The Next Economy

Bill Shireman

There is a reality that neither the left nor the right, each spun by their numerous power brokers, wants to face: we simply cannot cut, drill, or spend our way to prosperity, any more than the Soviets could in the 1980s. It is impossible to live off subsidies forever. Eventually, someone has to create real value. But who? And how?

In February 2011, I picked up a report by McKinsey Global Institute called Growth and Renewal in the United States: Retooling America’s Economic Engine. McKinsey is a name that always carries weight with corporate leaders. When
CEOs want to drive through a change at their companies, they often hire McKinsey consultants to make the case. So I wanted to see what they were telling senior executives about how to drive future growth in the U.S.

Their conclusion sounded right on target. If the U.S. cannot boost productivity growth rates by a third, the consequences will be painful and far more damaging to U.S. prosperity than a double-dip into the great recession. “More than ever, the United States needs productivity gains to drive growth and competitiveness,” the McKinsey team wrote. “This acceleration needs to come both from efficiency gains – reducing inputs for given output – and from increasing the volume and value of outputs for any given input.”

Labor productivity gains alone are not enough, McKinsey wrote. It is important that the United States return to the “broadly-based productivity growth of the 1990s when strong demand and a shift to products with a higher value per unit helped to create jobs even as productivity was growing.”

If we fail, America might face problems we thought we had overcome in the 20th century: genuine shortages of food to eat, water to drink, and energy to heat our homes and power our machines.The world, after all, is growing more crowded, with people whose affluence is approaching or even exceeding ours. In the next 20 years, today’s 1.8 billion middle class consumers will almost triple, to as many as 4.8 billion, McKinsey projected in a second study.

That could pit Americans against consumers in other nations, in a competition for food and resources. Last century, real global prices for these dropped by almost half, McKinsey reports, benefiting both rich and poor. But in the first decade of the 21st century, the prices doubled, erasing 100 years of declines. For Americans and the world’s rising middle class, this is difficult. For the three billion on the planet earning under $3 a day and the one billion surviving on a dollar or less, it can be life or death.

McKinsey offers good news as well. “There is an opportunity to achieve a resource productivity revolution comparable with the progress made on labor productivity during the 20th century,” its team wrote in their November, 2011 study, Resource Revolution.

Creative people, and the ideas and technologies they invent, can birth a second revolution in productivity in which we no longer need to trade ecological assets for economic ones. The combination of the microchip, computers, the Internet, advanced materials, advanced recycling, renewable energy, clean technologies and other innovations on the horizon can increase the amount of wealth we create per unit of energy by more than tenfold by the end of this century.

Consider how information and communications technology has already driven leapfrog gains in productivity, from 1960 to today.

Energy productivity gains for specific activities – some 1000% or more – led to overall gains in economic productivity. But more interesting than the quantitative gains are the qualitative impacts they had. Each major innovation created powerful new tools that could be used by people and institutions.

A handful of resource productivity innovations could meet 30% of the world’s total resource needs in 2030, according to McKinsey. That could reduce projected demand for oil from 103 million barrels a day to as little as 76 million, and cut carbon emissions half-way to the level many scientists believe is needed to minimize global climate change.

Companies like Cisco, Google, Hewlett Packard, Intel, IBM, AT&T, and many others are beginning to see even greater potential. Their technologies, and others from the information and communications sector, are today’s equivalent to the industrial infrastructure that powered the last economy’s growth. If we can replicate last century’s leap in productivity, but this time with a focus on energy and resources, we can more than pay off both our economic and our ecological debt and deliver greater prosperity to more people than ever before.

In the process, “digital freedom” could turn out to be the cheapest energy replacement of all, and some of the companies above could displace Saudi Arabia as our primary source. If the past fifty years of economic and energy data hold, the U.S. could shift away from fossil fuel intensity at a rate of 3-5% a year, possibly more. At a 3% annual pace, that would drive down carbon intensity 75% by 2060; at a 5% annual pace, we could readily drive down overall U.S. carbon emissions to the levels many climate scientists say is needed, without the need for complex and expensive commands, controls, or trading regimens.

