services, skill, and supports a very high wages. this is what happens when you truly can build a cluster. this is how productivity gets built. this is how innovation occurs making it a critical mass a series of fields in your states and reinforcthat process. you let the state government support those clusters. that is how successful economies. we have growing evidence of helen fortin these clusters are. -- how important these clusters are. here is what we know. if you can build a strong cluster, it will create faster job growth. we know that if you can build a strong cluster that it will provide higher wages. we know that if you can build a strong foster that you will have more parenting and other

types of innovation. we know that if you can build a strongluster, that is where the new businesses form. they do not form randomly in any field in your state. they tend to bird is proportionally out of the clusters that you have. ifou can get the fly wheel turning, and it spits out of touch of the things. not only do more businesses form, but they grow better, survive better over time. these are something very fundamental to the success of your state. this slide is complicated and it is in your packet. there is a tdency to think that some clusters are better than others. some clusters, like financial services, have higher wages than other clusters than, for example, tourism. what we have found is that it is the wrong way to think about it. what we find is the dominant influence on prosperity is not

what clusters you are in. the dominant influence on prosperity is how you compete in each of the clusters that you are in. 75% of all the differences across the states in terms of wages are not determined by the mix of cultures that you have in your state but by how good you are in the cluster you are in. the last thing for economic development here is very clear. build on your strength. do not chase hot field or try to get into biotech because that is whatever losses as cool. you have to build on your existing strength. you have to build on your emerging strength. thais the way to build your state economy. do not dream about some field where you ve no capability or assets. it will not work. for strategy is to build on your strength.

for each of you in your presentation, i have given you the portfolio of clusters in your state. this is south carolina. the red clusters are losing jobs. the green clusters are gaining jobs. thones in the upper right are gaining market share. the ones on the left are losing market share in america. eryone of you has your own portfolio. everyone of you has your own circumstances. getting a handle on this, what is going on, and how you can help is going to be fundamental to your strategy. this will really this proportionally drive your prosperity. what we find is that clusters in an economy are interconnected. some of them are related. this chart is a little schematic in the sense that it is try to capture multiple dimensions. see the areas that are overlapping? these are the roughly 40

coster's that exists in any modern economy. when these overlap, that means they are synergistic. with that says is that if you are in educati, it helps to compete in the medical devices. if you can put those two together in your state, that will create an even greater strength. the way states diversify is not random. it will not scatter shot over the chart. it will follow the connections. if you are in medical devices, you have a better chance in analytical instruments. this is how economies develop. here is m massachusetts. you can now see why it is so prosperous.

it has an array of clusters. they are synergistic. the challenge is how to keep the vitality going. ok. having the dreaded computer issue here. thank you. there we go. it's done. ok. now, this picture is a great story about how economies evolve.

this is san diego. it is a some region of california, but it is its own defined economy. california needs a strategy for not only california, but each of these defined regions. you can see that the california economy built from one cluster to the next. there are a random. the position in one area give the region some assets that allowed them to get into the next area. this is how each of you needs to think about this state. where do you have assets to we can build upon and had we facilitate diversifition process? let's talk for a second about multiple geographic levels. you all are affected by deral policy and federal programs.

one of the jobs the you have to accomplish is that you have to do a good job of getting your fair share of the support. you all work on bottle law all of you are affected by your neighbors. the department of commerce, when it defines what an economy is, usually the concept is an economic area. there are regions in which the data shows that congress takes place. i have shown a picture of the northeast of the united states. what you can see is that massachusetts is part of three different economic areas. it is connected to the albany economic area, boston economic area, then down with the connecticut area. when you are thinking about economic strategy for your state, you cannot think of this has the right unit.

