Dec 18th 2013

Shale Gas to the Rescue?

by Robert Skidelsky

Robert Skidelsky, a member of the British House of Lords, is Professor emeritus of political economy at Warwick University, author of a prize-winning biography of the economist John Maynard Keynes, and a board member of the Moscow School of Political Studies.

LONDON – The developed world is slowly emerging from the Great Recession, but a question lingers: How fast and how far will the recovery go? One big source of pessimism has been the idea that we are running out of investment opportunities – and have been since before the 2008 crash. But is that true?

The last big surge of innovation was the Internet revolution, whose products came onstream in the 1990’s. Following the dot-com collapse of the early 2000’s, speculation in real estate and financial assets – enabled by cheap money – kept Western economies going. The post-2008 slump merely exposed the unsoundness of the preceding boom; the mediocrity of the recovery reflects the mediocrity of previous prospects, coolly considered. The risk now is that a debt-fueled asset spike merely perpetuates the boom-bust cycle.

The economist Larry Summers has reintroduced the term “secular stagnation” to describe what awaits us. By the mid-2000’s, Summers argued at a recent International Monetary Fund conference, the average prospective return on new investment in the United States had fallen below any feasible reduction in the Federal Reserve’s benchmark interest rate.

That remains true today. We may be in a permanent liquidity trap, in which nominal interest rates cannot fall below zero, but the expected rate of return to investment remains negative. Unconventional monetary policies like quantitative easing may inflate a new generation of asset bubbles, but the underlying problem – negative returns to new investment – will not have been solved by the time the next crash comes.

So the problem is poor investment prospects. Why? In the 1930’s, the economist Alvin Hansen argued that opportunities for new investment in already-rich countries were drying up. Investment growth had depended on population growth, technological innovation, and westward expansion.

With the closing of the frontier and static populations, growth would depend on innovation; but future innovation would require smaller inputs of capital and labor than in the past. In other words, the returns to capital were bound to fall as it became more abundant relative to population. In this situation, full employment could be maintained only by running continuous fiscal deficits.

John Maynard Keynes held a different view. In 1945, he wrote to T.S. Eliot: “[T]he full employment policy by means of investment is only one particular application of an intellectual theorem. You can produce the result just as well by consuming more or working less. Personally, I regard the investment policy as first aid.…Less work is the ultimate solution.”

Developed countries’ strong postwar investment performance dispelled fear of secular stagnation. But this occurred after a world war that had created huge pent-up demand for new equipment, transport infrastructure, and household appliances, together with a military-industrial complex that armed the West during the Cold War.

The real rate of return to capital may have started to decline by the early 1970’s; productivity growth certainly has slowed since then. Some crucial changes in the political economy of Western capitalism in the 1980’s can also be viewed in this light: the rise of neoliberal ideology, the growing inequality of wealth and incomes, the increase in structural unemployment, the growth of financial services, globalization, the invention of post-Cold War threats to sustain military spending, and so on.

The question today is whether a new upsurge of investment will come to our rescue. Optimists point to the shale-energy revolution in the US.

The McKinsey Global Institute has identified shale energy as a “game changer” for the world economy, estimating that it could boost America’s GDP by as much as 4% ($690 billion) per year and add 1.7 million permanent jobs to the labor market by 2020. From 2007 to 2012, North American shale-gas production grew at an average annual rate of more than 50%. As a result, the share of shale gas in America’s overall gas production rose from just 5% in 2007 to 36% in 2012. With the share of imports in US natural-gas consumption dropping from 16.5% in 2007 to 11% in 2010, America is on the path to energy self-sufficiency.

Likewise, a September 2013 report by IHS concludes that midstream industries like transportation and downstream industries like manufacturing and chemicals are also receiving a massive stimulus. As a result of the shale-energy boom, “over $216 billion in total will be invested in the midstream and downstream oil and gas industries” from 2012 to 2025. Nearly 380,000 of the 2.1 million jobs that shale-related industries generated in the US in 2012 , were created in these areas.

Beyond this, the most dramatic impact of shale oil and gas on the economy has been the fall in energy prices. In the US, the price of natural gas has fallen to $4 per MMBtu, from $13 in 2008, boosting household purchasing power. IHS estimates that in 2012, developments in the shale-energy industry increased households’ real disposable income by more than $1,200. Thus the shale revolution represents a huge stimulus for America, in terms of investment, exports, and a reduction in energy costs.

I am not in a position either to judge the quantitative impact of shale energy on the US economy and, via growth there, on the rest of the world, or to comment on its geopolitical consequences or net effect on carbon emissions. But it does seem to me that contemporary apostles of secular stagnation like Summers and Paul Krugman at least ought to be taking the shale-energy revolution into account.



Copyright: Project Syndicate, 2013.
www.project-syndicate.org

 


This article is brought to you by Project Syndicate that is a not for profit organization.

Project Syndicate brings original, engaging, and thought-provoking commentaries by esteemed leaders and thinkers from around the world to readers everywhere. By offering incisive perspectives on our changing world from those who are shaping its economics, politics, science, and culture, Project Syndicate has created an unrivalled venue for informed public debate. Please see: www.project-syndicate.org.

Should you want to support Project Syndicate you can do it by using the PayPal icon below. Your donation is paid to Project Syndicate in full after PayPal has deducted its transaction fee. Facts & Arts neither receives information about your donation nor a commission.

