Lilly CEO Urges Extension of Research Tax Credit (Transcript)

Oct. 7 (Bloomberg) - Eli Lilly & Co. Chief Executive Officer John Lechleiter said during a panel discussion in Washington that U.S. lawmakers should renew the research-and- development tax credit to make it easier for companies to compete globally. The Oct. 5 event, sponsored by Harvard University and the Business Roundtable and hosted by Bloomberg News in Washington, centered on ways to spur innovation.

Participants during the day’s meetings included Drew Gilpin Faust, president of Harvard University; former Michigan Governor John Engler, president of the Business Roundtable; Albert R. Hunt, executive editor of Bloomberg News; Bill Green, chairman of consulting firm Accenture Plc; Tim Solso, CEO of diesel truck-engine maker Cummins Inc.; Susan Hockfield, president of the Massachusetts Institute of Technology; Sally Mason, president of the University of Iowa, Ellen Kullman, CEO of DuPont Co.; James Goodnight, CEO of SAS Institute Inc.; Freeman Hrabowski, president of the University of Maryland, Baltimore County; John Hennessy, president of Stanford University; Linda Katehi, chancellor of the University of California-Davis; John Lechleiter, CEO of drugmaker Eli Lilly & Co., and Teresa Sullivan, president of the University of Virginia. Following is a transcript of the research and development session, moderated by Norman Pearlstine, chief content officer of Bloomberg News.

(This is not a legal transcript. Bloomberg LP cannot guarantee its accuracy.)

NORMAN PEARLSTINE: Our roundtable is really on research and development. And I’d like us to start by talking a bit about the competitive landscape. For much of the last century, the United States was an undisputed leader in innovation, in part because of our great universities, because of our national labs, because of policies with regard to R&D, government policies that encouraged it.

And certainly in the last few years, we’ve seen competition not only from small markets, such as Canada and Australia, in terms of immigration policy, but from large markets and from countries that are particularly innovative in their approaches to R&D.

And I thought perhaps we might begin by talking to some of the representatives here from industry who are given choices in terms of where to allocate resources. And, John, perhaps you could talk a little bit about Eli Lilly and some of the countries that are coming at you and what they’re offering you, in contrast to what the possibilities here are?

JOHN LECHLEITER: Well, thanks, Norman. I think that, first of all, I’d like to say, I believe we’re still very much the leader, this country, in terms of global innovation. That’s sort of the snapshot, but there are too many leading indicators that look like they’re going in the other direction.

So I think one of the reasons we’re having this dialogue is, you know, not how do we sort of maintain and tread water, but how do we do the sorts of things that we know are going to keep us in this position in 10 or 20 years?

One of the things that’s changed dramatically is the extent to which we do have global competition today for talent and ultimately for jobs. Within Europe, for example, in our industry, in the last - within the last several years, the European Union has sponsored this huge innovative medicines initiative, where, in essence, they’re putting a lot of money on the table to be matched by company funds to help sponsor and fund fundamental research in Europe, to keep people employed in Europe, to attract new talent there, and to ultimately build new companies.

Individual countries - Ireland, the U.K., France, China, Singapore come to mind - are very aggressively pursuing high-end research-based kinds of opportunities and jobs. They’re offering tax incentives, tax credits. They’re, you know, willing to facilitate in various ways companies getting established there. They’re building up their own university systems to make sure that that talent pool is there and present.

But I think they’re also making a clear statement that they value what we do, they welcome what we do, and they’re going to be there beside us as good partners. We get mixed messages sometimes in this country in terms of what we hear and then what we see, whether it’s regulations, tax policy, immigration policy. The unpredictability of the R&D tax credit is something very fundamental. We’re going to come to the end of this year - we’re going to have to - we’re going to go through this whole thing again. Is that going to be renewed? We need to make that a permanent part of our policy infrastructure as a start, I believe.

PEARLSTINE: Jim, you were talking about questions in terms of the number of people you’d be able to bring in on visas, preferences to stay U.S.-based. But what kinds of incentives do you find yourself weighing from outside the U.S. when thinking about where to put your R&D?

JAMES GOODNIGHT: Well, a lot of it has to do with, I guess, the long-range cost, the long-range availability of talent. You know, I have always felt like some of the labor costs in China and India over the years for high-tech people are going to fairly well equalize other than the cost-of-living difference. So, you know, we have never made a big rush into India or China.

