Charles R. Morris's presentation at the World Economic Forum

1. Comeback: America’s New
Economic Boom
Charles R. Morris
World Economic Forum
July 11, 2013

2. Outline
• The argument in brief
• The energy opportunity
• Job implications
• How to fumble it away
• Infrastructure
• Health care
• Paying for it
• A new political cycle?
2

3. The argument
3

4. US’s new energy advantage will trigger a broader recovery,
kicking long-term growth rates back to traditional real ~3.5%
• US energy production itself is a big, and growing, employer, with
powerful multiplier effects
• Turnaround in trade accounts adds directly to GDP
• Much of the specialized supply chain for shale-based energy an American
monopoly
• Oil and gas industry infrastructure spending alone is planned at $348 billion in
2013, equivalent to about 2% GDP.
• Cheaper energy is already triggering a revival of traditional energy-
intensive manufacturing
• Chemicals, steel, refining, cement, paper all highly sensitive to natural gas
prices
• At same time, rapid cost increases in China have triggered a “reshoring”
movement independent of energy developments.
4

5. Faster growth will ease spending constraints on job-producing
public programs like infrastructure and health care
• Heavy manufacturing revival will drive investments in inland
waterways, railroads, bridges, and pollution and waste control.
• As growth returns to traditional path, deficits will shrink as a share of
GDP, allowing increased investment in education and health care.
• Health care is the example used here: despite much resource misallocation, it
adds to GDP, just as, eg, SUV and video game production does
• It is a driver of both semiconductor and biotech advances
• A top creator of well-paid professional career tracks supported by training
widely available in community college and 4-year public colleges (despite
current cutting)
• A favorite of Wall St and venture capital, in contrast to gloom on health care
spending in Washington.
5

6. Risks and dependencies
• Growth path will take several years to evolve and lock in:
manufacturing recovery just getting under way, and heavy industrial
plant takes several years to build and bring on-line
• The energy industry could fumble its opportunity without better
environmental performance
• The risks are manageable and the technology straightforward
• But requires highly disciplined performance, which has too often been absent
• Public sector growth-enhancing investment in infrastructure and
education/training will require completing the cyclical political
transition begun in 2008
• Visible growth improvement before 2016 will help make that happen.
6

7. Energy

8. Geology of shale
8

9. US is rapidly building the world’s largest shale-based oil
and gas industry
• Geologists have long known that shale is the “source rock” for oil and
gas.
• In geologic time, sea and lake-bottom mud compresses into hard, thin layers
of rock that traps and cooks biologic matter
• Conventional oil and gas wells are formed as hydrocarbons seep from the
shale into sandy formations that form natural reservoirs. They are relatively
easy to exploit, but hard to find.
• Probably 85% of hydrocarbons, however, remain in the shale, but
neither technically nor economically feasible to get it out.
9

10. Until recently...
10
Source: EIA

11. Multiple enabling technologies
• Micro seismic geologic contouring
• Directional drilling and diamond drill bit designs
• Fracturing techniques – eg, guns that perforate collection pipes
• Slippery fracturing fluids – (friction of < 4 miles 3-4” pipe at very high
pressure.)
• Multiple-well drill pads, and moveable rigs
• In short, thousands of small innovations
• Industry growth driven by small, entrepreneurial companies
• But important federal role, not unlike that in semiconductors.
11

12. First commercially viable shale well only in 1998
EIA forecasts of US natural gas and oil and other liquids to 2040
12
Source: EIA (both charts)
Speed of takeoff reminiscent of the internet

13. EIA generally quite conservative in its estimates
• In April EIA estimated 2012 oil and liquids production at 6.5 mm b/d;
in June, BP upped the estimate to 8.9 mm b/d.
• Fears of early depletion in Barnett and the Bakken now seem
unfounded and major new discoveries coming to light in the
Southwest (Permian, Cana Woodford, etc.), plus possibly huge
deposits in Monterey.
• By late 2010s, US should surpass Saudi Arabia in oil production and
Russia in gas production.
13

