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12.08
Outlook
for 2009
By George
McClure
First, the Long View
For a long-term outlook, the National
Intelligence Council’s report, “Global Trends
2025: a Transformed World” is instructive and
comprehensive [www.dni.gov].
Four possible game-changing scenarios are
postulated, with a caveat that these are not
inclusive, inevitable or even necessarily
likely:
-
A World Without the West
— new powers supplant the West as leaders on
the world stage.
-
October Surprise —
major impacts result from inattention to
global climate change.
-
BRICs Bust-Up —
Brazil, Russia, India, and China engage in
disputes over vital resources. The two
emerging heavyweights are India and China.
-
Politics Is Not Always
Local — nonstate networks set the
international agenda on the environment,
eclipsing governments.
Geographer Jared Diamond notes
that not just demographics is destiny, but also
increases in consumption rates.1
About 1 billion of the world’s 6.5 billion
population have a relative per capita
consumption rate of 32, while the other 5.5
billion have a much lower consumption rate [www.nytimes.com].
As those others in developing nations increase
their consumption, strong
competition for finite resources will develop. Over two
billion more automobiles, growing from low-cost
offerings in India and China, would fuel demand
for oil and metals [www.economist.com].
World consumption rates would double if China
alone catches up with the United States and
would triple if India did as well.
The just-released 2008 report to
Congress of the U.S.-China Economic and Security
Review Commission (USCC) includes a total of 45
recommendations. Two of interest here involve
research and development, technological advances
in some key industries, and changing trade flows
with China:
-
The Commission recommends
that Congress revive the Office of
Technology Assessment, which for 23 years
advised Congress on the social, economic,
and environmental consequences of
technology. The office should be reopened
with the mission of advising Congress on
technology policy and related issues, with
specific attention to Chinese actions that
affect U.S. technology interests.
Specifics in Eight Areas
The remainder of this article
will examine the outlook in eight areas of
significant import to the U.S. endeavor:
technology, energy, climate change, work force,
employment benefits, immigration, infrastructure
and the economy.
Technology
Hydrogen fuel-cell vehicles have
been just around the corner for a decade. General Motors predicted in 1998 that a
production-ready vehicle would be ready by 2004.2 But
effort more recently has focused on the
all-electric or plug-in hybrid vehicle, with a
range of some 40 miles on battery power alone,
enough for the majority of work roundtrip
commutes. As part of the recent energy bill, the
Big Three auto makers were given a $25 billion
government loan through the Department of Energy
to use in retooling their factories for the new
vehicles, but they claim that tight credit is
keeping them from being able to use that loan.
In Congressional hearings, the
CEO of Chrysler proposed a research consortium,
jointly funded and sharing its findings, to aid
improvement in mileage and pollution performance
for the Big Three, while internal combustion
engines still predominate in road vehicles.
Photovoltaic cells are being
used to coat entire roofs for power generation,
but the manufacturing cost needs to be reduced
further to make them competitive for wide usage.
Smart-grid technology is here now, to make
two-way metering of power to/from the grid
feasible, if the costs can be covered.
Improved vehicle passenger
safety and higher capacity for roadways both
could result from new informatic technologies
permitting communication between adjacent
vehicles for braking and speed control aimed at
intelligent highway systems. Former
Transportation Department secretary Norman
Mineta has pointed to the need and the
opportunities. A Commission report released in
December 2007 includes detailed recommendations
for creating and sustaining a pre-eminent
surface transportation system in the United
States. The bipartisan commission’s report
entitled, “Transportation for Tomorrow: Report
of the National Surface Transportation Policy
and Revenue Study Commission,” is found at [www.transportationfortomorrow.org/final_report].
The growth of broadband Internet
access will be matched by a move to cloud
computing, where the application resides with
the provider, rather than on your laptop. More
broadband access will lead to more telecommuting
and telemedicine, and lessened need for physical
transportation. Eric Schmidt, CEO of Google,
notes that oil is finite, but information is
infinite.
Energy
Global oilfield output is
declining at a 9.1 percent annual rate,
according to a preliminary report from the
International Energy Agency. With new investment
of $360 billion per year to 2030 to cope with
increasing demand from developing countries, the
rate of decline can be reduced to 6.4 percent.
