The Forces of the Future

Michael T. Childress
Executive Director, Kentucky Long-Term Policy Research Center

Good morning, everyone. My name’s Mike Childress and I’m the Executive Director of the Kentucky Long-Term Policy Research Center and, unfortunately, the one who always seems to have the bad fortune of having to follow people like Al Smith on the program. So please be charitable with me as I go through this presentation about some of the forces and trends affecting the future of the state.

Before I do that, though, I want to recognize the people who I work with, the folks on the staff at the Kentucky Long-Term Policy Research Center. Much of what I’m going to show you now is the fruit of their labor. Michal Smith-Mello, Amy Watts, Billie Sebastian, and Mark Schirmer. To them, I thank them very much.

I’m the only thing that’s standing between you and the presentation that we’re really all here to see this morning, the discussion of the 13 august Kentuckians who will be moderated by Bill Goodman, who will be discussing the future of Kentucky. But I think that this presentation can maybe help frame that, provide a little bit of context for that discussion, because we’re going to be talking about or showing information and trends and data about some of the major factors affecting the future of Kentucky. Clearly, if you were here yesterday, and I know that many of you were, there was a lot of discussion about what Kentucky needs to do to adapt to the New Economy and there are a lot of sub-themes to this globalization and information technology. These trends are creating a situation where they are creating inequities, to touch on what Al talked about. In other cases, exasperating existing divisions, policymakers, citizens of this state over the next several years are clearly going to have to deal with some of these inequalities and then ultimately we’re going to all have to figure out how to manage change.

And some of the sub-themes here have to do with the role of government and this major demographic landslide that is about to affect the future of this country over the next several years, with the aging of the population. Without belaboring the point, I thought I would talk a little bit about what we mean when we talk about the New Economy. First, and not necessarily foremost, but, first, is global markets. We are getting to the situation where using a global perspective for markets and suppliers and labor is becoming the norm, instead of the exception. And at the center of all of this is the role of information and technology or “digitization,” as it’s called by some. Innovation, knowledge workers, this kind of ideas and innovation information is becoming just as important as physical assets to the bottom line of many companies and communities, and quality and personnel are becoming absolutely imperative to be successful in this.

Now, Kentuckians are somewhat ambivalent about the global economy (see Appendix A, slide 1). This is a result of a couple of surveys. One we did in 1998 and another that we actually paid the University of Kentucky Survey Research Center to do for us. We have a project called “Visioning Kentucky’s Future.” There are 26 long-term goals. One of them is focused on this topic of the global economy. And we asked people to tell us if they think that Kentucky is making progress, standing still, or losing ground with respect to this particular goal: Kentucky will benefit from participation in an integrated global economy. What you see here, I think, are two major points. First, a large number of people believe that we are making progress, but you see a big drop off there from 1998 to 2000 in the percentage of people who think that we’re making progress. So people clearly have mixed feelings about this. I think that part of the reason that they have mixed feelings about it is because there are winners and losers in this global system. These are some projections that were made by the Cabinet for Workforce Development looking out over about the next six years to the year 2006 to forecast what kind of job changes we’re going to have (see Appendix A, slide 2). These happened to be the top six jobs that in their forecast will experience the largest absolute decline in jobs.

You’ll see at the very top of the list sewing machine operators. I worked in a sewing factory as a bundle boy when I was in high school. That factory is no longer around. Clearly in Logan and Todd County and Edmonson County, where I went to high school, and even in Frankfort, many of those operations have closed down. They’re moving to Mexico, Central America, and other locations because of this global competition. Farmers. We all know what’s been going on with tobacco and this is clearly having a profound influence on the future of family farms and our rural communities. Bank Tellers. That’s probably less a function of globalization and more a result of the role of information technology.

As I said earlier, though, there are winners and losers and this is the number of ISO 9000 companies in Kentucky (see Appendix A, slide 3). ISO 9000 companies are companies that have demonstrated rigorous adherence to high quality standards that really enables them to engage in economic relationships with the European community and others. It’s really a badge of honor. In fact if you drive along the Interstate, you see companies have big banners frequently out in front of their buildings indicating that they’re an ISO 9000 company. And a number of Kentucky companies have clearly gone up over the last several years in terms of how Kentucky looks with respect to some of the surrounding states (see Appendix A, slide 4). You can see the yellow bar, Kentucky, 6.1 companies per thousand, but it’s right there with surrounding states where we’re obviously far behind Indiana and Ohio. Some of this, however, is primarily manufacturing-type businesses that get ISO 9000 registration and those states have a heavy manufacturing presence. So does Kentucky, for that matter, but we seem to be doing quite well with that.

