What Lies Ahead: Forecast for 2006

by George McClure

Now that we're four years past the end of the last recession, what lies ahead in 2006? Here are eight categories of changes and trends that are likely to affect all of us, in one way or another, in the new year: technology, energy, climate change, work force, employment benefits, immigration, infrastructure and the economic outlook.

Technology — U.S. Research & Development Losing Ground

If innovation is the answer to keeping a competitive edge, the quest for the "next big thing" will bear fruit. Fourteen papers describing prospects were published in the Proceedings of the IEEE for October 2005 (Ref. 1). Fostering innovation is the role of basic research. Research and development (R&D) is largely devoted to advanced development where payback time is faster than for investments in basic research.

The recently released National Research Council (NRC) report, Rising Above the Gathering Storm, points to the need for expanded government investment in basic research. (Ref. 2) Yet, the U.S. percentage of global R&D is expected to slip in 2006 to 31.3 percent of the worldwide total of $1 trillion dollars, according to a global forecast for R&D published by the Battelle Institute. The heaviest R&D spending in the United States has been in biotech and pharmaceuticals, a trend that is expected to continue. IEEE-USA co-sponsors an annual Congressional Visits Day and an Engineering R&D Symposium to help volunteers understand the state of R&D and the need for further investment, highlighted by visits to members of Congress to encourage funding for basic research at budget preparation time each spring.

In Why Globalization Works, Martin Wolf points out that basic research is a public good, similar to highways, canals and harbors, and should be government-funded, aiding a country in global competition.

Energy — Seeking Alternatives to Oil

Recent fluctuations in the price of oil and gas, driven by uncertainty over hurricane damage to Texas refineries, underscored concerns about whether oil extraction is peaking. Kuwait has announced that its future oil production will decline, but Saudi Arabia does not reveal its production prospects. After a swing through the Middle East to encourage producer nations to sustain maximum output , U.S. Secretary of Energy Samuel Bodman asked oil and gas companies to provide an assessment of the global outlook.

Lord John Browne, group chief executive of BP, offers a more sanguine outlook, pointing out that, although the effects of recent hurricanes cut about 1 million barrels of oil per day from the global consumption of 85 million barrels per day, that shortfall is being restored and oil prices are receding as a result. BP is setting up a new business, BP Alternative Energy, to exploit solar and wind energy.

Expect a new attempt to increase automotive fuel efficiency, through raising Corporate Average Fuel Efficiency (CAFE) standards (attempted but beaten back in the 2005 energy bill), and calls for more incentives to move to hybrid vehicles. Announcing plans to ramp up hybrid production, Ford CEO William Ford is calling for higher tax credits for hybrid auto buyers and tax incentives for producers to invest in U.S. production of components for such vehicles (currently, all hybrid automotive batteries are produced offshore). The U.S. Department of Energy shifted its focus from encouraging hybrid vehicle development (after Toyota and Honda took the lead without government support) to promoting fuel cells and hydrogen-powered vehicles. A roadmap shows milestones to make fuel-cell power competitive with oil by 2010.

General Motors is pursuing longer-lead research into hydrogen-powered vehicles, while critics say the energy saved by such vehicles must be used to produce the hydrogen, so it is a zero-sum game. However, like aluminum, hydrogen can be produced where energy (e.g., hydroelectric) costs are low, then transported to user locations.

Bioethanol is another possibility to reduce dependence on oil, if biotechnology can produce more efficient enzymes for reaping ethanol than exist today. Brazil derives ethanol from sugar cane, but the United States still depends on corn, where the total energy consumed exceeds that derived from the ethanol. Production from sugar cane is more environmentally friendly than from corn, but sugar cane tends to be grown in tropical areas deforested for the purpose.

Expect support for building more nuclear power plants in the United States. We currently derive only about 25 percent of our electric power from nuclear, while some other countries are much more reliant on nuclear power. France derives about 75 percent of its electric power from standardized nuclear power plants. The 103 existing U.S. nuclear plants were all custom designs, but efficient new standard designs will cut time for licensing approval and construction. By 2025, the United States will need 50 percent more electric power. Licenses for the 103 existing nuclear plants are expected to be renewed for another 20 years, but more will be needed. In the United Kingdom, Prime Minister Tony Blair is proposing more nuclear power plants but meeting considerable resistance. China will double its energy production in 15 years. It is bringing a gigawatt of capacity on line each week, according to Lord Browne.

