Boom Times Ahead?

Probably. But Will Washington Make the Most of Them?

The consensus outlook for the U.S. economy is, to put it mildly, pretty bleak. The boomers are retiring, the debt-fueled consumer-spending binge of the 2000s has ground to a halt with nothing to replace it, and American manufacturing workers are trapped in a brutal competition with hundreds of millions of cheap, eager workers from all over the developing world.

Worst of all, as middle-income Americans get squeezed, the very richest Americans are amassing wealth as never before. And they are deploying it to lock in their advantage. The chances of a young American from a lower- or middle-income family moving up the economic ladder are now poorer than in most major industrialized countries. A nation with our traditions should be deeply ashamed. 

But the gloom can be overdone. Opinion-makers were similarly depressed at the start of the 1990s, which turned out to be one of the most productive and high-growth decades in the country’s history. The key development, the advent of the internet, seemed to come out of left field. Even Bill Gates didn’t see it coming, although the government had been working on it for a long time. It was the kind of game-changer that transformed business productivity in fundamental ways.

To get out of today’s impasse will require another such deus ex machina—some new large-scale development that could generate a step-change in American competitiveness. And voilà, just when we need it most there is an extraordinary natural-gas boom developing throughout almost the entire area between the continent’s western and eastern mountain ranges, from central Canada to the Texas Gulf.

According to the BP 2012 Global Energy Forecast, natural gas will be the fastest-growing fossil fuel for a long time to come, and the most important new sources of natural gas are “unconventional”—primarily shale-based deposits. For the foreseeable future, most of the development of these unconventional sources will be in North America.

How big a deal is this? The BP “middle risk” projection is that North American shale-gas production will be running at 60 to 65 billion cubic feet a day by 2030. That’s equivalent to between 10 and 11 million barrels of oil a day—roughly the current production of Saudi Arabia. And there’s enough of it to last at least a hundred years. So, yes, it’s a very big deal.

Two separate reports, one from the Economist and another from the progressive New America Foundation, point to the great potential benefits of a robust shale-based natural-gas industry in North America. It pays above-average wages and is investment-intensive. It will also greatly reduce input costs—not only in all energy-intensive industries (big power plants, heavy-equipment factories, and cloud-computing server centers), but also in any industry, such as plastics, that uses hydrocarbons as its basic raw material. 

American-owned overseas chemical plants are already beginning to move back home to exploit low natural-gas prices. PricewaterhouseCoopers estimates that this energy-price advantage could create a million new factory jobs over the next dozen years. Pennsylvania’s shale-gas industry already supports, directly and indirectly, 180,000 jobs and produces $1.4 billion in much-needed state and local tax revenue.

Shale-based gas recovery comes with its own environmental dangers; but, properly managed, it’s cleaner than coal and safer than nuclear energy, and the technology is improving all the time. Opening a field takes about a year, but once the well is in production, it’s almost invisible. All the action takes place below ground, and wells can run almost by themselves for thirty years or more. (There have been instances of aquifer contamination from early wells, but the sealing regulations that are now in place seem to be very effective. The dramatic cases of flammable tap water documented in the movie Gaslands mostly had to do with water wells inadvertently drilled in close-to-the surface natural methane pools. Shale-gas wells are usually more than a mile below aquifers.)

Natural gas, which has already reduced coal’s share of the national energy budget to the lowest level since records have been kept, is a big part of the reason the United States has seen the world’s biggest decline in greenhouse gas emissions over the past five years. The European Commission, which is very strict about environmental issues, has decided that no new laws are required to regulate shale-based natural gas.

The technology is mostly American, and there are many hundreds of small companies that have mastered it. The final breakthroughs were made by private companies, building on two decades of federal research and pilot projects. Europe may have similar shale-based reserves, but development there will take much longer because underground property rights are much more complicated in Europe than in America and Europe’s shale regions are much more heavily populated.

The industry’s spinoffs will be at least as important as the gas itself. For example, the industry is a big user of steel, and the wells are conveniently located in American steel country. Even more important, successful exploitation of the wells will require very large investments in new infrastructure, in two decade-long stages. Stage one will build the required access roads and pipelines in the gas regions, as well as the deep-water tanker ports and liquefaction facilities for exporting gas. Stage two will involve converting the American private automotive fleet to natural gas and replacing today’s petroleum-based service infrastructure. Total investment will be in the hundreds of billions of dollars. 

If the natural-gas industry develops along the lines described here, the economic impact will be felt gradually. There will be forty to fifty thousand new jobs a year in the industry and its direct suppliers. Far more important economically will be the reduction in energy costs. Wellhead gas costs only about a third to half as much as wellhead crude. As more industries switch to natural gas, the benefits will be felt like a permanent tax cut. Making sure those benefits flow throughout the economy will require some intelligent policy.