But yet even as the - we’re listed as one of the best companies to work for in America, we still have some difficulties filling some of the high-end jobs, such as our PhDs and economics and our econometrics and statistical and OR (ph). And for those, we have made use of the H-1B visa program to help bring talent in from overseas.

We also very much appreciate the R&D tax credit that we make use of. The tax credit, just for those of you who are not aware of it, you take the average of your last three years of R&D expense and take the average of those three years expenses, and then you take this year’s expense, and the increment between the average of the last three and this year is subject then to a tax credit.

So we’re really only looking to pay for an increase in R&D. So this is very encouraging for companies who do their R&D here in the U.S. to want to - you know, to take advantage of that tax credit. So I think that does help level the playing field a great deal for those of us here in the U.S., to have that tax credit.

PEARLSTINE: Bill?

BILL GREEN: Yeah, I think - I mean, the world has become multipolar. I think you have to start there. It used to be just us and everyone else. And now there are - political and economic power has shifted from North to South and from West to East, and it’s a profound change. And it’s not about tax credits and incentives and those things. Those are all nibbling around the edges.

It’s also about the rise of the emerging market multinational and that the competitors of the future are companies whose names we can’t pronounce. And that is the competitive threat. That’s the competitive threat back home here. You take Huawei, right, a large Chinese - I mean, this company, you know, came from nowhere to a huge presence, incredibly competitive, with a mission and a focus that is profound.

If you look at the economies around the world that have natural resources, natural resources - and there’s a whole resource economy building up. That gives you incredible power, right, to fuel economies.

So I think the incentives and so forth are kind of around the edges. I think the reality is, all these other countries want to be like us. And we need to be gone when they get there. And the challenge to us is, gone where? And what national asset do we have to leverage to propel us? And I think that’s where our national research capability and innovative gene pool comes in.

PEARLSTINE: Well, in addition to trying to bring companies from - U.S.-based companies overseas with R&D offers, we’ve also seen some migration of great universities to begin campuses abroad. Yale is going into Singapore, Duke into China. Qatar has got a relationship with Northwestern, among others. I know with Stanford, we’re hoping you’ll come to Governors Island, but -

(LAUGHTER)

But beyond that, John, could you talk a little bit about what kinds of offers you might be receiving from outside the U.S. to establish campuses or relationships and how seriously you take them?

JOHN HENNESSY: Well, I think all of us have had propositions from various parts of the world, beginning in the Middle East, I think, but certainly Singapore, a country that has a very enlightened vision. And if you look at the R&D expenditures being made in Singapore and the rate they’re rising, I think that’s what you see globally in Asia.

If you look at - one of the most surprising things is to see what’s happened over the last 10 years in terms of where R&D is being spent. The U.S. has fallen from 40 percent of the world’s R&D to 36 percent, and Asia’s risen from 24 percent to 30 percent. And that process is continuing. And that’s what we need to worry about. Where will the universities be? Who will invest?

And I think what’s made it attractive in these other parts of the world is a willingness to invest. So we sit down and say, can we build something there? Will it work? Will it be sustainable?

One of the attractions of New York City is that, that’s a place you can hire faculty, you can recruit students to. It’s a diverse community. You can provide opportunities. And that’s what we find attractive about the mayor’s proposition to think about New York City as a next innovation hub for the U.S.

PEARLSTINE: President Faust, please?

DREW FAUST: I think a part - an important part of this competitive threat for universities is not necessarily in the institution as a whole, but the way that we compete for talent of faculty and students and how we see many individuals who can identify better research opportunities for themselves, perhaps, in China or in Singapore than they are able to anticipate in the United States because of uncertain funding streams, uncertainty about the commitment of this nation to investing in research and development.

So even for institutions that are staying exactly where they are or thinking about their current configuration, we are facing really competitive offers for our faculty and also a very competitive environment for students thinking about where they want to be educated, from places like National University of Singapore, Tsinghua in China, or institutions like the Max Planck institutes in Europe that are assuring our faculty that they will have almost unlimited support for their work.

PEARLSTINE: Susan?

SUSAN HOCKFIELD: Yeah, so I very much like the way Bill put the problem. The U.S. model that we’ve developed post-World War II, with this enormous infusion of federal dollars into research and the decision to put those dollars largely in research universities, rather than freestanding research institutions, to set up great policies to encourage the transfer of technology from, you know, research lab benches into companies and into the marketplace, the idea post-World War II, again, to invest in education, with the G.I. Bill and other ideas, these were very powerful. And the United States became the economic powerhouse that dominated the world.