14. Jobs

15. Job implications
• Daniel Yergin/IHS calculate 1.7 million jobs in the current energy economy,
growing to 2.5 million by 2015 and 3.5 million by 2035
Source: IHS “America’s New Energy Future” Vol. 1, 2012
• Direct oil field jobs generally very well paid, while workers in direct supply-chain,
like steel and heavy equipment, usually have better-than-average industrial pay
• Annual Oil & Gas Journal survey shows $348 billion planned oil and gas
infrastructure spending in 2013, equivalent to about 2% of GDP
Unconventional Oil & Gas Employment
2012 2015 2020 2035
Total 1,749,000 2,511,000 2,985,000 3,499,000
Direct 360,000 506,000 600,000 724,000
Supply-chain 538,000 770,000 916,000 1,074,000
Induced 850,000 1,234,000 1,469,000 1,700,000
15

16. Economists at ACC estimated employment gain in eight energy-intensive manu-
facturing industries by 2017. (US oil-equivalent natural gas a third as expensive.)
Economic Impact in Eight Industries
Employment Payroll $Bs Output $Bs
Direct 200,000 14.6 121.0
Supply-chain 462,000 31.7 143.8
Induced 517,000 24.2 76.8
Total 1,179,000 70.5 341.6
Citigroup economists forecast a total contribution of < 3.6 million jobs,
including both direct and stimulated jobs, by 2020 – in the ballpark
of the summed IHS and ACC estimates
16
Source: American Chemical Council: “Case Study of Eight Industries” 2012

17. Typical projects have long lead-times, but once in place will
have real staying power
• Dow Chemical is spending $4 billion in four major Texas projects that
will come on line between 2015 and 2017
• Nucor converting entire US national production to natural gas, and
introducing major changes in smelting technology. Total conversion
over 5-6 years, now about half complete.
• America’s Energy Advantage, a heavy industry lobbying group, has
compiled a list of major energy-intensive planned industrial projects
• 108 separate projects
• Total investment just under $100 billion
• A third either in construction or due to start this year
• 60% to be under construction by 2015.
17

18. Energy boost reinforces a new “Reshoring” trend
• In many industries, Chinese and American productivity-adjusted costs
are nearing parity
• Yangtze valley average factory wages jumped from $0.72 an hour to $8.62
over 2000-2008
• GE, the pioneer of offshoring, now a poster boy for reshoring.
• By re-engaging its design and manufacturing teams, GE reduced the
production cost of a reshored appliance to 20% below the Chinese costs
• Many examples of European and Japanese companies locating in US
to take advantage of low manufacturing costs
• Brutal “re-sizing” of US firms during the Crash, unattractive though it
was, has made industry extremely competitive.
18

19. Modest recovery in manufacturing employment
10,000
11,000
12,000
13,000
14,000
15,000
16,000
17,000
18,000
Manufacturing Employment (000s) Some analysts have noted
that mfrg “always picks up
during a recovery.”
Actually, no. Kept drop-
ping 2003-2007
One reason why US growth
outstripping most other
developed countries
despite drag of shrinking
public spending
19

20. How to fumble it away
20

21. Conventional oil and gas production is typically in highly
specialized locales; shale is nearly everywhere.
• Shale hydrocarbons are widely and thinly distributed
• Harvesting takes place in areas without a drilling/mining culture; eg, active wells
are seeded throughout built-up areas of Fort Worth.
• Large-scale water usage
• Massive truck and heavy equipment traffic
• Leakage and spills
• 24/7 floodlights; airport-quality noise
• Occasional blowouts
• Shale energy exploitation is actually least water-intensive of all hydrocarbon
recovery technologies, by 8-60x. But it is unusually visible, with thousands of
giant water tankers taking over the roads during well development
• Virtually all pollution issues come from surface spills, holding tank overflows,
intentional venting, or poorly built or managed wells, rather than from the
fracturing and drilling itself.
21

22. Operations that would be normal in conventional oil or coal
regions are shocking and disruptive in the wider world
• Problem exacerbated as fast-moving, entrepreneurial companies often lack
interest/resources for environmental management.
• Industry is rapidly consolidating, however, and the bigger companies seem
to realize the stakes.
• Hopeful signs abound, eg:
• Environmental Defense Fund, nine of the biggest companies, and two universities
have joined to document complete well-to-customer volume of methane leakage
• First results due to be out this year; additional studies already underway
• Technology for clean operations is relatively simple; but installing the
management disciplines is VERY hard, especially given wild-catter ethos
• Without a serious upgrade of industry performance, its continued
expansion could be at risk.
22

