San Diego Offers Lessons on Art of the Comeback

The debates about economic growth at the Republican convention beginning here in 13 days will be narrow and short-term in contrast to the innovative ideas being tried in the city outside the Convention Center.

San Diego is just completing an ambitious $4-million effort to link its city government, businesses, schools, hospitals and libraries on computer-telecommunications networks.

It calls itself the “City of the Future” because it has a foothold in the industries of the 21st century: telecommunications, biotechnology and medical instruments, software and computer electronics.

In acting to ensure jobs in tomorrow’s economy, San Diego sends an impressive message but also a stern challenge to other cities and America at large: If business is good today, don’t get comfortable. A knowledge-based economy spells heightened competition and decline awaits the town or country that lives off past research and neglects education.

San Diego is a comeback story. The city boomed in the defense build-up of the 1980s as one-fifth of its 3 million people moved in. Then it all fell apart. Jobs and aerospace companies, including General Dynamics, a major employer that was sold to Lockheed Martin, left town.

In 1992, San Diego set out to remake its economy. But it didn’t try to recruit industry from elsewhere with tax breaks and free land.

Instead, Mayor Susan Golding launched an effort to enhance the area’s existing telecommunications capabilities, which included greater than average amounts of fiber-optic and television cable lines because of the region’s mountainous terrain.

“A lot of technology was not accessible, the Internet was not being used,” Golding said. “We knew that San Diego’s economic future depended on upgrading our telecommunications capabilities.”

The idea was to increase computer links for business and civic life: issuing business permits online, along with interactive contact with police, fire and other city departments.

The effect on business has been dramatic. San Diego now has 200 telecommunications firms, more than 350 software companies and 200 biotech and medical products companies. It has added 20,000 jobs in the last year and its unemployment rate, at 5.2%, is below the national and California averages.

There are no Fortune 500 giants here, but there are fast-growing outfits that are beehives of research and recipients of massive research support from the area’s universities, including the science and medical schools of UC San Diego, the communications center at San Diego State and the Scripps and Salk research institutes.

It has an organization named Connect, attached to UC San Diego, that plays matchmaker to new companies by bringing scientific researchers together with entrepreneurs, venture capitalists and big companies looking for partners.

The area also has a legacy of military research, especially in Navy telecommunications--the wellspring of Qualcomm Inc., a rapidly growing global leader in wireless telecommunications.

And the city has its blemishes. In its public high schools, 40% of the largely Latino students drop out.

What is San Diego doing to remedy that? “Trying to have institutions and industries that are on the cutting edge,” said Marney Cox, an economist with the San Diego Assn. of Governments. “If we improve the economic status of jobs here, it sends a signal to the labor force: If you want high paying jobs, get an education, get trained and you’ll get them.”

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That same determination not to become ghost towns of the future drives cities and businesses from Austin to Minneapolis and Charlotte to San Jose these days. It’s important to understand the challenges facing them all.

* Research: San Diego’s new industries are not making telephones but inventing the basic structure of a wireless telephone system. They are not producing traditional medicines but a genetic pharmacology for the next century.

Industries do not spring from thin air. San Diego’s are building on a vast foundation of investments in research by military and space programs and private industry over the last five decades.

All U.S. industry built on that foundation. The White House Council of Economic Advisors declared recently that 50% of U.S. economic growth since World War II has come from investments in research and development.

“Research” may be a dry, laboratory word but “its results can spread quickly throughout the economy with applications far beyond those imagined by the original researcher,” the council noted.

The inventors of the laser did not envision better brain surgery or compact discs, the inventors of the transistor did not envision voyages to the moon or cellular phones. Yet those breakthroughs and hundreds more resulted from the laser and transistor and helped drive the U.S. and world economy in recent decades.

The Internet, another legacy of military spending, will soon create more industries.

Or will it? Where are tomorrow’s lasers and transistors to come from if U.S. research investment by government and private industry continues to decline? Research spending as a percentage of the U.S. economy peaked eight years ago, and has fallen well below that of Japan.

Unless new ways--or new resolve--to fund research are found, a silent crisis will erode industrial strength.

* Education: San Diego’s knowledge-intensive industries demand lots of education and that accentuates a powerful trend. In California today, 60% of the jobs require community college or university training after high school. Twenty years ago, only 30% of California’s jobs demanded such educational levels.

An emerging answer to the needs of industry is continuing education for all. Just as doctors and nurses have always done, production workers in California today are taking two to three weeks compulsory training every year.

Increasingly sophisticated technical schools offer a resource to workers beached by layoffs or departing defense contractors. Education in new trades helped 1,400 employees that General Dynamics left behind in San Diego.