Other countries - this is not - there’s no magic to this, really. And so other countries want to replicate the innovation economy that America has become. And, I mean, I think all of the university presidents around the table are in the same position I am, that, you know, hardly a week goes by when someone doesn’t come calling, asking MIT to help out as they establish what they understand to be at the foundation of an innovation-based economy, which is a great research university.

And I think that’s great. The American model won. But to Bill’s point, by the time they get here, we’ve got to be at the next place.

And so we have engaged - MIT has engaged in helping to build research enterprises around the world because we see that it’s like the - you know, the major corporations around the table, this is where the future is. And it doesn’t mean that we’re abandoning our Cambridge campus, but we see the incredible opportunity around town, around people, around resources, around research funding, to John’s point, that it is a global enterprise. You know, science is no different - you know, in my world, neuroscience is no different in Cambridge than it is in Palo Alto, nor than it is in Beijing or Berlin.

And I think this is all very good. But, you know, the models that we’re working on that hopefully we will have left where we currently are when the other countries catch up are critical important. And I feel that one of the places that we’ve done well but we can do better is in the collaboration between the industry and the academy.

You know, we have nibbled at that. Some of us have participated at that interface more aggressively than others. And I think, you know, understanding what we can do to smooth that border will be hugely in this nation’s advantage. Our students aren’t patient enough now to wait until they leave to experience the world of business. Our students engage in internships during the summer, and they come back super-charged to, you know, engage in the kind of science and engineering that’s going to power them in the jobs that they’ve had a glimpse of during the summer.

Our research enterprise, we have depended largely on the federal government. However, you know, MIT has also engaged with corporations for research for, you know, decades, and that’s growing. I think that’s all a very good thing, because, again, if we want to speed the transition of these innovations, you know, take out all the valleys of death between, you know, something that happens between the lab bench and the marketplace, we’ve got to do it by working even more closely with industry, and we’ve got to figure out how to make that industry.

And, you know, making the R&D tax credit something permanent, absolutely critical. You know, this morning, we talked a little bit about the PTO. Well, you know, the new legislation is good. If the funds don’t flow to actually speed up the patent process and smooth it out, all that legislation is going to be, frankly, useless.

So there are a lot of things we can do that are kind of low-hanging fruit, and then there are harder things to do, but, you know, I think figuring out how to get to the next step has to be the most important charge for, you know, this group and our colleagues outside this room.

FREEMAN HRABOWSKI: Building on what Susan was saying, I think that the notion of collaboration and partnerships, which we’ve talked about before, will be critical in looking at companies, universities, national agencies, universities working across institutions, since faculty do collaborate a lot, looking at the problems that companies are having right now, challenges -

PEARLSTINE: Can your students do co-ops with industry?

HRABOWSKI: Oh, very much so. Very much so. And the Baltimore-Washington corridor is just hot, whether you’re talking about biotechnology, all the national institutes, but the biotech companies, but also looking at intelligence and defense, and so work with NIST and with National Security Agency, cybersecurity, everybody, so - we’re in the middle of a cybersecurity competition right now, but it’s not just the workforce development. It’s in the research.

And so I think this theme of need to share, rather than need to know, will be more critical than ever. Product innovation has to deal with, how do we give people more so that the synergy can build among different kinds of institutions? And I think faculty have gotten away from thinking we want to keep this separate, what we’re doing, from companies and understanding the hottest stuff going on, quite frankly, is happening in the corporate sector, because you’ve got great researchers there, too.

And so the collaboration, the partnerships, need to share, will be themes we’ll hear more and more about.

PEARLSTINE: Chancellor?

LINDA KATEHI: Yes, basic research as part of the R&D I think is something we all care about. And we worry about how it has been funded over time.

Today, we’re looking at, in the U.S., about 60 percent of the funding comes from the federal government, and the next one are public universities or private universities who are - which are placing their own funds towards support of basic research. Industry comes third.

And we need to find a better way to really, over time - and stable way, to provide funding for basic research. It’s absolutely critical. We find we have seen difficulties in getting our researchers to participate in this process early in their careers. We see NIH having difficulties in terms of getting researchers before their late 30s into the research enterprise.

And personally, what I see as a threat in R&D in the U.S. is our inability over time to create a stable environment in support of basic research.

PEARLSTINE: Teresa?

TERESA SULLIVAN: Yeah, I’d like to talk a little bit about basic research, but the first thing I want to say is that a focus group done last year showed that a cross-section of the American public believes basic research means unimportant research, that basic is so fundamental that you really shouldn’t even be doing it.