But yesterday’s tax and spending policies don’t drive innovation. They just drive consumption. Consider what we tax: income, jobs, profits, and savings. These levies tax prosperity. They discourage work, thrift, and investment. They tax things we want, not things we want to reduce or avoid.

One of the most determined advocates of a shift in the way we tax is George Shultz. With his colleagues at Hoover Institution, Shultz is seeking to develop a better approach. The external costs of energy should be embedded in the price, so that “all forms of energy compete on a level playing field,” Shultz explained to me. “There are lots of different ways of doing it. Most of us around here think the right way is a revenue neutral carbon tax....You make it revenue neutral, so the tax is not a fiscal drag on the economy. And people can’t say you’re just another way of getting some money for the government to spend in one way or another.”

Shultz and his team are researching ways to impose the tax and assure that “it really is revenue neutral. And my own inclination is to distribute it in a visible way to people.”

One of the models Shultz is studying is in British Columbia, where a carbon tax is already in place. “It’s fascinating to see what they’ve done.... The way that they make it revenue neutral is to distribute the money to you personally as your carbon dividend. You get a check. You get a deduction from your tax. And you do it yourself, so you feel it. So you say, hey, this carbon tax is a good thing. I get a dividend out of it.”

McKinsey suggests the benefits would be broad. An economy-wide shift from taxing prosperity to taxing pollution and depletion would not simply raise revenues. It would also directly drive innovation, create jobs, promote growth, and reduce pollution while lessening the need for government interventions and programs directed to these ends. The result would be to gradually lower taxes. Everything we tax, we get less of. So as we tax
pollution, we reduce it.

Of course, politicians could still raise taxes, in theory. But the political odds would finally be stacked against that. Today, taxes rise automatically. Inflation and prosperity combine to push people into higher and higher tax brackets, increasing government’s share of total income. If we tax pollution instead of prosperity, this “automatic” process would begin to reverse. Politicians would be required to vote on any tax increases, again and again–incurring the political risk of doing so. Voters would increasingly appreciate the benefits of taxing pollution instead of
prosperity.

Look at the predicament politicians face on the Highway Trust Fund, which directs gas taxes to fund highway construction. As inflation rises, the effective tax declines. As fuel efficiency rises, revenues per mile fall. Politicians are on the hook: if they genuinely need more revenue to meet our needs, they have to ask us for it.

How might we build an Innovation Agenda that would restore U.S. economic growth without wasteful spending, environmental destruction, climate risk, tax hikes, and oil wars?

First, set a national innovation goal. Make the political commitment to increase the productivity of energy and carbon by 5%, every year, for 50 years.

Second, stop taxing jobs and prosperity. Cut personal income taxes. Cut corporate taxes. Make it easier to create new value and new wealth.

Third, wind down resource subsidies. Rather than maintaining the illusion of low prices, and paying with waste, pollution, and war, we need to gradually shift to real prices in which full costs are reflected for energy, water, and food. This won’t increase real prices – it will reduce them.

Fourth, develop the next energy economy. Rather than simply depleting our energy savings, we need to develop and increase them. Our most abundant source, the digital efficiencies generated through information and communications technology, must be increasingly tapped. Natural gas must be harnessed to provide a bridge to more advanced technologies, but in environmentally safe ways, with externalities to air, water, and land included. These will allow us to reduce our dependence on polluting coal and imported oil.

Fifth, tax pollution, not prosperity. Put a price on fossil fuel pollution, set at the rate that will drive the 3% or greater annual energy productivity gain. Make the net cost zero by cutting taxes on prosperity in various forms: payroll, income, and profits.

Sixth, use border adjustments to cut taxes more. Apply the same price on pollution to imported goods – including oil imports – so the price on domestic pollution does not inadvertently subsidize China, Venezuela, or Iran. Use 100% of the proceeds to cut other taxes. As the dominant global buyer, a U.S. carbon tax with border adjustments would force China, India, and other nations to either follow suit, or lose out to lower-carbon competitors.

