Chapter 11

What Do We Do Now?

The saying goes that economists have been put on this earth to make weather forecasters look brilliant. That may be true, but economics does provide the framework for looking into the future, even if the future is foggy. While you would never want to bet the bank on an economist's forecast, you would never want to bet the bank without one. Of course, it is probably never good to bet the bank on anything, but households and businesses do it every day, though maybe in a smaller way. They make retirement plans, put into motion long-term business plans, or make major capital investments—be it a house or a new plant—that depend on certain circumstances holding true. The simple fact, though, is that conditions change and recognizing they can and do change is the key to success. In this chapter, we discuss some of those potential trends.

“The Future Ain't What It Used to Be”

It is hard to believe that one of the most important economists of the twentieth century was former Yankee star and Hall of Famer Yogi Berra. Of course, like every famous quote, there is a question about who first said it. Regardless, Yogi made the comment “the future ain't what it used to be” famous, and that sentence completely sums up the whole concept of looking at the world and the economy through the lens of context.

Context makes us consider whether the current “common knowledge” makes any sense. It requires us to factor in not just what has happened but what may happen in the near and often distant future. Conditions change. The world evolves. Economic relationships are not constant. That is what understanding economics in context means. Essentially, the answer to any economic question is, very simply, it depends!

Of course, forecasting the future is dangerous. Fifty years ago, the Internet was nonexistent, and personal computers and mobile phones were goods that were at best only a glimmer in some scientists' minds. Thus, any forecast of the future has to recognize that it is being made in the context of what we know now. Context determines our forecasts.

There are several major trends that we have identified. The global economic integration, emerging developing countries' middle classes, energy supply restructuring, demographics, and technology will be key drivers of future economic activity and income distribution across the world. They will alter, potentially dramatically, the way we look at private investment, consumer spending, government budgets, trade, and political relationships. The changes of the past 50 years will likely look like baby steps compared to the next 50 years. That is the one thing we do know about factors that drive the economy: in each decade, the rate of change accelerates.

Here are some ideas about the future of the U.S. economy and its place in the world order.

Flying Robots, 3D Printers, and the Future

On a late October evening, twilight is starting to engulf Manhattan. City lights are twinkling on, and New Jersey is backlit in fuchsia. There is no place better to watch the show than the 44th floor of the Hearst Tower, with its unobstructed views of Central Park and the Hudson River. Or a visitor can ignore what's going on outside and instead look at the future.

No, Hearst, the venerable publisher, has not invented a time machine. But one of its publications, Popular Mechanics, is exhibiting the winners of the ninth annual Breakthrough Awards, which in some ways is a crystal ball into the future, perhaps showcasing technologies and products that may help drive future economic growth.

Walking around the aerie are 20-something innovators in T-shirts as well as corporate-types from companies like General Motors who were working on the cars of the future and drones that land on aircraft carriers. Some of the brainy types are showing off their ideas on laptops, in floor-model demonstrations, or, in at least one case, literally levitating in one part of the room.

The hovering part came from Vijay Kumar's flying robots—YouTube sensations—that can fly, dart, and interact with their surroundings without anyone guiding them with a joystick.¹ In the fall of 2013, the tiny drones didn't have FAA approval for commercial applications yet, but Kumar, a professor at the University of Pennsylvania's School of Engineering, says that ban will eventually be lifted. Once the FAA relents, how could these agile helicopter-like flyers help society? He envisions farmers using them to monitor plants in their fields. The bots might check out which plants need additional care, a shot of fertilizer, or extra water. He thinks it could lead to a breakthrough in non-labor-intensive “precision farming.”

He can also envision his swarms of flying robots helping first responders. If a building is on fire, as happened after the World Trade Center was attacked, he says his swarms could fly up stairwells to discover if there is anything that can be done before firemen risk their lives.

Not far from Kumar is 23-year-old Stephen Lake, the cofounder and CEO of ThalmicLabs, who was demonstrating an armband, called “Myo” that allows him to control electronic devices through gestures.² Sensors detect even relatively minor finger and arm muscle activity. What will this do? He envisions people being able to control computers, smartphones, and other digital devices by simply slipping on a Myo. He thinks he's on the forefront of “wearable computers,” that will change society.

