely to result in any meaningful economic impact, but the manner in which these cuts will occur is arbitrary and highly inefficient. Valuable and effective government programs are being cut alongside inefficient and wasteful ones.

The long-term outlook remains a serious concern. Beyond the ten-year budget window, the federal deficit is scheduled to increase dramatically. Last November, the Congressional Budget Office stated that, left unchecked, “spending on major federal health care programs would grow from more than 5% of GDP today to almost 10% of GDP by 2037 and would continue to increase thereafter.” Despite a recent slowdown, federal spending on healthcare is projected to increase faster than the overall growth rate of the U.S. economy in the coming decade.

It is mathematically impossible to establish fiscal balance only with tax increases while chasing spending policies that are outpacing the economic growth rate. Such an approach, in addition to adversely affecting economic growth, would require that tax burdens also grow faster than the overall economy. In short, an unsustainable spending problem cannot be solved with an unsustainable tax policy.

Tax reform is a critical component of fiscal reform. While indiscriminate tax hikes cannot put Medicare and Social Security on solid ground, tax policy remains a key component of any fiscal reform

agenda. Tax reform debates often revolve around the appropriate level of federal taxation and its distribution impact on households. Equally important, however, is resolving the way the tax code serves as an impediment to economic growth.

In broad terms, there are two primary ways that the current tax system discourages growth. First, the base of the tax system is all income. This means that the returns to savings and investment are taxed and therefore discouraged. Because the income tax lowers the return to savings, rational taxpayers will substitute higher levels of consumption in the current period for savings and investments in the future. As a result of lower savings, the economy will grow more slowly in the longrun.

Second, myriad provisions in the current income tax system lead to the misallocation of resources across the economy. The erosion of the tax base in the form of tax credits, deductions, and exclusions also leads households to shift resources in ways that would not naturally occur in a truly free market. For example, the tax benefit afforded to employer-provided health insurance has undoubtedly fueled growth in fringe benefits at the expense of wages. Other policies, such as various tax credits and deductions afforded to individuals, require higher marginal tax rates than otherwise would be needed for any revenue target. Perhaps the most economically damaging of all tax policies is the corporate tax, which stands at 35%, the highest among all industrialized countries. This high tax rate impedes global competitiveness, induces leverage, and discourages corporate investment.

Even modest growth effects from tax reform can have a meaningful impact on the deficit. Economists have long-studied the

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In antiquity, much of the world’s recorded knowledge was located in one spot: the Library of Alexandria in Egypt. Nearly every culture and empire of

that era recognized the library as the epicenter of scholarship. Today, however, information is increasingly decentralized. Alexandria’s vast repositories of papyrus scrolls could now fit onto a single flash drive. In the 21st century, digital information is being created, analyzed, and stored at an astonishing rate. Consider that 90% of the world’s data has been produced in just the last two years. This explosion of information is known as “Big Data,” and it is completely transforming the world around us.

Big Data is already an integral part of every sector in the global economy—as essential a factor of production as physical and human capital. Much of our modern economic activity simply could not function without it. The main driver of Big Data is the nearly incalculable amount of transactional data being produced by companies, financial institutions, and online intermediaries. This includes trillions of bytes of information about buyers, suppliers, and operations of critical interest to businesses and financial analysts.

As important as Big Data is today, its impact will be even more pronounced in the near future. The Big Data market is expected to grow to $16.9 billion in 2015. Gartner predicts that the expansion of the information economy will produce 4.4 million tech jobs globally. This growth will be amplified by a multiplier effect: each IT job created by Big Data will generate three more non-IT positions.

Yet working with Big Data can be intimidating, even for tech veterans and savvy startups. Because Big Data is so, well, big, it can be a difficult concept to comprehend, let alone explain. To be certain, Big Data is more of a dynamic than a “thing.” An

oft-cited McKinsey Global Institute (MGI) report defines it as “large pools of data that can be captured, communicated, aggregated, stored, and analyzed.” We might also add that this data is often so large that it exceeds the processing capacity of traditional database systems and analytics software.

Unlocking the potential of Big Data is a puzzle for business executives and entrepreneurs, but also an opportunity. Large data sets and sophisticated analytics can create new products, enhance existing services, significantly improve decision-making, mitigate and minimize risks, and produce valuable insights about operations and consumer sentiment.

SOCIAL, MOBILE, AND THE CLOUD

The next few years will represent a big tipping point for Big Data in terms of technology, market share, and economic impact. Companies already adept at data accumulation and analysis will secure their market share, while start-ups and disruptors will push aside also-rans. Peter Sondergaard argues that this transformation is being driven by the convergence and mutual reinforcement of mobile, social, and cloud technologies.

Social networks generate a tremendous amount of personalized, location-specific data about users that is tremendously valuable to businesses and marketers alike. Although networks such as Facebook are finally reaching the boundaries of audience growth, many businesses are only now integrating social media into the core of their operations. Gartner predicts that in three years, at least ten organizations will each spend more than $1 billion on social media. That investment should pay off as social network data is linked with offline and localized data to create new, highly-optimized marketing opportunities.

B Y L E S L I E B R A D S H A WF E L L O W , U . S . C H A M B E R O F C O M M E R C E F O U N D A T I O N

C H I E F O P E R A T I N G O F F I C E R , G U I D E

GAME CHANGER BUsiness Horizon Quarterly BIG DATA

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The convergence between these trends becomes clear when you consider that mobile devices are increasingly the point of entry for social networks and many other applications. The Economist notes that the number of mobile phones and tablets surpassed the number of laptops and PCs for the first time in 2011. By 2020, the number of mobile connected devices operating across the globe should reach 10 billion. The data emanating from mobile phones holds particular interest because it can be linked directly to individual users in identified locations.

The transformation of mobile devices into mobile wallets represents the most important link between Big Data and the consumer experience. Apple, Google, and Microsoft are all making investments in near field communication (NFC), a short-range wireless technology that allows for the automatic transmission of data between devices in close proximity. With a single tap, an NFC-enabled phone can download product specifications and coupons, complete payments at the register, and update shopping points in loyalty programs. The technology still has room to improve, but retailers and credit card companies see an opportunity to develop in-store shopping apps and flexible mobile payments options.