The current downturn in demand means that a
shortage may not be felt for several years, but
the matching shortage in investment could make
the shortage worse later. In November, the 2008
World Energy Outlook report was released by the IEA.
A weak business outlook and
greater conservation measures have conspired to
reduce demand for oil. With lower world demand
and oil prices having fallen from $147 per
barrel to little more than $40, refineries are
cutting back on production.
Renewable energy has gotten a
lot of support, including investment tax credits
added to the first bailout/rescue bill. But Wall
Street’s enthusiasm for renewables wanes as oil
prices fall. Coal continues to supply about half
of the power plants producing baseload power.
Nuclear power accounts for 20 percent of the
U.S. demand. There are no commercial breeder
reactors operating anywhere in the world.3
New renewable energy conversion
accounts for about 1.7 percent of the U.S.
power, but the financial decline will likely cut
back on plans to expand this in the near term.
More nuclear power will be
essential to bridge the chasm before other
energy sources can be brought online.
The fall in the price of oil has
effectively put the brakes on the processing of
tar sands for oil in Canada. Deep water drilling
for oil off of Brazil continues, but in some
less likely areas exploration has been suspended
pending the return of higher oil prices.
North Dakota has reaped a
bonanza in “The Bakken,” an energy formation
with up to 4.3 billion barrels of recoverable
oil — 25 times more than was estimated in the
mid-1990s. The state is pumping 170,000 barrels
of oil per day, twice the level of five years
ago. Supply has outstripped the capacity of oil
pipelines so rail cars are being used to
transport the oil, at higher cost [www.ft.com/cms/s/0/1622534c-b511-11dd-b780-0000779fd18c.html].
In 2009, Cuba will have foreign
contractors begin to drill for offshore oil,
perhaps only 45 miles from Florida.
The largest U.S. producer of
ethanol from corn is close to bankruptcy;
cellulosic ethanol is produced more efficiently
from sugar cane in Brazil, but tariffs block
importation.
CO2 emissions limit the
attractiveness of coal as a low-cost energy
source in the United States but not in
developing nations. China’s total energy
consumption is growing and is projected to
surpass that of the United States in 2010. By
2030, China will consume 25 percent more energy
than the United States. China is expected to
increase its use of coal, its primary fuel
source.
Climate Change
Consideration will start shortly
on a successor to the Kyoto Protocol, intended
to mitigate greenhouse gas emissions. The
agreement was ratified by 141 parties, but not
India, China, the United States, or Australia.
The effect of compliance on industrial output
was a concern. Australia has a large coal
industry [www.bbc.co.uk/climate/policies/kyoto.shtml].
China is calling for developed countries to
spend 1 per cent of their gross domestic product
to help poorer nations cut their greenhouse gas
emissions. For the Group of Seven industrialized
nations, this would amount to over $300 billion
to aid in transfer and adoption of green
technologies such as renewable energy to poorer
countries. The breakdown is $130 billion from
the United States and $160 billion from the
European Union. At the Group of Eight talks in
July, China joined with India, Mexico, Brazil
and South Africa in demanding that G8 countries
(including Russia) cut their emissions by 80-95
percent by 2050 [http://en.wikipedia.org/wiki/G7].
The debate continues on the
extent of man-made contributions to climate
change. Ice is thinning in the Arctic Ocean at
the same time that the thickness of the ice
sheet is increasing in Antarctica. But there is
no doubt that increases in power demand, fueled
with coal, will increase greenhouse gases.
European airlines are considering adding a
carbon tax onto air fares. Climate engineering,
called geoengineering, describes efforts to
intentionally alter the Earth’s environment to
compensate for higher greenhouse gas
concentrations. Reducing the amount of solar
radiation reaching the Earth’s surface could
offset some effects of global warming.
Reflecting about 2 percent of the incoming
sunlight could balance warming effects likely in
this century. Spraying a fine mist of seawater
into the air could increase cloud reflectivity
by about 10 percent, to counter the warming
effects of gas emissions. Painting roofs white
is a simple way to reflect some sunlight.