“It really is one of the first wearable interfaces out there,” he says. “You can control video games and entertainment, but if you are in an office on the productivity side, you could be giving a presentation and actually pull up information on the screen and annotate it by just pointing. It is a blurring of the line between us and computers.”

As of the fall of 2013 he said his company had presold over 40,000 of the gesture control armbands in more than 145 countries. The devices were expected to ship in late 2013.

In another nook at Hearst is a large 50-inch television set marketed by Seiki, a Chinese company.³ But the big set is not just any television: the display has four times the resolution of high-definition sets sold off the shelf in 2013. These 4K, super-high-definition sets, have been available for some time. But they cost $5,000 to $10,000 apiece. This Seiki set retails for under $1,500.

Why is that important? Because in 2011, according to the New York Times, the Nielsen Company estimated 96.7 percent of American households owned a set.⁴ And why would they want to buy a new one?

“4K Ultra HD is the newest resolution standard in TV, and it has the potential to change the face of digital entertainment,” says Sung Choi, the vice president of marketing for the Chinese company Tongfang Global and the Seiki Digital brand. “4K Ultra HD offers visual clarity and realism that is second to none.”

The Seiki sets have more than 8 million pixels on a 50-inch panel, four times as many pixels as standard HD. “It will look as if you can step right inside the screen,” says Frank Kendzora, executive vice president at Tongfang Global and Seiki.

And it may not just change entertainment. The pair from Seiki thinks there are many other applications for the high-resolution sets, such as health care imaging to provide more detailed images of the human body or to provide a much sharper screen on mobile devices.

Another one of the Breakthrough Awards went to MakerBot's Digitizer 3D scanner, which can scan any real-world object and make a computer file from it.⁵ Combine the computer file with a 3D printer, which melts biodegradable plastic filament into a very thin layer that on a layer-by-layer basis makes a solid object, and you have a copying machine for real objects.

NASA plans to send a 3D printer into space in 2014 so it can make spare parts for objects that get lost or break. “3D printing provides us the ability to do our own Star Trek replication right there on the spot,” says NASA astronaut Timothy “TJ” Creamer.⁶

Jerry Beilinson, the deputy editor of Popular Mechanics, thinks the printer has the potential to make a future impact on the economy because the machine, which is the size of a small copier, allows backyard inventors to make inexpensive models of their ideas. “You can scan any small object on a turntable that creates a 3D file, then you go and print out a copy of that object. It's not quick and seamless, but that whole loop now exists,” he says.

The 3D printers also won't produce instant chocolate cake and pork chops like the versions on Star Trek. But in a few years, who knows?

Beilinson knows a good idea when he sees it. He founded the Popular Mechanics awards program in 2005. However, he alone does not make the decision over who wins. The magazine has a complex process that includes lower level editors, past winners, Beilinson, and the editor-in-chief, Jim Meigs. In addition, the publication contacts 250 research institutions, national labs, and funding agencies such as the National Science Foundation to scope out potential ideas.

“I must say we've been pretty good at crystal-balling,” he says. “As I look back, there are few things that I say ‘why did we do that, that was off base.’” His involvement with the awards often takes him into contact with some of America's great inventors, such as Dean Kamen, who is best known for creating the Segway but also has made dozens of other inventions such as the first wearable insulin pump for diabetics and the first home dialysis machine.

“One of the things Dean said is that innovation these days is exponentially faster than when he was starting out in the 1970s,” says Beilinson. “Because when he was starting out every time you needed a simple circuit, or any piece of electronics, you started out by building or designing that piece of electronics just so you could get to the invention you were trying to create. Now most inventors are sourcing components that already exist and combining them in new ways. Say you are making an unmanned aerial vehicle, and you need accelerometers and GPS chips to help it navigate; you don't design and build those instruments—you just buy the parts you need.”

“We are in a period that is substantially different than any other period we were in during the twentieth century,” says Beilinson. Popular Mechanics calls the era the “New Innovation Economy.”

In the past, a lot of research and inventions came from large corporations such as AT&T's Bell Laboratories, which invented the transistor, the solar cell, and the laser.⁷ Of course, many of those companies are still around (Bell Labs is part of Alcatel-Lucent). But Beilinson says what has changed is the huge growth of small startup companies. “We're seeing it in Silicon Valley, and we're seeing it in New York,” he says.