Cloud computing is a perfect complement to Big Data (and mobile data) since it offers unlimited storage space on demand. Cloud users do not have to commit to expensive software or a hardware infrastructure expansion—they can simply rent the resources they need as they go, only paying for what they use when they use it. Cloud computing usage has grown exponentially over the last few years. According to a recent IBM survey, most companies anticipate the cloud will replace on-premise servers for most or all of their needs by

2015. Most importantly, the combination of mobile devices and cloud servers makes Big Data completely decentralized. Big Data is now truly everywhere—and on the move.

Along with increased mobility comes context-aware computing—a mix of location awareness, social network integration, and smartphone hardware such as cameras and microphones. These components currently operate separately, but the next leap in mobile computing will occur as they begin to interoperate and connect. Today, less than 1% of all physical objects are connected to the digital network. Yet that number will only grow as connected devices become ubiquitous, and previously low-tech industries become digitized. This new wave of tech development will enhance the way we interact with all digital devices—but it will also put a new focus on existing privacy and security concerns.

BIG PRIVACYPersonal and private data is collected about

consumers all of the time with little to no publicity, leading some observers to cite the specter of Orwell’s Big Brother. Digital skeptic Nicholas Carr argues that Big Data could soon produce a “nightmare world” where “moment-by-moment behavior of human beings—analog resources—is tracked by sensors and engineered by central authorities to create optimal statistical outcomes.” The promise of Google Glass also suggests a world in which we may be recorded at any time, without our knowledge. Alistair Croll at O’Reilly Radar makes the case that Big Data is a civil rights issue: the same technology that can personalize marketing can also be used to discriminate against particular demographics. And as one might suspect, this could eventually result in restrictive federal regulations.

There is certainly historical precedent for such policy. In the 1960s, Congress was forced to take action in response to public outcry about “redlining”—the banking practice of marking a red line on a map to delineate neighborhoods where they would not invest. The Fair Housing Act of 1968 prohibited redlining based on race, religion, sex, familial status, disability, or ethnic origin. Complaints concerning telemarketing calls to homes led to the establishment of the National Do Not Call Registry in 2004. Three years later, 72% of Americans had registered their phone numbers on the list—completely decimating the telemarketing industry. Companies dependent upon Big Data could experience a similar decline should data collection and application become restricted behind red tape and litigation.

Businesses would be well advised to stay in the good graces of both the public and legislators by developing internal privacy best practices that aim to keep your databases secure, limit the exposure of your customer information, and make sure the information you collect on consumers doesn’t turn into a public relations disaster.

GOING BIGThe significance of Big Data to businesses, marketers,

and the entire global economy is well established. One important caveat hasn’t been emphasized enough

though: without strategic vision and careful planning, even a treasure trove of Big Data will only serve to distract business operations rather than drive business success. Indeed, the problems previously associated with “small” data—unreliability, lack of context, relative value—are only amplified as they grow larger. As The Economist has sagely observed, Big Data is ultimately ”no substitute for sound intuition and wise judgment.”

Business leadership, then, is the critical link between data and data-driven success. Skillful executives will seek out the best tools, the best people, and the best information. Through forward thinking planning, today’s companies can become tomorrow’s data leaders. n

Leslie Bradshaw is a fellow at the U.S.

Chamber of Commerce Foundation and the

chief operating officer at Guide, a software

company focused on turning online news and

blogs into video. Prior to launching this new

venture, Bradshaw co-founded and served as

president and chief operating officer of JESS3, a creative interactive

agency specializing in data visualization and visual storytelling.

Bradshaw, a Phi Beta Kappa graduate of the University of Chicago,

also is a regular contributor at Forbes on the topic of female

entrepreneurship.

GAME CHANGER BUsiness Horizon Quarterly BIG DATA

Personal and private data is collected about consumers all of the time with little to no publicity, leading some observers to cite the specter of Orwell’s Big Brother.

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A simple change in viewpoint can make a powerful difference for business leaders. An abundance mindset is a game changer that

changes how the rules of innovation are perceived.

two mindsets//

Not enough jobs, not enough funding, not enough invention, not enough patents, not enough innovation—not enough. This language is symptomatic of a scarcity mindset. A scarcity mindset, within reason, helps ensure we keep our focus. The scarcity mindset helps us to plan, budget, and forecast, all so that we may run a lean business, allocate our resources wisely, and act carefully within our limits.

An abundance mindset focuses instead on the emergence of new opportunities and the creation of new options, which in turn leads to bigger thinking. With an abundance mindset, people ask “what if ” and “why not?”

With an abundance mindset, opportunities for more learning and successes are equally celebrated as milestones toward a longer and oftentimes larger vision. Once you start to look for more, you soon see more everywhere around you, and you begin to expect more too.

Business author Steven Covey discussed this “abundance mentality” in his 1989 bestselling book, The Seven Habits of Highly Effective People. An abundance

GAME CHANGER BUsiness Horizon Quarterly ABUNDANCE

BY TAMARA CARLET ONFELL OW, U.S. CHAMBER OF C OMMER CE F OUNDATION

CHIEF OPERATING OFFICER, INNOVATION LEADERSHIP BOARD, LL C

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GAME CHANGER BUsiness Horizon Quarterly ABUNDANCE

mentality occurs when a person believes there are enough resources and success to share with others, and Covey argues that turning this belief into a personal habit soon leads to leadership results.

Business guru Jim Collins refers to the abundance mindset as a shift in attitude as “the genius of the ‘and’ versus the tyranny of the ‘or’.”

two examples//

The abundance mindset is apparent in the use of genetically-modified (GM) crops. Supporters make the argument that GM crops can produce more food safely and consistently at a cost that addresses the needs of both first-world and developing nations. GM producers have invented crops that resist disease better, reduce carbon emissions, and use less land and water for the same output. Farmers in traditionally emerging markets see these inventions as the potential foundation of a third green revolution.

While the United States has become the largest producer of GM crops, the impact is occurring globally. According to a recent report by the independent International Service for the Acquisition of Agri-Biotech Applications (ISAAA), developing countries are now growing more hectares of GM crops than rich countries.

A second example occurs in the business of academic publishing. In the traditional model, research is controlled by an extensive peer review system maintained by journal publishers who provide quality control and re-distribution of research. University and corporate libraries support this practice by purchasing expensive subscriptions, so that the same researchers who performed the research can gain access to the distribution network.