Kentucky Exports (see Appendix A, slide 5). Kentucky exported in 1998 almost $9 billion worth of goods. Kentucky ranks, I believe, 22nd in a ranking of the 50 states with respect to the value of our exports. We’ve experienced huge increases in exports and we export a really broad range of products.

Foreign Direct Investment (see Appendix A, slide 6). This is the Toyotas. We’ve seen a large increase over the last, really, 20 years in the level of foreign direct investment. Almost 90,000 Kentuckians work for foreign affiliates, and a foreign affiliate is defined as any business that has a least 10 percent foreign ownership. The average for the United States is almost 80 percent. On average, these jobs pay higher than domestic companies. And finally, in the percent growth, and this is since 1977, the percent growth in employment among these foreign affiliates has been the largest in Kentucky when compared to selected surrounding states (see Appendix A, slide 7). So it appears that we’ve actually done quite well, looking at several indicators there.

The digital economy. It’s hard for me to describe the transformation, this New Economy. The third wave, the digital revolution, whatever you want to call it, is just really having a tremendous impact on this nation’s economy for sure and will continue to have an effect on Kentucky’s economy. Here, Donald Johnston is comparing it to the industrial revolution and the Gutenberg Press and this is no small fact (see Appendix A, slide 8). I can remember about a year ago, there was a show on the History Channel or Discovery Channel where they were polling various leaders in the United States––political, intellectual, and military leaders––about who they thought was the most important figure over the last millennium. And the consensus opinion was Gutenberg. So that’s saying a lot, comparing that to Gutenberg.

CEOs seem to believe that it’s going to have a huge effect on their business. This is a result of a PriceWaterhouseCoopers study of CEO interviews (see Appendix A, slide 9). The vast majority of them believe that their businesses will be affected at some level; that is to say this information technology. It’s easy to see why. Take banking, for example. You can see the largest red and blue down there at the bottom of all the sectors. Chuck Martin yesterday held up a bar chart to illustrate this point. There was an article in Business Week talking about how information technology is affecting banking. It costs about $1.25 if I go in and do a transaction with the teller. The transaction costs $1.25 with a teller. If I do it over the phone, it costs about $.54. If you do it with an ATM, it’s about $.24, and if you do it over the Internet, it’s about $.02, so you can see that there’s a lot of efficiency to be gained by embracing these technologies. It’s had a huge effect, as you know, on our economy. It’s helped keep inflation low, and increased productivity. The online business-to-consumer sales has been estimated at about $23 billion for the first seven months of 2000. Forrester Research has projected that in 1997 they estimated about 3 percent of the U.S. population 14 and over had made an online transaction. They forecasted that by 2003 it would be about 30 percent. They may have updated that by now, but this is something that a lot of people are, of course, willing and eager to use.

But the real benefit here appears to be in the so-called B2B, or the business-to-business transactions. They are projected to be at stratospheric levels and there is a lot of money that businesses can make here. Chuck Martin talked about some of this yesterday, in fact, this last point here (see Appendix A, slide 10). At least one estimate puts it at $7.3 trillion by 2004. That’s a number that Mr. Martin presented yesterday. And you can see here why the business-to-consumer transactions get most of the ink. The B2B stuff is really where the action is (see Appendix A, slide 11). These are some projections out to 2003 from the U.S. Internet Council out of Washington, D.C. and you can see the comparison and the value of these transactions between them.

Registered Domain Names (see Appendix A, slide 12). To what extent are Kentucky businesses really embracing these information technologies? Kentucky is the 2nd one from the bottom there. We collected these data for different years––1997, 1999, and 2000––and these are only estimates. We have the data, but there are some issues with the data, so I trust these as a comparison as a relative measure of Kentucky to other states. I don’t trust the absolute numbers so much. Given that, though, you see that the number of businesses in Kentucky is roughly one half the U.S. average in terms of the number of businesses who have a registered domain name per thousand businesses.

These data are from the University of Kentucky Center for Business and Economic Research (see Appendix A, slide 13). In 1998 and again in 1999, they did surveys of businesses in Kentucky to find out really what kind of technology they are using and how they are using it. What they found in these two surveys is that about 15 percent of the businesses are selling online and about 10 percent are advertising online. Given that, Forrester reported that about 34 percent of U.S. businesses were online in 1999. So you can see that the Kentucky estimate clearly lags behind the U.S. estimate. And, it’s really unfortunate in many ways, I think, because it’s a way for Kentucky businesses, especially small businesses, to prosper.

