U.S. House of Representatives Democratic Caucus Retreat

Microsoft Chief Executive Officer Steve Ballmer
Williamsburg, Virginia,
February 6, 2009

STEVE BALLMER: Well, I want to thank Jay, I want to thank the speaker and all of you for the opportunity to be here today and chat with you. It’s a real honor to have a chance to share some thoughts on the economy and on innovation, and hopefully spur some thoughts on how we all participate in restarting long term economic growth.

As Jay was telling my story, so to speak, I thought I’d put in one parenthetic that might be of interest. When I got to Microsoft and we were this tiny little company, we didn’t have the budget to put people up in hotels, so I lived with Bill. And every time I sat down, in every corner, nook and cranny of couches, tables, I’d find these little yellow pieces of paper with Bill’s writing that had a bunch of people’s names and companies’ names and numbers.

So, finally — I think of myself as pretty good pattern matching. Actually I was sitting next to Congressman Frank, and we were both trying to see which of the six states that are going to be still bigger than North Carolina by 2015. So, we’re going through the pattern matching game, and I just couldn’t figure out what these numbers were.

So, finally I said to Bill, what is this? He says, Steve, I’m really always worried about whether we’re going to have enough cash to pay people. So, every night I write down everybody who works for us and how much we pay them, and every contract we have and how much it’s worth. I’ve got to count the pennies tightly and that’s why you’re here now.

In this economic climate, whether you’re talking about businesses or consumers, everybody I think is having the little yellow sheets of paper out, and counting pennies pretty tightly.

I’m going to make one thing clear up-front: I’m not going to claim to be an economist. On the other hand, I think it’s sort of the responsibility of every businessperson to really form a model of what’s going on in the economy, if you’re going to provide proper stewardship to your business; big company, small company, it’s important to have a model of what’s going on, and certainly have been thinking a lot about the economy in the context of how we think about and plan for the future of Microsoft.

For the past 25 years, the world has certainly enjoyed incredible, incredible global growth. Average incomes around the world grew at unprecedented rates, millions of people moved from out of poverty into the middle class for the very first time.

I think that expansion was built on three things: innovation, globalization, and debt, increasing debt.

American technology was certainly at the heart of the innovation that played the central role in the process. The PC, the Internet, fiber optics: Those things were things that continue to keep America at the forefront of technology, and really at the lead of a growing global economy.

But over time, over the last period of time, the balance has really shifted. Instead of innovation and productivity driving growth, it’s really been unsustainable levels, particularly of private debt, that have been a key driver of economic growth.

The hard truth is this, in my opinion: The private sector of our economy has borrowed too much money, businesses and consumers alike, fueled by the a lot of different things, some notion that housing prices would go up forever, that you could borrow money cheaply.

I gave a speech at Stanford Business School a few years back, and I was talking, we’re a company that has been conservative, per the yellow pieces of paper. We like to keep cash. And a very smart Ph.D. in the audience puts his hand up and said, ‘Why don’t you borrow money?’ I said, ‘I don’t like to borrow money.’ He said, ‘But it’s so cheap; you’re depriving your shareholders.’ I think it reminds us that essentially consumers and businesses alike have really borrowed too much money.

The bubble has burst. We can no longer rely on consumption by refinancing our homes or inexpensive money to fuel economic growth, and that’s certainly had a huge impact.

At our own place, what we think about PC sales, they are discretionary in most home budgets, the second, the third PC. Consumer electronics has that characteristic. Fifty percent of capital spending in this country is on information technology. Less capital, less spend on information technology. No sector will be immune.

There’s a natural tendency to want to blame somebody for the economic crisis. In reality, I think you have to say we’ve all contributed to a culture of spending and private debt. And I distinguish private debt and government debt, because I think you have to be much more — the private sector has less ability to be thoughtful, and the government sector needs to be quite thoughtful. But there certainly has been too much use of debt.

At Microsoft, we’ve studied these developments. We believe this is a once-in-a-lifetime economic event, but it’s not unique frankly in U.S. history. The current situation looks a lot like several — not one but several previous cycles of long-term private sector debt.

In 1929, for example, just before the stock market crash, the private debt-to-GDP ratio was 160 percent. Last year, private sector debt as a percentage of the GDP: 300 percent; far more leverage. And you can see it’s been a steady increase basically since almost the end of World War II.

In my view, what we now have will be a fundamental economic reset. The economy is going to have to re-establish itself at a level of spending that reflects the real value of underlying assets before we can all start growing again at a healthy rate.

This may not be the thing that people really want to hear, but it’s certainly what we’re planning on, and it’s the truth on which we’re basing sort of our model, if you will, at Microsoft.

In our opinion, in order to reach the reset point, three things need to happen. First, the economy must be deleveraged. Private debt as a percentage of GDP has to be reduced. Restoring health to the nation’s financial system is a fundamental part of this.

Just for historical note, not only during the Depression, but actually in 1837 and in 1873 we had similar style resets in the economy. We actually have at least three historic periods that we can study in which similar phenomenon occurred. I think it was 1873 where even the state of Florida filed for Bankruptcy. So, we need to be thoughtful about being students I think of the history.