An abundance mindset around open-access to research, notably work performed on government grants, has already shifted perceptions of the academic publishing model. Dozens of high-quality, open-access journals have launched in recent years, allowing scientists to bypass publishers and share their work directly with research communities through alternative channels. Nature Publishing Group, which owns the prestigious journal Nature and 81 other scholarly journals that operate under the traditional model, recently bought a controlling stake in Frontiers, the fifth-largest open-access publisher. Changes are afoot.

The government has also pushed for open access to publicly financed research, arguing that citizens should not pay twice in taxes and subscriptions fees to access research. In February 2013, the White House Office of Science and Technology Policy (OSTP) told U.S. federal agencies to make the research they support available for free within 12 months of publication. The European Union is considering a similar approach.

what leaders can do//

Business leaders can easily cultivate a mindset of abundance. Abundance thinking is a profound shift that quickly changes how people orient to one another, to future opportunities, and to the potential for more.

Leadership strategies can be addressed at personal, team, and company levels—which, together, build a powerful shared mindset of abundance. A variety of possible strategies are highlighted in the accompanying table.

In his 10 years as CEO and president, Doug Conant helped refocus the Campbell Soup Company, a producer of canned soups and food products. He had a long-time practice of writing 10 to 20 personal notes a day to his employees, which he attributes to his “fierce resolve” as CEO and also to an abundance mentality.

In an interview with MIT Sloan Review, Conant explains, “People spend more of their waking hours either working or thinking about work than anything they do, including being with their loved ones. They want that time to be associated with a worthy endeavor. That’s part of what [Steven] Covey framed as the abundance mentality. It’s not one or the other, it’s both. My observation is that increasingly, companies are finding the power of abundance thinking. I find that to be one of the more encouraging trends in the corporate landscape.”

By embracing an abundance mindset, business leaders can become more innovative and growth-oriented in their own worlds—and create more role models like Conant around them. n

Tamara Carleton, Ph.D., is a fellow at the

U.S. Chamber of Commerce Foundation and

is the founder and chief executive officer of

Innovation Leadership Board LLC, a global

leader in the design of tools and processes

that enable radical innovation. Previously,

she was a fellow with the Foundation for Enterprise Development

and also for the Bay Area Science and Innovation Consortium.

A former management consultant at Deloitte Consulting LLP,

Carleton specialized in emerging solutions in enterprise

applications, customer experience, and marketing strategy.

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GAME CHANGER BUsiness Horizon Quarterly IMMIGRATION REFORM

BY NICK SCHULZSCHOL AR, U.S. CHAMBER OF C OMMER CE F OUNDATION

With the U.S. economy continuing to be stuck in idle and unemployment trapped at alarmingly high levels, it’s a good time to look for game

changers—events, policies, and people that might significantly disrupt the status quo and propel the American economy forward.

To unearth those game changers, it helps to consider some of the nation’s history as a guide. As with earlier disruptive periods in America’s long-unfolding economic story, the game changers often come from beyond our shores. Simply put, we need to bring more of the world’s most talented people to the United States.

To understand why a new wave of skilled immigration might fundamentally change the game here at home, it’s important to understand what makes the U.S. economy unique. After all, a game changer for America might not work for a country like Japan, Sweden, or India.

Three things, when combined together, make the United States almost uniquely suited to benefitting from a wave of skilled immigrants.

The United States is the dominant nation today at the technology frontier. Given its size, the diversity of its work force, and its unrivalled research universities and technical institutes, American innovators are always pushing the technological envelope. This is true in areas as diverse as information systems and communications, biotechnology, manufacturing, energy, pharmaceuticals, and more.

For the United States to continue to grow rapidly, it must advance that frontier. Aspiring nations can grow by copying or adopting the best technologies, as well as methods developed by other nations—practicing what Brink Lindsey calls imitative growth. Often that means imitating what the United States has done in the past.

By definition, the United States can’t imitate itself. The United States has to keep pushing forward—it must practice what Lindsey calls innovative growth, which comes from developing and deploying ideas in original ways.

For this reason, talented immigrants—brimming with fresh perspectives and human capital—can play a vital role in helping the American economy push forward through innovative activity.

It’s difficult to overstate the importance of immigrant-entrepreneurs to American political, economic, and technological success. Think of Alexander Hamilton, the nation’s first Treasury Secretary; or the industrial giant Andrew Carnegie, who came from Scotland and remade American business and philanthropy; or Intel’s Andy Grove, who fled communist oppression and found a safe haven the United States and went on to build what some regard as the most important technology company of the

america is at the technology frontier

america has a history of successfully integrating immigrants and unleashing their talents

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GAME CHANGER BUsiness Horizon Quarterly IMMIGRATION REFORM

20th century; or Elon Musk, the serial entrepreneur who is breathing new life into America’s electric car industry and private-sector space enterprise.

No other nation of comparable size can boast a record of welcoming immigrants and providing an ecosystem within which they could flourish.

That ecosystem consists of many interconnected and self-reinforcing parts—a system of private property rights; deep and varied capital markets; a tolerance of risk-taking and failure; an openness to new ideas and new business models; a culture of “venturesome consumption” in Amar Bhide’s phrase, that yields a market of buyers willing to try new technologies and models of commerce and enterprise.

It is not as if there aren’t other countries that are technologically sophisticated. Consider Japan, one of the great technological and industrial success stories. Unlike the United States though, Japan does not have a rich tradition of welcoming immigrants and permitting them to reach for the stars.

One of the many things that attract aspiring entrepreneurs to the United States is the breadth and variety of its marketplace.

The United States offers a continental economy with a huge, educated, and growing population. This gives aspiring immigrant entrepreneurs a higher degree of confidence, such that their innovative ideas might find that critical initial niche to get off the ground.

Smaller nations, or countries with a less dynamic and free consumer sector, understandably hold less appeal.

In addition to being large, the United States economy is quite competitive. Firms large and small compete with one another vigorously for market share. A primary

way of innovating is by adopting new technologies to get a leg up on their competitors. This competition dynamic ensures that entrepreneurs will be confident that innovations they develop will at least get a hearing from private firms looking for advantages in the marketplace.

America clearly offers so much potential to skilled immigrants; what might America receive in return? Fortunately, there is ample research documenting the enormously beneficial effects of skilled immigrants on the American economy and the U.S. labor market.

