America unleashed: Why we’ll be number one once more
Are America’s best years behind us or are we headed for new heights? We’ve heard from both sides of that debate on Making Sense. Last spring, David Stockman, director of the Office of Management and Budget under President Ronald Reagan, yearned for 19th century America and warned that believers in a “sunny future” are blind to the debt bubble. Just as quick to condemn America’s dependence on printed money and predict a spectacular economic bust was former trader Terry Burnham, now at Chapman College.
But not all economists are so gloomy. When we saw Charles Morris, the man who analyzed the crash several years before it happened, writing about what he called “the best-kept secret in the economics media,” we thought we’d better tune in. “Comeback: Why the US Sits at the Brink of a New Boom” is Morris’ prediction of a long-term growth period rivaling the 1950s and 1960s. And it’s not going to be a self-destructive boom, as afflicted the housing market; it will be rooted in manufacturing and energy, Morris says.
Here with another dose of optimism is Milken Institute senior fellow and former Harvard Business Review editor Joel Kurtzman, who identifies four forces of economic change propelling the U.S. toward a brighter future. The following is adapted from his forthcoming book, “Unleashing the Second American Century.”
Joel Kurtzman: For some odd reason, Americans like to think of our nation — which is by far the largest and most sophisticated economy in the world — as the underdog. It wasn’t that long ago — at least it doesn’t seem like it was that long ago to me — that books were being published like, “Japan as Number One.” And now it’s China.
Case in point: a chart in the Wall Street Journal about research and development in a number of countries was titled “China Catches Up,” despite the fact that the amount China spent on R&D, according to the chart, was only about half of what the United States spends. Not only that, but if you think about it, whereas the U.S. spends big on R&D since we have a robust research infrastructure already in place, a lot of what China spends is to set up labs and train people, which we’ve already done. Now, I have nothing against China, in fact I admire it, but catch up to the United States? Not for a while. In my view, the United States is about to undergo a “growth spurt,” just as China, and much of the emerging world, are slowing down.
There are four forces that explain why the United States will be entering a period of very strong growth: our creativity is ahead of all other countries; there is a renewal of manufacturing; we have enormous newly accessible supplies of energy; and we are flush with investible capital.
The Force of America’s Creativity
If you take a walk through the Kendall Square area of Cambridge, Mass., you get a sense of what I mean by the force of America’s unsurpassed creativity. In a one-square-mile area around the Massachusetts Institute of Technology, there are dozens of large biotech and life sciences companies, dozens of startups and one of the most vibrant (if not the most vibrant) academic research centers in the world. As a result, Novartis, a giant Swiss pharmaceutical company, moved nearly its entire research center to Cambridge from Switzerland to take advantage of expertise located in that one square mile. And the French pharmaceutical company Sanofi recently paid $17 billion to buy Genzyme, an American biotech pioneer, to get into Cambridge and gain access to its brains, its CEO said.
At the same time, billions of dollars have been spent building new research centers linked to MIT and nearby Harvard, like the Broad Institute, the McGovern Institute for Brain Research, the Whitehead Institute and many others. These research centers are doing pioneering work in genetics and medicine.
No other country has anything quite like that one square mile of Cambridge real estate. But in the United States, we also have other centers of creativity that rival Cambridge — the areas around Stanford, in San Francisco, around San Diego, in Austin and Seattle, at the Research Triangle, along the I-95 corridor in New Jersey, in Houston, and in many other areas. And this is just biotech and the life sciences. We also have other world-leading clusters of creativity focusing on robotics, advanced manufacturing, computing, software, telecommunications, entertainment, materials science and many other scientific and technological areas.
And, because America is entrepreneurial, these clusters also produce companies — lots of them, which is why ideas coming out of our labs end up on our desks, in our phones, attached to our eyeglasses and in our cars, offices and homes so quickly. These centers of creativity are creating measurable value and are unique to the United States.
The Force of a Manufacturing Renewal
At the same time, while many people mindlessly repeat the phrase, “We don’t make anything here anymore,” it’s simply not true. The fact is the United States remains the preeminent manufacturing power in the world, producing about 20 percent of the world’s manufactured goods in the United States, and a lot more outside the country. Though China produces almost as much as the United States does within its borders — also about 20 percent of the world’s goods — there is a big difference between what our two countries make.
China is a world power in low-margin electronics assembly, textiles and machinery. But the United States is a powerhouse in high-end, high-margin, sophisticated manufacturing processes. The United States leads the world in aircraft engines, turbines, avionics, advanced material fabrication, helicopters, business jets, and — depending on the year — airliners. We are also the leader in sophisticated radar and telecommunications technology, and, of course, in weaponry. In addition, the United States has retained its leadership in space, with private companies, like SpaceX, building some of the world’s most sophisticated rockets.