But too many poor youngsters in San Diego and every other city drop out of school. And as rhetorical arguments at the political conventions will undoubtedly demonstrate, the nation lacks a consensus on how to improve public education.

Some educators look to technology. Richard Atkinson, president of the University of California, is confident that “in kindergarten through 12th grade, the telecommunications infrastructure will improve instruction dramatically in the next 10 to 15 years.”

But that’s a long time. Meanwhile, Judson King, head of academic affairs for the UC system, says university officials will be going into elementary school classrooms to encourage students and instill study habits lest the state’s vaunted education structure go into permanent decline.

* Community. San Diego’s City of the Future program is focused on a broad civic perspective. Libraries offer patrons Internet access, while the mayor, City Council and government services are accessible via the World Wide Web.

The aim is to head off a feared technological division of society. “The nightmare vision assumes that a small cadre of people and a lot of machines and technology can do all the work of society,” said Mary Walshok, vice chancellor of the UC San Diego School of Extended Studies and Public Service.

“But all the work of society is much more complex than that. It includes caring for aging parents, raising children, building housing,” Walshok said. “My sense is that a whole range of occupations and careers that relate to caring for our human capital need to be done better.”

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Nonetheless, the fear is real among many Americans that the “information economy” will produce a two-tier society of educated elites and less fortunate drones.

“There is a major disparity between those who have a relationship with their e-mail address and those simply concerned about their street address,” said Mark Whitlock, an economist at Los Angeles’ First African Methodist Episcopal Church. “Those with an interest only in their street address earn between $7 and $18 an hour. Those who have e-mail earn $50,000 and above.

“And the concern is that the disparity will get wider as we move out of the industrial age into the technological age,” Whitlock said.

The big problem in U.S. society is how to help the working poor, those earning $10,000 to $15,000 a year, said economist Paul Krugman of Stanford University.

It is not an insolvable problem. “Poor people don’t make very much money, so it doesn’t take a lot to improve their living standards,” Krugman said. “The earned income tax credit, on which the government spends $20 billion a year, helps the working poor. If we tripled it, we’d still have a much smaller program than Social Security or Medicare.

“You may not want to do that, but it gives you an idea of the cost,” Krugman said.

Neither the Republican nor Democratic conventions are likely to entertain such thoughts, having embarked on a new era of welfare reform.

But they should be aware of economic realities in the age of knowledge industry. The truth is, there will be no two-tier society. It’s too expensive and we don’t have surplus people to begin with.

The cost of a single school dropout in lost tax revenues and higher social spending is $4,600 a year, according to a study by Eastman Kodak. That adds up to $3.6 billion a year for the average number of high school dropouts nationwide, hundreds of billions over a working lifetime.

Also, growth in the U.S. labor force now is less than 1% a year, after a 3% growth rate when the baby boom generation was joining the world of work. Therefore, dropouts or not, the youngsters of today will get the high-tech job opportunities of tomorrow. If they can’t handle the work, U.S. industry and the U.S. economy will suffer.

It’s that simple and direct: If the United States falters in research and fails in education, it won’t be a two-tier society but a single, poorer one.

That’s because an economy based on knowledge-intensive industries is inherently more competitive, domestically and globally, said Peter Drucker, author and economic historian.

Unlike raw materials or the old economic triumvirate of land, labor and capital, knowledge can be accessible to anybody or any country. “Knowledge underlay the transformation of the world economy after World War II. The rise of Japan was based on applying management and training as they had been developed by the Americans during the war,” Drucker wrote in his newest book, “Managing in a Time of Great Change.”

A prime example of a knowledge-driven economy today, he says, is Singapore, which “heavily promoted and financed advanced education.” As a consequence, Singapore has become a producer and exporter of pharmaceuticals, electronics and telecommunication equipment--the same kinds of products San Diego makes.

Singapore, which also built up its telecommunications networks, served as an economic model and advisor for San Diego’s City of the Future program.

That is simply another indication of how the world’s economic center of gravity is shifting. Within 20 years the countries of Asia could account for half the world’s output of goods and services, double their percentage today.

But the most direct competition is personal, not global. “With knowledge accessible to everyone, everyone is expected to improve himself or herself,” Drucker writes. “There are fewer excuses for nonperformance.”

If that sounds grim, it also promises greater opportunity for those who acquire knowledge. And many young people are hearing that message. “African American kids are graduating more than they ever have both from college and high school--74% graduating from high school,” reports Bernard Kinsey, a Los Angeles business consultant.

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Those who have education know it’s wise to acquire more. Brian Merrill, 32, worked six years at General Dynamics’ missiles division in San Diego before that operation moved to Denver.