Madeline Zavodny of Agnes Scott College and the American Enterprise Institute recently studied the effect of skilled immigrants, such as those with science, technology, engineering, and math (STEM) degrees, on the job market. She found that adding 100 foreign-born workers in STEM fields with advanced degrees from American colleges was associated with more than 250 new jobs for native-born Americans.

Temporary foreign workers also have a beneficial effect on the job market. For example, for every 100 holders of H1-B visas, Scott found an associated increase of 183 jobs for U.S. citizens.

Skilled immigrants are more likely to start new businesses, something an economy at the technology frontier needs in order to catapult forward. Skilled immigrants are also disproportionately represented in our high-growth sectors, such as telecommunications, biotech, and health care. They are also more likely than natives to file patents, a sign of their importance in an economy built on human ingenuity, science, and technological advance.

So what part of the American game needs to change? The United States would benefit from a fundamental

rethinking of its approach to immigration. As Pia Orrenius of the Dallas Federal Reserve recently noted, “The United States issues about 1.1 million green cards a year and allocates roughly 85% to family members of American citizens or legal residents, people seeking humanitarian refuge and ‘diversity immigrants,’ who come from countries with low rates of immigration to the United States. The remaining 15% go to people who are immigrating for work reasons—but half of these are for workers’ spouses and children, leaving a mere 7% for so-called principal workers, most of whom are highly skilled. No other major Western economy gives such a low priority to employment-based immigration, and for good reason: these immigrants are the most skilled and least likely to be a burden on taxpayers.”

Here’s the kicker. Changing our approach to immigration costs the nation absolutely nothing. As Washington debates various trade-offs between spending cuts and revenue enhancements, changing the game on immigration offers something for everyone. It’s a blessing to those many aspirational immigrants, to be sure. Yet, it also boosts the American economy and boosts job prospects for the native-born. Moreover, it doesn’t require raising taxes or cutting cherished spending programs.

Most game changers in life are hard. This one is easy. There’s no time to waste. n

Nick Schulz is a former scholar with the U.S.

Chamber of Commerce Foundation as well

as the former DeWitt Wallace fellow at the

American Enterprise Institute. He has been a

frequent contributor to the Business Horizon

Quarterly from its beginning. Schulz now

serves in the private sector.

america has an enormous, dynamic marketplace of goods, services, and ideas

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A merica has a competitive advantage in energy compared to the rest of the world. We have some of the most advantageous

natural gas prices, resulting from the growth of shale gas production. This wasn’t always the case. In the mid-2000s, energy intensive industries reduced production and closed facilities. Manufacturing companies looked for opportunities to move facilities to regions of the world with more favorable energy costs. Today, shale oil and gas has changed the outlook for “Made in America.” Fifty new major industrial projects have been announced, including petrochemical, steel, and fertilizer manufacturing.

The American Chemistry Council estimates that growth in manufacturing will entail $72 billion in capital investment and construction activity and a 7.3% manufacturing expansion. This growth will contribute 662 thousand direct and indirect jobs and contribute $342 billion to the economy.

Several studies look at the direct economic benefit of energy production. The economic benefit of abundant energy goes far beyond the immediate benefit of production and beyond the political rhetoric of energy independence. Energy abundance offers real opportunity to renew America’s manufacturing base.

Energy in Manufacturing

Manufacturers use energy in a variety of ways. Energy intensive manufacturers use energy products as feedstock or have significant heating or cooling applications critical to the manufacturing process. Less energy intensive manufacturers use energy for machinery, transportation, and operating facilities.

Energy intensive industries include petroleum refining, chemicals, steel, aluminum, paper, glass, and

fertilizer manufacturing. Many of these industries require energy in the form of heat to transform a raw material, such as iron ore, into a finished product, such as steel. For others, such as fertilizer, chemical, and oil refining manufacturers, the energy products supply both raw materials and heat to create their products.

In energy intensive industries, energy is a critical component of the variable production costs. The more products made, the greater the energy and raw materials used in the process. A competitive advantage in energy cost is a game changer for these industries.

Even for less energy-intensive manufacturers, energy can have an important impact on the bottom line. The recent shale gas discoveries have lowered prices both for natural gas and for electricity, since natural gas is a growing fuel for power generation. As energy is a fixed cost for small manufacturers, any reduction in the cost directly increases the bottom line. If their energy expense is 5% of operations, then a 40% decrease in energy expense reduces total costs by 2%, which is a very real addition to profitability. Increasing company performance directly facilitates business growth.

BY JAMES SL UTZFELL OW, U.S. CHAMBER OF C OMMER CE F OUNDATION

PRESIDENT AND MAN AGING DIRECT OR, GL OBAL ENER GY S TRATEGIES LL C

GAME CHANGER BUsiness Horizon Quarterly ENERGY

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GAME CHANGER BUsiness Horizon Quarterly ENERGY

Petroleum refining is an energy intensive process and manufacturing gasoline, diesel, and other products provides an example of the impact of competitive energy supply and prices. The input is a raw material—crude oil—and the output is gasoline, diesel, specialty chemicals, and other products. The process to convert crude oil to usable products requires energy to distill the various products and hydrogen to change the chemistry of some hydrocarbons into other useable products. The energy and the hydrogen come primarily from natural gas. To make each barrel of refined product requires 500 to 800 cubic feet of natural gas per barrel of crude oil, depending on the quality of the oil.

U.S. refining businesses have a significant competitive advantage over foreign refiners because of natural gas prices. If we assume a natural gas price of $4.00 per thousand cubic feet (MCF), then each barrel of crude oil requires $2.00 to $3.20 of natural gas for a refinery in the United States. If the refinery

is in Rotterdam, where gas prices are about $11.00 per MCF, then the cost of natural gas required per barrel is $5.50 to $8.80. In Asian countries relying on Liquefied Natural Gas (LNG) imports, a natural gas cost of $16.00 results in the cost per barrel of $8.00 to $12.80. To understand the extent of the advantage, it is useful to note that the margin per barrel of refined product has historically been around $3.00 a barrel. Current natural gas prices have greatly improved the global competiveness of U.S. refineries compared to those in Europe and Asia.

