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Joel Kurtzman’s Case for Economic Optimism

The founding editor of strategy+business argues that the United States is about to launch an epic new wave of growth.

One of the most compelling voices on the future of global business is Joel Kurtzman, the editor who founded this magazine back in 1995. (One of his first moves was to coin the term thought leader, which he introduced in the first issue of strategy+business to designate its one-on-one interviews.) Joel edited the magazine through the 1990s, and then moved on, first to PricewaterhouseCoopers, where he was the global lead partner for thought leadership, and then to the Milken Institute, where he heads the senior fellows and specializes in economics and finance news, along with biotech innovation. He is also on the board of directors for the Wharton School’s SEI Center for Advanced Studies in Management.

We conducted this interview by phone after the publication of Joel’s most recent book, Unleashing the Second American Century: Four Forces for Economic Dominance (PublicAffairs, 2014). His counterintuitive take on the future—one of economic recovery and rapid growth, first in the U.S. and then the world—will be of interest to all business leaders, wherever their companies are based.

S+B: In Unleashing the Second American Century, you argue that the United States will drive global economic recovery and growth during the next few decades. Is that because the U.S. speeds up, or because the rest of the world slows down?
It’s because the American rate of growth is returning to its previous [level, which is] faster than anyone else’s. From the 1950s through the global recession of 2008, the immense demand in the U.S. for goods and services propelled a lot of the growth in the world economy. Then, after 2008, Asia and emerging markets took up the slack. But that’s reversing again now. Growth in emerging markets is slowing down, and the American economy is improving.

To be sure, the U.S. still has serious economic problems, including income inequality. But some of these can, and will, be addressed through prosperity.

S+B: One of the four forces you name is energy, oil and gas obtained largely through fracking [hydraulic fracturing]. Why is that so critical?
This transformation is not getting the attention it deserves. Since 2008, the U.S. has become the largest producer of energy in the world. It has reduced its oil and gas imports from 40 percent of total consumption to about 14 percent—a total reduction about equal to the amount of energy that Japan uses in a day. The U.S. may soon pay a quarter of what Europe and Asia pay for natural gas. That’s a staggering change. I don’t think there are any historical precedents.

It happened first in the U.S. because the American system favors entrepreneurship. This is one of the few countries where individuals and companies can own mineral rights, including the rights to oil and gas fields. There are also some intelligent energy policies in the U.S., especially at the state level. For example, California’s mandate on the percentage of renewable energy has kept fossil fuel emissions low, by mixing natural gas; energy conservation; and renewables like wind, solar, and ethanol. A natural gas plant might operate at night, while a solar plant can’t operate, and the two work in tandem. Meanwhile, fracking technology is getting better and more efficient. There are fewer than 400 rigs now in the U.S., down from 1,400 in 2012, and this country produces more natural gas now than it did then. The U.S. is becoming the center of fossil fuel–based chemical manufacturing—plastics, agricultural chemicals, pesticides, and so forth. Companies like Dow Chemical, ExxonMobil, and Sasol are moving plants from the Middle East to the United States.

S+B: Eric Spiegel, CEO of Siemens USA, believes manufacturing will transform the U.S. economy.
Manufacturing is the second force. The equation has tipped in favor of North America, for several reasons. First, because of factory automation and robotics, the productivity is staggering. The U.S. produces about seven times as much factory output per employee as China does. To be sure, this is tough for individuals. Factory workers need a minimum of two years of college, and ideally four years. But because productivity has grown faster than wages, labor in North America is not much more expensive than in Asia. There is still a lot of room to pay workers more, which would be very helpful for resolving income inequality.

Second, since the life of a typical product is shorter and shorter, manufacturers need to be nearer to North America, which is still the largest market in the world. Now, they can run a U.S. factory on cheap natural gas, instead of transporting it from Asia with expensive oil. Companies like BMW are making vehicles for the whole world in North America, because the overall costs are lowest here.

S+B: What’s the third force?
The U.S. culture, and its orientation toward creative endeavor and risk taking. My book opens at MIT, where students come from all over the world and conduct research for biotech and information technology companies before they leave school. The U.S. has at least eight such high-tech centers: Boston, San Francisco, San Diego, New York, North Carolina’s research triangle, Austin [Texas], Boulder [Colo.], and Ann Arbor [Mich.]. This creativity is boundless.

China has been investing heavily in R&D, and has more gene sequencers, for example, than the United States. But there haven’t been many scientific breakthroughs coming out of China. It’s because their culture, like most other cultures around the world, has less tolerance for risk and nonconformity. One example of American risk taking is the appointment of Joichi Ito in 2012 to head up MIT’s Media Lab. He never finished college and had no management experience aside from [the online multiplayer game] World of Warcraft, where he led a guild. That’s not a typical CV for the leader of a major academic R&D facility, but the U.S. has that kind of tolerance for differences.