Merrill had transferable skills. In his quality control job, he worked with suppliers to ensure that the parts General Dynamics was buying measured up. But instead of going to Denver, he opted for company-financed retraining to learn computer networking. “My wife said go for it. We knew there was no future in defense,” he said.

Merrill went to a commercial computer school for five months, a long time for a married man with two young daughters. But the effort paid off. Today he earns $40,000 a year, 14% more than his last salary at General Dynamics, administering a local area computer network for Managed Care Solutions, a San Diego firm that keeps track of medical insurance contracts.

Graphic artist Rick Wilson, 43, worked 14 years for General Dynamics making engineering drawings of missile systems. When the end came for his General Dynamics job in 1995, Wilson took 10 weeks training on the Apple Macintosh, learned to draw on the computer and is now an illustrator for Qualcomm. “If I hadn’t taken the course, I would not be working at this company,” Wilson said.

In each case, additional education helped these aerospace employees make a transition to jobs with a future. And in each case they went to small or medium-sized companies, the kind of firms setting the pace in innovation these days.

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Up north in Silicon Valley, Solectron Corp. of Milpitas is an innovator on several fronts.

A contract manufacturer of circuit boards and other computer gear for 80 customers, including IBM, Intel and Hewlett-Packard, Solectron lavishes 78 hours of training a year on every one of its 13,000 employees worldwide. Tuition reimbursement for courses at community colleges and universities is routine and the company offers a fully paid master of business administration degree.

Why does a job shop put so much stress on learning? Because the manufacturing is specialized far beyond job shop tolerances. Solectron represents a shift in industrial structure.

The 19-year-old company has grown dramatically since 1991, from 2,000 employees to 13,000 and from $250 million in revenues to $2 billion, because the recession forced IBM, Hewlett-Packard and other firms to examine each step in their operations and to focus their energies on design, marketing and quality control.

Suddenly it made sense to farm out electronic parts manufacturing to companies such as Solectron. “We can make it better, faster and cheaper than they could themselves,” said Thomas Morelli, Solectron’s vice president for human resources.

“Cheaper” manufacturing used to mean producing in low-wage developing countries, but not anymore. The electronic products are too sophisticated and the need for prompt shipments too important to risk cutting corners. Because of that, a lot of manufacturing has returned to Northern California.

San Jose has become America’s most manufacturing-intensive city, with 30% of its workers making chips, circuit boards and communications gear.

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The pattern of separate, decentralized operations is already evident in the economy--AT&T; splitting up manufacturing and communications services. And the trend will accelerate as the Internet comes into mass usage in the next five years, as computer networks get easier to use.

Quite simply, the Internet will eliminate the middle man. Even now there are services that allow music lovers to listen to compact discs on the Internet and order the CD. In the interactive time to come, customers will download the music onto a blank disc.

It won’t mean the end of record stores, but it will diminish the stores’ importance just as computerized supermarket information systems have reduced inventory and thus the need for warehouses and the part of banking that financed inventory.

A lot of people and companies have been displaced through this process of “creative destruction,” as the 1930s Austrian economist Joseph Schumpeter termed the gales of change that blow through economies.

But technological change is a much less chaotic process than that phrase implies, said economist Paul Romer of UC Berkeley and the Hoover Institution.

Romer, 40, is a leading authority on “new growth theory,” or what he calls the “economy of ideas,” which maintains that research brings about innovation and so generates industries, jobs and wealth.

Moreover, it is not an accidental process as traditional economics believed. “If you prospect for gold you may not find it, but 10,000 prospectors panning in a stream have a better chance,” Romer said.

Equally, if a society invests in research, as the United States did for decades after World War II, it reaps breakthroughs that generate employment--11 million net new jobs have opened up so far in the 1990s, a rate of 2 million jobs a year.

Moreover, Romer said, technological change explains why developed economies do not simply taper off and decline as labor and other costs rise. Ideas create new ways of doing things so that smart labor and not cheap labor is needed for the work of society.

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We are now at a technological crossroads. The personal computer has reached a late stage of its development, and the era of computer communications is beginning.

The impact of the personal computer, invented only 20 years ago in California, has been profound. In creation of wealth alone, the PC has created $250 billion in new wealth, according to the investment firm Morgan Stanley, which totaled results of 580 personal computer firms that sold stock to the public between 1980 and 1996.

Where did that wealth go? It went to pension and mutual fund and individual investors and it went to entrepreneurs who started the companies and employees who worked for them.

And it financed the new companies now building the new communications infrastructure, such as Cisco Systems, a 3-year-old San Jose firm that leads in developing tools for computer networking. Cisco has 700 job openings right now, all requiring community college training at least and knowledge of major computer systems and languages.