Second, confidence must be restored. The stimulus package, in my opinion, is vital. It will provide a cushion as we reach the reset point and it will help restart our economic engine. (Applause.) I certainly want to applaud the steps that the House has taken under the speaker’s leadership to quickly pass a strong stimulus package and to help shore up our financial institutions.

Third, America really has to return to growth that’s built on innovation and productivity, rather than leverage and private debt. That must happen.

The good news is that the U.S. economy is still the world leader in innovation. Our universities are the envy of the rest of the world. The American workforce is the best on the planet, and U.S. companies continue to drive technological progress in almost every industry.

But the time has come when we need to renew our innovation capacity.

We went back and studied what innovation companies did during the time of the Great Depression. One company that stands out, if you study the Depression, is RCA.

Now, the fact that RCA is not around today, this has nothing to do with their behavior during the Depression. There’s probably good learnings for a lot of technology companies in that.

But during the time of the Depression, RCA was probably the most broad-based R&D-centric company in America. And while it cut costs certainly to survive the Depression, it never retreated from its commitment to core research and development. And as a result, after the Depression had ended, it really led and the U.S. led TV technology developments for the next 25 years.

That was good for RCA; it was good for America.

In my view, American companies aren’t going to be able to weather this economic downturn just by cutting costs either. You may have heard that Microsoft, our company has decided that we need to reduce 5,000 positions. What you may not know is that at the same time we’ve decided we’ll also create two to three thousand new jobs — mostly in the US — as we continue to push into new areas that require investment.

In addition, despite the tough economy — I might even say because of the tough economy — our company will continue to invest more than US$9 billion a year in R&D, because we think it’s that R&D spending that will cause us to remain strong. (Applause.)

People ask me, are you upbeat or not, and I say, about technology I’m super upbeat. The industry that we’re in, information technology, stands at the threshold of again a new revolution.

I joined Microsoft essentially for the PC revolution. The Internet revolution, we have the revolution of what I might call pervasive computing. Computers that are as thin and light as this on which you can have access to the world’s information will be kind of expected over the next five and 10 years.

So, being optimistic and positive about what technology can accomplish is very, very important.

If you take a look at it today, there is increasing ubiquity and power in the computing platforms. A laptop today has more computer power than a mainframe did when I came to Microsoft. Mobile phones today are more powerful than the PCs that existed 10 or 12 years ago, at the start of the Internet era.

But over the next few years, we’ll continue to go into uncharted territory as many-core chipsets and devices become common, and we develop new ways to write programs to help us model the world’s climate, the world’s population, the world’s energy needs; all of that will be super possible.

This is going to lead to breakthrough applications, more intelligent, more aware of their environment, and where we can really help anticipate the information you need and the capabilities that you really want to have.

The next few years are going to see dramatic changes in the way you interact with technology: touch, gestures, handwriting, speech recognition. Instead of telling my secretary to get me ready for my trip to the House Democratic Caucus, I’ll just type it in or speak it to my computer. It can look up, it turns out, who you all are, and where you’re all from, and it’s got all — it’s all out there. We just need to automate it in ways that real people can get access to information.

Some of this I’m sure sounds a bit like science fiction, but we’re rapidly nearing a time when interacting with technology really will be like interacting with people, which will make technology more accessible and really unlock the potential of computers to individuals and communities to help solve tough problems.

A third trend, as I talked about, is screens and displays. Literally every wall, every tabletop, you’ll be able to roll up your computer, if you will, and put it in your purse or put it in your pocket. That’s what we have to look forward to.

All of these trends are going to help create a computing platform that extends from PCs and phones and TVs out into the massive storage and connectivity out in the Internet.

All of this will enable us to transcend the barriers that exist between technology today, and seamlessly connect people to the information and applications that you’re interested in, no matter where you are, no matter what kind of screen you have in front of us.

It’s very important. As the computing environment becomes richer and more pervasive, and more universally useful, it will enable citizens to be more active participants in our national economic recovery. If we do our jobs right, the computer revolution will help amplify our ability as individuals and as a nation to tackle the pressing problems of society: education, health care, energy independence; and at the same time, continue to enhance our productivity and economic competitiveness.

They say GDP is consumption plus investment, plus government spending, plus productivity growth and innovation, and I’m very bullish on what will happen in our industry.

Imagine, for example, an intelligent energy system in your home that’s linked to a smart energy grid. With that infrastructure, your dishwasher and washing machine would know to run when electricity is cheapest. That kind of intelligence and control could really have a major impact on residential power consumption, which is a very large piece of energy consumption in this country.

There are similar scenarios in healthcare, where genomic research will open the door to personalized treatment; and in education for sure, where technology will enable all teachers to use the very best teaching methods and connect with students in new ways.

The truth though, we can barely guess what is possible. With the kinds of technologies we envision, other people, many people in many fields, fields of science and social science and many, many others, will come forth with an incredible outpouring of new ideas and innovation that will continue to expand the universe of what’s possible. So, the enablement not only of information technology and the productivity it brings directly, but other new forms of innovation I think will really be important for long term growth and prosperity across many, many fields of endeavor.