Climate Change — A 150-Year Problem?

Moving away from oil dependence will reduce future environmental pollution, especially in transportation, where most of the oil is used. Debate still exists over the extent of climate change beyond long-term trends experienced in the past, but technology makes possible alternatives that did not previously exist.

Ten states are coming up with their own pollution control standards, following California's lead. More stringent standards than those imposed by the Clean Air Act could affect a third of the U.S. automobile market. An open question is whether federal law would preempt state requirements, if a variety of standards are enacted in various states.

Signed by more than 70 countries, the Kyoto Protocol of 1997 has not achieved its intended result. It involved 162 countries, with the aim to reduce greenhouse gas emissions five percent below 1990 levels by 2012. The United States signed, but never ratified, the protocol. Many of the protocol's signatories were less-developed nations. A process for trading credits for unused emissions to more highly developed countries that exceeded their quotas was developed — but economic growth has made it unlikely that Japan and the European Union will meet their emission-reduction commitments.

By 2003, overall hydrocarbon emissions had risen nine percent over 1997 levels, and are expected to exceed the 1997 levels by 20 percent in 2010. The United States, Australia, China, Japan and other Asian countries announced in 2005 a different accord to reduce greenhouse gas emissions, in conjunction with G-8 leaders.

Private companies are pursuing programs including emission reductions, increased efficiencies in energy usage, and alternative energy development, including power generation from solar and wind sources. A hydrogen-powered electric plant in Scotland, running on natural gas, splits out the CO2 from the hydrocarbons to be injected into North Sea oil fields to extend oil extraction. The same process in Canada could increase oil production by 155 million barrels.

While some have tried to attribute the recent upswing in hurricane activity in the Atlantic to greenhouse warming, National Oceanic and Atmospheric Administration studies cannot find a connection.

Private corporate initiatives are aimed at reducing carbon emissions, but that will be done on the basis of cost-effectiveness. The Pareto Principle applies — 20 percent of the resources invested will yield 80 percent of the possible return — and those are the initiatives that industry will address in reducing emissions, says Michael Parr, DuPont government affairs manager. He notes that this is a "150-year problem."

Work force — Offshoring, Immigration and Baby Boomer Effect

Benefiting from a continued growth in productivity, the Gross Domestic Product (GDP) will likely grow at 3.5 percent for the next year. Unemployment will continue at about the same five percent rate. Pressure to deal with the guest worker issue, both with terms for H-1B work visas and for a solution to the illegal immigration problem will continue.

Pressure is also building for a Trade Adjustment Assistance Act to provide benefits for workers displaced in the services sector because their jobs moved elsewhere. Currently, only manufacturing workers whose jobs were displaced by imports are covered.

General Motors has announced plans to cut 30,000 jobs by 2008 to reduce capacity in the face of foreign competition. Ford will announce downsizing plans in January.

Wage insurance — a fund that makes up the difference if wages fall owing to offshore competition — is an interesting idea, but unlikely to get traction in a recovering economy with many other funding choices.

With baby boomers reaching retirement age in five more years, dual concerns are workforce demographics (fewer younger workers to replace those retiring) and retirement security. Both point toward more retirees working at least part-time in their sunset years. Attitudes are already pointing in that direction, but employers are slow in planning for the transition, according to an AARP survey.

A provision for partial retirement — continuing to work reduced hours for an employer while drawing a partial pension from the same employer for, perhaps, five years — is a prospect, but requires changes in the law.

Employment Benefits — Footing the Bill for Health Care and Retirement

Health care and retirement security are two principal benefits from employment, and both are endangered. The rising cost of health care has been ascribed, in part, to inefficient and excessive use by consumers who have no stake in managing the budget because it is not their money. Health Savings Accounts with a large deductible have been sold as the answer — providing catastrophic coverage, while giving incentives to the user who has to pay the deductible himself. But Health Savings Accounts, like the earlier Medical Savings Accounts, have not proved as attractive as it was hoped they would be.