And it’s important for people to understand that, when we speak of basic research, we actually mean the long-term, patient, curiosity-driven research that might not seem to have an immediate marketable result, but which often turns out to be remarkably useful in the long run.

For example, there was some obscure work done by a German biologist in the late 19th century that found that butterfly wings were colored because of a metabolic process. Looks like perfectly useless information, but later led the University of Texas to the discovery of a vitamin.

So it’s very hard to tell sometimes where the basic research is going to go and what its result’s going to be. And yet the pressure on the funding is greatest on that basic research. And without that basis, we won’t have the know-how or the skills to be able to go on and do the development-oriented research, to do the partnerships the companies would like us to do.

PEARLSTINE: Before getting into the issues of government funding for basic research, I’d like to just talk about the corporate side of it for a second. You know, when we think back to periods of great basic research, I think about Bell Labs, I think about Xerox PARC.

The corporate landscape has changed in a way where it’s very difficult for CEOs today to commit to that kind of expenditure. Have we lost something as a country as a consequence of, if you will, the corporate structure today, the emphasis on short-term profitability at the expense of long-term investment? And is that something that is going to have an impact in terms of the decline of important basic research?

LECHLEITER: Well, I think the character of research, what we call R&D within our companies, has certainly changed. I don’t think - certainly in the life sciences - I see any logic set that would say to us, we should back off from that investment, notwithstanding the fact that quite recently Wall Street’s pressures have been the opposite direction. They look at the research we’ve invested in the last 10 years, and they say, where are all the new medicines? And we’re not sure all that money should have been spent. We want some of it returned to shareholders. I think that’s a short-term focus, but obviously it’s a pressure that we all feel.

You know, I think that the distinction - I think Teresa said it earlier - between R&D gets blurred. For example, if we seek to discover new medicine to treat Alzheimer’s, we probably don’t have a lot of research going on within our company that looks at the fundamental biological targets. We depend on work done at Harvard and MIT and - and Stanford and Virginia and all these great places to give us that information. That’s our substrate. That’s why we’re just as passionate - even though most of our R&D spending, you might say, is D, about the importance of maintaining a strong research infrastructure in this country, to see that the NIH, the National Science Foundation, other institutions get funded adequately, and in a consistent way, Norm.

And, you know, this - what we call basic research or fundamental research, has long time horizons. You can’t - you can’t do a sine wave-type investment pattern and expect to see it pay off. There needs to be some consistency and some certainty over a long period. That’s what’s made this country as competitive as we are, this pattern that started around World War II, this ecosystem that’s developed between government investment, university-based research, and industry.

And we’re in peril if we think we can cut that apart and still maintain the competitive position that we’ve enjoyed.

PEARLSTINE: Ellen?

ELLEN KULLMAN: You know, we’ve been doing basic research for 110 years and continue to do it today. I mean, we’re a science company, 209 years old. When the experimental station was put into place in like 1902, it fundamentally has fueled - the DuPont Company has fueled major inventions in material science, things like Kevlar, things like Nomex, I mean, just tremendous franchises that have come out of that basic research. And that’s not a short-term gain.

But research has changed over the last few decades, and it’s much more distributed today than it ever has been. It’s no longer what our scientists do in our own laboratories, invent it and they will come. It is - we work very closely with the national laboratories, with universities, not only on the R, but on the D, and on application development, really, to the connection to the customer.

And so the changing face of research has meant that that landscape has changed. But fundamental to it all is that the United States and their position in a very distributed research world - and it is globally connected today - fundamentally has to be maintained if we’re going to keep that connection to our economic engine, because that has been a great connection to our economic engine.

HENNESSY: Norm, I think there’s an interesting perspective. You look at the work that went on at Bell Labs and Xerox PARC, whether it was the invention of the transistor, Unix, the creation of the modern prototype for personal computers, those largely became public goods that many companies benefited from.

Well, that’s the kind of long-term research that belongs in the universities, where it can spread out and benefit - all of American industry can take advantage of it. And I think that’s a legitimate long-term basic research investment.

They didn’t start - they didn’t invent the transistor because they knew there was this device there. They were studying basic solid-state physics, and they discovered a phenomenon. And that’s the kind of research that we should have in the universities, the government should be funding. And then we should have collaborative working relationships with all of American industry to try to get that research out into the marketplace.

PEARLSTINE: Tim?