they're usually not the right economic unit. your state is often connected to multiple economic units. seing the policies to understand and it established that will be very important. the other thing is that you have both rural and urban areas. they're systematically less prosperous. the averagrural wage is $32,000 and urban is $45,000. had to get those connected is a fundamental challenge. we have a big problem in massachusetts year. we have a very high wage state in massachusetts. we have a below average wage state ever else. one of the biggest challenges is to move the prosperity is to not to make the boston region better, of course you would love to do that, but the real problem is how to get the rest of the state that does not

really participating engaged. any state economic strategy coming you cannot just look at the capital city. you have to understand how the state's success is built up into these multiple geographic areas. there are a few comments we can talk about later. what i am been talking about, i hope the impression about was to build strategy for your state and the competitiveness that you would have to deal with a fair number of things. there is no silver bullet. you have to deal with a lot of issues. many things matter. the roads matter, schools, regulations. lots of things matter. when you have a problem like that, you need a strategy. it is the list of 55 action steps. most of them are 5 action

steps. that is not a strategy. a strategy is where you develop an overarching view of where your state can be unique. how your state can create unique platform for a particular set of businesses. as you understand the strategy, it starts to give you a sense of priority. one of those things and i really need to do, because these are critical to how my state will be different, is because strategy's about being different. also, that type of thinking should tell you which weaknesses that you really have toeal with. every state needs a strategy rego every state needs a strategy that can allow themselves to find their own

distinctive role in the american economy and the world economy. i am confident that everyone of you can develop a strategy. all of you have access. it is a question of doing the thinking to think about it that way. how should you be competing with each other? barbara question, is it not? we are all sitting around this table in trying to build competitive economies. yet, we're competing. at the level of individual businesses deciding where to locate. one the problems is that we have not been mpeting the right way. we have been falling into the trap which is sought -- which are cozier some competition. one state wins, the other loses. we have been using the wrong tools to compete. this talks about how we need to change the nature of competition in america. we have to focus even more on

getting our existing companies to invest more in our states. we will have much more success if we doing your job of existing with our companies rather than gng out looking for new ones. it is the existing companies that are really going to drive succs. we have to stop competing for every plant. our state has this position, these strikes, and let's focus on reinforcing their strength. we have to be more strategic about the way that we compete. if we could lead to specialize and get better at what we're good at then we will see everyone living a much more rapidly. offering general tax breaks

does not work. all it does is take money from the state and give it to businesses in a way that is not very productive. if we're going to spend subsidies, we need to do not assets that will stay in our state. we can support training, infrastructure, help build the institutions. those kinds of state investments are going to lead to a long-term return on investment. just competing for tax breaks will make this neutralize each other. we have to think about how we support and how we've had businesses come in and not just doing it. many stes come i find, offer subsidies to offset the high cost of doing busine in their state. what you're going to do is fundamentally lower the cost of doing business.

do not hunt. tackle the real problems rather than try use subsidies to offset our neutralize them. that principle is ineffective over and over again. many states are in free-for-all. every city, region, subregion, county, is out there struggling. the states generally successful are the state's that can get some appropriate efficiency and collaboration. understand that is not a zero sum game. the issue. looking for those investments that it is circumstantial and everyone should not be going after everything. if we're going to attract investnts, we have to engage the private sector. of the best efforti have neve seen around the world are those where the goverent in the private sector do it together. where you can get business leaders in a particular field to help and work with you to

the record the next in the next one, it will be much more effective. i promise you. we also understand that the process of economic development has fundamentally changed. it used to be government driven. today, it is a collaborative process and involves engaging companies, universities, trade groups, and all types of other institutions in the process. the you have that five of collaborative process going on in your state. i do find a way of engaging these d other actors around a fact-based agenda? as this time when you are having to take all these really tough actions that is important in achieving the ultimate

success. let me make a few final remark said that if we have time, we will take the questions. what we have to understand is that the goal of the economic shredded you for your state is to enhance competitiveness i hear too many governors say their goal is to create jobs. you cannot do that. the only way to do that is to enhance competitiveness. we have to get the cart before the horse. is about building competitive this and then that will create jobs. two, as we go about doing that, productivity and innovation must become the guiding principles. everything we do, every policy that we said, every executive order, you need to be thinking, is this moving the ball on productivity?