The growth of plankton, which
can capture and sequester carbon dioxide, is
limited by lack of iron in some parts of the
ocean. Field experiments expected next year will
demonstrate the feasibility of this idea — ocean
iron fertilization. 4
Another alternative being mentioned in the use
of peridotite rock, which has a potential for
absorbing large quantities of carbon. Usually
found deep in the Earth’s mantle, peridotite has
been forced to the surface in some parts of the
world through tectonic plate movement. By
fracturing the rock, its carbon-eating capacity
can be greatly increased. Pipelines from
carbon-producing plants to the rock formations
could remove up to 4 billion tons of carbon per
year [www.economist.com].
The diesel engines last used in automobiles in
the United States 25 years ago gave the
technology a bad name. They were noisy, smelly,
air-polluting, and slow-starting. Some were
adaptations of gasoline engines where the engine
blocks were not strong enough to cope with the
needed high compression. But the new
high-efficiency, low-polluting diesel engines
being used in vehicles in Europe have overcome
those problems. They perform well and can meet
the toughest emission standards in the United
States Their importation is to be expected. BMW,
Mercedes, and Volkswagen have them.
Work Force
Unemployment is climbing as
employers anticipate a long time to recovery.
They are less willing to hold on to employees
awaiting the upturn. The legacy U.S. automobile
industry is in dire straits, with all three U.S.
producers experiencing severe sales downturns.
Some 590 new-car dealers closed in the nine
months through September. There may be mergers
or takeovers in the offing. Some major suppliers
are in bankruptcy. GM, Chrysler and Ford are
looking for $34 billion in government loans to
restructure and downsize their operations. There
was already $25 billion appropriated to aid
conversion to energy-efficient vehicles, which
the administration encourages to be used for
this purpose.
The end of the machinists’
strike against Boeing was welcome news. Both the
machinists and later the engineers agreed to new
four-year contracts. All aircraft deliveries
were pushed back by at least eight weeks. The
Dreamliner deliveries will be pushed back
another year to the second quarter of 2010 or
later.
The credit squeeze has taken its
toll, with businesses experiencing the worst
decline in customer demand in 80 years, and
consumer confidence at a near all-time low. Ship
charter costs have fallen over 90 percent since
May. The steep decline in Asian imports has cut
demand for container ships, some orders for
which are being converted to cruise ships or
tankers.
The United States has lost 1.9
million jobs since the recession started in
December 2007. There are 10.1 million
unemployed. The unemployment rate is at 6.7
percent and likely to rise to 8+ percent before
a recovery takes hold [www.bls.gov/news.release/pdf/empsit.pdf].
Citigroup announced a workforce
reduction of 52,000 workers in the next few
months, to reduce costs by $10 billion. Sun
Microsystems plans to cut up to 6,000 jobs
making the total of IT job cuts this year
140,000 [www.computerworld.com/action/article.do?command=viewArticleBasic&articleId=9120323].
A new report, “Measuring Up
2008,” finds that the college completion rate
for the United States ranks 15 out of 29 nations
in the study.
http://measuringup2008.highereducation.org/ This
does not bode well for U.S. competitiveness.
Colleges will need to find ways to improve
productivity and effectiveness.
Employment Benefits
Some form of universal health
care was a big issue in the presidential
election campaign. Nearly 60 percent of those
covered in 2007 had employment-based private
insurance; about 10 percent purchased coverage
on their own. About 15 percent are covered by
Medicare and a like number by Medicaid. About 4
percent have military health care. This leaves
about 16 percent (45 million) with no coverage.
The young and healthy may choose to opt out from
coverage to save premium costs, but Elizabeth
Edwards points out that their premiums are
needed to pay for the less healthy. This was a
sticking point in the earlier Clinton health
plan as well.
The Baucus-Obama plan has been
proposed to meet the need [http://finance.senate.gov/healthreform2009/home.html].
A white paper describing the plan is found at [http://finance.senate.gov/healthreform2009/finalwhitepaper.pdf].
Key elements include:
-
Individual Responsibility.
Every individual will be enrolled in some
form of health care plan, private or public.
Affordable options are to be available to
all.
-
Strengthening the
Employer-Based System. Eliminating
employer-based coverage would upend health
care for more than half the American people
— 158 million in all. This plan envisions a
role for employers to contribute to
employees’ access to health care through a
tax if the employer does not provide
coverage.