The controversial Medicare Part D prescription drug plan, enacted in 2004, takes effect in 2006. Projected cost over five years has grown from $400 billion to $720 billion, according to the Congressional Budget Office (CBO). Added to Medicare and Medicaid, government expenditures for health care could consume 20 percent of the entire federal budget in 50 years.

The President’s Commission on Tax Reform has recommended taxing the value of health care benefits employer provide. Other recommendations would impact charities and the real estate industry, and/or overhaul the entire income taxation system. Easing the effect of the alternative minimum tax on a growing number of taxpayers would be a benefit. However, chances are slim that those recommendations will be adopted.

Retiree health care is a voluntary benefit by employers. Expect it to be reduced or eliminated as employers encounter economic difficulty, because it is not mandated by law.

The proportion of current workers covered by defined benefit pension plans has fallen from 40 percent in 1980 to 21 percent today, and many of those are in plans that have converted to the cash balance form, generally providing a lower benefit. Expect these conversions to continue.

Social Security expenditures will grow from 4.5 percent of the GDP today to more than seven percent in the long term. Revenues peak in 2010, with outlays larger than receipts after that. The mythical “lockbox” to secure the excess receipts figured in the 2000 presidential election, and has recently resurfaced — in a bill to reserve those receipts for Social Security rather than being used for other purposes. But those receipts go into the general fund, credited with special Treasury bonds that will have to be redeemed when Social Security requires the excess receipts .

Given growth projections for Medicare, Social Security and interest on the federal debt, CBO director Douglas Holtz-Eakin says the present fiscal policy is unsustainable.

Immigration — Weighing Economic and Humanitarian Concerns

Dual problems here are delays in getting green cards for those within the immigration quotas, and delays in dealing with illegal immigrants, some eleven million who are already here. Note that someone who crosses the border without documentation, or who overstays a temporary visa, whether for a visit, business, or as a guest worker, falls into the illegal immigrant group. In Arizona alone, about one million illegal border crossings occur per year, leading to the passage of Proposition 200, in 2004, to cut back on government-funded services for illegals. Deportations are deemed not feasible, owing to the large number of people involved and other duties assigned to the U.S. Customs and Border Protection's Border Patrol.

Employers of illegal workers sometimes find their work crews decimated by unannounced Border Patrol raids, but there are too few Border Patrol agents to make such raids a serious threat. Only three employers in the United States were fined for hiring illegal workers in 2004, according to Mark Krikorian of the Center for Immigration Studies.

In the Tucson/Yuma districts, agents apprehended 1.1 million illegal border crossers last year, according to David Aguila, CBP chief. This number included 165,000 non-Mexican citizens and 139,000 with criminal records. Agents also seized 1.2 million pounds of narcotics. An unmanned aerial vehicle has been added in Tucson for border surveillance. It is credited with detecting 1,000 illegal aliens and 400 pounds in narcotics in just two months. Expanding the use of radio-controlled drones to Texas and New Mexico is being delayed by a jurisdictional dispute with the Federal Aviation Administration.

In February, the Senate will first take up the issue of border security and then treatment for illegal immigrants already here. The threat of terrorism makes border security a priority issue. In Tucson, President Bush renewed his call for a guest worker program to provide documents to illegal immigrants already here, to allow them to work, pay taxes, and cross borders for home visits for up to six years, at which time they will be expected to leave the United States — no green cards, no amnesty. Critics say that if 11 million cannot be deported now, how will they and their offspring be deported in six years, if this proposal becomes law? Hispanic advocates say it is not enough — that full amnesty is warranted, but even a rumor of future amnesty increases the flood tide of illegals crossing the border.

The United States tried amnesty in 1986, when a serious attempt at reforming immigration was made. Nearly three million illegals here then signed up to become citizens. Border security was not strengthened, and sanctions against employers who hired illegals were gutted.

Infrastructure — Significant Upgrades Needed

According to the latest report card issued yearly by the American Society of Civil Engineers (ASCE), the United States needs to spend $1.6 trillion to upgrade crumbling infrastructure. This total includes $50 billion to upgrade the national power grid over five years — twice the current rate of expenditure. Maintenance expenditures have decreased one percent-per-year since 1992. Deregulation has separated profit-making generation from less-profitable transmission and distribution. As power demand increases by 50 percent in 20 years, so will the problem of getting it to the user, as well as the prospect for further blackouts, if reliability is not improved.