To harness this potential of this transformation, I think it’s going to take a lot more than investment by the private sector. We need investment and we need leadership by government as well. I don’t understand all of the issues and interests that you have to deal with. As I was sitting listening this morning, I understand more that there are hundreds of unwritten things that citizens just don’t really know about what it takes to catalyze these things to happen. But I would at least like to offer a couple suggestions on some things I think are important.

First, we really need the federal government to invest in human capital, in the citizens of our country. (Applause.)

I sit here and talk, talk, talk about innovation, but it’s people who turn ideas into positive and productive innovation. And in today’s knowledge-driven world, innovation will depend on people who are actually technologically sophisticated, have strong critical thinking skills, have expertise in math and science and engineering.

This is true not only for people who live in places like Seattle and work at places like Microsoft, but live in places like Detroit, where I grew up, and work for companies like Ford Motor Company, where my father worked when I was a child. I think this is going to be true for anyone, anywhere in this country, who hopes to earn a wage that can really properly support their family.

This means investment in education is critical, and I’m really encouraged by the very heavy emphasis on education that’s in the stimulus package. (Applause.)

We really need to transform math and science education in America. We need to improve teacher training, teacher quality.

I was talking earlier in the day with some folks about just how many of our math and science teachers don’t have the correct training and accreditation, and that stands in the way of us really breaking through.

For those who are already in the workforce, we need programs that provide ongoing education and training, so they can be successful in this knowledge-based economy. For those who are unemployed, we need new technical skills training to give those people a start back up the economic ladder. And we are going to need lifelong learning programs to keep people fresh, as innovation and technology continues to power the economy.

The second thing we need — and I’ll tell the Speaker this was written even before our meeting this morning — we need greater government investment in our nation’s science and technology infrastructure. (Applause.)

I came in, flew in red eye, was a little groggy this morning when I got here. I sat down with the speaker at 8:00 AM, and she woke me right up. She said there are four things I want you to make sure you understand are a priority: science, science, science, and science. I was awake by the end of the fourth science for sure, and I couldn’t agree more wholeheartedly.

Science and technology is the backbone for productivity and innovation; has been, not always information technology, but science and technology has been a driver of economic success. Government investment in science and engineering as a percentage of GDP is half, in this country, what it was in 1970, and it would be growing rapidly, particularly in countries in Asia, off a small base albeit, but in places like India and China and Korea the trend is the other direction.

We need to pursue breakthroughs over the coming years in green technology, alternative energy, bioengineering, parallel computing, quantum computing. Without greater government investment in the basic research, there is a danger that important advances will happen in other countries. This is truly I think not only an issue of competitiveness, but also in a sense of national security. Companies like ours and others can do our fair share in terms of funding of basic research, but government needs to take the lead.

This is also a moment when government should invest, I think, in information technology to help transform healthcare. We deliver information technology that we think can help create a connected health system that delivers predictive, preventive, and personalized care, a system that I think can improve the health of Americans and reduce the cost of health care in this country.

Government support for innovative development, rapid adoption of information technology in health care is important. I was talking to Congressman McDermott this morning. Government has a big role to play, including the fact that Medicare and Medicaid pay over 50 percent of all health. If Medicare and Medicaid want to take on some issues and use its authority to push health information standards, I’m sure this industry and this area of technology innovation can move even more quickly.

There’s always broadband. My number one encouragement to you is start with government itself. Every school, every hospital, every government building, is it wired, have we funded that infrastructure; very important. (Applause.)

This is a once-in-a-lifetime economic crisis. There is a lot of history around that, and frankly if you stop and think about it, 1837, ’73, ’29, 2008, it’s almost exactly a whole lifetime between each of the major economic difficulties that we face. But I think it’s also a once-in-a-lifetime opportunity to think about our priorities again and make the investments that put us on the right foot.

In his inaugural address, President Obama said we need to assume more responsibility and make the hard decisions that have been postponed for too long.

The president’s remarks actually reminded me of something I heard a lot from my dad when I was growing up. My dad was an immigrant to this country. He came from Switzerland after World War II. He went and was an interpreter with the US military at the war trials in Nuremberg; came to Detroit with some of the soldiers he had met there, who sponsored him in this country; went to work at Ford Motor Company, was there for 30 years. Never finished high school never went to college, but he had a simple model: “If you’re going to do a job, do a job. If you’re not going to do a job, don’t do a job.”

You could say, okay, that’s probably a good thing to tell a 10-year-old, but what it really came to mean to me was that if you want to accomplish anything at all, you’ve got to be committed, you’ve got to be motivated, you’ve got to be tenacious, you’ve got to be smart. And, of course, that’s not really just my dad’s message to me and my sister as we were growing up; it’s really the essence of the American work ethic, and I think it’s been passed down to millions of American children every generation.

This country has what it takes to succeed. We have talent, we have technology, we’ve got the track record. We’ve got to be really honest about where we are. We’ve got to take the kind of bold steps that the vice president so well characterized in his remarks this morning, and we certainly have to roll up our sleeves and put ourselves back on the path of the kind of innovation that will drive the kind of economic success that I know we all want.

I thank you again for the opportunity. It’s been my pleasure.