The editor says one of the reasons for the growth is the development of a kind of ecosystem to support the creative types. The inventor may no longer require the equipment that only a big company can afford. Instead, the inventor can join a place such as TechShop, which has sophisticated machines and tools that members can use for a relatively low monthly membership.

In addition, inventors no longer need to operate in a vacuum. Many rent space in old offices or manufacturing facilities, where they can ask other inventors in the next cubicle for advice. Or, Beilinson says, individuals can post an idea on a cloud-based forum where information is traded back and forth. Instead of relying on a corporate engineering staff, which may be busy with multiple projects, there is this kind of broad world of people sharing information, he says.

Raising funds is not as difficult as it used to be either. In the past, an inventor might have to max out a credit card or borrow money from parents and friends in order to fund an obsession. At the 2013 Breakthrough Awards, three of the winners funded their start-up on Kickstarter, which calls itself the world's largest funding platform for creative projects.⁸ On Kickstarter.com on a day in late October 2013, some engineering students were trying to raise money to build a small satellite, someone else was trying to raise money to make a smartphone into a bike key, and yet someone else was trying to raise money for a device that will help people remember their dreams.

Beilinson points out that even retailing has changed. In the past, an innovator might have had a great idea but couldn't find a way to sell it. Now, he points out, there is Amazon, eBay, and other companies. The transfer of money and the security and the process is all taken care of for you by the e-tailer. “You don't need to have that infrastructure, and you don't need to get yourself into a brick-and-mortar store at all if you have a product,” he says.

What does all this mean for the economy and the future? Beilinson thinks there will be more opportunities for entrepreneurs and technically minded people to start their own companies. And some of those companies will be in manufacturing, which some pundits once declared was dead.

“There are an increasing number of people we've talked to who get a premium price for small-batch manufacturing. They are able to survive and thrive with relatively small volumes partially because they are selling high-value, high-price products, and partially because they don't have a lot of overhead,” he says.

And maybe a few of those companies will manufacture a product or invent some new object that will change the context surrounding the economy. Who knows, the next technological wonder may be featured in a Breakthrough Award in the future.

Will the Consumer Continue to Reign? Maybe, Maybe Not

For the past 50 years, U.S. economic growth was all about the consumer. Even today, consumption makes up nearly 70 percent of economic activity. But will that be the case 25 years from now? More important, should it be the case?

One of the major points made about household spending was that income distribution and income growth are the driving factors behind the economy. In the United States, there is a winnowing out of the middle class. That may be disconcerting to most of us, but it should have been expected.

When the global economy became the Möbius World Economy, downward pressure on worker compensation became inevitable. Industrial wages, long protected by Fortress America, was opened to the reality that workers could be anywhere, and therefore the supply of employees available to manufacturing firms became limited only by the ability to train the workers.

Technology also changed the need for large segments of the business workforce. Middle management, the bastion of middle-class America, was doomed long before anyone realized it. It wasn't just manufacturing-floor workers who were being displaced by industrial innovations and the globalization of manufacturing, but information technology also reduced the demand for managers. Thus, the United States will have to restructure its economy to take into account the inevitable movement to a more concentrated distribution of income.

But the “regressing” of U.S. wages toward world levels is not simply an American phenomenon. While worker compensation in the United States may be going nowhere, that is hardly the case in many other countries.

Consider the situation in China. Manufacturing wages have quadrupled over the past decade and are expected to rise by double digits for possibly the next decade. Incomes of managers and directors are beginning to match U.S. salaries for similar positions, according to a Hays Asia Salary Guide.

That surge in income is already having huge implications for Chinese, U.S., and world economic activity. In China, the middle class is burgeoning. Economic activity is beginning to shift toward domestic consumption, not just exporting. But there is also a downside to rising wages: as manufacturing wages rise, foreign manufacturers' drive to locate industrial plants in China is waning.

It is likely that outsourcing manufacturing activities by U.S. firms to China for importation back to the United States is a trend that is nearing its end. Over the next decade, it may actually be more expensive to produce in China and ship to the United States than produce many of those same products in the United States.

While outsourcing or offshoring, or whatever people want to call it, may be waning, that does not mean that manufacturing will return to the United States en masse. The decision by a manufacturing firm to locate a production site depends not just on the wages in the United States or China but the costs of doing business in other countries. While we may see our imports from China slow, other even lower wage nations such as Vietnam could become the location of choice for manufacturers.