TIM SOLSO: Yeah, your question about short-term pressures, I think it - in our case, we invest 3.5 percent to 4 percent of sales - and the sales are growing, so we’re investing more, and we won’t compromise on that. If you start compromising on your research and development, you’re basically going out of business, which I think is true for the government, as well.

And I would just build on what Ellen said, is that we have a research model - we call it product-preceding technology - which is the development side that we know that we’re going to allocate so much money to every year, regardless of what the economic conditions are.

And then the second thing is that we partner more now than we did before. So, for example, right now we’re involved with the Department of Energy, a couple other companies, two national labs, and the idea is by 2017 to reduce fuel - or improve fuel economy by 25 percent for heavy-duty trucks. And so each of us has a chunk of that, and it breaks down into the systems.

And some of that we’ll never use, but some of it we might use in a different way. So would we be doing that? The government put $39 million up; we matched it. So clearly, there was some incentive. But that distributed technology - and we do that outside the United States, as well.

SALLY MASON: That consistency that Tim just mentioned that his company invests in is what Linda was alluding to, we don’t get on the federal side. And it’s alarming, because then it goes back to some of the other issues that we’ve talked about this morning, including, how do you keep young people interested in the STEM disciplines? Because if they’re constantly looking at the challenges of, where are the research dollars going to come from for me to be able to do the work that’s important to me and important to the country and important to many, many other people, they’re going to lose interest in staying in those fields.

And, you know, whether they flee to law or whether they flee to some other discipline, they’re going to go someplace else because there isn’t that consistency. There’s too much uncertainty. And you see generation after generation just kind of winnow away because of that inability to just provide some basic consistency in what this country has grown itself on, which is research.

PEARLSTINE: John, perhaps you could talk a little bit about that. Basic research seems to be very much under pressure, as government thinks about tough spending choices with a weak economy. The America Competes Act is under fire again. Is this problem as intractable as the problems that we were talking about with regard to immigration? Or is there a consensus or constituency that can gather around the importance of basic research and government funding for it?

JOHN ENGLER: This actually may be harder than immigration, I hate to say, only in the sense that Congress doesn’t even seem to be able to pass budgets on an annual basis. I mean, that’s what we’re talking about here. There isn’t a company or a university that doesn’t do an annual budget and have, you know, a multi-year plan that they’re working off of.

And the short-termism up on the Hill today is such that - and I think it’s a big problem in terms of - I look at basic research as sort of like the - what I would - it’s in the intellectual capital budget for the United States. There’s the physical capital budget. They don’t get that done, either. That’d be infrastructure, and you can’t do infrastructure either on this kind of a curve, because you overpay one year and underfund the next. And it’s - we desperately need that kind of reform.

There is - and it’s interesting. People like Paul Ryan, for example, at least have said that one of the reasons he didn’t want to be part of the committee of 12, he was concentrating on trying to devise comprehensive budget process reform so we can get to - I mean, and I think that - that is a worthy goal. It needs to be done.

And to the consensus about basic research, the debt problems are real, of course. But, you know, nobody’s used the metaphor about, you know, eating your seed corn, but, I mean, that’s your - Iowa would understand that.

(LAUGHTER)

MASON: (OFF-MIKE)

ENGLER: You do not do that. And - and so I think this is - this is really - this is one where probably the collaboration - if there’s one thing that will come out of this conversation today, is probably how unified we are on the importance - and this is a very, very small part of the federal budget. That’s the other part to be - I mean, we’re - we’re really down into the rounding errors here.

I mean, you have fraud in some programs that are bigger than the research effort we’re making as a nation, so you have to - you have to step back and say, wait a minute, this is - so we’ve got to get this right. And I think Leader Cantor, who comes in here, this is a good set of questions to be posing to him.

But I would hope that in the - and this is against all hope, maybe, at the - as we get into this next election cycle, that we would be pressing both presidential candidates on their - on their support for this. Because this has got to stop at the top, too, and it’s got to be men and women in the Congress of both parties who join in. This is the intellectual capital that you’re -

MASON: It’s tremendous economic impact, too, locally in particular. I mean, if you just take any one of our universities and you begin to look at just the economic impact with the research dollars that are spent, you can see anywhere from three-, four-, five-to-one returns on the investment that’s being made. And I challenge you to find investments today that are giving you that kind of return.

It’s even greater in other areas, in terms of job creation. You’re creating high-quality, good-paying jobs from those R&D - most R dollars that you’re getting. And, you know, why are we quibbling over such a small part of the discretionary budget that’s doing such a lot of good in - across the country today, both locally wherever those research universities are, but across those states where those universities are located, too?