There is a lot of evidence that there was movement underway to repatriate manufacturing to the U.S. from abroad before the 2008 crash. That movement stopped during the Great Recession but has now resumed. American companies, as well as foreign firms, are expanding their manufacturing in the U.S. BMW, for example, is now making all of its SUVs for the world in the U.S.
The Force of Newly Available Energy
The forces animating our return to manufacturing are twofold. First, energy has changed the equation. Chemical companies, in particular, are moving plants to the U.S. from around the world to take advantage of America’s cheap natural gas. Whereas it costs about $14 to buy a million BTUs worth of natural gas in Europe and $16 in Japan, in the U.S., the same amount of natural gas costs plus-or-minus $3. Since chemicals like insecticides, plastics, fertilizers, paints, cosmetics and many others, can be manufactured from natural gas, it makes sense to go where the natural gas is cheapest — the U.S.
In addition, companies that make things, from cars to computers and airplanes, can use cheap American natural gas to heat, cool and run their factories. And, as wages in China and India rise, and since the productivity of the American worker greatly exceeds workers in the emerging market, the United States is now competitively priced as a manufacturing site. Add to that the fact that if you make something in Asia, you still need to ship it to the U.S. in ships that burn expensive diesel fuel, but if you make things in the U.S., you have far less distance to travel to get your goods to customers. By cutting travel time and distance, manufacturers get more flexibility and lower costs.
Our newly available energy supplies are a powerful force for change in areas other than manufacturing too. With massive new sources of natural gas and domestically produced oil available, thanks to fracking technology (a technology perfected in the U.S.), the U.S. has cut its imports of oil dramatically. Whereas the U.S. imported more than 35 percent of the energy in 2005, in the last quarter of 2013, it imported only about 15.5 percent. To put that in context, the U.S. cut its imports of oil during that period by an amount equal to all the oil Japan uses. Japan is the world’s third largest economy. The U.S. is once again the world’s largest energy producer.
This massive shift in energy production means that a great deal of money — hundreds of billions of dollars — that would have been sent overseas to pay for oil will be staying in the U.S. And, a great deal of that money will be invested in new energy infrastructure projects that will create jobs. In addition, since we are using more natural gas and alternative fuels, like solar, wind and biofuels, America’s carbon dioxide emissions have fallen to 1993 levels. As more trucks, trains and, in some cases, cars use natural gas instead of oil, not only will we import less fuel, we will substitute an inexpensive fuel for a costly one. That will give the United States a significant edge over its competitors.
I think of the American energy boom this way: Take the world’s largest and most sophisticated economy and graft onto it the oil and natural gas riches of Saudi Arabia, Qatar or Russia, and you get an idea of what this transformation will do to the United States.
The Force of Capital
The fourth force that is powering our transformation is the massive amount of capital (money) that is now available for investment. The Great Recession did what recessions usually do. It moved debt from the private side of the balance sheet to the public side. As a result, the government has a lot of debt, as we know too well, but households are in better shape than in decades. Households use a smaller share of their incomes to pay off their credit cards, mortgages and other debts than anytime in the last 35 years, and Americans are saving money at very high rates.
As they pare down their debt, the value of people’s 401(k)s and other retirement accounts has recovered since falling during the Great Recession, and home prices are recovering too. Meanwhile, in the midst of the recession, companies took advantage of low interest rates and refinanced their debt on more attractive terms, much of it in the form of securities like bonds, which reduced their debt payments.
I’m not trying to minimize the damage done to the economy by the Great Recession. But I do want to point out that a great deal of the damage from the worst downturn in 70 years has been repaired and people are behaving (at least for now) more frugally than in the past. Because of these changes, American consumers and American households have seen their net worth increase by tens of trillions of dollars.
There is another aspect to this story. Corporations are sitting on a mountain of cash — between $4 and $5 trillion, a sum greater than the size of the German economy. That money will be invested as soon as companies feel confident about the future. And, while about a quarter to a third of that money is being held offshore by American companies, when (or is it if?) U.S. corporate tax laws are reformed, a great deal of that money will be coming home, looking for opportunities.
In addition to all of the investible capital I already mentioned, there is more than $1 trillion in excess reserve held at the Fed, which banks will soon be lending to clients. Right now, the problem in America is not too little money; it’s too much money sitting on the sidelines. As problems go, it’s not such a bad one to have.
Whereas some countries might have one or two of these four forces (creativity, manufacturing excellence, abundant energy, large capital reserves) working in their favor, no country but the U.S. has all four forces pushing in the right direction. For the first time since the Great Recession, the economic winds are at our backs.
I’m not suggesting that the U.S. doesn’t have problems. We do. But what I am saying is that we now have resources available that we haven’t had in decades to fix those problems.
Because of these four, very powerful forces, I am very bullish on the United States over the next decade or more. That future will be built around a prolonged period of new growth. And, while we might like to think of ourselves as the underdogs, forced to play catch up, the fact is the United States is on top and likely to stay there for the foreseeable future.