While the above analysis is a simple review of one component of a complex business involving many more variables, it illustrates the impact of energy abundance on one industry. It is not just about making oil refineries—an industry with historically thin margins—more profitable. The refiner’s competitive advantage results in running their manufacturing facilities at greater capacity, which increases domestic fuel supplies.

The excess production can be exported, increasing economic output for the country. In 2011, the United States became a net exporter of refined products, reversing decades of being a refined-product importer.

Energy and Manufacturing Future

Current North American energy abundance is the result of innovation and private sector investment. Government policies that restrict development or prevent the market from working effectively may reduce the benefits this energy competitive advantage offers to Americans and to our manufacturing industries. The best way to ensure the highest value for our economy is to allow the market to work in the manufacturing and energy sectors.

For energy, markets will effectively allocate energy production, particularly natural gas and oil, to uses that generate the highest return for their owners. Oil is a global commodity, so any restrictions on trade will not provide long-term price benefits to consumers. Restrictions can have an adverse effect if the result is decreased investment and production. Furthermore, North America has a structural competitive advantage in natural gas because of the high cost to liquefy and ship natural gas. The cost of liquefying and shipping natural gas to Asia is approximately $6.00 per MCF, almost two times the current gas price. This incremental cost will limit the amount of LNG exports and continue the U.S. comparative natural gas price advantage for the foreseeable future. The more energy we produce, the better our competitive advantage. Polices that discourage supply or restrict demand potentially reduce energy investment.

For manufacturers, the best energy policy encourages long-term productive energy development. At present, abundant energy supplies mean exceptional opportunities for energy intensive industries. If the United States can maintain its energy advantage over the coming years, the projected $72 billion in manufacturing investment and construction referenced earlier will be only the beginning of a long-term trend resulting in greater job growth. While we don’t know what the future holds, relying on markets, while sometimes resulting in higher prices, will provide the price signals necessary to usher in entire new resource opportunities.

The shale oil and gas resources are an example of markets and innovation working together. These new resources offer energy supplies for the next 50 to 100 years. Innovation will change our energy future, although when and how is unknown. With history as a guide, we can maximize the value of these resources now, and trust markets and innovation to find our next energy breakthrough. n

James Slutz is a fellow at the U.S. Chamber of

Commerce Foundation and is the president and

managing director of Global Energy Strategies

LLC, focusing on energy project development

and technology commercialization, primarily

with oil and gas environmental applications. He

serves on the Advisory Boards of Hart Energy Publishing, the Canada

Institute of the Woodrow Wilson International Centre for Scholars, and

the University of Southern California’s Center for Geothermal Studies.

Slutz is also a Distinguished Associate of FACTS Global Energy. Prior

to founding Global Energy Strategies, Slutz served in roles as the

Assistant Secretary of Energy at the U.S. Department of Energy as well

as the Indiana Oil and Gas Director.

Valero Energy is the world’s largest independent refining company with 13 refineries in the United States. One of Valero’s refineries, Three Rivers Refinery in Texas, was slated for possible sale in 2008 because it was only marginally profitable. Shale oil and natural gas have changed the prospects for the refinery and the people working there. Crude oil from the Eagle Ford shale formation, along with lower natural gas prices, has saved $665,000 a day and raised profits by 400%. Once a marginal asset, Three Rivers Refinery is now a valuable facility. For Valero, lower natural gas prices have saved the company more than $1 billion annually since 2008.

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The complexity of the modern world can seem overwhelming. The world moves faster every day, and despite obvious advances in

technology and living standards, public officials see the chaos of life and seek ways to soften the world’s edges. The great temptation is to match the world’s growing complexity with corresponding rules and programs that help citizens and firms navigate the tumult.

Evidence increasingly suggests, however, that the content, number, and unforeseen interplay of these multiplying rules is doing far more harm than good. The economy’s continued underperformance, therefore, offers an opportunity to fundamentally reexamine our approaches to regulation and public finance. We believe such a reexamination will suggest a stark new path: one that demands simple rules for a complex world.1

Two examples highlighted below suggest bad rules can even begin with the very best of intentions. Yet, the results can be catastrophic.

A LABOR MARKET EXAMPLE

In the wake of the Great Recession, the employment-to-population ratio has dropped to around 58% from an average in the decade preceding the Great Recession of around 63%. Beyond the official unemployment rate, millions of Americans have stopped working. The initial wave of Baby Boomer retirements explains only a small part of this work slump. One of the prime culprits is our well-meaning but complex social safety net, which too often hurts the people it is meant to help.

Gary Alexander, the public welfare commissioner of Pennsylvania, summarized the complexity and perversity of the safety net in a simple chart.2 Programs like Medicaid, food stamps, the earned income tax credit (EITC) and other cash support, child care, Head Start, and housing, heating, and transportation subsidies are

intended to mitigate hardship. The compounding effect of these programs, however, often discourages work and marriage, and, over time, depletes human capital.

As Alexander shows, a single mother, taking advantage of the transfer programs, is better off earning $29,000 a year than she is earning $69,000 a year. The value of the benefits declines much faster than her income rises. I have drawn two additional dashed black lines to show other extreme perversities: in terms of total net income and transfers, the Pennsylvania single mother is better off making $9,000 than $64,000. She is even better off earning zero than she is earning $50,000! At many points along the income curve, her marginal tax rate is well over 100%.

Casey Mulligan, an economist at the University of Chicago, thinks these and other support programs, such as unemployment and disability insurance, are a chief cause of the prolonged economic slump. In his book, The Redistribution Recession, Mulligan estimates that as unemployment, food stamps, disability, and other programs were expanded during the downturn, the average marginal tax rate for this income range jumped to 48% from 40%.3 BY BRET S WANSON

SCHOL AR, U.S. CHAMBER OF C OMMER CE F OUNDATIONPRESIDENT, ENTR OPY EC ONOMICS

PRESIDENT, ENTR OPY CAPITAL

GAME CHANGER BUsiness Horizon Quarterly REGULATION

THE COMPLEXITY OF THE MODERN WORLD CAN SEEM OVERWHELMING. THE WORLD MOVES FASTER EVERY DAY, AND DESPITE OBVIOUS ADVANCES IN TECHNOLOGY AND LIVING STANDARDS, PUBLIC OFFICIALS SEE THE CHAOS OF LIFE AND SEEK WAYS TO SOFTEN THE WORLD’S EDGES.