-
Guaranteed Access to
Affordable Coverage for Individuals and
Small
Business. To find and obtain health
coverage that best meet their needs, the
Health Insurance Exchange — will connect
individuals and employers to insurance
offered at local, state, regional, or
national levels. In order to make insurance
affordable, the existing insurance market
must be reformed.
-
Strengthening Public
Programs. Existing public programs can
offer an effective
and efficient way to increase access to
coverage. Offering individuals approaching
age 65 the chance to buy into Medicare early
and eliminating the requirement that
disabled individuals wait two years to
enroll in Medicare could ensure coverage to
populations that the private market is
under-serving. Improving Medicaid and the
State Children’s Health Insurance Program
(CHIP) could provide coverage quickly to
additional low income Americans.
-
Focusing on Prevention
and Wellness. Increased access to
preventive care and
wellness could create a national focus on
maintaining wellness, rather than treating
illness.
A new trend is the offering of
only high-deductible health insurance plans by
employers, to contain their contribution to the
plan — fine until someone becomes seriously ill.
About half of personal bankruptcies are the
result of large medical expenses for which there
was no insurance coverage.
Workers have seen the value of
their 401(k) defined contribution pension plans
fall by $2 trillion in the past 18 months. For
many this is about 40 percent of the total
account value. Some employers have stopped
making matching contributions to conserve cash;
others are expected to follow suit. The best
advice for plan participants is to continue
their salary deductions to add to their plans.
With the asset values down, they benefit from
dollar-cost-averaging, in that their
contributions have a greater bang for the buck
than before. The worst thing to do is to stop
participating because one could lose out in an
upsurge. Participants who are near retirement
age and were depending on their DC plans for a
retirement nest egg may want to consider working
a few more years, if that is possible — giving
the market time to recover. For those in
retirement and worried about their Minimum
Required Distributions from IRAs, Congress is
considering a temporary reduction in the amount
that must be withdrawn, recognizing that the
value of IRAs generally have fallen [http://online.wsj.com/article/SB122705736367039573.html].
Pension funds have suffered. At
the end of 2007, the 700 largest corporate
pension plans were more than 100 percent funded.
But market loses in 2008 have cut into that by
17 percent or more. To bring the pension funds
back to full funding will require over $100
billion — at a time when cash is tight. The
shortfall is more than 5 percent of corporate
book value for 76 companies. To restore full
funding for the top 100 funds would require $50
billion in 2008 and another $50 billion in 2009.
Another $30 billion to $40 billion would be
needed for the rest of the smaller funds. The
Pension Protection Act of 2006 mandates that
pension fund shortfalls be made up within seven
years, but money added to those funds is not
available for business recovers. Many firms are
seeking relief from those rules for now [www.guardian.co.uk/business/feedarticle/7952031].
Worldwide, pension funds have
lost $4 trillion in 2008 [www.crainsbenefits.com].
Immigration
Comprehensive immigration reform
was promised again starting in 2009, but the
definition varies. For some, the key is border
security. For others it is employer enforcement
(verification of status before a new person is
hired). Family unification is important for some
advocates, but means that the impact on
infrastructure (education, housing, health care)
will be greater than if only skilled workers
were admitted. A point system has been used
successfully to regulate immigration in
Australia, Canada, and the United Kingdom, but
is opposed by some lawmakers for the United
States [www.npr.org/templates/story/story.php?storyId=10366600].
For border security, an
electronic virtual fence has been begun, and 28
miles completed (out of a 6,000 mile total for
both southern and northern borders, not all
electronic). But unanticipated problems are
hampering the plans to complete the fence by
2011 [www.computerworld.com].
Various abuses of guest worker
visas have come to light. In a sample of 246
H-1B petitions, the U.S. Citizenship &
Immigration Services found that 13 percent of
the requests were fraudulent and 7 percent
contained technical violations. Required
qualifications have sometimes been overstated
when a company requested a visa. In one case, a
“business development analyst” turned out to be
a washing machine technician, doing laundry and
machine maintenance [www.businessweek.com].
In another case, it was found
that L-1 (intra-company transfer) visas, for
which companies can get blanket approval, had
been sold by third party individuals to people
not employed by the company supposedly employing
them. One suspected terrorist was apprehended
using such a visa and ten more L-1 visas from
the same company were found to have been
misused, with counterfeit signatures [www.cis.org/kephart/Kargudri].