will this make us a more productive state taxes is moving the ball on innovation? will this allow for more innovation? if the answer is yes, usually the thing to do. number three, sometimes the five governors get it into their head that to do competitive finishes that they need lots and lots of new money. the answer is you do not. this is really about using existing resources better. there is often plenty of money being spent on economic development. do not think that this is capital intensive stuff. bayh they give we could just make our infrastructure investments more effective that we could get a huge impact even if we did not have more money, even if we had less money. they give competitiveness as setting the rules, policies,

collaboration,trategic agenda. it is not about taking out your checkbook in deriding a big check. as i said, to do this welcome you have to mobilize the private sector. u have to get them on your team. they can do a lot of this themselves. if you could just get them energized and if you to give them a feeling like you are all in it together. i'm confident many of you are doing so, but i cannot emphasize enough from the world. finally, i want to say that coming out of the bruising political campaign, in which many of you have been engaged recently, on what to say that improving competitiveness and economic strategy is not partisan. it is about building the prosperity of everyone. the benefits of economic strategy are going to be even greatest for the middle and lower middle income brackets

that it will be for ose who are at the top. we have to turn this issue into one of getting results, not ideology there is no ideology here. inhe competitiveness, there is the iron law of productivity. it is just a fact. we have to be able to convince all ofur colleagues the matter would discussion we have all these oer issues to think of it that way. that comes from being clear about what we need about competitiveness and taking the collaborative approach to the process. hopefully -- will take a look and this will provide you with some specific advice aut your state. this is meant to start the discussion and not concluded.

we would be thrilled not to take some questions and have dialogue with you in your economic development directors over the coming years. i will say this to conclude. i hope things get better in washington. i hope o federal government is more successful in tackling some of the issues it has to tackle in terms of economic strategy. i'll tell you that what is really going to determine the success of america in restoring competitiveness is actually what all of you do. the real greatness of america from an economic point of view is the decentralization. every state, and many cities, take responsibility to drive competitiveness themselves. i hope washington will help, but i have great hope that the skipper people can be those who will turn around the

competitiveness of this country. thank you very much. [applause] >> we do have time for questions. can we begin? gov. herbert? >> thank you, dr. porter. i think the states are the laboratories of democracy and we can lead to this economic recovery. i am fascinated to hear the discussion about how this is not about ideology and how this works. there arcertainly differences among the economists in the country to stimulate their not to stimulate. how do we get past the ideology because there were certainly in -- >> may i have your attention please? may i have you attention please? we have an emergency report in the building. please leave the building in the nearest stairway. do not use the elevator.

may i have your attention please? may i have your attention please? >> there has been a fire emergency reported in the building. please the the building in the nearest exit. >> do we need to do it? >> we need tgo. [sirens]

>> a big hurry up and get back to your seats we wi reconvene. f you could hurry up. please take your seats so we can reme with dr. porter. >> ladies and gentlemen, if you could please take your seats again, especially the governors, we will resume our conversation with dr. porter. this is at the request of our chair who is losing her voice,

and maybe her patientce. >> should we continue, gernor? >> this is much more like my harvard business school class than such an august meeting. let's move quietly, and we will continue the discussion in the time we have. governor herbert, your question about partisanship. i think there are many macroeconomic issues like the stimulus or not that there is a lot of debate on. i think when you get down to the level of competitiveness, there is quite a wide consensus on many of these issues. the big partisan issue that i encounter over and over again is if people think that competitiveness means lower

wages, that it's very partisan. but of course, competitiveness is not about lower wages. if you have lower wages, that means you are not competitive. competitiveness is about higher wages. if we can get everybody to understand it is about creating productivity so we can support high wages, then a lot of the rtisan concerns tend to get less vigorous. i think you can communicate to your citizens that my job is to create conditions here so we can all get paid more, but we cannot get paid more unless we turn that, unless we can be more pructive and have better skills and have a more efficient infrastructure. hopefully that can be a less partisan discussion that some of these broad issues of stimulus or not stimulus, should taxes be this high or that high. those issues get very partisan.