In San Diego, Qualcomm makes telephones containing computer chips more powerful than IBM mainframes of years ago. They could form the basic phone systems of South Korea and India.

Yet even in such advanced products, global competition is intense. “The technology is evolving rapidly, so you have to keep up research on products you’re selling today, a year from now and a year after that,” said Irwin Jacobs, Qualcomm’s founder and chairman.

Qualcomm spent $81 million or 21% of its 1995 sales on research. “And the percentage is higher this year,” Jacobs said.

But Qualcomm’s basic technology stems from military research. In a time of declining government funding, what will support such innovation in future?

The universities will form new partnerships with industry, said UC’s Atkinson, as they did before the Cold War and the space program made government so dominant in funding. The universities can pursue basic research “that industry can build on as applied research and development.”

In biotechnology, Atkinson has just started a program in which scientists from the UC system and from private companies can work together on a project and share the cost.

Another way to support research, Romer said, is to educate people at all levels. Before World War II, industries funded scholarships and tuition. “The chemical industry needed chemical engineers, so duPont and Eastman Kodak funded tuition to encourage the study of chemical engineering,” Romer said. Soon, U.S. industry pulled even and then surpassed Germany in chemical innovation.

We have been here before. After World War II, the GI Bill sent people to college, financed home ownership and launched a broader middle class.

Is the U.S. political and economic system capable of mounting such an effort again? The political conventions should try to answer that question. On a local level, San Diego already has.

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About This Series

The Times today concludes a four-part series examining the dramatic changes sweeping the nation’s economy. What the series has covered:

* Sunday: A look at central Indiana, an area best known for cornfields and high school basketball that used to be part of the Rust Belt. Now one of the nation’s most vibrant manufacturing areas, its dramatic metamorphosis from pauper to prince provides valuable lessons for the rest of the country.

* Monday: They are known as the Band of Angels and they’re a major reason the river of green flowing through the Silicon Valley is overflowing its banks. As the financiers of the new economy, these so-called venture capitalists are tough, experienced and constantly on the prowl for the next Netscape.

* Tuesday: Vik Gupta is among the clearest beneficiaries of the nation’s new economy. After studying computer science at Stanford University, he was among the most sought-after graduates of the Class of 1996. It’s an elite group that wears its grade-point average on its sleeve and has been at the center of intense recruiting wars. Ten years ago, these people were known as nerds.

* Today: Where are all these changes taking us? To an economy that is based on knowledge, knowledge, knowledge. So what does the future look like? Try San Diego, which bills itself as the “City of the Future” because of its toehold in areas such as telecommunications, biotechnology, medical instruments, computer electronics and software.

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Growth Jobs

For each educational or training level occupations with the largest numerical increase in employment from 1994 to 2005. They are in descending order. For instance, there will be more jobs for lawyers than physicians:

Professional Degree

Lawyers

Physicians

Clergy

Chiropractors

Dentists

****

Doctoral Degree

College and university faculty

Biological scientists

Medical scientists

Mathematicians

****

Master’s Degree

Management analysts

Counselors

Speech-language pathologists and audiologists

Psychologists

Operations research analysts

****

Work Experience Plus Bachelor’s Degree

General managers and top executives

Financial managers

Marketing, advertising, and public relations managers

Engineering, mathematics, and natural science managers

Education administrators

****

Bachelor’s Degree

Systems analysts

Teachers, secondary school

Teachers, elementary school

Teachers, special education

Social workers

****

Associate Degree

Registered nurses

Paralegals

Radiologic technologists and technicians

Dental hygenists

Medical records technicians

****

Postsecondary Vocational Training

Secretaries, except legal and medical

Hairdressers, hairstylists and cosmetologists

Legal secretaries

Medical secretaries

****

Work Experience

Marketing and sales worker supervisors

Clerical supervisors and managers

Food service and lodging managers

Instructors, adult education

****

Long-term Training and Experience (more than 12 months of on-the-job training)

Maintenance repairers, general utility

Correction officers

Automotive mechanics

Cooks, restaurant

Police patrol officers

****

Moderate-Length Training and Experience (1 to 12 months of on-the-job experience and informal training)

Human services workers

Medical assistants

Instructors and coaches, sports and physical training

Dental assistants

Painters and paper hangers, construction and maintenance

****

Short-Term Training and Experience (up to one month of on-the-job experience)

Cashiers

Janitors and cleaners, including maids and house-keepers

Salespersons, retail

Waiters and waitresses

Home health aides

Sources: Bureau of Labor Statistics

Researched by JENNIFER OLDHAM / Los Angeles Times