We did an economic impact study in Iowa that showed that we’re responsible for 1 in 30 jobs in Iowa, just the University of Iowa. And that has to do with the research engine and everything else that we do, but it’s a compelling story in every state.

ENGLER: In an era where there are at least minimizing of earmarks, which in some cases provided for some of this funding, because somebody thought, “I got credit for doing it,” is there a case to be made for - for peer-reviewed research investments that - and how do you - how do we make that case differently? And do we have at the university level - as we think about intellectual property - you’ve got different models that you’ve used, in terms of, you know, the faculty by - you know, the competition for faculty that Drew talked about earlier, I mean, so you’ve got the brilliant scientists with the idea.

Do they take it out? Do they keep it in? How do they get rewarded? How do - are the incentives there to keep - to keep your researchers, your best? And I don’t know how that works, but has that changed?

HENNESSY: But I think they - John, I think they largely stay at the university. They may go out. They may cycle out to Silicon Valley. We’ve had lots of faculty go out and do their thing and then come back. Of course, we send out - we export technology every day. Every year, a bunch of our students graduate. They go out with great new ideas and they take all the technology and they take what they’ve done.

I think your key point is, this is a tiny piece of the federal budget. It’s less than the cost increase of six months in Medicare, less than just six months cost increase, the entire federal R&D investment in universities. So to cut that off, to take their seed corn away, will just result in weaker economic growth for the country, fewer jobs.

HOCKFIELD; Yeah, and, by the way, John, taking it away, it takes away any possibility that we’ll reduce those Medicare costs, because the solution -

(UNKNOWN): Right. Right.

HOCKFIELD: to greater - you know, medical care more efficient, lower cost is more technology, not less. And we’ve got to be sure that we’re funding the innovations that will drive that.

You know, a lot of what we’ve talked about in this session is about patient, long-term investments, and something that I think we probably all worry about in the United States, and getting the kinds of policies that encourage investors and companies to - you know, to make long-term commitments and for the nation to make long-term commitments.

The other thing that I hear again and again from our corporation colleagues is, also, reliable regulation. You know, this idea that things change year to year makes it impossible. And I hear this a lot around biopharma and biotech, that it has become increasingly difficult to actually, you know, move a product over the 10- or 15-year development period when you don’t know what the target’s going to be out at the end.

So I think, you know, our government would do the nation a great favor to have, you know, reliable investments in R&D, reliable regulation, and reliable tax incentives so that companies can invest in ways that are good for the nation and good for themselves.

HRABOWSKI: The American public believes in our universities. We know that. They continue to send us their kids, clearly. The people keep coming back to us. So there is a level of confidence that’s there.

But I think many Americans would say something that’s very similar to something Teresa was saying when she was talking about basic science. They would say they don’t know a lot about some things that we do, and that when we talk, we tend to talk to each other, and that the language we use is not clear enough that people become convinced and even passionate about the issues.

When you think about - you take that with the issues about the elections and what the American public really cares about, yeah, they do care about health care costs and making places safe and all the kinds of IT-related inventions, but they still don’t connect it to necessarily to what we’re doing.

And so in our state, what has been significant - and it gets back to the local level - when you talk about what’s going to happen in the federal level, you’ve got to say, what’s happening in these states? Well, we’re very fortunate to be in a place that talks about the knowledge industry, with a governor and legislators who want to come around, get into the companies. We’ve got 75 companies on campus. My governor is on our campus, trying to understand how this relates to the biotech world, to the cybersecurity world, and then to talk about those things.

We need not only people at the universities talking about these issues, but elected officials who become comfortable enough that they will talk about these issues at the local and state levels as we think about how you get it up, because while it may be a small percentage of the federal, everything has to do - and what is it people care about? What are they willing to fight for? And what do they see as important to their future?

FAUST: It just strikes me that so much of what’s been said here speaks exactly to your point of what is the constituency for research, and that we have not created the constituency in a forceful enough way. And earmarks, as you point out, was one way to kind of tie it to a constituency, but we’ve seen so many examples around this table of different ways of building a constituency.

One would be - and you’ve remarked on this, Terry, and so did John - that we have to explain why basic research has an impact on everyone’s life. Transistors, look what that does for each one of us and where it came from. It came from basic research, and so to make that connection to people’s daily lives.