I had a couple of people come up to me yesterday after Mr. Martin’s presentation and after the Digital Divide presentation. They worked in various Chambers around the state and they said the thing that people don’t talk about is the digital divide in the business community. The big businesses in Kentucky are capable of taking care of themselves. They’re really using these technologies, but the bulk of the businesses, of course, in this state are small businesses and they’re really not using this to the extent that they could be. The National Trust for Historic Preservation surveyed 1,500 main street businesses in 16 downtown commercial districts nationwide (see Appendix A, slide 14). This study was reported on about two months ago, maybe three months ago. What they found was that about 16 percent of these businesses were online to sell products, and that about 14 percent of their total sales came from the Web.

We all care about downtowns. The Governor’s Office has an initiative to try to make downtowns strong. I live in Lexington. People are always wringing their hands about the future of downtown Lexington. The Kentucky League of Cities has a big effort to try to build up Kentucky’s downtown districts. What they found in this survey was that, with 14 percent of the total sales coming from the Web, that it was enough to keep them in business in many cases. It put them over the edge because they’re running such tight margins as it is. So it really can be a tool, and unfortunately it’s an underutilized tool, for not only keeping businesses strong, but for keeping downtowns invigorated across the state.

What these changes are doing is increasing the educational demands for Kentucky citizens and for Kentucky institutions. This rather long statement by Robert Reich was recently published in the Chronicle of Higher Education, but at the end of it, I thought it was a very good statement (see Appendix A, slide 15). What he’s arguing here is, “thus demand is growing for people who can spur innovation by identifying and solving new problems or figuring out what clients and customers might need or want.” We really need good thinkers out there.

Going back to the Cabinet for Workforce Development, what they’ve projected is that 8 out of 10 jobs created out to 2006 are going to require more than a high school diploma, so the bar is clearly increasing. How’s Kentucky been doing? (see Appendix A, slide 16). These data are from the Current Population Survey. The Kentucky data represent a three-year moving average. This is a percentage of persons with at least a high school diploma and you can see that Kentucky has made up some ground over the last several years, but we still have a lot of ground to make up. Nevertheless, if you calculate these ratios, we have caught or made some ground on the U.S. You can’t really say that with the percentage with at least a bachelor’s degree (see Appendix A, slide 17). We still have a significant gap there, but I know that there are people, the Council and the various institutions and others, who are working very hard to rectify that. What the Council on Postsecondary Education has determined is that we need more undergraduates, lots more. Nationally, about two thirds of high school students attend college. In Kentucky, it’s about half. In 1998, it was 53 percent. To reach parity with the national average––this was all tied into per capita income and our quality of life––we would need to increase enrollment from about 161,000, what it is now in Kentucky’s public institutions, to about 221,000 by 2014 and 241,000 by 2020. So, we’ve got a lot of work to do.

There’s a payoff, as we all know. Education pays (see Appendix A, slide 18). Again, this is some analysis of Current Population Survey data. You can see that there is significant return to education and that return has been increasing over time. In the late 1960s, the weekly earnings of college-educated men exceeded high-school-educated counterparts by 40 percent. That increased to 60 percent by the late 1990s. That’s what this information technology, globalization has really done to the education system in terms of increasing the returns.

The Nobel Laureate, Amartya Sen, wrote that the economies that have been most successful in the recent development of world trade have all been oriented toward education. So we seem to be doing about average, but we’re doing about average with respect to the surrounding states, with respect to how well our businesses are integrated into the global economy. Kentucky businesses appear to be trailing the U.S. somewhat, and it’s created a situation of winners and losers. This has, as I said at the beginning, really widened the gap with respect to income. There’s a digital divide, an education gap, and health care created some new gaps, or exacerbated existing ones.

This is a ratio of upper to lower middle class income over the last several years (see Appendix A, slide 19). The yellow line is Kentucky. High ratio means that there is a bigger gap, and, over time, the trend, you can see, is an upper one, with Kentucky being consistently higher. This shows over time in the percent difference in the real change in real family income and you can see the 25th percentile is about flat, which is over this time period (see Appendix A, slide 20). Families at the 25 percentile, after adjusting for inflation, are about where they were in 1997 compared to where they were in 1977 for Kentucky. Whereas folks at the 75th percentile and 90th percentile really increased; the folks at the bottom really fell down. Among economists, the consensus seems to be that it’s primarily a function of this New Economy that we’ve been slowly easing into for the last several years with globalization, information technology, and an increasing return to education. We have in Kentucky, unfortunately, a disproportionate percentage of our population with lower levels of education and skills, and so we’re being hit a little bit harder than the U.S. average. There are other reasons for the income gulf, having to do with the labor market structure and some demographic shifts as well.

