(1) the news that the US may become an exporter of energy and have energy independence in the coming decades, perhaps even with an era of cheap energy for the US itself; andIn brief, a report from the International Energy Agency (IEA) predicts that, with domestic oil production soaring, the US will possibly become the largest oil producer in the world by 2020, and by 2035 it could become virtually energy independent.
(2) the revolution in automation and robotics, and the return of manufacturing to the West from East Asia.
That also means that the US trade deficit will fall significantly.
The cheap energy will also feed into and reinforce the second factor above: the return and invigoration of domestic manufacturing, which will be effected by the increasingly cheap and effective forms of industrial automation, especially robotics.
There should be some return of manufacturing to the US and Western nations from East Asia and other developing, low wage countries, as production costs – above all, labour costs – fall significantly. If cost of production differences are not great, why not produce in the huge consumer markets of North America and Europe?
A third related issue is what this means for the rise of China. It was always nonsensical to suppose that superpower status has no relation to economic power. And the US’s status as the world’s superpower will be strongly reinforced, not weakened, by the emergence of energy independence and the return of manufacturing.
It has got to the point now that the idea that China is somehow destined to be the world’s new superpower is assumed by many people when discussing this issue. The RMB is touted as soon to be the world’s new reserve currency, and so on. But there is no inevitability about any of this, and there are many reasons to be rather sceptical.
For one, how can China be a superpower with a domestic currency functioning as a reserve currency when its financial and real asset markets are severely closed off to outside investors? Why hold RMBs, if you do not have a wide range of assets to buy with them, in order to get a return, and to repatriate your money quickly and easily?
The strength of the US is precisely its relatively free and vast financial and real asset markets that provide resting places for savings held in US dollars.
And here is the paradox: if China allows a highly liberalised capital account, liberalised asset markets, and deregulated finance sector, it could be digging its own grave, for the tight control of these things is actually the foundation of its economic stability.
In trying its hand at superpower status, a country like China could be setting itself up as new “lost decade” Japan.
LINKS
Oil and Energy
“US is on Fast-Track to Energy Independence: Study,” 11 February 2013
http://www.cnbc.com/id/100450133
“IEA Report: USA set to become Number One Oil Producer by 2020–Energy Independent by 2035, ” http://www.forbes.com/sites/rickungar/2012/11/12/iea-report-usa-set-to-become-number-one-oil-producer-by-2020-energy-independent-by-2035/
Robert J. Samuelson, “The U.S. may become energy-independent after all,” 11/14/2012
http://www.washingtonpost.com/blogs/post-partisan/post/the-us-may-become-energy-independent-after-all/2012/11/14/ef8624e4-2e7d-11e2-89d4-040c9330702a_blog.html
US Manufacturing
“Coming home: A growing number of American companies are moving their manufacturing back to the United States,” 19 January, 2013
http://www.economist.com/news/special-report/21569570-growing-number-american-companies-are-moving-their-manufacturing-back-united
China
Matias Vernengo, “Is China the new #1?,” April 9, 2012
http://nakedkeynesianism.blogspot.com/2012/04/is-china-new-1.html
Matias Vernengo, “Is China Buying the World?,” October 20, 2012
http://nakedkeynesianism.blogspot.com/2012/10/is-china-buying-world.html
Matias Vernengo, “Is China really opening the capital account?,” March 6, 2012
http://nakedkeynesianism.blogspot.com/2012/03/is-china-really-opening-capital-account.html
Matias Vernengo, “Michael Pettis on the Chinese Growth Model,” March 28, 2013
http://nakedkeynesianism.blogspot.com/2013/03/michael-pettis-on-chinese-growth-model.html
Matias Vernengo, “On China and Jobs,” October 4, 2011
http://nakedkeynesianism.blogspot.com/2011/10/on-china-and-jobs.html
Matias Vernengo, “Is Growth in China Investment-Led?,” June 17, 2011
http://nakedkeynesianism.blogspot.com/2011/06/is-growth-in-china-investment-led.html
Hmmm... interesting. I agree on the energy thing. Oil price speculation has had the unusual effect of leading to an investment boom that essentially is setting the US on the road to energy independence.
ReplyDeleteBut the high-tech stuff? I'd love to think so, but I doubt it. Why? One word. Demand. There is simply not enough demand to ensure that these expensive technologies are invested in in sufficient number to reindustrialise the US economy.
All the East Asian country rely on Western demand. Even if they make the (difficult) switch to domestic demand, they will not be able to absorb Western goods too. And demand is stagnant in the West due to low-wage growth.
This will mean extremely lax labour markets. And this in turn will mean that a reverse Kaldor-Verdoorn dynamic will take place. I.e. lax labour markets mean low levels of fixed capital investment (check FRED if you don't believe the theory...). So, the productivity boom will never take place because wages and demand are too low.
For more information on the Kaldor-Verdoorn dynamic and how it relates to demand I recommend the seminal Kaldor paper from the 1955: "The Lessons of the British Experiment Since the War: Full Employment and the Welfare State".
Bet you can't track that one down, LK! Okay... it's in here -- the whole collection is fantastic, I'm seeking out Vol. II at the moment. I think me and Ramanan are the only people in the world reading this stuff right now:
http://www.amazon.com/Essays-Economic-Policy-Volume-I/dp/B0013BNZ5C/ref=sr_1_2?ie=UTF8&qid=1366665923&sr=8-2&keywords=Kaldor+essays+in+economic+policy+I
I'd also recommend the work of Robert C Allen in this regard. He makes the case that the entire industrial revolution was the result of the Kaldor-Verdoorn effect in the form of high employment and relatively high wages. His "Short Introduction..." is extremely meaty.
"So, the productivity boom will never take place because wages and demand are too low."
DeleteYes, that could derail the process.
Well if this happens, would you think this means that the green energy market is going to diminish even greater, especially in the US?
ReplyDeleteSurely environmental laws will diminish energy demand, increasing exports and reducing imports? In other words , reinforce the trend.
Delete"(1) the news that the US may become an exporter of energy and have energy independence in the coming decades"
ReplyDeleteThis is false information:
http://www.peakoil.net/headline-news/an-analysis-of-world-energy-outlook-2012-as-preparation-for-an-interview-with-science
"perhaps even with an era of cheap energy for the US itself"
But not produced from oil. IEA estimates of future world oil prices:
http://gailtheactuary.files.wordpress.com/2012/11/iea-estimates-of-future-oil-prices.png
The era of cheap oil is over !!!
I almost forgot about how important automation will be in the future, but am a little bit concerned about outsourcing and whether there will be greater sources of employment in the United States. Energy independence is the #1 aspect that we should all be welcoming, and hopefully cleaner energy will be accessible and cheap by then. Again, great analysis, Lord Keynes.
ReplyDelete"The strength of the US is precisely its relatively free and vast financial and real asset markets that provide resting places for savings held in US dollars."
ReplyDeleteAnd also it's openness to immigration and its suitability as a refuge for the wealthy. I believe a green card is not difficult to obtain if you hold sufficient wealth in the US.