In other words, planning where to locate a firm is not as simple as current costs look, but planners will have to make assumptions about what they will look like in 5 and 10 years. Fifteen years ago, the decision was easy to build a plant in China and ship the output to the United States. We even shipped plants to China to start the process. But if a company made the same decision two years ago, they may have found that the cost structure has changed dramatically enough to make the assessment questionable. The no-brainer may have become a really bad choice.

In the 1990s, no CFO or CEO could get fired for deciding to move production to China. That is not the case now and will be less the case in the future. Making the decision where to locate must take into account the workings of economics and that growing demand for labor means rising wages. The context can and does change.

Similarly, the perception that China is a place where we get goods from but not a place where we sell goods is also succumbing to changing context. Twenty years ago, that was the situation because the Chinese middle class largely didn't exist. Now, it is growing rapidly and a McKinsey and Company study estimated that by 2022 there will be about 300 million Chinese in urban areas with salaries that would place them in middle- to upper-income class levels.⁹

The Chinese consumer market, which was relatively small 20 years ago, will be massive in 20 years. That makes it an ideal place to sell goods. In essence, China could or more likely will become the United States as far as being the world's market of last resort. For U.S. companies, the opportunities for sales will only rise. That is especially true since the Chinese currency is likely to appreciate versus the dollar, making U.S. goods cheaper in China. The very existence of this market will require the United States to become a major export nation if it is to keep up its growth rate.

Thus, the idea that exports don't matter made sense once upon a time, but as conditions and the context of world economic incomes changed, the whole approach to trade has to change dramatically. The same thing happened with Japan. First, the Japanese competed by exporting cheap products. Then, as incomes rose, they developed a first-class manufacturing sector, followed by a fully developed financial sector. The result was that within 30 years after being defeated in World War II, Japan was once again a major economic force in the world. China only followed that proven blueprint.

Fracking: Controversial but Changing the Future

Van driver Fidel is tanking up a shuttle bus at the Gulf Oil gas station that is in shadow of Newark Airport. All day he will drive from parking lots in Newark to the terminals and back. He worries about traffic, and he worries about the weather. But the one thing he does not need to worry about is the price of gasoline.

That's because his red and white polka-dot-covered bus does not use gasoline. He's filling it up with compressed natural gas (CNG). And while other drivers at the conventional gas pumps are paying $3.53 cents a gallon for regular unleaded that day, his company, Haynes, is paying the equivalent of $2.30 per gallon. “It's way cheaper,” he says. “I wish I could use it for my own car.”

Why is Fidel's fuel so much cheaper than conventional gasoline? In a word: supply.

In the fall of 2013, one storage field in Pennsylvania had enough natural gas stored up to supply the entire Northeast for six months.¹⁰ So much gas was being produced in places such as West Virginia, Pennsylvania, Texas, Oklahoma, and Louisiana that companies that have large fleets of delivery trucks such as United Parcel Service and Federal Express or shuttle buses like Fidel's were converting them to run on the less expensive and cleaner fuel.

The main reason for the ample supply of natural gas is an extraction technique called hydraulic fracturing, better known as fracking. After a well is drilled, the company hoping to produce oil or gas injects fluid—such as water and acids—as well as solids—such as sand—to create tiny fractures in shale formations that contain hydrocarbons. Many groups are opposed to the technique because of environmental concerns. But fracking has become a game changer for the economy.

Larger supplies of natural gas means companies operating in the United States have a reliable, plentiful supply of relatively low cost energy. At the same time, utilities are shifting over from coal and oil to natural gas, a shift that could help consumers with more stable electric bills and potentially clean up power plant emissions. Potentially lower energy bills helps consumers better manage their finances in the future without being worried over the impact of flare-ups in the Middle East.

