By Crystal D. Swann
August 1, 2011

Michael Milken, Chairman of the Milken Institute and noted financier and philanthropist, discussed the role America will play worldwide in the coming century during the Conference of Mayors Leadership Meeting in Los Angeles on July 22. As the Administration and Congress currently debate the debt ceiling, spending cuts and deficits, Milken told the mayors that this isn’t an unprecedented time in history from a fiscal perspective; however, what makes this situation unique is the mass movement of urbanization and the United States- specific role as a model in sustaining metro areas. Milken framed his discussion around four concepts – perception vs. reality, democratization of capital, building human capital, and, interestingly, “Where’s Sputnik?”

In the first concept, perception vs. reality, Milken challenged the mayors to rethink how they do business in their cities – in this new information age where “dot.com” websites are more valuable “locations” than downtown New York City and where a company like Netflix, with no “bricks and mortar” stores in cities, can in ten years out-perform and essentially bankrupt a company with thousands of national locations called Blockbuster. “So as you’re thinking about where the world’s going to be – in your cities, if you’re focusing on areas – and the realization that you can go anywhere in the world at little to no cost, and access any information. You need to figure out where the jobs are going to be created in a competitive world,” Milken stressed.

In this second concept, democratization of capital, Milken tested the current thinking that investing in large companies is a job creator in cities. Milken pointed out that there are only 500 large companies in the world and that small businesses are the real job creators. He further stresses that access to financial capital is a critical component to the prosperity of small businesses, and that without financial capital, small businesses can’t create jobs in cities. “The promise of America is that you have a chance based on your ability, not your race or where you went to college, or who your parents were but the promise of America…. to the entire world, is based your ability,” Milken stated.

Milken emphasized that over a 30-year period of time, non-investment grade companies (small businesses) created 62 million jobs in the U.S., while Fortune 500 companies lost 4 million jobs during the same period of time. “I just want to suggest to that if you’re thinking that large companies are going to create jobs and drive your cities, you are not going in the right direction,” he said. Milken maintained that new ideas and jobs are largely generated by small business, and thus cities must create an environment that supports small business development. “If you don’t have a mechanism that says this is a place where you can grow and create capital, it [growth in small and medium businesses] is not going to happen in your city,” stressed Milken.

“The real competition in the 21st century will be for human capital,” Milken said. Human capital makes up 75 percent of the wealth of cities, according to him, and attracting the best and most innovative minds to cities is when innovation and job creation occur. Milken maintains that one person moving to a city can make a difference, citing the return of Steve Jobs to Apple as one example of how one person can change the course of the future. When Steve Jobs returned to Apple, Apple was worth $1.65 billion to Sony’s $34 billion. In fourteen years time and with the leadership of Jobs, Apple is the now second largest company in the world and worth $358 billion. Milken encouraged the mayors to connect with their colleges and universities in their cities and develop strategies to create opportunities for students to become engaged in the community as entrepreneurs and corporate citizens. Milken offered a quote from Steve Jobs to reinforce his point, “Innovation has nothing to do with how many R&D [research and development] dollars you have. When Apple came up with the Mac, IBM was spending at least 100 times more on R&D. It’s about the people you have [and] how you lead.”

The question becomes, according to Milken, can a human capital strategy work for cities as well as it works for countries? Based on the premise and understanding that the “.com” is the most valuable real estate in the world, who lives in cities is critically important to the success of that city. Using the example of Jamaica and Singapore after they both broke from British rule, Milken underscored his premise that investing in human capital, which Singapore did, can work for U.S. metro governments also. Singapore now has a per capita valuation more than ten times that of Jamaica – yet they were both the same 40-50 years ago. “What I want to enforce today is, try to identify those individuals who have the capability of building an organization that will not only change the world in terms of its business, but [in terms of] job creation in your cities,” he said.

Sputnik, as Milken explained, served as a “wake up” call and challenged the United States’ assertions of global leadership and military superiority; it also spurred, in the U.S., a greater interest in math and science and a commitment to protect liberty. During that time, America was willing to invest in, and bear any burden to ensure the success of, America. According to Milken, the question today is whether America is still willing to make that commitment to global competitiveness and bear those burdens necessary to achieve that goal. While many have asserted that America is on the decline, he maintains that the “American Century” can continue and be extended into the future, “if the public and private sectors, and all of us as individuals, assume greater responsibility for our common destiny by summoning the will to face hard facts and make difficult choices – and by elected officials who will do the same.”

Milken noted six areas of opportunity for America to make positive changes: energy, housing, entitlements, education, immigration and health. With regard to energy, as a nation, the U.S. now imports over 60 percent of its oil, creating a dependence that is unsustainable in the future. Milken urges recognition of the importance of supporting energy security and sustainable energy sources at home, the same way America supported cotton and tobacco production in centuries past.

With regard to housing, Milken addresses the fallacy that a loan against real estate is a good investment and that the price of a home only goes up. He notes that when looking at housing prices over the last 120 years, housing prices have dropped 62 years and gone up in value in 57 years. “Almost all of the financial problems in America over the last forty years can be traced to investments in real estate,” Milken said. He suggests that non-recourse and low equity loans have not resulted in higher home ownership rates compared to other countries. The cost to society has been far too high.

Reflecting on entitlements, Milken suggests that the problem with entitlement programs today is that they are rooted in: 1) unrealistic assumptions about the rates of return on assets; 2) falling ratios of current workers to retirees; 3) workers who pay into the system for too few years; and 4) pensioners who live longer than the original system planners assumed. Milken recommends: a) establishing retirement age at 85 percent of life expectancy; b) encouraging greater personal responsibility for retirement planning; and c) promoting healthier lifestyles. The remaining three challenges are education, immigration and health. Milken offers recommendations and solutions for these in his publication “Where’s Sputnik?” by the Milken Institute.

Milken asserts that America can lead in the next century but it will be up to committed individuals. To the mayors, Milken plainly stated, “How you lead and what direction you take your city will determine the future of your city and the future of the country, and whether the United States plays a role in the coming century.”

The view Milken’s presentation and slides online, go to the website www.usmayors.org.