Dean Bromley, students, guests. Thank you for the nice
welcome.
It's a definite pleasure to be here at Yale. After all, your
alumni include Jack Horner, a former chairman of our company and
one of the pioneers of American aviation; we recruit both here at
the School of Engineering and at SOM; you buy our Carrier air
conditioning from time to time, and, most of all, unlike my own
alma mater in Cambridge, you have never once asked me for money.
I'd like to focus my remarks today on income gaps in America,
what causes them, and what to do and not to do about them.
You'll see quickly the outlines of my argument. Technology and
its implementation have provided most of our physical well being
on the planet. At times of very rapidly changing technologies,
there are gaps which arise: in education, in incomes, in
abilities to keep up with change, and in consequent propensities
to go backward not forward, and to turn inward not outward.
United Technologies is a technically inclined organization. We
spend about $900 million of our own money on research and
engineering every year, and another $800 million of our
customers' money, mostly our Government's. We rank inside the top
ten of all U.S. companies on this combined measure, and exotic
achievements do result.
With The Boeing Company, we are building and have flown now the
Army's new stealth, reconnaissance helicopter - with a radar
signature 600 times less than present generation equipment. The
aircraft also flies backwards at about 90 knots, and sideways at
70 knots, not normal modes for either fixed or rotary wing
aircraft.
We're building the new F-119 engine for the Air Force's stealth,
F-22 Fighter, replacing the now 20 plus year old F-15's. The
engine weighs between four and five thousand pounds, about the
same as a Lincoln Continental. The Lincoln's power output,
expressed in pounds rather than horsepower because that's how
engines are rated, is about 200 pounds. The F-119's engine's
output is about 35,000 pounds, and we use two. The airplane,
fully fueled and loaded, weighs about 60,000 pounds, so you will
see that, among other things, it accelerates straight up.
We have already converted to entirely chlorine free refrigerants
at Carrier Corporation, the first in the world in our industry to
do so.
We can run elevators theoretically entirely contact free with
buildings, which means among other things without cables,
enabling the nice feature of multiple cars in a hoistway at the
same time, and we're building a facility to test exactly this in
Japan right now.
There are even greater advances outside our company and all
around us. Thirty years ago the total transatlantic telephone
cable capacity was 138 simultaneous conversations. Today, we do
two million calls simultaneously, and with perfect digital
clarity. Agricultural yields in our country are up by a factor of
two over the post-War period. And we can go on and on.
The problem is the income gaps in consequence, not only between
nations but within societies, and most notably our own. On the
between nations measure, 76% of the wealth of the world is
concentrated right now in the countries of the United States,
Japan, and Western Europe, but 87% of the people of the world
live elsewhere.
Within our own society, 40% of the wealth of the nation is
concentrated in the top 1% of the households.
Under the pressure of accelerating technical and skills changes,
these gaps are widening. In America, that same concentration
statistic twenty five years ago was only 17% of the wealth in the
top 1% of households.
This contrasts with the immediate post-War years and through
1970, when the concentration had actually gone down. The earlier
period covered higher economic growth, broader access to higher
education consequent on, among other factors, the G.I. Bill, and
comparatively slow technology change.
This was, after all, the era of electromechanical controls,
non-engineered materials, and high natural resource consumption
rates based on cheap energy, plentiful resources and limited
environmental impact concerns.
Silicon changed all that in our country. And nowhere do we see
the comparison more clearly than between our own society and the
former Soviet Union.
Guess what? There are no semiconductors in any material quantity
in Russia, even today. This is instead a society frozen in brute
force: every factory is the largest in its industry in the whole
world, the prevailing theory being economies of scale without our
evolutions toward lean production and ever smaller and more
flexible facilities.
And silicon flatly won the Cold War. Partly because of the
information age and Gorbachev's glasnost, but more significantly
because electromechanical devices change slowly and are fairly
readily copied. Everything in Russia is a Western knock-off, but
bigger and more brute force. I see this naturally in aircraft,
the Tupolev 154 being an up-scaled 727, the Ilyushin 62 a larger
Vickers VC-10 with its distinctive T-tail and four tail mount
engines, and the ill-fated supersonic Tupolev 144, with its
distinctively drooped Concorde nose.
The difference is that you can copy silicon but it's changed by
an order of magnitude or two by the time you're done.
Silicon has not only left the Russians behind, it has left large
portions of our own society behind too.
Thirty years ago, upper income Americans, the top 20%, earned
eleven times more than the bottom 20%. Today, the same ratio
stands at fourteen times. At higher income levels, the widening
of the gap is greater still.
Stated alternatively, real wages for more than half of all
American households have been flat or fallen over twenty five
years.
It's fairly straightforward why these trends have occurred. We
have automated much of the low skill work out of our society, at
the same time that we have made the high skill knowledge work
dependent on higher and higher levels of education. The result is
that it's easy to get left behind, and large of numbers of
Americans have been.
This has happened before, and we can anticipate the consequences
and the pressures that will build in our society.