The digital divide, the numbers for the Internet access, Internet use, and computer access have been going through the roof (see Appendix A, slide 21). There are a lot of reasons why it is very important. At a purely mercenary level, the research has found that individuals who use computers at work tend to, holding all other things constant, earn 10 to 20 percent more than their counterparts who don’t use computers. It’s increasingly becoming a source of where we get information about how we live our lives, as Chuck Martin talked about yesterday. So there’s a real danger here about embedding a structure of social stratification that does not favor those who don’t have access to this.

Quickly, let me give you some statistics on Kentucky, 1998 data (see Appendix A, slide 22). Just last month, the Census Bureau released a report on Falling Through the Net. They have a series of reports that they periodically issue and they have the 2000 data. I’m not showing the 2000 data because what they do is aggregate their data at the household level and I have all my stuff at the individual level. We actually went into the data and analyzed it ourselves. So, with that in mind, I wanted to keep it at the individual level, but, if you look at the 2000 numbers, imagine that they’d be a little bit higher than this, but this rank ordering more or less stays the same. What I take away from this is that Kentucky is really doing kind of good, in a way, with respect to the way individuals are using these technologies. We’re right there close to the U.S. average. There’s not a statistically significant difference between Kentucky, Tennessee, and North Carolina.

Individuals using the Internet (see Appendix A, slide 23). Again, we’re doing pretty well. We’re trailing the U.S. average, as you can see, but not by a whole lot, and there’s not a statistically significant difference between Kentucky and Tennessee, who’s right in front of us. These data are from the University of Kentucky Survey Research Center again (see Appendix A, slide 24). We’ve been collecting these data on Internet use since 1996, and really we can say that for the first time in the state’s history, a majority of Kentucky adults have access to a computer in their home; that’s the little turquoise portion of that chart. For those who said, “I don’t have a computer at home,” we asked if they had access to a computer someplace else, like school, work, or the library. Twenty-four percent indicated that they did, so almost 80 percent indicate that they have access to a computer someplace.

Internet access (see Appendix A, slide 25). Again, for the first time in our state’s history, of course the Internet hasn’t been around that long, but 63 percent of the adult population indicate that they have accessed the Internet in the last year. We cut the state up into four regions (see Appendix A, slide 26). They’re self-explanatory, and you can see what you would expect with the Urban Triangle being the leader of the pack with respect to Internet access. I think that in 2000 part of the good news is that eastern Kentucky, which had been significantly trailing the other regions in 1998, really shot up extensively in 2000. We see a clear divide here in terms of the access to these technologies. In this case, this is the Internet along education level, while the level has generally been increasing. You can see the bars get generally higher (see Appendix A, slide 27). There’s still a clear division here and this cut up in terms of educational attainment. We did some more formal statistical analysis to explore the digital divide in Kentucky. What we found was, while holding a number of sociodemographic factors constant, that the upper quartile of Kentuckians are almost three times more likely than the lowest quartile to have access to a computer to access the Internet. There’s a big difference in terms of people who have a bachelor’s degree compared to high school.

Race is a big factor in terms of the divide. There was one of these divides that actually got wider. They all narrow, except for one, between 1993 and 1998. The one that got wider was between non-Hispanic whites and non-Hispanic blacks. In 1993, they were about the same with respect to Internet use, but by 1998, non-Hispanic whites were about one and one half times more likely to access the Internet than non-Hispanic blacks. So we clearly have a system of haves and have-nots in Kentucky.

We, unfortunately, also have an opportunity gap (see Appendix A, slide 28). Incoming freshmen, and this is national data here, really don’t reflect our wider society. The yellow chart bars here reflect the U.S. population. About 26 percent of the U.S. population have family incomes below $25,000, and so on. The incoming freshmen, though, according to the UCLA Study on Incoming Freshmen that they do nationally, are in the red chart and you can see that they’re underrepresented in the lower income group and overrepresented in the upper income group. What I take away from this is that the very people who need access to that which will level the playing field for them are, unfortunately, less likely to access it.

We analyzed some data, again using some statistical modeling to estimate the probability of attending school for 15- to 24-year-olds (see Appendix A, slide 29). Here I’m showing it broken out by income quartile, again, in the United States and Kentucky. You see that, if we focus on this column first, lower income people in Kentucky and the United States have a lower probability of being in school. What’s interesting about this is that there’s a big difference between men and women in Kentucky and there isn’t nationally. Nationally, men and women look pretty much the same. In Kentucky, the men have a much lower probability than women of being in school. Again, the very people who need it the most seem to have the lowest probability of actually being in school.