One company faces nearly $10
million in civil penalties for employing 389
illegal immigrants for meatpacking in Iowa [www.desmoinesregister.com/article/20081029/NEWS/81029013].
The company helped immigrants obtain counterfeit
resident alien documents [www.desmoinesregister.com/article/20081030/NEWS/810300398].
Infrastructure
The United States receives
failing or near-failing grades on the quality of
its infrastructure in 15 categories, according
to the American Society of Civil Engineers. The
collective grade is ‘D’ [www.asce.org].
To bring infrastructure up to standard would
require the expenditure of an estimated $1.5
trillion over five years.
Railroads are a case in point.
There are four Class I long-haul railroads after
a series of mergers. They spend $2 billion per
year for improvements, but are falling behind.
Capacity limitations will push freight traffic
to less-efficient highway trucks, unless the
railroads strep up their investment in
improvements to $70 billion over 20 years.
Adding repair and maintenance needs, short line
improvements, and safety upgrades bring the
total need to $175 to $195 billion over 20
years. If improvements are not made, and the
record volume of container freight returns after
the economic downturn, using truck freight for
more of the overland hauling will increase
stress on highways. In addition to higher costs
to consumers for delivery of goods, that could
mean an additional $64 billion in highway funds
over the next 20 years needed to maintain the
roads [www.asce.org/reportcard/2005/page.cfm?id=29].
Infrastructure investment is
being considered as a part of a second economic
stimulus package. The House Transportation and
Infrastructure, and House Ways and Means
committees held congressional hearings in late
October to review pending and delayed
transportation projects that could be quickly
expedited to boost the economy. Committee
members are considering whether to add a
transportation element to a second economic
stimulus bill.
Investment in transportation
infrastructure projects would be a double bonus.
Not only would it create new jobs (35,000 for
every $1 billion of federal investment), but an
infusion of federal dollars also would foster
new and improved infrastructure to meet the
rapidly growing demand for transportation
services. The next administration talks about
2.5 million jobs created.
A bridge collapse is
spectacular, and bridges have not received the
attention needed to ensure safety. ASCE
estimates that it will cost $9.4 billion a year
for 20 years to eliminate all bridge
deficiencies. Bridges rated a ‘C’ — the highest
grade on the report card [www.asce.org/reportcard/2005/page.cfm?id=22].
Congress is due to take up a
$500 billion six-year highway bill. The
construction lobby wants $18 billion for
highways and bridges, and $10 billion more for
water infrastructure projects. The aviation
industry wants to boost runway construction,
telecom firms want tax breaks to expand
broadband service, while electric utilities want
incentives to modernize the transmission grid [http://online.wsj.com/article/SB122705499948839373.html].
Economic Outlook
In 15 years, the savings rate
for U.S. consumers fell from 8 percent to
virtually nothing.5
The dangers of subprime lending
were seen a decade ago. But the real estate
bubble was abetted for at least five years
before the subprime mortgage collapse. Some
consumers acquired mortgages they could not
maintain long term, expecting that housing
values would continue to go up so they could
refinance and take spendable cash out. The home
became an ATM. But the music stopped. A quarter
of mortgages are bigger than the present value
of the home they cover. The median is 120
percent — the mortgage is for 20 percent more
than the house is worth. That’s 12 million homes
with an aggregate value of some $2 trillion.
Eventually house prices will be reset to what
they were five years ago, before the bubble
started. Current mortgage debt in the U. S.
totals some $14 trillion.
The normal supply of unsold
homes allows turnover in 5 months. Today’s
inventory is a 10.5 month supply, and that may
go higher in 2009 with more foreclosures [http://blog.builddirect.com/industryinsights/?tag=us-housing-market].
That means a potential for a further fall in
home prices.
Two successive quarters of
declining GDP defines a recession. Japan, the
European Community, Singapore, and Hong Kong are
already in recession. A look-back by the
National Bureau of Economic Research,
considering production, employment, and real
income among other indicators concluded that a
U.S. recession began in December 2007 [http://wwwdev.nber.org/dec2008.html].
Inability to value “toxic”
securities held by financial institutions led to
a freeze-up of credit markets where banks were
not willing to lend to other banks. They could
not value their holdings of these securities.