The Proceedings of the IEEE has spotlighted some of the problems in two recent special issues: Special Issue on Power Technology and Policy: Forty Years After the 1965 Blackout, in November 2005, and Special Issue on Energy Infrastructure Defense Systems in May 2005. IEEE-USA advocates improvements in electric reliability as a pressing problem that must be addressed. A new eBook from IEEE-USA offers a detailed analysis of reliability provisions in the Energy Policy Act of 2005.

Railroads are efficient freight movers, but U.S. transcontinental railroads are reaching capacity limits, owing to the volume of containerized freight from Asia being shipped eastward from west coast ports. The ASCE infrastructure report card predicts that freight railroads will lose market share as demand grows by two-thirds over the next 20 years, shifting more freight to highways, unless improvement budgets are increased from the present $2 billion per year. One freight train’s capacity is equivalent to 500 trucks.

The largest container ships cannot transit the Panama Canal, leading to calls for a parallel set of larger locks, but under President Jimmy Carter, the United States began relinquishing control of the canal — a process now completed. This class of container ships, called Panamax, was specifically designed to fit the existing locks.

Amtrak, provider of U.S. passenger rail service in the United States, has never turned a profit but has made progress toward becoming more efficient. Its board of directors fired its CEO in October 2005 over policy differences. It appeared that he did not agree with plans to split off the northeast corridor, the only part not operating at a loss, into two companies — one with the tracks and another with the rolling stock. In a congressional hearing, the Board's chair denied the allegation. The northeast corridor needs $2 billion to remain operational in the future. While the federal government invests in highways, airports and harbors, Congress has assumed optimistically that, one day, Amtrak would be profitable.

Broadband telecommunications is an infrastructure area perhaps more susceptible to improvement through private investment. IEEE-USA’s Committee on Communications and Information Policy has been active in promoting gigabit communications to aid U.S. competitiveness. (Ref. 3).

The NRC “Gathering Storm” report (Ref. 2) has identified improvement in wideband as essential for the United States to be globally competitive in the future.

The Economy — Higher Energy Prices Threaten to Slow Recovery

A debate persists about the effect of the zero-to-negative savings rate for U.S. consumers. This rate is lowest among developed nations. It implies a lack of savings for future retirement and for children’s higher education. Some explain it by the “wealth effect” felt by home-owning consumers as the value of their homes rises in the current market. Many of those consumers are spending the increase in real estate value, through home equity loans, with the result that consumer spending is greater than consumer income. However, this strategy works for only so long, and will cease to be a source for consumption funding as interest rates rise to combat inflation.

Fed Chairman Alan Greenspan argued some years ago against “irrational exuberance” in the stock market, then later against interest-only adjustable rate mortgages that fed the real estate bubble. Most recently, he argued against large deficits in government operations, particularly the current account deficit, now around six percent. This deficit in our foreign trade means that such countries as China are buying our bonds and real estate with their excess dollars, so that we can continue to buy their goods.

Areas in which we generate a surplus in foreign trade are aircraft sales and agricultural commodities. Airbus' growth as a competitor to Boeing for large passenger aircraft has reduced the U.S. surplus from aircraft, but Airbus is now asking all its suppliers to deal in dollars only. After the recent Dubai Air Show, it was reported that Boeing had more orders on the books for future aircraft deliveries than Airbus. The B777 is selling well. Recent increases in jet fuel prices have favored the more efficient B787 Dreamliner (deliveries starting in 2008) over the A350 (operational in 2010). While Airbus has garnered some orders for its 600-passenger jumbo A380, Boeing is counting on operators wanting to offer more frequently scheduled flights with its smaller B787, scheduled to go into service in 2008. Boeing has also announced a stretched B747, the B747-8, in both cargo and passenger versions. Firm orders from two cargo carriers are booked for 18, with options for 16 more. Initial deliveries are scheduled for 2009. 2006 is shaping up as a very good year for aircraft production.

A World Trade Organization issue for the past year was the dispute between Boeing and Airbus over government subsidies for aircraft development, and for launch aid from governments for new models. The UK, Germany, France and Spain — the original owners of Airbus — have provided such aid, which Boeing challenges as free market interference. Airbus points to Boeing’s role as a defense contractor, and charges that this work also amounts to subsidies for commercial ventures. The issue may be resolved in 2006.