We know about the Luddites on the front end of the last century's
Industrial Revolution, the followers of one Ned Ludd in
Nottinghamshire in England who sabotaged the innovative weaving
machines that ultimately de-skilled and replaced their
craftsmanship.
But we might not know that the word "sabotage" itself
arises from the French "sabot," for clogs, after the
shoes their owners threw into the advanced machinery that
comparably threatened their jobs.
More recently, we will recall the pressman at the Washington Post
setting fire to their presses before accepting the advent of
offset printing and, ultimately, direct electronic publishing.
Now, this is opposition to technology driven change. It's analog,
opposition to globally driven economic change, is fortress
America, fortress Europe, fortresses that keep the wealth in and
the poverty out.
And these fortresses arise for the same reason: threat of job
loss to lower skilled persons, the notion that another person in
another society will be all too often and all too well qualified
to do the same job for less.
The answers to these difficulties seem to me evident. We need to
grow our economy faster. We need to engage aggressively with the
world's economies and especially the world's emerging markets; in
other words, the direct opposite of fortress America. We need to
reaffirm the value of technology as the fundamental force to
improve living standards for all peoples. And we need to be sure
that our traditional American values and political and economic
systems continue to provide opportunities for all.
Some say, "Impossible." I say flatly the contrary.
First, growth rates. Not only are we growing faster than we
think, but we can grow faster still consequent on a specific
factor in our economy and especially our largest corporations:
process re-engineering.
This is first an old and often politically inspired debate, so I
anticipate opposition. By reflex, Wall Streeters hate inflation
so growth makes them nervous in the extreme. Politicians like
growth because it creates jobs and incomes and gets them
re-elected. There is no surprise that this is a specific tension
right now within the Administration, Congress, the Congressional
Budget Office, the Federal Reserve and all the think tanks.
One argument I agree with is that we understate actual growth
today because we overstate inflation. We measure our economy in
money terms, so we infer real growth by deducting the erosion of
inflation from measured dollar based growth. Overstate inflation
and you arithmetically understate physical growth. And the higher
inflation makes the Wall Streeters nervous, so it's a double
negative.
The problem is that inflation indices are derived from measuring
price changes in products, without sufficient attention paid to
function changes within products. The obvious example is personal
computers. But we could add to this longer life appliances, like
cars, and cars that are much more reliable and cost less to
service; in other words, life cycle cost as compared with sticker
price. We could add supersonic travel and measure cost per minute
rather than cost per mile. Jumping past the endless debates, the
increasingly accepted conclusion is that we overstate inflation
and understate real growth by about a point each.
Leaving this technical point aside, we can and should target
higher national economic growth anyway.
The reason is kaizen, lean production, process re-engineering or
whatever similar term we choose. This is the single most powerful
force in corporate America and in our economy today, no
qualification, no question. And I believe I am in a position to
speak persuasively about this.
The facts are that United Technologies has reduced employment by
about 15%, a total of 30,000 positions, and manufacturing space
by another 15%, or 10 million feet, over the last four years.
To put the space alone in perspective, our reduction is equal to
the existing total space for the one hundredth ranked American
manufacturing company today. And yet we produce a higher physical
volume of production now than four years ago.
The principles of process re-engineering are straightforward.
First, make something only when you need it and never early. Make
it in the smallest possible quantity and make it again when you
next need it, which of course requires set-up time and cost
minimization, which is kaizen's most basic initiative. Third,
minimize the numbers of separate operations, and therefore
hand-offs and therefore opportunities for inventories and delays,
and minimize travel distance within the manufacturing process.
Fourth, measure quality at every intermediate step and eliminate
rework per operation rather than reject parts at final
inspection.
The results for us are overwhelming. The typical kaizen process
in a plant will extend over about a year's time, but in many
individual steps and events, during which we will
characteristically double throughput with half the space, half
the inventory and a tenth of the defects. We have done this over
and over again and I tell you in the firmest words: process
re-engineering is remaking America.
The implications for our economy are straightforward and
important: we can make more with less, and that is the basic
measure of capacity and of the ability to grow at higher rates
without inflationary pressures.
I am certain that kaizen is at the root of our nation's economic
performance today. Corporate profitability is at record levels
and inflation is low; the reasons are very substantial cost
reductions for all of us, excess capacity in spite of good
economic growth, and strong price pressures in every market in
which we compete. It is a fact of life that we expect and deal
with real price decreases every day, with the only strategy for
survival being cost reductions and process re-engineering and
performance improvements at rates better than competitors.
We also have opportunities to grow our incomes much faster by
much larger international participation. UTC is again a robust
example: 22% of our sales were outside the United States in the
early 1970's, 35% were by 1985, 55% by 1995, and we readily
project 65% by 2005.
Remember that I said earlier that 24% of the world's wealth is
outside the United States, Japan and Western Europe, along with
87% of the population. The growth will be there and our
participation in this - and facilitation of it by technology
transfer and direct investment - will assure the incomes of our
peoples in the future.
My last comment about growth is money availability. Every
commentator bemoans our nation's low savings rate and states the
requirement to save more to grow more. I disagree.