The shift to natural gas is a trend that is expected to continue for some time because the energy industry is just beginning to tap the resource. The Energy Information Administration (EIA) estimates that daily natural gas production in the United States will grow from 24 trillion cubic feet to 33 trillion cubic feet by 2040, an increase of 37.5 percent. By 2040, shale gas will represent about half of U.S. output.¹¹

This shift to shale gas is all relatively recent. In 2004, Range Resources, an energy exploration and development company, drilled a well called Renz 1 in Mt. Pleasant Township, Pennsylvania. Range began testing a hydraulic fracture technique. The initial test was so successful that Range started buying properties for future drilling.¹²

Range had drilled into a huge shale formation that dated back 390 million years. At that time a huge inland sea covered the region. On one side of the sea were tall mountains, which resulted in a lot of run-off of sediment and nutrients pouring into the sea.

“It was semi-isolated, so ultimately there was a deficiency of oxygen in the deeper part of the sea, which was still probably only a couple of hundred meters deep at the most,” says geologist and professor of Geosciences Michael Arthur of Penn State University's Marcellus Center. “And the lack of oxygen helped exclude organisms that would have otherwise consumed the organic matter that was produced and raining down. The result was a kind of rich, organic shale that is up to as much 20 percent organic carbon, which is phenomenal,” says Arthur, who has spent years studying the origin and nature of “black shales.”

The discovery of the Marcellus gas came at just the right time. U.S. natural gas production had been declining, and the United States was using up its reserves. Without shale gas and gas found in tight formations that need stimulation to get it out, the EIA estimates U.S. production of gas would have been about 11 trillion cubic feet of gas per day. As of 2013, the United States was consuming about 25 trillion cubic feet of gas per day.¹³

Production will begin to outstrip demand relatively soon.¹⁴ The growing supply is one of the reasons why the EIA estimates the United States will become a net exporter of natural gas, with most of it going by pipeline to Mexico and Canada. But the United States will also be exporting liquefied natural gas (LNG), with the bulk of it being loaded on tankers and shipped to Europe and Asia.

The United States is not the only place where there are large shale gas and tight gas deposits. They can also be found in Mexico, Argentina, Canada, India, Australia, Russia, and China.¹⁵ But the United States leads the world in fracking technology.

Fracking is also helping the energy industry expand U.S. oil supplies. The EIA estimates that since 2009 domestic production of “tight oil,” that is, oil from fields that required some kind of hydraulic fracturing, has grown from 500,000 barrels per day to 2.5 million per day in 2013. The EIA expects production from fields in places such as Texas and North Dakota will continue to grow until 2020 before the fields start to slowly decline, depending on the industry's ability to coax more oil out of the formations.¹⁶

Can We Squeeze More Out of the Ground?

Obtaining more production from the shale formations is a big question mark.

“Here's the real kicker, the efficiency of the extraction process is really low so we are talking that we might get 10 to 15 percent of what's in the ground,” Arthur explains. “It's called technically recoverable reserves.” But he says the energy extraction industry has people trying to improve this efficiency. “What if we become really, really good at taking this out of the ground?” he asks. “Let's say we can take three times as much gas out over time. With innovation and all kinds of improvements in 20 years, we could be much more efficient at this.”

By way of contrast, in the Permian Basin in Texas, the Texas Railroad Commission, which regulates the state oil and gas industry, estimates the oil industry has recovered almost 30 percent of the 100 billion barrels of oil in the ground there. And the wells are still pumping out the petroleum.¹⁷

Here's an idea of what greater efficiency might mean for just one giant shale formation—the Marcellus, which sits under West Virginia, Pennsylvania, and New York (which did not allow fracking as of the fall of 2013.)

One of Arthur's colleagues, Terry Engelder, has estimated that the Marcellus formation holds about 500 trillion cubic feet of extractable gas. At current rates of usage, that would supply the entire United States for 20 years. “Something more conservative would be 230 to 250 trillion cubic feet, but it looks to be large, and there is no evidence Terry's estimate is wrong,” says Arthur. Even the more conservative estimate would mean the Marcellus could supply the entire United States for 10 years—at the relatively low efficiency rates. If the efficiency increases, add more years to the life of the field.

The availability of significant amounts of natural gas in Texas has attracted the attention of foreign investors, who have announced plans to build new factories and a chemical plant in Corpus Christi.

“The steady, reliable, and reasonable cost of energy is important to them,” says John LaRue, the executive director of the Port of Corpus Christi, whom we met in the last chapter. “Plus the access to the U.S. and the NAFTA markets, Mexico and Canada.”