Another issue is the duty the United States imposes on Canadian softwood lumber. The United States charges that Canadian lumber has an unfair cost advantage in that it is harvested from government-owned lands. U.S. producers claim that importing Canadian lumber cuts U.S. jobs. NAFTA was intended to eliminate such tariffs. One on steel imports was lifted earlier this year, after U.S. manufacturers charged that it cost them more for their raw material than competing manufacturers offshore had to pay, cut into their sales, and thus reduced U.S. jobs. American homebuilders could make a similar argument regarding the Canadian lumber, but since homes cannot be imported the net effect is to increase materials costs for home construction and for repairs from hurricane damage. Some of the jobs lost in the United States belonged to Canadian lumberjacks who were more skilled at timber-felling than their U.S. counterparts, and were thus sought south of the border, as long as the market for U.S. lumber was brisk.

The price of natural gas is six times higher than it was three years ago, owing to expanded industrial use. Sources in the Gulf of Mexico closed by hurricanes this fall have not been restored, and a colder winter is forecast, driving prices up another 20 percent in just a week. Heavy dependence on natural gas for manufacturing could increase costs of goods, and may push some manufacturers to move production to Europe or the Middle East to be closer to stable supply sources.

The U.S. Senate has proposed a windfall profits tax on energy producers. The last such tax was in the Carter Administration. An international market sets oil prices. Pre-tax profits run under ten percent of sales for major oil producers.

References

1. Special Issue on Blue Sky Electronic Technologies, Proceedings of the IEEE, Vol. 93, Issue 10, October 2005. Pages: 1687- 1873

• "Solid-state lighting: toward superior illumination," Shur, M.S.; Zukauskas, R.

• "Optical and interferometric lithography - nanotechnology enablers," Brueck, S.R.J.

• "Terahertz frequency sensing and imaging: a time of reckoning future applications?" Woolard, D.L.; Brown, R.; Pepper, M.; Kemp, M.

•  "Metamaterials for high-frequency electronics," Caloz, C.; Itoh, T.

• "Scenarios for molecular-level signal processing," Seminario, J.M.; Liuming Yan; Ma, Y.

• "Prospects for quantum dot implementation of adiabatic quantum computers for intractable problems," Kastner, M.A.

• "Integrated biological-semiconductor devices," Stroscio, M.A.; Dutta, M.

• "Nanoscale engineering for reducing phase noise in electronic devices,"
  Handel, P.H.; Tournier, A.G.

• "Electronic transport in molecular self-assembled monolayer devices,"
  Wenyong Wang; Takhee Lee; Reed, M.A.

• "Quantum dot photonic crystal light sources," Bhattacharya, P.; Sabarinathan, J.; Topol'ancik, J.; Chakravarty, S.; Pei-Chen Yu; Weidong Zhou

• "Virtual computing infrastructures for nanoelectronics simulation,"
  Fortes, A.B.; Figueiredo, J.; Lundstrom, M.S.

• "Hi-DRA: intrusion detection for Internet security," Kemmerer, R.A.; Vigna, G.

• "Future directions in electronic computing and information processing,"
  Gea-Banacloche, J.; Kish, L.B.

• "Surface high-energy laser," Fork, R.L.; Laycock, R.L.; Walker, W.W.; Cole, S.T.; Moultrie, S.D.; Phillips, J.; Reinhardt, C.
  

2. Rising Above the Gathering Storm, National Research Council, 2005
   Executive summary (10 pp.) and complete text (488 pp.) download available at [www.nap.edu/books/0309100399/html]
   

3. White paper: “Providing Ubiquitous Gigabit Networks in the United States,” IEEE-USA, 14 March 2005, [www.ieeeusa.org/volunteers/committees/ccip/docs/Gigabit-WP.pdf]

George McClure is chair of IEEE-USA's Communications Committee, a member of the IEEE-USA Career & Workforce Policy Committee, and technology policy editor for IEEE-USA Today’s Engineer. Comments may be submitted to todaysengineer@ieee.org. Opinions expressed are the author's.