As Jeff Madrick has pointed out in these pages (“The Stakes,” August 17), a Romney-Ryan presidency could do an enormous amount of damage—by gutting the tax base, pandering to their party’s taste for military adventures, repealing or crippling the health-care law, and shifting more government functions to profit-making, highly exploitative private companies. (See the scandals in New Jersey’s newly privatized halfway houses and the latest report from Sen. Tom Harkin [D-Iowa] on the criminal behavior of the for-profit college sector.) 

But even if we assume that President Obama will win a second term, the political atmosphere in Washington is now so toxic that it would be foolish to expect major policy breakthroughs. He will still have enough power to do some things. He will be able to protect the Affordable Care Act so it can put down solid roots. And the “fiscal cliff” will help him concentrate the minds of Republicans. If Obama were to let all the Bush tax cuts expire, Republican constituencies would be hurt far worse than Democratic ones. One presumes that the president has been purged of his 2009 “kumbaya” instincts and will play a hard game in his second term. And an energy- and manufacturing-based recovery should ease fiscal pressures and give him a stronger hand.

What follows is the outline of a program that probably can’t be achieved with the kind of Congress Obama will face if he wins a second term, but it does show the direction in which he ought to be moving.

First, it will be essential to increase the federal money available for domestic programs, from health care for children to food stamps and job training. The first target of opportunity should be the bloated Bush-Cheney-Rumsfeld legacy military budgets.  The second should be tax preferences for the rich, especially preferential capital-gains tax rates and the home-mortgage interest deduction (also heavily skewed in favor of upper-income taxpayers). If the government cut military spending and put an end to regressive tax preferences, it really could afford to lower nominal tax rates and increase funding for some critical programs.

Second, job creation and training efforts should focus in the “nontradable” sectors, the term economists use for jobs that cannot be easily outsourced overseas—jobs in education and health care, for example. The goal of the Affordable Care Act is to bring more people into a publicly supported health-insurance system and to save some of the money now wasted on unproven, often dangerous new technologies. Effective health-care management may well require expanding the ranks of mid-level care technicians, and that will mean ramping up training programs to produce the required work force. Mid-level professionals in health care earn good pay and generally have superior benefits.

Third, the best opportunity for job creation in the non-tradable sectors would be a major program to upgrade America’s dilapidated infrastructure—highways, mass transit, electrical transmission systems, water works, airports. One of the collateral dividends of the shale-gas boom is that it will align powerful private interests behind such a program. A substantial share of an infrastructure upgrade would be revenue-producing, and can therefore be financed in the private debt markets. 

Fourth, shale-gas production will itself be a major source of nontradable jobs; the work of drilling and refining has to be done here. The industry will create a host of job opportunities for mid-level engineers and technicians in well and pipeline management, and other related fields. It will also provide opportunities for state-college systems to sponsor cooperative public-private training and placement programs.

There are a number of other positive trends. The housing market is starting to stabilize. It will not be an important contributor to growth for some years yet, but it should no longer be much of a drag. Stable housing prices won’t clear up the backlog of “underwater” mortgages, but they will make it easier to deal with. 

Another good omen is that the financial sector, which has done so much damage, is contracting, and should continue to do so for some time. Recent research strongly suggests that a hypertrophied financial sector is a drag on growth, probably because so much investment capital is sidetracked into casino-like speculation. The truth is that, without extreme leverage, normal banking is not all that profitable. And as leverage is curtailed, investors are fleeing the financial sector in droves. 

Finally, the long lines of applicants for career-oriented programs at community colleges (the same kids who are cruelly exploited by for-profit colleges) bespeak a new seriousness about work. A generation that comes of age during a crisis like the one we’ve been experiencing is permanently marked by it.

The scenario I am outlining here is not an impossible dream. It’s not only possible; it’s likely. It isn’t a sure thing of course: the deck we’re playing with has some very disruptive wild cards—the possibilities of a messy breakup of the euro, or a political crisis in China resulting in an even more highly militarized state, or a war with Iran. And if there is a strong economic recovery, it will take time to unfold; there will be no sudden sunburst. But with a modicum of luck and some decent politics, the decade of the 2010s may well be viewed as one of those basic turning points that mark a new era of long-term growth whose benefits are equitably distributed. n

Published in the 2012-09-14 issue: 

Charles R. Morris’s most recent book is The Rabble of Dead Money, a history of the Great Depression (PublicAffairs).

Also by this author
The Two Economies

Please email comments to [email protected] and join the conversation on our Facebook page.

Must Reads

Culture
Books