There is in fact a surplus of money in the American economy
today. The clearest evidence is record stock market valuations at
a time of comparatively low money supply growth, low inflation,
and low speculative pressures. Add record IPO's and record new
equity issuance overall, and record stock buybacks by corporate
America, and it seems clear that the problem is too much money
not too little.
So we can grow a good deal faster and we ought to step up to
this.
The last question is opportunities for all. This is a more
difficult question in the private, for profit sector, leaving as
we do traditionally the opportunities issue to governments, and
concentrating instead on maximizing efficiency and earning power
and shareholder value.
But I see these views changing. A few weeks ago, President
Clinton began speaking about "responsible" employers
and raised five specific behaviors: family-friendly workplaces;
portability of health care and pensions to cushion job loss;
training and education; partnering between employer and employees
along lines such as labor bargaining, gain sharing and even
employee stock ownership; and safe and healthy workplaces.
I agree with the President, recognizing that companies are still
competitive enterprises and that we can never move so far as to
make us less effective in our marketplaces.
But we can do many things still. One I am especially proud of is
UTC's expanded tuition payment program launched last year. We
pre-pay 100% of tuition and directly related costs, we permit any
fields of study in accredited degree programs and not just
job-related coursework, and we award a little over $5,000 in
value of UTC common stock on degree completion.
The premises are the best educated workforce on the planet for
us, and to ensure that employees are ahead of the job loss hazard
if it ever materializes. Our goal is to triple employee
participation under UTC tuition payments, and enrollments are up
more than 20% already after only three months. And I had the
pleasure personally at lunch today of passing out stock
certificates to the first four graduates in the new program.
We have also launched a program funded at about a million dollars
annually in Hartford seeking to strengthen inner-city K-12
education. One specific is sponsorship of a magnet engineering
school in Hartford's South End. Another is kaizen training within
the district administration to support getting their own process
re-engineering efforts under way.
We also actively support INROADS, a cooperative education program
for minority students, sponsoring regularly about 80 students
UTC-wide.
These are starts, but I believe they are significant indicators
of awakening American corporate awareness of our requirements to
participate in creating opportunities for all, always consistent
with maintaining effective and competitive enterprises.
Fundamental to President Clinton's call for responsible employers
and to these UTC programs are the requirements to educate
Americans. There is no single more powerful force behind any
nation's achievements over the long term. That is why the
President has called for tax deductibility of college and
advanced degree education costs up to a $10,000 per annum per
family cap, and that is why UTC not only supports this but also
the tuition reimbursement exemption from taxable personal income
that expired at the beginning of last year.
I want to close these remarks today in the tax area, and with a
potentially contentious view in an environment rabidly intent on
tax reduction. Let's remember first that total taxation in
America today, including state and local levies, remains under
30%, significantly favorable to the other six leading industrial
nations globally - Canada, France, Germany, Italy, Japan and the
United Kingdom - with a combined average of 38%. Note also that
our top marginal Federal income tax rate is 39.6%, the lowest in
this population and certainly favorable to Canada (53%), France
(57%), Germany (53%), Italy (51%) and Japan (65%).
Note also that this top marginal U.S. rate is low compared to our
own history, with higher rates in 61 of the 83 years since the
Sixteenth Amendment making Constitutional the income tax was put
in place in 1913, and that we had a 70% top rate in place for
five whole decades.
Now, I am by no means calling for returns to these kinds of
rates, but instead for moderation in the current rate cut
environment, and especially for a clear and decisive willingness
to use the tax system to let Americans invest in their own
futures and specifically by continuing education.
This has been a broad topic this afternoon and I have worked to
be both persuasive and specific. There are great stresses in our
society today. I believe they are there for understandable,
predictable and correctable reasons. These stresses lead to
strong views and in many cases to wrong views. Technical advances
of the greatest magnitude in a full century are at the root, and
are driving gaps in capabilities, incomes and opportunities at
rates never seen before.
The answer is absolutely not Patrick Buchanan with his populist
advocacy of fortress America, turning both inward and backward,
nro his assault on corporate America.
The answer is also not unfettered capitalism, abandoning or
weakening too greatly Government's role in curbing excesses.
The answer is also not precipitous, by reflex tax reductions to
appease an anxious electorate.
The answers are instead reaffirmation of the most basic and time
tested principles: technical advances as the lever to improve
living standards, wealth generation for Americans by growing our
economy prudently but faster consistent with underlying physical
capacity and money availability, and ensuring opportunities for
all by both a traditional and continuing role for government and
by moderation and wise restraint in the private sector.
I've outlined today some specific actions by UTC, I'm proud of
these and I believe them to be both effective and increasingly
so, and anticipate that we will do more and not less in the
future.
There could not be a brighter time for our world and our nation
than today. So I invite students especially today to look
forward, not backward, to look outward, not inward, and to
embrace your futures with the greatest of confidence. Those with
different views are as wrong as they could be, and rarely do I
make a statement with that force.
I invite now your questions, comments and maybe even debate.
Thank you very much.
[ Sheffield Fellowship ]
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