According to LaRue, one of the companies is a Chinese steel pipe manufacturer who plans to spend $1.3 billion and will employ 600 to 700 people. Another new company is an Austrian company that will produce high-quality iron briquettes that are used in making steel for the European auto industry. The $750 million investment will employ 250 workers in the first phase. Yet another new investor is a large Italian company that is planning to erect a $1.1 billion polyethylene terephthalate (PET) plant, a base material for plastic that will employ 200 to 250 employees.

Fleet operators, such as the people who own the van operated by Fidel, are also starting to shift to natural gas. According to the Wall Street Journal, citing industry projections, about 5 percent of heavy-duty trucks will run on CNG in 2014, up from 1 percent in 2013. As the Journal notes, one heavy truck consumes as much fuel as 40 sedans in a year, and such vehicles gobble up 20 percent of U.S. fuel.¹⁸

The availability of the fuel is also starting to affect the products companies supply to consumers. For example, on July 31, 2013, Ford Motor Company said it would offer buyers of its popular F-150 pickup truck the option of running on compressed natural gas. Shifting to CNG will cost a buyer an additional $7,500 to $9,000, says Ford on its web site. But the company estimates that since CNG sells for at least $1 a gallon less than gasoline, buyers will get a return on their investment in between 24 and 36 months.¹⁹

According to Ford, the Environmental Protection Agency (EPA) estimates that shifting to CNG cuts greenhouse gas emissions by 30 percent. That prospect appeals to Fidel, the shuttle bus driver. “We have to use conservation if we want to be here for another million years,” he says. “This fuel is good if it helps the environment.”

However, Arthur is worried because even though the use of the fuel cuts down on greenhouse gas emissions in vehicles, natural gas is still a hydrocarbon. In the fall of 2013, he was working on a paper on the implications of shale gas for carbon dioxide and methane gas concentrations in the atmosphere. “Part of the analysis kind of assumes that if you make this really cheap resource available globally, there will be a disincentive to adopt renewables, which are at least at this point more costly,” he says. “And we will have this energy fossil fuel energy economy for a lot longer, and that's going to have even greater repercussions for global warming, for sea level rise, so it could end up costing us dearly in that regard.”

The Economics of More Energy

The new dynamics of energy is likely to be one of the biggest game changers for the future economy. Since the oil boycotts in the 1970s, energy supply and the cost of energy have driven everything from economic policy to monetary policy to foreign policy. Securing sources of energy supplies has been a major factor in wars and threats of military intervention. Fears of disruptions have roiled the energy markets and created the concept of “geopolitical risk” that gets priced into energy costs anytime global problems, especially in the Middle East, heat up. That is all changing.

We don't know what the structure of energy usage will look like in 25 years, but one thing we do know: it is not going to be the same. In the 1970s, forecasts were for the world to run out of oil by now. However, technology has revolutionized energy production, especially in the United States.

Since energy costs have driven so much of the economy over the past 50 years, there is little reason to think that they will not do so over the next 50 years. But this time it will be different. Instead of shipping so much of our income out of the country to pay for foreign products, the money will remain largely in the United States. That will allow for greater domestic purchasing power. Remember, imports are just an outflow of potential domestic spending, and the less we import (or the more we export), the more money there is for spending in the United States.

The availability and usage of natural gas because of the fracking technology will alter our manufacturing plants, our motor vehicles, and our outlook for inflation. It will also change the way we pay for the repair of roads, which get paid for by taxes on each gallon of fuel we use.

Declining gasoline demand, whether it comes from rising mileage standards, electric vehicles, or the changeover from gasoline to natural gas–fueled vehicles, means the end of the gasoline tax as the primary source of funding road infrastructure. The context in which we pay for our roads has been altered forever, and the charges for usage have to change accordingly. Amazingly, that simple and obvious conclusion has not yet hit the public mind-set. All we know is that there is less and less money for roads.

The likelihood that the United States could become energy independent has also yet to hit the energy markets. There, daily concerns outweigh long-term thinking. Every time something happens that could potentially affect oil supplies, the price of oil surges. However, except for Iraq's invasion of Kuwait and the aftermath of the first Iraq War, there has been no “crisis” that has led to a significant reduction in supplies. Thus, the whole concept of geopolitical risk makes no sense to energy supply even now. If “crises” don't do anything to supply, markets should price the minimal risk accordingly.