a lot of the fundamentals can be agreed upon, certainly within the business community. i would not go into this thinking it has to be partisan. i know there are other governors here who have had these experiences. >> dr. porter, you were describing the importance of not having resources leave the state, and the competition that often exists between states going and offering significant financial incentives to ge a corporation to build a plant or open an office in their state. is it feasible to consider if the governors all agreed that no state would offer financial incentives for existing jobs, that would only try to fuel new jobs or new ofces. no would tried

i try to frame the discussion as what kind of competing across states, keeping the total the same? i call that zero sum her. what kind of competition is a healthy competition? that build strength. in this particular area, i would suggest a distinction between general tax breaks, you just get lower tax breaks and incentives that are tied to the company making investments in training in the state, in infrastructure in the state. if we could get the competion and incentive game to be about investing in state assets rather than just giving tax breaks, i think that would be a very great step forward. ybe that is something many states could agree on, because ultimately plants that come to

yo state just because of lower taxes will be what economists call footlose. so you want to attract investment to your ste, because you offer assets. because you have a cluster in that area, because you have trained people in that area. and that is the way we want to compete, because that makes us all better and more productive. i hope you can lead us in that direction. >> in oregon and washington, almost half of the competition

is in health centers. we have medical devices that are extremely expensive that benefit individuals but have no impact of population health. we're now spending a bit of our gdp on that industry. can you talk a little bit about the apparent contradiction? >> absolutely. health care delivery is a local industry, not a traded industry. that is part of their problem. if health care delivery in your state had to really compete with health care delivery centers around the world, they would probably be a lot more affected. it is a local industry, and it is almost a local monopoly, that is people go to the hospital and they really do not choose where to go. and i have done an enormous amount of work on health care delivery and how to move away from the mess we're in, which has a lot to do, i think, with the finding of value as a goal,

starting to measure health outcomes, starting to reduce the incredible -- incredible implementation of services we have ievery state. every community hospital offers every service. and the governors that would be interested, i would be happy to send you easy to read, not to dense material about some of the critical steps to drive productivity in health-care delivery. i think we're starting to get consensus on some of the key principles. i am very encouraged today. i think there has been the wake up call in our health care delivery system, and there is a lot more flexibility to actually chae, but i think every governor needs to be making sure that your medicaid program is leading restructuring, not just pumping in more money.

if we bump in more patients and more money and do not change the way we do it, we are in deep trouble. >> governor ran paul. >> it seems like years ago whenever we saw state-by-state comparisons of personal income, you would see relative cost of living statistics state-by- state. why is it that i feel like i never see those statistics anymore? >> well, you know, you should not be comparing your wages to your cost of living to really understand your true prosperity. in if you earn the high income have to pay a lot for everything you need to buy, somehow the income produces less. when we compare countries, that is pretty easy to do.

we adjust it for what the dollar will buy or yen will buy. in the state area we do not see those comparisons. when you are trying to improve the standard of living in your state, driving up the average wage is all smedley will matter. you also have to make sure you are controlling the cost of living the best you can. if you have a high cost of living, that will for you in competing for talent. this is an issue gov. patrick and i and many others have been talking about for a long time. we have a tremendous amount of talent. that is likely getting better now for unfortunate reasons. i think the cost of living is another agenda i did not emphasize, but in the overall equation, it is a piece of the pie. thank you, governor.

>> thank you. i thought it was a great presentation. you said a state is best off when they have neighbors. i was wondering if you could give a couple of specifics about how states can work together in a regional area when they of different policies and different industries and the like? >> one of the things that we found was if you are in the pharmaceuticals and your neighboring region, which may be in the state next door is also strong in pharmaceuticals, it turns out that both of you are disproportionately stronger than if you'd just had one region in that area and not the neighrs. , and that is because the economic choices do not respect

state boundaries. they are more focused on where the people are, where the gut -- where the geography is. you often see clusters and other economic activity spill across state borders. all of you have examples of that in your state. that says if you are in delaware, you cannot think of delaware as the economy. delaware is connected south and into the philadelphia region, and when you are thinking strategically about how to drive to lower for work, you have to start thinking about how to make it easier and avoid any distortions or barriers or a silly policy differences that would somehow hurt the ability to tralee and freight across the region. -- to truly integrate across the region. certainly having a good transportation and logistical connections is key.