An agenda like this could drive a resource revolution in the U.S., based on the McKinsey data. If other nations follow our lead, it could help the world meet 30% of its total resource needs in 2030, and cut projected oil demand by up to 27 million barrels a day, reducing global climate risk.

That will pay off nicely. McKinsey projects a $3.7 trillion annual gain in global prosperity, through a combination of a $30 per ton carbon price and removing key subsidies. From 70% to 90% of the productivity investments have an internal rate of return of over 10%.

The bad news is that to achieve these gains, we need a massive increase in one extremely scarce resource: political courage and collaboration. Government and its industrial-era partners on the right and left must unwind more than $1 trillion in global subsidies that drive energy, agriculture, water, and other resource consumption beyond sustainable levels. The benefits would be widespread – a political liability in a system that feeds on concentrated wealth.

But two powerful interest groups could be motivated to help. First, the top retailers and brands, these companies have extraordinary market and political power. Their supply chain extends into every legislative district. To keep and build their brands, they can’t stay on the sidelines. WalMart, all by itself, has more power than the U.S. Congress to drive smarter tax and environmental policy. By cutting income and payroll taxes, and reducing subsidies, they put more spending power in the pockets of the WalMart moms they seek to serve. Second, the top digital technology leaders companies set to gain the most from a shift to a more digital, high-productivity, resource- efficient economy. They will be the source of the innovations that enable sustainable agriculture, manufacturing, transportation, and service sectors.
But they aren’t likely to risk the political capital, unless motivated by a broad alliance of empowered citizens. Not just labor unions on the left and Tea Partiers on the right, but mainstream Democrats and Republicans, professional networks, environmental advocates, and free market libertarians who oppose pollution subsidies, and fiscal conservatives and social progressives who know the difference between wealth and debt.

Pat Caddell and Douglas Schoen think that, eventually, they will. The two pollsters, who worked for Democrats Jimmy Carter and Bill Clinton respectively, say the U.S. is in the midst of a “prerevolutionary moment, and there is widespread support for fundamental change in the system. An increasing number of Americans are now searching beyond the two parties for bold and effective leadership.” Schoen’s poll of 1,000 Americans in early 2011 found that 57% of all respondents said there is a need for a third party. Nearly six in ten wanted a third party presidential choice, and one in five would almost certainly vote for one.

No national figures wanted to audition for the role played by Ross Perot in electing Bill Clinton in 1992 or Ralph Nader in electing the second Bush in 2000. More likely than a third party is a third force – a bipartisan political coalition dedicated to an agenda that combines the best from the left and the right.

The right dislikes concentrated government power. The left dislikes concentrated corporate power. From a larger vantage point, they have something in common. Both right and left dislike concentrated power. The right is concerned about protecting the market as a robust system. The left is concerned about protecting the environment as a robust system. From a larger vantage point, both want to protect the systems on which prosperity depends. Looking from this larger vantage point, left and right may be able to agree on a new social contract, one that gives people greater freedom to make choices, greater opportunity to contribute their gifts to others, and greater responsibility for both the benefits and the costs.The right and left may not think they need each other. But America needs them both.

The drill-and-spend economy has served its purpose. It made us prosperous. More important, it has birthed a new set of ideas and technologies that can carry it another step forward, and make us sustainably prosperous.
A half-century into the information age, many Americans find they no longer need to force themselves into a consumerist mold that no longer fits. They know they are more than that. It is time for Americans to step beyond dependence on outside powers, whether big government or big economic interests.

It is time for politics to catch up with change, not just fight it. The economy of the last century was dominated by industrial giants like General Motors, Standard Brands, General Electric, and Standard Oil. All have been destroyed, battered, or transformed. The politics of the last century was dominated by their political standard bearers, including the Republican Party, the Democratic Party, and the federal government. These three, and even the United States itself, are now up against the same forces that destroyed, battered, and transformed our industrial giants. All must innovate or die.

Innovation is better.

ABOUT THE AUTHOR
Bill Shireman is President and CEO of Future 500, a non-profit that builds alliances between business, labor, environmental, and political interests on the left and right. www.future500.org | bshireman@future500.org.