23. Another risk: The energy-based manufacturing revival
could be choked off by unrestricted natural gas exports
• For export by ship, gas must be liquefied (LNG), which is expensive but many companies
lining up to do it
• Economists almost universally in favor – the free market way
• But marginal energy prices are set by the OPEC cartel
• 90% of all oil supplies costs <$20 barrel
• When a market is fundamentally distorted, a free-market tweak often makes things worse.
• Danger that large-scale exports will link US gas prices to cartel-set oil prices
• Asian manufacturing companies would pay almost any price
• Would balloon profits of international companies, that invest internationally, not by flag of
incorporation (ExxonMobil now largest US gas producer)
• Large foreign presence in LNG export projects (Qatar is the control party of one high-profile
project) undercuts the myth that LNG export revenues would be US income
• With more than modest exporting, link between LNG and oil prices almost inevitable, wiping out a
big attraction for manufacturers.
• Worst case, US could become an extractive economy supplying an East Asian
manufacturing juggernaut.
23

24. Infrastructure

25. American Society of Civil Engineers performs a
quadrennial audit of American infrastructure
• Per its recently-released 2013 audit, the US infrastructure deficit is now
$3.6 trillion through 2020, 20% higher than in previous (2009) report.
Funding shortfall is $1.6 trillion.
• Heavy manufacturing recovery will place additional pressure on decaying
infrastructure:
• Inland waterways
• Bridges
• Freight rail and trucking arteries
• Water and other pollution abatement facilities
• Ports, harbors, other choke points
• Rapid transit
• Power grids
25

26. Infrastructure…cont.
• A fully- funded program to close the infrastructure gap by 2020 would
generate more than 5 million jobs each year of the program
• Opportunities for innovative funding and implementation
• Infrastructure bank with capital from public and private sources
• Privatization of selected public infrastructure
• Infrastructure bonds attractive to taxable investors
26

27. Health Care
Some Propositions
27

28. • Health care costs are generally falling. Eg:
• Heart surgeons get paid less for bypasses; most bypasses are being replaced by
cheaper stents
• Much breast cancer surgery now a one-day outpatient procedure, with
chemotherapy replaced by inexpensive generic drugs
• Expensive psychiatric care substantially replaced by psychotropic medication, usually
generic. Etc.
• Health care spending is rising as new technologies:
• Create new highly specific biotech and microprocessing diagnostic tools
• Proliferate new treatments for broader ranges of diseases (lap-band surgery; neural
stimulation for Parkinson’s)
• Expand patient populations by lowering costs, as in anti-depression medications
• Reduce risk of standard interventions (knee arthroscopy; laparascopic gall bladder
surgery)
• Cf, explosion of PC sales as they got cheaper and more powerful
• Spending increases, ie, driven in great part by market-expanding shifts on
both supply and demand sides
28

29. • Almost ALL successful health care increases spending
• Heart attack rates have been fairly stable (falling slowly) for a long time; but
heart attack death rates have dropped dramatically.
• With about a 20-year time lag, cancer incidence and survival rates are on a
similar curve.
• Ditto the great triumph of bringing AIDS more or less under control
• Required massive investments in research and response infrastructures,
diagnostics, new drugs and other interventional techniques.
• Result: tens of millions of people walking around who have survived heart
attacks, cancers, AIDS, and other previous killers. They are very expensive
patients – monitoring, medications, subsequent episodes.
• William Baumol (who calls health care a “stagnant service”) says that stopping
smoking would save health care costs. In fact, encouraging smoking would
greatly reduce the Medicare cost curve.
29

30. Health care arguably our largest single industry, and largest,
and arguably best, employer
• Pace Baumol, only about 30% of employees and 13% of revenue in
“stagnant” hands-on personal services (home health aides, etc)
• About 60% in professional, semi-professional jobs
• Qualify through national certification tests in most titles
• Public community and senior colleges offer panoply of career/title qualification
programs (currently being cut back)
• Walk into any big-city outpatient center: hundreds of competent black and brown
kids managing $millions in machinery and technology
• New specialties abound: Physician assistants, dosimetrists, inhalation therapists,
perfusionists, nurse-anaesthetists, etc
• Technology intersection at the sweet spot between biotech and
semiconductor technology
• Barron’s January 2013 investors’ outlook raved over health care
opportunities
30