trying to harmonize taxes and things like that so we do not have these artificial things that would distort the economically most productive thing to do. that would be the way i would think about it. >> one last question. please. >> thank you for the presentation. i think all of us around the table sure that same goal of wanting to create jobs, and that is what most of us ran on or are trying to do. my question is, my frustration as a governor, and i bet we all share this is when i go talk to my job creators and say as governor what can i do to help you grow jobs, their answer is have jobs, i just cannot find

the work force that is trained to do those jobs. that cost money. what we're trying to do is look at early heard -- ear childhood education. it children ready to learn across the spectrum since education is one of the places where governors can close the gap between the jobs of are out there and the lack of folks to do the jobs, how do we do that if we not spend more resources? >> you raise an excellent point. i certainly do not want any of us to oversimplify this challenge. i would make a couple of responses. absolutely the talent and skill issue is at some level fundamentalists. as we think about productivity in supporting high wages, the

only way we will be successful at that is to raise the skill level. the americans with very high education are just strivinghe americans do not have a high school degree are struggling. it is all about skill. it is all about education. ultimately that is a long-term agenda. now the question is what do we do as governors to try to move the needle on that? i would say first of all that all of you are probably spending money on training already today. every ate has training programs. you can spend that money all lot better. you can get those programs much more tied to your clusters, private sector needs. if you think about how to reorganize, some states move faster than others. if you have more money to spend on training, so much the better.

ultimately there is a lot you can do just by doing it more effectively. i would tell you that the private sector will spend re money on training also. the private sector is willing to step off on this, because they understand it is lacking skilled people. companies do not want to train in house. they would love to have well- trned people they can just hire. they will often contribute. in the area of public education. the logistics' -- system sticks statistics i have seen show that we spent quite a bit on education. in massachusetts we had a commission a few years back and we had all of the school districts. there was an estimate of $1 billion we were wasting because

we have the school districts and they were doing overhead functions and doing redundant and repetitive and so forth. i do not want to make this simple. if we have more resources we want to deploy them and spend them, but i find so much opportunity to deawith human resources issu much more objectively than we are now if we are willing to take on some of the system design and structural issues that we have in other areas like health care. we have a moment where maybe some of these issues around fragmentation in school districts and duplication, maybe we can take some of these issues onight now. so what i would encourage you to do not be paralyzed by your budget. realize there is a l you can do to spend the money you have available better, and drink --

think structurally. think about innovation in terms of tackling some of these things. very good question. i know there will be an extensive discussion of education issues later in the program, so i shied away from them given the limited time, but governor, your best part question. [applause] >> thank you, dr. porter. not only has he done a wonderful presentation here today, but he has volunteered to give us his presentation, which we will get out to each of y,hat there may be ways in which we can continue the collaborative work with him with our commerce department agency head and in other ways. i cannot tell you how valuable

will the four men are meeting in utah, convened by the national governors' association, and the chinese people's association with foreign countries. it will serve as a platform to promote. appear exchanges -- peer-to-

peer exchanges. topics that will be discussed, exploring opportunities in practical lopper critical operation, we will talk about education and the exchanges of free speech, and we will talk about trade. on behalf of the national governors' association, i like to welcome you, and i would like now for all of us to give a warm welcome to the secretary of the hunan province to say a few words to our forum. mr. secretary. [applause] [speaking chinese]

>> governors, ladies and gentlemen, dear friends. it gives me great pleasure to attend the winter conference of the national governors' association in the inauguration of the chinese governors forum. [speaking chinese]

[speaking chinese] >> i am from hunan province in the central part of china. as one of the cold as provinces, it was among the first chinese provinces to interact with the united states. over 100 years ago, a nonprofit organization affiliated with yale university established a school in the capital city of

hunan province. the school has developed into a school of medicine, a renowned institution of higher learning in the province. more than 70 years ago, during the second world war, a general headed the american flying tigers to talk about -- to fight against the japanese invaders. they made important contributions to chinese war of aggression against japanese, and it will always be remembered by the chinese people. on memorial museum was built for the future generations. in september 2010, within 300 chinese and americans, including president jimmy carter, and flying tigers and their families, attended a peace festival to commemorate those who had dedicated their lives to world peace during the second world war.