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These policies don’t affect everyone in the same way. At the margin, however, these policies discourage work and human capital formation—and thus, economic growth.

A CAPITAL MARKET EXAMPLE

There is another recent example where the interaction of multiple well-intended rules has been even more dynamic, unpredictable, and acutely harmful. The financial panic of 2008 was the biggest economic calamity since the Great Depression. The proximate

cause was a housing boom and bust, especially in subprime mortgages. Yet, as Federal Reserve Chairman Ben Bernanke noted, “The stock market goes up and down every day more than the entire value of the subprime mortgages in the country.”4 The collapse was far sharper, bigger, and more complicated than a mere housing downturn could explain.

Who could have predicted that four sets of well-meaning and seemingly unrelated policies, offered by smart and reasonable people, would combine to yield an historic crash? Each of these policies could be defended

at the time, and many defend these policies even in retrospect. Some of the policies even achieved their intended effects. One does not have to oppose these policies, in part or in whole, to acknowledge how they mixed to form a poisonous brew.

• FannieMaeandFreddieMacsubsidizedhome lending and borrowing.

• TheFed’s1%rate(andsubsequentnegativereal interest rates), along with Treasury’s weak-dollar policy, inflated prices of hard assets such as homes, oil, and other commodities.

• Inanattempttoencouragebankstoholdsafe assets, Basel capital guidelines and the Recourse Rule of 2001 created insatiable demand for “AAA” securities.

• Targetingfinancialtransparency,mark-to-market (fair value) accounting instead created opacity and helped detonate and sustain a panic.5

In 2006, the housing market peaked and subprime mortgage delinquencies and defaults began to rise. Yet, as Bernanke noted, the size of this market was not nearly large enough to sink the entire economy.

Banks had accumulated mountainous piles of AAA mortgage backed securities (MBS) to fulfill capital guidelines under Basel and the Recourse Rule. After home prices peaked, arguments erupted about the true value of these mortgage securities. These arguments would stretch out for years, but because of the practice of mark-to-market accounting, these “marks” were now treated as real prices and they filtered through financial markets.

THE WELFARE CLIFF THE CRISIS VORTEX

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The industry had packaged millions of mortgages into complex securities designed to achieve AAA ratings. The inclusion of faltering subprime mortgages in some of these AAA bonds meant some of the AAA ratings were suspect. Many, or even most, of the world’s AAA bonds, however, were in fact fairly described as AAA. The rules, regulators, and accountants, however, found it very difficult to discriminate. Firms were forced to mark “prices” in an illiquid, non-functioning market.

These indiscriminate mark-downs spread in waves across the financial landscape.6 Mark-downs reduced bank capital. To maintain their regulatory capital floors,

firms had to sell more assets. Prices fell further. Capital plunged again. Ad infinitum. It was a fire sale, a panic.

This series of events led to an historic lending contraction. In all, $500 billion in mark-downs of MBS and other asset-backed securities led to trillions in reduced lending capacity. The interaction of housing and monetary policy and capital and accounting guidelines amplified the impact beyond almost anyone’s worst imagination. As John Allison, the former CEO of BB&T bank concluded, “Accounting systems should never drive economic activity. They should reflect it. Fair-value accounting significantly contributed to the collapse of liquidity in capital markets (in 2007-2009).”7

A PATH TO PRO-GROWTH POLICY

We could easily supplement the preceding two stories. The U.S. tax code, for example, is an infamous morass. Or consider that even as we write rules for a new Internet age, the Communications Act of 1934 still mandates the deployment and maintenance of copper wires and telephone switching equipment that ever-fewer people use. Complex rules can distort markets and hurt the economy directly. They also do so indirectly, by diverting resources toward unproductive activities. Vast sub-industries of lawyers, accountants, and consultants are needed to navigate, avoid, and exploit government’s complex web.

The challenge is greater than ever because policymakers and regulators increasingly are succumbing to the temptation and offering ever-more complex rules for a complex world. The Dodd-Frank financial reforms, for example, fill 2,319 pages and call for 243 new rules. The Volcker Rule alone is 298 pages. Obamacare, likewise, is more than 900 pages, and regulators have already issued more than 3 million words of accompanying rules.

As a first step toward the development of a systematic way of evaluating public policy, we submit the following table listing some attributes and examples of both good rules and bad.

In a remarkable essay called “The Dog and the Frisbee,” Andrew G. Haldane of the Bank of England perhaps said it best:

Because complexity generates uncertainty, not risk, it requires a regulatory response grounded in simplicity, not complexity.

Delivering that would require an about-turn from the regulatory community from the path followed for the better part of the past 50 years. If a once-in- a-lifetime crisis is not able to deliver that change, it is not clear what will. To ask today’s regulators to save us from tomorrow’s crisis using yesterday’s toolbox is to ask a border collie to catch a frisbee by first applying Newton’s Law of Gravity.8 n

Bret Swanson is a scholar at the U.S. Chamber

of Commerce Foundation. He is also the

president of Entropy Economics, a research

firm focused on technology and the global

economy, and of Entropy Capital, a venture

firm that invests in early-stage technology

companies. In addition to serving as a scholar

at the U.S. Chamber of Commerce Foundation, Swanson is a

“Broadband Ambassador” of the Internet Innovation Alliance and

is a trustee and investment committee member of the Indiana

Public Retirement System (INPRS). Bret Swanson writes a column

for Forbes and often contributes to the editorial page of The Wall

Street Journal.

