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Expect a Slow—But Sure—Recovery

Remember that heady period of conspicuous consumption? Those days are gone, says economist and author Laura D'Andrea Tyson, and higher education must play a key role in restoring and maintaining our living standards.

By Margo Vanover Porter

*The economy is recovering, says Laura D'Andrea Tyson, a member of President Obama's Economic Advisory Panel. But it will be slow going. Talking by phone from the University of California, Berkeley—where she is the Haas School of Business's S.K. and Angela Chan Professor of Global Management—Tyson touched on a variety of economic issues. She'll further dissect trends and forecasts during her keynote address at the NACUBO 2010 Annual Meeting in San Francisco, July 24-27.

“Since we're starting from an unemployment rate of nearly 10 percent and we need a minimum of 100,000-125,000 new jobs a month just to absorb the normal increase in the labor supply,” says Tyson, “most forecasts say the economy will grow between 2.5 and 3 percent for a few years, but the unemployment rate will only gradually come down.” That probably means, she says, “a slow to moderate recovery in output growth with a slower recovery in job growth.”

By 2012, Tyson expects the unemployment rate may still be between 7 and 8 percent and it will not decline below 6 percent until sometime in 2015.

A former BusinessWeek columnist, Tyson indicates that this period of recovery may require a change in consumer spending habits. “The recovery period of 2002 to 2007 did not feel like a recovery for the majority of Americans,” she points out. “Rather than the strong income growth typical of a sustained economic recovery, we saw median household income in terms of purchasing power actually decline. Households supported their consumption spending by taking on debt, running down savings, and taking wealth out of home equity.” With housing prices also plummeting, says Tyson, many consumers face a difficult period of adjustment. “The next five years will feel different and look different—in terms of how people spend their money, what they do with their time, and how they save—from the five years starting in 2002.”

Tyson, the 1993-95 chair of the White House Council of Economic Advisers and National Economic Adviser to President Clinton in 1995-96, describes consumption growth and its relationship to consumer confidence as a chicken-and-egg problem. “Which comes first?” she asks. “The confidence to build a more secure future is a different kind of confidence than the confidence in easy credit terms and soaring home prices that fueled the roaring consumption boom between 2002 and 2007.”

Watch Emerging Markets

Never one to make predictions about the gyrations in financial markets, Tyson does share one tip for endowment and fund managers: Keep a close eye on emerging markets, particularly China and India. “Over the next several years, it's quite likely that the major areas of growth will be outside the United States,” she says.

Tyson, who is a senior adviser to the McKinsey Global Institute and the Center for American Progress, cites trends indicating that the growth rates in emerging markets have exceeded those of the United States, Japan, and Europe since the late 1990s. She predicts that over the next several years those rates could be double or even quadruple the growth rates of the United States and the other developed countries.

As far as economic recovery, “Europe and Japan are likely to emerge from this crisis very slowly,” she says. “The United States is likely to recover faster.” Her projections: In 2010, America will grow at 2.5 percent, while Europe and Japan will grow more slowly—in the 1 to 1.5 percent range—and China, India, and many other emerging markets will achieve growth rates between 6 and 9 percent.

Despite a somewhat lackluster growth rate, Tyson says, “The United States will remain the large, dominant global player as an economic power. By 2020, however, if my projections are correct, China will be the second largest economy in the world—close in size to the U.S. economy—and India will be the third largest.”

College Boosts Standard of Living

Tyson, who served as dean of the London Business School from 2002 to 2006 and dean of the Haas School of Business from 1998 to 2001, credits higher education for helping America achieve and retain its dominance in the global economy. “The United States clearly has a very significant leadership position in college education. We have great research universities. We have great community college and state university institutions in the public system. And we have a rich diversity of independent institutions and [attendance] options.”

Not so long ago, she recalls, a high school education was adequate. No more, she says. “With changes in technology and more global competition, we actually must aspire for everyone to have a good college education, with the opportunity for lifelong learning over time—that's essential to maintaining high living standards in the United States.”

Tyson praises U. S. higher education for permitting students to delay decisions about their areas of specialization. She also gives the system high marks for attracting talented, intelligent students from around the world. She ties a number of start-ups in Silicon Valley to foreign students who stayed long enough to develop companies that are now deeply connected to the economies of China and India. “They are playing the role of a bridge between our economy and the emerging market economies, with significant benefits for both,” she says.

Tyson laments, however, that more foreign students don't remain in the United States to put their education to work here. She wonders out loud: “If you get a college degree here, should we just give you a green card or grant you a certain number of years to stay? You've come here, you've learned here, and you've benefited from U.S. higher education. We would like you to stay and contribute to the economy here, at least for some period of time.”

Tyson applauds the Obama administration's commitment, in tight budgetary times, to increase the share of research and development in the U.S. economy from 2.7 percent to 3 percent. “That's a great goal,” she says. “If you look at the share of our GDP that we spend on higher education and research and development, we look pretty good compared to most other developed countries and emerging market economies. But we should increase our investments in these areas in the future as technology becomes more demanding and global competition becomes tougher.”

She also endorses proposals to increase funding for Pell Grants. “College education has become more and more expensive relative to median income, requiring students to take on a lot of debt. We could—and should—spend more to help students cover the cost of their investments in higher education through more generous income-related grants. These investments will increase the productivity of students during their working lifetimes, yielding benefits not just for them but for the overall U.S. economy.”

Cut Processes, Not People

As business officers struggle to balance their institution's budgets, Tyson recommends rethinking processes, rather than signing pink slips. “Try to maintain your talent not by resorting to massive reductions in workforce that could create major gaps in your institution's ability to function,” she urges.

“Increasing efficiency through process innovation, along with temporary reductions in work hours during periods of extreme budgetary constraints, is a much better alternative than laying people off and then having to bring them back, retrain them, and recreate teams and processes, when the budgetary situation eases.” Ask, says Tyson, “How can we do this differently? Can we reconfigure the technology? Can we take something that we do in-house and do it out of house? How can we reduce the time—perhaps from five days to three days—that it takes to do something?”

Tyson's closing message: encouraging business officers to think creatively. “Look at your processes and try to enhance productivity. Reengineer the way you do things. This crisis necessitates that you think in new ways. Be innovative.”

MARGO VANOVER PORTER, Locust Grove, Virginia, covers higher education business issues for Business Officer.

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