We did a survey again with some folks at UK at the Education Policy Department (see Appendix A, slide 30). The University of Kentucky Survey Research Center administered this survey for us of 3,000 16- and 17-year-olds we mailed this survey to. We got about 1,000 back, and they’re going to talk some more about it in this room, actually, this afternoon, in the education panel about some of the other results. Here are some of them. Who is taking AP classes, for example, the very courses in high school that will lay the foundation for success later in college and postsecondary education? You can see there are some pretty high percentages, broken out by income group. There’s a clear increase as you move to the higher income levels. Especially down here at the AP level, you get into the upper income levels and you have a much higher likelihood that these kids will have taken these classes.

What about costs? (see Appendix A, slide 31). Again, this comes from that same survey. Again, you see the lower income kids, and this empirically verifies what intuition would suggest. A lot of people will tell you where there’s student loans, grants, and all kinds of ways to enable people to go to college, particularly among the lower income levels that cost is a major obstacle and you can see the red portion of that chart. Two thirds of them feel that the cost of postsecondary education would be a major obstacle for them to attend college, compared with about 6 percent up at the top here.

Another important factor that policymakers and citizens are going to have to deal with in the future clearly is health care (see Appendix A, slide 32). I talked earlier about the 26 goals in the citizens’ survey. This goal the last time we did this was considered to be the most important goal of the 26, which was very interesting. This survey was done, I believe, about a year, maybe even closer to a year and a half ago. A majority of the population feels that we are losing ground with respect to satisfying this goal. These are some data from the UK Center for Health Services Management Research and the UK Survey Research Center from 1997 that show on the red bars the distribution of the population of people without insurance (see Appendix A, slide 33). You can see that they’re disproportionately located in the lower income. These are your working poor folks. So there are winners and losers.

There are increasing returns to education and skill resulting from these changes that our economy is going through. Kentucky has a lower supply of high-skilled workers and that’s what’s causing our ratio in the income gap to be wider than that of the nation. The key, obviously, is to develop a more educated population and skilled workforce. One of the problems is that the people who probably need the education and training most appear to be least likely to get it. So we’ve really got our work cut out for us, I think, to get those people to be included and part of the education system.

Finally, managing change, while all of this is swirling around us, we’ve got some other big things taking place that are going to hit us like a sledgehammer, such as Kentucky’s aging population. We’re going to be talking more about the aging population this afternoon in one of our breakout panels. Kentucky’s population is projected to age at a faster rate than most states (see Appendix A, slide 34). In 1995, Kentucky, in a ranking of all 50 states, was ranked 28th in the percentage of the population aged 65 and older. By 2025 it’s projected to move up to 14. It’s not going to be a good thing. It’s not going to be a bad thing. It’s just going to be a different thing. It’s going to create new demands for government and nonprofit, and anyone who is engaged in the lives of their community, because there are going to be so many elderly people, and it’s going to be a source of strength, too. I think it’s something that we’ll really be able to capitalize on. But, it’s going to create some financial pressures.

This is a rather extended quote from an Urban Institute report that was published in 1998, before the Congressional Budget Office started coming out with all of these projections forecasting these enormous surpluses. Within three decades, according to projections by Social Security and Medicare, pension and health demands of rising baby boomers, combined with the rising costs of health care and interest on the debt, will eat up close to 100 percent of the projected revenues at current rates, leaving literally nothing for any public expenditure. I don’t know if that’s going to happen or not, but what I do know is that it’s going to increase demand for certain governmental services. CBO, Congressional Budget Office, is projecting a Federal Budget surplus of $4 1/2 trillion dollars from now to 2010. I was just reading in the newspaper last night that in January, CBO is going to issue an update of that forecast and they’re going to increase it by anywhere from $500 billion to $1 trillion dollars. So the next President is going to have $5-6 trillion or the next couple of Presidents from 2000-2010, maybe they’re going to have that to play with.

Government is really going to be focused on closing this education gap, ensuring their older citizens are engaged and noting the continuing importance of social capital. Government can’t do all of this. The National Governors’ Association issued a report, about a year ago, and they talked about this. We’ve talked about it in some of the reports that we’ve written about. Social capital, finding partners in public/private partnerships to work to try to solve some of these problems and to capture some of the opportunities that present themselves, will continue to be important. And then finally, we must develop efficient, results-based government. This whole information technology revolution is really creating a lot of opportunities for government to engage the citizens and to be more efficient and productive.

I thank you for bearing with me and I’ll say that we’re going to take about a 20-minute break here. Please try to be back in here by about 10:30, if not maybe a little bit before, because that’s when we’re going to start the KET portion of the program. Thank you very much for your patience.