31. Why does American health care cost so much?
• Medical professionals are paid more than in other countries (but so are lawyers,
managers, and other professionals). That won’t change.
• Uniquely, US shift to outpatient, minimally invasive delivery has improved access
to, and attractiveness of, vast swathes of services. That is mostly a good thing.
• Paperwork: the cardiac surgery unit at Columbia-Presbyterian deals with 2,800
payor groups(!). This is ridiculous.
• Lack of agreed treatment standards: only about half of all services have industry-
wide consensus on correct procedure.
• Physicians/patients have wide practice latitude in unsettled areas
• Local peer groups dominate in standards setting. Evolutionary drift creates vast practice
differences. US hospital C-section rates vary from 7-70%. (Cheaper intervention, to be fair,
isn’t always the best)
• Many opportunities to exploit reimbursement systems, and many doctors and hospitals do.
• These last two – standardizing interventions and rooting out exploitation – should be main
focus of policy.
31

32. America only country that attempts to manage health care
spending through payment incentives
• A micro-economist’s fantasy: How a dozen economists brought a million doctors to heel
– and with almost no data feedback
• Unintended consequences abound. The outpatient movement was triggered by Nixon-
era attempt to lower costs by shifting services away from hospitals
• The US health care model – an idealized market with highly rational agents – works, if at
all, only for the elite (who consume a disproportionate share of US health care)
• For bottom 60-70%, Kaiser-Permanente style, salaried docs, with senior physicians
establishing evidence-based treatment pathways is best solution. Such plans spreading
fairly rapidly.
• Major opportunity for Obamacare federal exchanges to gradually transmute into Kaiser-
style plans and establish pricing and treatment discipline.
• The new “Accountable Care Organizations” will likely founder on the challenge of
combining fee-for-service payment with capitation, but may establish the required
organizational base for a more manageable approach.
• Conversion to a more practical system will be a 1-2 decade-long process.
32

33. Paying for It
33

34. Growth solves a lot of problems
34
0
100
200
300
400
500
1941
1942
1943
1944
1945
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
GDP US Debt
Alarming WWII debt as share of GDP

35. US economy has grown by real annual 3.5% since 1950,
including the Crash
Plug that figure into CBO debt forecast (1.3% pickup)
35
10,000
12,000
14,000
16,000
18,000
20,000
22,000
24,000
26,000
28,000
30,000
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
$ MMs
CBO and Adjusted GDP and Debt
CBO GDP CBO Debt Adjusted GDP Adjusted Debt
45%
50%
55%
60%
65%
70%
75%
80%
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
CBO and Adjusted Debt % GDP
CBO Debt Adjusted Debt

36. Myth of Health Care “Squeezing Out”
36
0%
20%
40%
60%
80%
100%
1930 1940 1950 1960 1970 1980 1990 2000 2010
All Other Food (for home) Clothing & Shoes Housing & Utilities Health Care
As share of “All Other” rose, real per capita incomes tripled

37. And we can easily afford to pay higher taxes
37
15
20
25
30
35
40
1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
Taxes As % GDP, 1965-2010
US OECD Average
US all-tax share of GDP typically 27th or 28th of 30 industrial countries.

38. Are we entering a new liberal political
cycle?
38

39. Post WWII cycles
Conservative: pro-business, neoclassical economics, traditional religion,
strong military, restrictive view of federalism.
Liberal: interventionist economics, pro-equality, secular, suspicious of
military, broad view of federalism
• Wartime to late 1950s – conservative
• Late 1950s to late 1970s – liberal
• 1980 to 2008(?) – conservative
• 2016 will confirm/disconfirm whether liberal cycle has taken hold.
NB: Cycles not specifically party-based. Bill Clinton, a Democratic
president during a conservative cycle deregulated more than Ronald
Reagan did.
39

40. Arthur M. Schlesinger, Sr.’s analysis of American political
cycles
Cycles are inherent in the electoral process
“The thinking conservative finds his chief allies in the self-complacency of
comfortable mediocrity, in the apathy and stupidity of the toil-worn multitudes,
and in the aggressive self-interest of the privileged classes. The honest radical
draws much of his support from self-seeking demagogues and reckless
experimenters, from people who want the world changed because they cannot get
along in it as it is, from poseurs and dilettanti, and from malcontents who love
disturbance for its own sake.”
Political cycles turn when an extended period of either conservative
or liberal hegemony brings the baser, more self-interested, or
barmiest elements to the fore.
Conservative regimes, perhaps, more prone to the corruptions of money, liberals to
the corruptions of power.
40