I think another important part of what we’ve talked about is, really, what Sally said about basic research being an engine of growth in regions and almost in explicitly identifiable terms for each of our universities. What is our impact on Boston? What is your impact on Iowa?

And then another part of this, it seems to me, is the constituency of the future, which is, if we lose a generation of students because they decide this is too uncertain an area to go in, they don’t see the rewards in it, that is devastating for our employing the talent in our nation.

And so I think we need to have youth and a generation be our constituency, as well, for this, because their future depends on the appeal to their talent to go into these fields and believe that they can be meaningful.

PEARLSTINE: If research is so important to universities - and if we can stipulate that cost pressure is going to be a reality for all education going forward - are there other places where restructuring our education system or the universities themselves, in terms of bringing new technology to teaching and so forth, where you can get economies that - that at least enable you to maintain resources for research?

FAUST: I think for all of us, cost control and, really, examining the model of cost in higher education is at the core of how we’re thinking about our jobs, if I may be so bold as to speak for all of you, but that is something we’re all thinking about, ways of teaching, ways of changing administrative structures. The whole set of how we do our business and how we fund our business is, I think, under tremendous examination.

HRABOWSKI: And legislators are looking at that. I mean, the university system of Maryland has had so much success because the leadership has pushed the idea of effectiveness and efficiency for the last seven or eight years. And we’ve been cutting costs and finding ways of redesigning courses and using technology and talking about it with legislators. And as a result, they’ve said, listen, they’ve done the cutting; let’s see how we can support them.

So we have to find ways of getting people to really give us that support. And at the state level, Senator Mikulski is a social worker who can talk about science with anybody. She loves it. And to have people who are elected officials who are passionate about science can make a big difference.

PEARLSTINE: Can you say the same about California?

KATEHI: Not quite, but I would say - I would say, however, that - talking about the constituencies, that is an important discussion to have, because at times it feels that the universities are trying to make the case for themselves, and at least that’s how it comes across on the other side. And it is important, of course, to make the connections between basic research and the eventual improvement in quality of life that we have observed over many years in this country.

But I would say, there is a need for that, but also a need for leadership at the state or the federal level that recognizes that and then articulates it for the public. It is very hard for a person who has not received an education higher than high school to really understand how basic research connects at the end. Why is it critical that we have creative ideas and a big pool of them before we can produce anything that is useful to people?

And somehow, we need to have a leadership that understands it. Obviously, it happens in some states. It does not happen in others, for many reasons. But that is absolutely critical.

And I think, at the end, it’s an issue of the wellbeing of the country and it needs to be presented like that. It’s a major threat to this country if somehow we reduce and limit our ability to produce new ideas.

I mean, we spoke about innovation extensively. We spoke about immigration as part of this, just in the session before. But all of this is a moot point if the ideas are not in place to eventually help us go through the innovation process and then eventually create products and services that will make everybody’s life better.

Somehow, that is made, the argument, but it’s getting lost in the noise of a budget, in the noise of other, of course, priorities that we see. Health care is a major priority. Pensions are major priorities. And it seems like in our state, in the state of California, that the importance of higher education is getting lost in that.

And we are desperate for leadership that is going to really pull it up and put that, place it right upfront and place with that the importance of it in the -

HENNESSY: I think Linda’s right, but the higher education community also has to hold itself accountable. We’ve got - we’re a people-intensive, high-talent business. So you have to understand that and understand that that has implications for our cost. At the same time, we’ve got to be thinking about what we can do to hold down costs. That means using our community colleges in a more creative fashion, thinking about how we collaborate with them, something the UC system has done very well.

We’ve got to think about, how do we begin to use technology to at least temper the growth rate in the costs of education? If we don’t do that, we’re just going to get to a situation where education becomes more unaffordable, given the dilemma the states find themselves in, the federal government, and families find themselves in, affording it. And we have to make sure that accessibility remains a key goal for young people in this country. That’s the only way we’ll have a great country.

PEARLSTINE: President Sullivan, do you have -

SULLIVAN: Virginia’s famously efficient in higher education. But we’re also seeking a good partnership with our state government so that we can talk about ways that we can bring added value to the problems the state faces.

For example, we have an underfunded retirement system, common with a lot of states. I called together our experts at the university who often consult with Fortune 500 companies about their pension plans. We wrote an unsolicited white paper to state government to say, here are some of the ways that you can solve this based on what we’ve seen happening in the private sector. There are ways we can volunteer to be out there to be helpful.