REFERENCES 1 Epstein, Richard A. Simple Rules for a Complex World. Harvard University Press. 1995.2 Alexander, Gary. “Welfare’s Failure and the Solution.” American Enterprise Institute. July 2012. http://www.aei.org/files/2012/07/11/-alexander-presentation_10063532278.pdf3 Mulligan, Casey B. The Redistribution Recession. Oxford University Press. New York. 2012.4 Financial Crisis Inquiry Commission. Financial Crisis Inquiry Report. 2011. p. 227.5 For additional critiques of mark-to-market (fair value) accounting, see: Isaac, William M. Senseless Panic. Wiley. 2010; and Allison, John A. The Financial Crisis and the Free Market Cure. McGraw-Hill. 2012.6 See, for example, Stanton, Richard, and Nancy Wallace. “The Bear’s Lair: Index Credit Default Swaps and the Subprime Mortgage Crisis.” June 1, 2011. http://faculty.haas.berkeley.edu/stanton/papers/pdf/indices.pdf7 Allison, John A. The Financial Crisis and the Free Market Cure. McGraw-Hill. 2012.8 Haldane, Andrew G. “The Dog and the Frisbee.” Kansas City Federal Reserve Jackson Hole Conference. August 31, 2012. http://www.bis.org/review/r120905a.pdf?frames=0

GOOD RULES BAD RULES

SIMPLE COMPLEX

FEW MANY

CLEAR MURKY

INERT INTERACTIVE

ENCOURAGE NEGATIVE ENCOURAGE POSITIVE FEEDBACK FEEDBACK

BASIC PRINICPLES DETAILED PRESCRIPTIONS

COMPETING STANDARDS ONE SIZE FITS ALL

BOTTOM-UP TOP-DOWN

ENCOURAGE COOPERATION ENCOURAGE COERCION

OFFER AN EXIT OFFER NO EXIT

ADAPTIVE RIGID

AT

TR

IBU

TE

S

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Heather BreschChief Exective OfficerMylan

EXECUTIVE PROFILE Heather Bresch

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“Mediocrity breeds mediocrity. And standing still will kill you.”

Heather Bresch is chief executive officer of Mylan, a generics and specialty pharmaceutical company. During her 20-year career with Mylan, Bresch previously served as the company’s president, chief operating officer and chief integration officer. In addition to her current role, Bresch also sits on the company’s board of directors. She has served two consecutive terms as chairman of the Generic Pharmaceutical Association and provides expert testimony to national institutions, such as the U.S. Congress and the U.S. Food and Drug Administration. As a career-long advocate for initiatives and policies that improve access to high-quality medicine for those in need, Bresch holds a keen insight on how game-changing individuals and ideas can transform industry and government and make a dramatic influence on healthcare and patient well-being.

Foundation:Who or what is the biggest game changer in business today?

Bresch:Technology.

Foundation: What are the qualities of a game changer?

Bresch:To me, a game changer is someone who is willing to be disruptive and able to manage effectively through this disruption. You have to be aware of the impact of disruption on the organization and ensure that your day-to-day business can move forward, even as you are seeking to transform it.

Foundation: In an industry as dynamic and competitive as yours, what do you have to do stay in the game and keep advancing forward?

Bresch:You need to be constantly rethinking everything. We are always challenging the status quo and asking the question, “If we weren’t already doing things this way, is this how we would we do them?” Being a game changer requires a mindset of continuous transformation, not just incremental change, and a willingness and desire to become something that is truly new. At Mylan, we don’t just want to become a bigger generics company or become “Big Pharma,” we want to change our industry and become something that doesn’t exist today. However, in transforming and becoming something new, it is important to stay true to the values and culture of the organization, assuming those are worth preserving, and at Mylan they certainly are.

Foundation:Who is the game changer that has had the biggest impact upon your career as a business leader?

Bresch:I have had the privilege of working with a number of game changers at Mylan and in our industry. Milan Puskar, one of Mylan’s founders and someone who helped establish the modern generics industry, showed me the value in taking an active leadership role in the industry in order shape how the industry operates. Robert J. Coury, our executive chairman and former CEO, had the vision to take Mylan global and the courage to acquire a company two and a half times our size. He has taught me that transformation can come with both great challenges and great rewards, and the importance of being willing to take calculated risk in order to change the game. Finally, one of my mentors from outside of Mylan, Agnes Varis, taught me the importance of getting out of your comfort zone. She taught me that sometimes

you can see more from the edge than from the middle, and that sometimes it takes looking at something from the extreme to get to the right place in the center.

Foundation:What are the game changing qualities you look for in employees and business partners that help you move Mylan into the future?

Bresch:I value people who realize that we are better together than we are as individuals and who understand the importance of building a strong team around them. I want people to recognize that valuable information and insights can lie outside of their specific functions/areas of expertise, and that changing the game requires looking at things from all angles. Most of all, I look for people who are passionate about their work, because that passion and willingness to go the extra mile is what makes all the difference. I am lucky that I am surrounded by a team of talented people who are passionate about achieving our mission of providing access to high quality medicine to the world’s seven billion people.

Foundation:What are some of the strongest lessons you’ve learned from your competition in the game of business?

Bresch:Mediocrity breeds mediocrity. And standing still will kill you.

Foundation: There are always scientific breakthroughs in your industry but what is the one game changing innovation that will totally revolutionize your industry?

Bresch:I believe mobile technology will transform how health care is delivered. By 2018, five billion people will have access to the Internet via their phones. The possibilities that this and other technologies create in terms of access to medical information and treatment are boundless.

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RESEARCHAs the world becomes increasingly more complex and connected, American leaders and businesses have a unique advantage. Unlike our global counterparts, we are pioneering a path of abundance. Beyond increased technology—which holds the ability to radically transform lives and marketplaces—abundance is also embodied in a positive mindset and in available talent, resources, and know-how integral to the American character.

The key point is to know when to consider abundance as a state of fullness or overflowing rather than as a quantity or surplus amount. For instance, it is the difference between a company’s success being measured by the stronger brand position it has gained versus the amount of products it has sold. Depending on the context, abundance as a state of fullness may be a more useful and revealing indicator than a quantity one.

From A Measure of Abundance by Tamara Carleton

WHAT YOU SHOULD KNOWCurated from recent U.S. Chamber of Commerce Foundation research, blogs, and events. http://bit.ly/EmergingIssues

BLOGS http://bit.ly/EmergingIssuesBlog

The key metric for gauging our long-run fiscal sustainability is public debt as a share of the economy, known as the debt-to-GDP ratio. It was just 35% in 2000 and 41% in 2008. At 73% right now, it not only is cause for concern, but also casts doubt on assertions about our bright debt future.

Alex Brill, Foundation Fellow and Research Fellow at the American Enterprise Institute“Why does America have Debt?” | January 30, 2013

By refocusing our national energy strategy on creating a more dynamic and abundance platform, we will maximize the value of our current energy sources and allow the market to develop energy technology that adds future value and opportunity.