Where they used “mark-to-market” valuations, the
results were very bad because no markets
existed. Leveraging permitted a ratio of ten to
30+ times the institution’s assets in loans. An
unintended consequence of undervalued assets was
a locking up of student loans. Some students
made commitments expecting a loan would be
forthcoming — but were disappointed. Because
financial markets are world wide the declines
were global; the United States, U.K., European
Community, Japan, and even China had to lend
support to their banks.
Congress approved $700 billion
for the Troubled Assets Relief Program in which
the U.S. Treasury could rescue financial
institutions. Nine large banks received $250
billion; $125 billion has also been allocated to
smaller banks, but less than half the latter is
committed.
The World Bank plans to loan up
to $100 billion over the next three years to
developing countries that may otherwise be
devastated by the global credit crunch.
“Engine Charlie” Wilson,
president of General Motors during World War II,
and then Secretary of Defense, famously was
credited with saying “what is good for General
Motors is good for the country.” This theme
arises again in the debate over bailing out the
Big Three auto makers. The industry is seen by
some as a national industrial resource — able to
make mass transit vehicles or military hardware
when needed. Some argue that restructuring
through bankruptcy, with a total change in
management and a renegotiating of union
agreements, is necessary to save the companies.
A sticking point for the multinational
automakers is that any relief would be
accompanied by strings requiring that the money
be used for protecting U.S. jobs. Ford’s most
advanced factory is in Brazil [info.detnews.com].
Another issue is that the U.S.
facilities of non-U.S. auto firms, mostly
located in the south and operating without
unions, pay taxes, too, and wouldn’t like
subsidizing their less-efficient competitors.
Rather than a bailout, one critic suggests a
check, perhaps $10,000, payable to each
autoworker [online.wsj.com].
There are several choices:
-
Convert the $25 billion
low-interest loan, already approved for
retooling factories to produce
energy-efficient vehicles, to use for
restructuring and downsizing the companies;
-
Ask for another $25 billion
to $50 billion instead ($34 billion is on
the table awaiting action by the Congress);
-
Go through pre-packaged
bankruptcy (Chapter 11) as some airlines
have done, coming out more efficient; or
-
Go through liquidation
(chapter 7), but lose the legacy auto
industry.
CEOs claim surveys show 80
percent of car buyers would not buy from a
company in bankruptcy, fearing that their
warranty would not be honored, or, more
seriously, that the dealer would disappear when
they needed parts or service.
Congress has held hearings on
the auto industry’s requests. The earliest
decision date is mid-December, but it is not
clear that there would be public support for
anything other than bankruptcy.
The automakers are considering
qualifying their consumer financing arms, such
as GMAC, as banks, so that they could borrow and
be protected under the TARP umbrella.
When will it get better?
When will we see an upturn in
the economy? The consumers play a major role —
accounting for about 70 percent of GDP. But
consumer confidence now is the lowest it has
been since measurements began [www.nber.org/releases].
A record drop in the producer price index in
mid-November raised the specter of deflation.
This was reflected in price changes in Treasury
Inflation-Protected Securities (TIPS) showing an
expectation of an annualized -0.67 percent
inflation rate over the next five years.
For the first time, junk bond
yields have exceeded 20 percent, indicating an
expectation of a prolonged recession and more
corporate defaults.
References
-
Quoted in Thomas L.
Friedman, Hot, Flat, and Crowded, New
York: Ferrar, Straus and Giroux, 2008, pp.
65-67
-
“The car of the perpetual
future,” The Economist, 4 Sep. 2008
-
V. Smil, “Moore’s Curse and
the Great Energy Delusion,” The American,
Nov.-Dec. 2008
www.american.com/archive/2008/november-december-magazine/moore2019s-curse-and-the-great-energy-delusion
-
S. Thernstrom, “Engineering
the Climate,” The American ,
Nov.-Dec. 2008
-
R. J. Samuelson, “ A Darker
Future for Us,” Newsweek, 10 November
2008
George McClure is Technology
Policy editor for IEEE-USA Today’s
Engineer and a member of IEEE-USA's Committee
on Transportation and Aerospace policy.
Comments may
be submitted to
todaysengineer@ieee.org.
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