But the other thing I wanted to say is, we don’t save the money for its own sake, because how we reallocate it is important. In a research university, it is important that you start reallocating that money so that students get the experience of research as early as their first year. That’s how we produce the next generation of researchers.

It’s not just that the knowledge gets reproduced in the classroom. It’s that they get to go out and help us co-produce that knowledge for the future.

PEARLSTINE: Bill and then John?

GREEN: No, you know, our national research machine is a national asset that we’ve been investing in for 50 years. And it’s payback time. We’ve got big challenges in this country. Who are you going to turn to, right? You know, business has not a whole lot of credibility. Obviously, the Congress and the government has no credibility. There are very few people left who have enough credibility to get the confidence of the American people. And I do think the story has to be merchandized in a more profound way.

And I think, secondly, taking it to the - I mean, everyone’s worked very hard within their institutions to raise their game and deliver more value for money. Collaboration is the next frontier, because there’s tons of duplication. Everyone has their own, you know, technology backplane. Everyone has their own processes. Everyone has their own agenda. There’s duplication. And I think the opportunity to rationalize across is where there’s huge potential still.

PEARLSTINE: If I could just pick up on that - and this will be a declaration against interest, as a history major graduating from a small liberal arts college who avoided every science course - one of the things that I note that we might be able to learn from China is that all of its leaders for the past couple decades have basically come out of electrical engineering, and maybe the answer for this is that we need more engineers and scientists running for Congress and taking political positions, rather than staying in industry or staying in academia.

And perhaps with that, I might ask John, if you could wrap up for us, before we go to break.

ENGLER: Well, yeah, actually, Bill Green (inaudible) about our messaging. And one of the things that - Drew’s comments really struck me, that - and - and Susan Hockfield made this same point, I think, a little bit ago about the - you know, the research. That’s how we actually solve some of the big public policy questions. It’s, how do we unlock the answers?

And of all people, I was listening on one of the public radio stations in - and former Speaker Gingrich was giving out his plan. But one of the points of his plan was interesting. He was proposing, I think, you know, a $1 trillion effort - you know, he was saying the $1 trillion cost of Alzheimer’s, you know, and - and he wanted to have a crash program - one of the - and he said this will (inaudible) a big, new idea.

I do think that one of our conundrums here is, does it take - do you have to have these big, new ideas out there, as we did with the - in defense and space and others - to drive this? Can you do it just for the good of the order, which I think is considerable, but non-specific? Is there a - is there a need to have a rallying cry? Or how does that get defined to - the call to action versus the - and how specific versus how general? Because I think that’s important.

I do believe that - that the magnitude that we’re talking about - and we’re subject to the Golden Fleece Award always, because they can always find some professor who’s doing something which sounds - and maybe it’s, you know, perfectly defensible, but it’s going to sound silly.

(UNKNOWN): Butterflies.

(UNKNOWN): Butterflies, yeah.

ENGLER: Yeah, exactly. And, boom, there goes - and that’s an assault on the whole thing. But - so I - I throw that out, but I do think this is one where you leave here today and our ability to continue to talk about how we would - what that agenda ought to be.

I do not think we’ve given Congress a clear agenda. I will say that. I mean, I think we are - we are for more, but I think - to do is a little bit of a question mark. And -

PEARLSTINE: Great. Well - yes, Jim?

GOODNIGHT: Well, I just want to add that, you know, we’ve focused a lot in this session on government spending at universities, but, you know, us private companies are doing a lot of R&D these days -

(UNKNOWN): Two-thirds of it.

GOODNIGHT: especially in - in my area and all the computer software area. It’s either you research and stay ahead or you’re lost. So last year, we spent 24 percent of our total revenue on R&D. We have developed advanced analytics laboratories, advanced computing laboratories. The advanced computing laboratories are working on taking all of these statistical routines that we use and putting them in massively parallel, so that we’re using thousands of cores simultaneously to solve the big data problems of the world, doing problems that used to take days and doing them now in just minutes. Our advanced analytics lab is working on social network analysis, where we can decide what people are integrated to create fraud schemes, that we’re doing a lot of work for local governments and state governments on insurance fraud. We’re doing a lot of work on Medicaid fraud.

And all of this is new research that we are doing on our own. So there’s a lot going on in the corporations of the country.

PEARLSTINE: Well, with that, we have hit a time where we’re ready for a break, and then we’ll return in a few minutes, where Susan Goldberg will moderate our third panel. But my thanks to all of you for a terrific discussion.

***END OF TRANSCRIPT***

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