>> [speaking chinese] [speaking chinese]

[speaking chinese] [speaking chinese] >> hunan is just one of the chinese provinces. it is a vibrant province with past development. in 2010, gdp -- 1.9 trillion yuan, a growth of zero or 4.5% of the previous year. the gdp has maintained an annual

growth rate of over 14%. in president obama's stated the union address, he mentioned the fastest computer in the world. it is -- it was built in hu nan, and he also mentioned the high-speed rail, the electrical control system was actually done by a huanan company. big companies and huanan had extensive international cooperation. prestigious companies nationwide invested $69 million in the state of georgia to build an assembly center for construction equipment. at present, the city of hunan formed 16 pairs of relationships with -- sister relationships with american cities.

many have invested or set out centers and hunana and all have been quite as successful. >> [speaking chinese]

>> not long ago, president hu jintao made a visit to the united states. it has achieved fruitful results. one of them being the signing of the memorandum of understanding concerning the establishment of the china-u.s. governors forum. with the active efforts of the chinese people's association for friendship with foreign countries and the american national governors' association, the mechanism of this forum will be officially established. this is a pioneering undertaking to expand the national corporations. i believe with the establishment of this forum, there will be more closer cooperation for the

local government of our two countries. the increasing exchanges and cooperation will in ridge and invigorate the china-u.s. cooperative partnership based on mutual respect, mutual benefit, and a win-win outcome. >> [speaking chinese] [speaking chinese]

>> i have visited the united states many times. in february 2009, i met with many business leaders. most of whom were pessimistic, and told me they had no idea when they call me -- how the economy would get out of the crisis. during the visits this year, i have seen the strong recovery of the u.s. economy, and contributed greatly to the recovery of the world economy. in today's complex and changing world, china and united states faced many common challenges and risks. in responding to these challenges and risks, and promoting the development of the cooperative partnership, the local governments of our two countries can play effective roles. >> [speaking chinese]

>> this morning i had extensive talks with different governors in the united states. we explored a lot of areas of common interest. we all felt that time was not enough. i hope that the china-u.s. government's borrowing and the national governors' association meeting is held in china or hunan in particular so that we can have more time to have more extensive dialogue. >> [speaking chinese]

>> i would like to suggest that we strengthen dialogue and communication, even economic cooperation, and expand people- to-people exchanges. hunan invites all to visit and explore more opportunities for cooperation. >> [speaking chinese] >> in conclusion, i wish this conference a complete success. thank you. [applause] >> thank you secretary jo. before we head into the governor's only meeting which will held at 1:00, secretary jo would join us in signing an

accord that will establish the u.s.-china governors forum. if the media can still stay in the back, then we will proceed to the signing ceremony and take any questions you may have. again, doctor, on behalf of the national governors' association, thank you for joining us. we look for to a great partnership with you. my fellow governors, i will see you at 1:00 in salon one. thank you very much. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2011]

>> next, live, your calls and comments on "washington journal ." and then chris then holland. at 11:00 a.m., our live coverage from the national governors' association's winter meeting continues with how did

help of medicaid. >> i think our system of government is breaking down. i think the system of checks and balances we have in our system are not operating properly. >> when so wheeler is critique has written to just-published essays in "the pentagon labyrinth." >> they have the power to go to war, the power of the purse, the power to investigate. the first two powers, to go to war and of the purse, are meaningless if congress does not exercise the power to investigate. and it is not doing that. >> see the rest of the interview tonight on c-span. and this morning a reporter's roundtable, on this week's budget showdown between congress

and the white house over spending cuts and a potential government shutdown. then muyrna