Going forward, geopolitical risk largely disappears from oil pricing. That leads to lower energy prices both from growing supplies and the backing out of the political risk premium. How much is that premium? The estimates vary all over the map, but it doesn't matter. Whether it is $5 per barrel or $25, it will move toward zero and that lowers prices.

Lower energy costs obviously will help the U.S. and world economies, not just because demand rises but inflation expectations fall as well. People will have more money to spend after they have paid their heating, cooling, and transportation bills. But also, without risks to energy supplies and growing availability, energy's impact on inflation will wane.

During the past 25 years, on an annual basis, energy costs have increased by as much as 57 percent and fallen by as much as 38 percent.²⁰ That volatility has whipsawed the economy, consumers, and businesses, and made planning for the future extremely difficult. It has also made monetary policy decisions more complex. While the Federal Reserve may look at inflation measures that exclude energy, there is also a realization that energy cost increases greatly change consumer spending power. Thus, energy's impact on inflation, both positive and negative, is problematic.

To the extent that the growing supply of more reasonably priced, secure, domestically produced energy will stabilize energy inflation and therefore overall inflation, only good things can come from it. Interest rates, which reflect inflation, will be lower with the expected reduction in energy costs. Consumer spending will be stronger as households have more money to spend on non-energy-related products. Businesses that are energy dependent will be attracted to the lower-cost American economy. And all that adds up to a better economy. Thus, anyone who looks at energy or inflation or interest rates has to look at the changing context of energy production if their business decision is to make any sense.

The Aging of Boomers Will Change the Economy Once Again

All things must pass, and that is the case with Baby Boomers. When they were young, businesses looked at the market for children's clothing, sporting goods, and baby food and salivated. When they became young adults, they drove the sales of jeans, vehicles, and fast food restaurants. When they became middle-aged, they drove the suburbanization of America and altered the landscape of cities and regions. And now, as they are approaching retirement, they are changing the face of demand once again.

That businesses have followed the aging of the Baby Boomers only made total economic sense. They were the bulge in the snake. Feeding the beast, though, is the classic example of businesses designing new and better products and marketing campaigns to account for the changing context of demand.

What does the aging of the Baby Boomers mean? Obviously, it starts with health care. Boomers will require more of it and at a growing pace. They will also be moving onto Medicare, which means they will be spending tax dollars, not just private dollars for health care. The projections of expanding financial strains on the health care system and public finances are a direct result of the growing demand of the elderly Boomers.

But that, too, will change. The greatest challenge facing the United States over the next 50 years is likely to be paying for aging Boomers without bankrupting the economy or, and this is rarely discussed, creating a system that will be overbuilt and excessively costly. Boomers will age and get sick. But they will also eventually pass from the scene.

In 40 years, the youngest Boomers will be 90 years old while the leading-edge Boomers would be, if they made it that far, will be over 105 years old. Not surprisingly their ranks will be shrinking precipitously. The context in which health care is being provided will be changing rapidly once again. The extensive infrastructure needed to care for the very old will have to be redeployed. That can either be extremely costly or relatively seamless. Managing health care not just for today's demand but for future demand is critical.

But it isn't just all about health care. When Boomers became young adults, they led the trend toward gentrification, which started the revitalization of cities. When they started having children, they led the movement not just to suburban locations but to exurban settings as well. The metropolitan areas were broken wide open.

As Boomers move out of full-time work, their locational decisions will once again change urban form. Baby Boomers are “retiring,” maybe not all at once, but at a growing pace. About 10,000 turn 65 every day, and they are looking to throttle back. This group has led the changes in the economy and household location for 60 years, and once again they will create a major rethinking about where people want to live and work.

Boomers are reevaluating what they want most in a housing location. Instead of large homes and suburban lifestyles, they are looking for “high-density, amenity-rich” locations. That usually includes cultural, sports, and entertainment facilities as well as nearby retailers and restaurants.

The impacts of the change in Boomer locations will affect how metropolitan areas evolve and change the growth expectations for states. For most Boomers, the selling of the McMansion brings them to the same location decision that businesses face: Do they stay in place or do they move to a different setting? If they move, do they stay in the region or do they go somewhere else.

The “Greatest Generation,” those who fought in World War II and the Korean War, looked to the South and then the Southwest. Sun and fun was the calling card, and places such as Florida and Arizona saw their populations soar. But the idea that all you need is warm weather to attract retirees is being retired. Boomers need more.

