Tuesday, October 25, 2011

Light at the End of the Tunnel

Contrary to the doom and gloom of many analysts, British journalist Ambrose Evans-Pritchard of The Telegraph paints a fairly optimistic picture of the American near future. From his perch in England he writes that:
The American phoenix is slowly rising again. Within five years or so, the US will be well on its way to self-sufficiency in fuel and energy. Manufacturing will have closed the labour gap with China in a clutch of key industries. The current account might even be in surplus.

The making of computers, electrical equipment, machinery, autos and other goods may shift back to the US from China.

Assumptions that the Great Republic must inevitably spiral into economic and strategic decline - so like the chatter of the late 1980s, when Japan was in vogue - will seem wildly off the mark by then.
What accounts for Evans-Pritchard's contrarian view? He explains that the biggest driver of an American renewal is abundant energy:
Telegraph readers already know about the "shale gas revolution" that has turned America into the world’s number one producer of natural gas, ahead of Russia. Less known is that the technology of hydraulic fracturing - breaking rocks with jets of water - will also bring a quantum leap in shale oil supply, mostly from the Bakken fields in North Dakota, Eagle Ford in Texas, and other reserves across the Mid-West.

"The US was the single largest contributor to global oil supply growth last year, with a net 395,000 barrels per day," said Francisco Blanch from Bank of America, comparing the Dakota fields to a new North Sea.

Total US shale output is "set to expand dramatically" as fresh sources come on stream, possibly reaching 5.5 million barrels per day by mid-decade. This is a tenfold rise since 2009.

The US already meets 72% of its own oil needs, up from around 50% a decade ago.

"The implications of this shift are very large for geopolitics, energy security, historical military alliances and economic activity. As US reliance on the Middle East continues to drop, Europe is turning more dependent and will likely become more exposed to rent-seeking behaviour from oligopolistic players," said Mr Blanch.
He also thinks that the Chinese economic success will ultimately prove unsustainable:
Meanwhile, the China-US seesaw is about to swing the other way. Offshoring is out, 're-inshoring' is the new fashion.

"Made in America, Again" - a report this month by Boston Consulting Group - said Chinese wage inflation running at 16% a year for a decade has closed much of the cost gap. China is no longer the "default location" for cheap plants supplying the US.

A "tipping point" is near in computers, electrical equipment, machinery, autos and motor parts, plastics and rubber, fabricated metals, and even furniture.

"A surprising amount of work that rushed to China over the past decade could soon start to come back," said BCG's Harold Sirkin.

The gap in "productivity-adjusted wages" will narrow from 22% of US levels in 2005 to 43% (61% for the US South) by 2015. Add in [China's] shipping costs, reliability woes, technology piracy, and the advantage shifts back to the US.
There's more on these positive indicators for the future at the link.

He concludes with this:
The switch in advantage to the US is relative. It does not imply a healthy US recovery. The global depression will grind on as much of the Western world tightens fiscal policy and slowly purges debt, and as China deflates its credit bubble.

Yet America retains a pack of trump cards, and not just in sixteen of the world’s top twenty universities.

It is almost the only economic power with a fertility rate above 2.0 - and therefore the ability to outgrow debt - in sharp contrast to the demographic decay awaiting Japan, China, Korea, Germany, Italy, and Russia.

The 21st Century may be American after all, just like the last.
Evans-Pritchard doesn't mention it, but it's hard not to see that both of the drivers of this possible American resurgence are opposed by the Obama administration and the American left. Increased fossil fuel production and the attractiveness to business of the American south where right to work laws and non-union shops make business much more efficient and profitable than elsewhere in the country are both attributes that the left would reverse if they could.

If Evans-Pritchard is right the U.S. economy will resume it's global dominance within the next five years as long as it's not strangled in the crib by regulations and taxes imposed by politicians ideologically averse to American dominance in the world.

Population Implosion

In the 1960s people like Stanford biologist Paul Ehrlich were predicting world wide starvation, war, and chaos before the turn of the century due to exploding global population. Largely because of technological advances in agricultural production it didn't happen.

Now demographers are forecasting that the world's population is likely to implode over the next two centuries and that this decline will make the world a very different place. Reuters has a fascinating story about this projected crash. You should read the whole piece, but here are some excerpts:
If the world follows the demographic habits of Europe -- and that's a big if -- by the year 2200 it could be home to a population of less than half its current level, living in housing built for almost three times that number.

With the global population estimated to pass 7 billion on October 31, many of policymakers' short-term worries revolve around providing resources for the additional 2-3 billion people expected to be born in the next half-century.

Numbers of this magnitude inevitably conjure up terrifying visions of shortage and chaos. But in fact improvements in food production and technology have allowed population growth to continue unimpeded and relatively smoothly, and the real potential nightmare is of a rapidly aging population, combined with collapsing birthrates in both rich and poor states.

Many demographers and long-term planners say the challenge for the next century will be less dealing with growing numbers of people and more managing the much larger population of aged and perhaps dependent people while finding new strategies to deliver prosperity, jobs and essential services.

The trend has already contributed to the current global financial crisis by driving up health and social care bills and perhaps also undermining productivity. But while politicians tie themselves in knots over short-term worries, experts say there is not enough discussion of longer-term demographic challenges.
If birthrates fall to the same level as those of Shanghai, at around 0.8 per couple, then by the early 22nd century population would be falling so fast that it would drop from the 9 billion expected to inhabit the planet by 2070 to under a billion by 2150, a span of only 80 years.

If birthrates were closer to the European Union average of 1.5 then population would fall below 5 billion around 2140 and 3 billion by 2200. In contrast, maintaining the current rate of 2.5 would see it top 15 billion by 2100.

If life expectancies also fall these rates of decline would all be accelerated. These really are startling statistics.

Declines like these would place extraordinary pressure on countries which try to provide care for their elderly. Such care is possible when the population distribution is pyramidal with lots of young workers supporting a relative few elderly, but should the pyramid be inverted, as the above projections suggest they may be, it's hard to see how it could be sustained.
By 2030, more than a third of the population in a number of Western states as well as some Asian economies, such as Japan and Korea, will be aged over 65.

Many developing states, most notably China with its one-child policy but also a growing number of other nations, will follow suit -- often without the financial resources to help pay for the cost of medical and nursing care.

"It's the seminal issue of our time," says Michael Hodin, executive director of the New York-based Global Coalition on Aging and a senior fellow at the Council on Foreign Relations.

"The numbers are stunning. The exact projections vary but it doesn't really matter because they are all going in the same direction."
Currently, fertility is still high in many of the world's poorer countries and the aging nations can import workers from them to sustain their elderly populations but even this expediency, which poses significant dangers to the cultural survival of the importing nation, won't last. The pool of available labor in poorer countries is also expected to eventually diminish.
Exact predictions vary, but most projections suggest the global population will peak at around 9 billion around 2070 and then start to fall, perhaps very fast.
In other words, by the end of this century the world's population could be in a rapid descent which would make the world poorer, resources more scarce, and violence more prevalent.

Or not. Fertility rates could buck current trends and remain at 2.5 children per couple worldwide. The future, after all, is a difficult thing to predict. Just ask Paul Ehrlich.