S+B: Do you think other countries will respond by becoming less risk averse and more open?
That’s a great question. Most countries realize that they have to be more tolerant of failure, but it takes a long time to change the culture of a country—far longer than it takes to change a company, which is difficult enough. Even so, awareness is spreading that new ideas emanate from the scary edges of society, not from the conservative center. Think about music. Where did rap come from? Not the elite music schools. It came from the inner cities of New York, Los Angeles, Detroit, and Chicago, and it’s spread to every country in the world. There are rappers in every language, and they sell albums.

S+B: And the fourth factor promoting prosperity in North America?
It’s the enormous amount of capital available for investment. Most people, when judging economic vitality, look at debt relative to GDP. But available global capital is a more important statistic.

S+B: You’re not talking about “hot money” that moves rapidly from one country to another.
Just the opposite. It’s cold money—stable, earning lower interest rates than it should, and ready to be deployed.

The recession was cleansing for both business and consumers. Corporations renegotiated their debt downward through lower interest rates; their carrying charges for that debt plummeted. Altogether, the private sector now has about [US]$4.4 trillion in uninvested liquid assets. Banks have another $1.5 trillion deposited with the Federal Reserve. There has also been a massive refinancing of household debt. Some of it was forced, in the aftermath of the subprime loan bubble, but most of it was by choice, and it has put a lot of money in people’s pockets. Many homeowners, for instance, negotiated their mortgages down from 5 or 6 percent to 2 or 3 percent. Many Americans also became more frugal and put more money away for retirement.

As a result, households in the U.S. have $60 trillion in assets, much of which could be invested. For the first time in a long time, American savings have increased to close to worldwide levels. This money earns very low interest, but investors are afraid of risk, because of the uncertainties in the world at large: the clashes between political parties, the geopolitical uncertainties, other uncertainties related to the Affordable Care Act and immigration reform, and so on. Once stability and confidence return, there is enough capital available to chart an entirely new future in investment.

S+B: But a lot of people believe that stability will never return. They think we’re never going to settle into a “new normal.”
No, it’s going to smooth out. There’s a lot of pressure, including from major investors and economic figures, to see it smooth out. This chilling bickering between the political parties in the U.S. can’t go on forever, for example. As we see the current wave of growth expand, we’ll see that money begin to be used productively. Banks are starting to lend, albeit tentatively, so housing is picking up. In addition, people from around the world have been willing to invest their money in the U.S. at near-zero interest rates.

S+B: How do you know that the current wave of growth is genuine, and not the beginning of another bubble?
To be honest, there will be another bubble. People are people, and they bid up the price of assets unrealistically from time to time. But at the same time, these forces are very powerful, particularly energy. When it’s managed effectively, energy production can transform economies. Look at how fast the economies of Dubai and Abu Dhabi have grown and diversified since the early 1980s. That same force, applied to an already industrialized country with the largest economy in the world, could lead to tremendous changes, because the U.S. can absorb this immense amount of capital and make it productive again. Some of these changes were already under way, by the way, before the Great Recession, and then they were put on hold—and now they’ve resumed.

S+B: What about the argument made recently by Northwestern University economist Robert J. Gordon—that innovation and productivity improvement benefited from a one-time historical surge that has ended and will never come again?
I don’t buy that it’s over. When you spend time as I have in the biotech cluster around Boston, you see that we’re at the beginning of a new age of innovation. The rate of change is astronomical. The science has never been more advanced. We’re still just beginning to build out an intensive innovation culture in this country that only started in the 1840s, with the telegraph and railroads. That’s a very short time in human history, and we’re much closer to the beginning than we are to the end.

I didn’t start out Pollyannaish. I spent a lot of time looking at the economy from a pessimistic perspective. When I looked more deeply at the endowments given to this continent, I became very optimistic.

I think many business leaders will realize, soon, that they are underinvesting in North America.  From Mexico to Canada, there are 450 million people with a combined GDP larger than that of Europe, and immense resources—physical, mental, and energy-related. While the three governments of North America don’t work together nearly as closely as the governments of Europe do, their economies are increasingly intertwined and growing. That connection is very powerful, and could lead to a new type of North American economic bloc.

“Many business leaders will realize, soon, that they are underinvesting in North America.”

Brazil, China, and India—and other emerging economies—will continue to grow, but they will no longer be the fastest-growing parts of the world. The world as a whole will be a place of bounty in many of the things that matter: food, medicine, material wealth, and even ways to pull CO2 from the air. The U.S. will take the lead on this, because of its endowment and culture. It will stay in the lead for longer than most analysts expect.

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