Over the next 25 years, Baby Boomers and other retirees will have a variety of choices. Central cities that have all the amenities that the new generation of retirees is looking for will become magnets for growth. As the cities grow, businesses that service this newly growing portion of the population will expand as well. Just as the outflow of households led to an outward migration of companies from the cities to the suburbs, a return to downtown will create a similar inflow of firms that see this group as their prime market.

Thus, within metropolitan areas, there will be a rising supply of suburban housing as Boomers sell their homes, coupled with a rising demand for areas within cities and near other places such as universities, that also support a large number of desired amenities. That will mean a massive change in housing construction, and home prices will rise and fall according to the changes in where people want to live.

But the impacts are not just within regions. While some retirees will want to reside relatively near where they had been living, especially if they continue to work in a scaled-down manner, others will still follow the sun. But while 20 years ago you could put up a retiree community in Florida and sell out quickly, going forward, a home and a golf course just will not cut it.

For many retirees looking for those places where they can do lots of things, smaller residences in their home communities as well as warmer locations will likely be how they decide to spend their “golden years.” Multifamily dwellings rather than single-family homes may be the residences of choice. Those warmer places will also have to contain the same types of amenities that the home communities offer. Thus, cities in states such as Florida will either have to adapt or see their population growth fade. That could have enormous implications for state and local finances.

That the world is changing is nothing new. But how we face those changes is critical. Assuming that trends continue unabated may have worked reasonably well in the past, but it will not in the future. If the belief that the rate of change accelerates over time is correct, trends and patterns may work for only limited periods. Economic decisions must consider the current and soon-to-be-different context. That means all decisions will have to be based on the simple idea: “It depends.”

Notes

1. YouTube, Vijay Kumar on TED.com on March 1, 2012. www.youtube.com/watch?v=4ErEBkj_3PY.

2. www.thalmic.com. January 14, 2014.

3. www.seiki.com. January 14, 2014.

4. “Ownership of TV Sets Falls in U.S.,” New York Times, May 3, 2011. www.nytimes.com/2011/05/03/business/media/03television.html.

5. www.makerbot.com. January 14, 2014.

6. Nasa: 3D Printing Will Enable ‘Star Trek Replication’ in Space,” The Telegraph, August 14, 2013. www.telegraph.co.uk/science/space/10242091/Nasa-3D-printing-will-enable-Star-Trek-replication-in-space.html.

7. “Bell Labs Top 10 Innovations,” on the web site of Alcatel-Lucent, the owner of Bell Labs as of 2013. www3.alcatel-lucent.com/wps/portal/BellLabs/Top10Innovations.

8. www.kickstarter.com. January 14, 2014.

9. “Ten Forces Forging China's Future,” McKinsey Quarterly, July 2013.

10. Source: Mike Arthur, Penn State University, Marcellus Center. October 28, 2013.

11. Energy Information Administration, “Outlook for Shale Gas and Tight Oil Development in the U.S.,” for the Deloitte Energy Conference, May 21, 2013. www.eia.gov/pressroom/presentations/sieminski_05212013.pdf.

12. From Marcellus-shale.us, which includes maps of the region as well as the history. www.marcellus-shale.us/Renz-Well.htm.

13. EIA, 2013.

14. Ibid.

15. World.Fracking Boom web site. http://world.frackingboom.com/.

16. EIA, 2013.

17. Independent Petroleum Association of America web site. U.S. Geologic Survey 1995 estimate of 100 billion barrels of oil in place. The Association quotes the Texas Railroad Commission as estimating that 29 billion barrels have been produced from the Permian Basin over the past 90 years. http://oilindependents.org/the-imperishable-permian-basin/. January 14, 2014.

18. “Truckers Tap into Gas Boom,” Wall Street Journal, October 30, 2013, p. B1.

19. Ford Motor Company, “Compressed Natural Gas Comes to Ford F-150,” July 31, 2013. http://at.ford.com/news/cn/Pages/Compressed%20Natural%20Gas%20Comes%20to%20Ford%20F150%20Fall%202013.aspx.

20. Bureau of Labor Statistics, Consumer Price Index data, Naroff Economic Advisors, Inc., analysis.