James Slutz, Foundation Fellow and President and Managing Director, Global Energy Strategies LLC“5 Principles for Energy Abundance” | February 7, 2013

The industrial development and impact that occurs within one century rests on the inventions of the prior century. The internal combustion engine, which was developed in the 19th century, gave rise to the automobile industry that dominated in the 20th century. Cars, in turn, gave rise to suburbs, highways, fast food, shopping malls, and the strategic importance of global energy stores.

Tamara Carleton, Foundation Fellow and Founder, CEO, Innovation Leadership Board LLC“Industries That Will Define the 21st Century” | March 5, 2013

In the 21st century, digital information is being created, analyzed, and stored at an astonishing rate. Consider that 90% of the world’s data has been produced in just the last two years. This explosion of information is known as Big Data, and it portends a radical paradigm shift in business, much like that of the personal computer and the Internet.

Leslie Bradshaw, Foundation Fellow and COO, Guide“Big Data and the Change it Brings” | April 2013

QUOTES“Whether it’s in infrastructure investment, education on STEM, identifying tax incentives or other ways in education to stimulate innovation – that happens at the state level.”

~ Mead Treadwell Alaska Lt. Governor and Chair of the Aerospace States Association February 11, 2013

“When this industry (space) figures out how to quit eating its young, we will succeed.”

~ John Higginbotham Chairman and CEO, Blue Ridge Networks February 11, 2013

“Business can suffer through ups and downs, but not knowing is the worst thing you can do for business.”

~ Peter Marquez Space Policy Director at White House National Security Council February 11, 2013

Business Horizon Retreat (March 18, 2013):A.G. Lafley, the former head of Proctor & Gamble, began the Business Horizon Retreat by talking about putting together practical strategic frameworks to achieve innovation. A panel of the U.S. Chamber Foundation’s Scholars and Fellows followed Mr. Lafley’s discussion by helping to define today’s operating environment and the tough choices the nation faces. Subsequently, a panel of chief technology and operating officers looked at how they are creating real opportunities in their firms through innovation. Noted astrophysicist Dr. Neil deGrasse Tyson concluded the program by looking at the three fundamental drivers of bold innovation, and concluding that science and technology are the agents of tomorrow’s economy.

“In the 1960’s, you didn’t have conferences and meetings on innovation. Why? Because you were doing it.”

- Dr. Neil deGrasse Tyson

Astrophysicist Dr. Neil deGrasse Tyson

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Scholars and fellows SPEAK!

The

GAME CHANGERTO WATCH THIS YEAR is…

“The impact of Sheryl Sandberg’s “Lean In” movement on not only how both genders conceive of their roles at home and at work, but also how employers approach cultivating female talent and building flexible work policies.”

- Leslie Bradshaw

“Growing shale oil and oil sands production, along with improving energy efficiency and alternative transportation fuels, such as natural gas, will exert downward pressure on oil prices. Oil prices could fall by 20% or more in a few years.”

- James Slutz

“The abundance of mobile connectivity and computing power available in your hand. The explosion of tablets and smart phones is changing the ways in which we work, learn, play, and run our businesses.”

- Tamara Carleton

“The enormous risks that rising debt burdens around the world pose to the global economy. Slow growth in the Eurozone and elsewhere will make foreign consumers bearish and deficits difficult to tame.”

- Alex Brill

“The realization that the Internet, already the greatest tool of knowledge diffusion, is exploding some of the worst and most stagnant features of formal education, setting the stage for lower-cost learning and higher-value teaching.” - Nick Schulz

“…in compound growth fueled by innovation that transcends any problems that policy ‘solves.’ Failing to grasp the human capacity for breakthroughs is, in fact, a chief cause of bad policy.”

- Bret Swanson

“The impact of the Syrian conflict on Jordan, under strain from the massive influx of refugees, an anemic economy, and internal unrest. Weakening of the Hashemite Kingdom to a breaking point and ensuing regression could be a game changing blow to Middle East peacemaking.”

- John Raidt

Scholars and fellows SPEAK!

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We’ve all seen it before – the instant when a certain player steps onto the field and by their shear presence and talent, changes the entire game. In our mind’s eye, we’ve probably even imagined ourselves stepping out onto the field, putting up the score that wins it all. What baseball- or football-loving child has not imagined winning the World Series or Super Bowl, hoisting the trophy before cameras and saying, “Hi Mom!”

While that may seem like a once-in-a-lifetime experience, it is a whole lot more common for us to see these moments today than in the past. We see them captured in the blizzard of

television channels and social media posts, showing us how one person with a single word or action can change their circumstances, for better or worse.

Those who are satisfied with the status quo remain static and do nothing to change their condition. Then there are the risk takers, those who are never satisfied and believe there is always something more that can be done. Their tolerance for risk is higher than most, and as such, they color outside the lines, go where no one has gone before, and are willing break the established rules and accepted norms, sometimes to the discomfort of those around them.

We know these people from history–the likes of Galileo, Columbus, Wright, Goddard, and others. For all of those whom we celebrate for their groundbreaking successes, there are innumerable others whose names are long forgotten because their efforts failed, sometimes causing them ruin, if not lost life.

Such is the risk of stepping onto the field of play in the game of life. Whatever we are called to do personally or professionally involves risk. We can choose to stay put or break out, but no one ever changed the game or the world without getting their uniform dirty and getting knocked down a couple of times. Ask champions in any sport, industry, or profession about how they succeeded, and they will undoubtedly cite hard work. More often than not, however, they will also cite the times they previously lost and forced themselves to get back in the game.

It’s a lesson I have seen with my own children, as well as the professionals I’ve worked with throughout my career. Only by taking the step never taken before will they ever know the lessons of failure or the thrills and rewards of success. For as often as we herald the winners in life, there needs to be recognition of those who didn’t quite make it but brought value nonetheless. Their example–their outright guts to challenge the status quo and not stand still–can be as inspiring as the winners we admire. Let’s face facts: no one ever changed anything without first making a move. Standing still never changes a thing, but taking a chance and giving it your all can truly change the game.

Rich Cooper Editor-in-chief

FINAL WORD

TOM RIDGE DAKOTA MEYER HOWARD SCHMIDTFormer U.S. Secretary of Homeland Security and Governor of Pennsylvania

Medal of Honor recipient and veteran of the War in Afghanistan

Former White House cyber security czar and computer security expert

COMING SOON

BOB McDONNELLGovernor of Virginia

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