 

 

Browse articles by author

More Current Affairs

Mar 1st 2024
EXTRACT: "The lesson is that laws and regulatory structures are critical to state activities that produce local-level benefits. If citizens are to push for reforms and interventions that increase efficiency, promote inclusion, and enable entrepreneurship, innovation, and long-term growth, they need to recognize this. The kind of effective civil society Nilekani envisions thus requires civic engagement, empowerment, and education, including an understanding of the rights and responsibilities implied by citizenship."
Feb 9th 2024
EXTRACT: "Despite the widespread belief that the global economy is headed for a soft landing, recent trends offer little cause for optimism."
Feb 9th 2024
EXTRACT: " Consider, for example, the ongoing revolution in robotics and automation, which will soon lead to the development of robots with human-like features that can learn and multitask the way we do. Or consider what AI will do for biotech, medicine, and ultimately human health and lifespans. No less intriguing are the developments in quantum computing, which will eventually merge with AI to produce advanced cryptography and cybersecurity applications."
Feb 9th 2024
EXTRACTS: "The implication is clear. If Hamas is toppled, and there is no legitimate Palestinian political authority capable of filling the vacuum it leaves behind, Israel will probably find itself in a new kind of hell." ----- "As long as the PLO fails to co-opt Hamas into the political process, it will be impossible to establish a legitimate Palestinian government in post-conflict Gaza, let alone achieve the dream of Palestinian statehood. This is bad news for both Israelis and Palestinians. But it serves Netanyahu and his coalition of extremists just fine."
Jan 28th 2024
EXTRACTS: "According to estimates by the United Nations, China’s working-age population peaked in 2015 and will decline by nearly 220 million by 2049. Basic economics tells us that maintaining steady GDP growth with fewer workers requires extracting more value-added from each one, meaning that productivity growth is vital. But with China now drawing more support from low-productivity state-owned enterprises, and with the higher-productivity private sector remaining under intense regulatory pressure, the prospects for an acceleration of productivity growth appear dim."
Jan 28th 2024
EXTRACT: "When Chamberlain negotiated the notorious Munich agreement with Hitler in September 1938, The Times did not oppose the transfer of the Sudetenland to Germany without Czech consent. Instead, Britain’s most prestigious establishment broadsheet declared that: “The volume of applause for Mr Chamberlain, which continues to grow throughout the globe, registers a popular judgement that neither politicians nor historians are likely to reverse.” "
Jan 4th 2024
EXTRACTS: "Another Trump presidency, however, represents the greatest threat to global stability, because the fate of liberal democracy would be entrusted to a leader who attacks its fundamental principles." ------"While European countries have relied too heavily on US security guarantees, America has been the greatest beneficiary of the post-war political and economic order. By persuading much of the world to embrace the principles of liberal democracy (at least rhetorically), the US expanded its global influence and established itself as the world’s “shining city on a hill.” Given China and Russia’s growing assertiveness, it is not an exaggeration to say that the rules-based international order might not survive a second Trump term."
Dec 28th 2023
EXTRACT: "For the most vulnerable countries, we must create conditions that enable them to finance their climate-change mitigation" ........ "The results are already there: in two years, following the initiative we took in Paris in the spring of 2021, we have released over $100 billion in special drawing rights (SDRs, the International Monetary Fund’s reserve asset) for vulnerable countries.By activating this “dormant asset,” we are extending 20-year loans at near-zero interest rates to finance climate action and pandemic preparedness in the poorest countries. We have begun to change debt rules to suspend payments for such countries, should a climate shock occur. And we have changed the mandate of multilateral development banks, such as the World Bank, so that they take more risks and mobilize more private money."
Dec 27th 2023
EXTRACT: "....if AI causes truly catastrophic increases in inequality – say, if the top 1% were to receive all pretax income – there might be limits to what tax reforms could accomplish. Consider a country where the top 1% earns 20% of pretax income – roughly the current world average. If, owing to AI, this group eventually received all pretax income, it would need to be taxed at a rate of 80%, with the revenue redistributed as tax credits to the 99%, just to achieve today’s pretax income distribution; funding the government and achieving today’s post-tax income distribution would require an even higher rate. Given that such high rates could discourage work, we would likely have to settle for partial inequality insurance, analogous to having a deductible on a conventional insurance policy to reduce moral hazard."
Dec 21st 2023
EXTRACT: "Shocks are here to stay, and our task is not to predict the next one – although someone always does – but to sharpen our focus on resilience. Staying the course of politically mandated policies while minimizing the inevitable dislocations is easier said than done. But that is no excuse to fall for the myth of being victimized by the unprecedented."
Dec 21st 2023
EXTRACTS: "A new world is indeed emerging. It will be characterized not only by more interdependencies, but also by more insecurity, danger, and war. Stability in international relations will become a foreign concept from a bygone age – one that we did not fully appreciate until it was gone."
Dec 14th 2023
EXTRACT: "Yet one must never forget that Putin is first and foremost an intelligence officer whose dominant trait is suspicion."
Dec 2nd 2023
EXTRACTS: "In a recent commentary for the Financial Times, Martin Wolf trots out the specter of a 'public-debt disaster,' that recurrent staple of bond-market chatter. The essence of his argument is that since debt-to-GDP ratios are high, and eminent authorities are alarmed, 'fiscal crises' in the form of debt defaults or inflation “loom. And that means something must be done.' ----- "If, as Wolf fears, 'real interest rates might be permanently higher than they used to be,' the culprit is monetary policy, and the real risk is not rich-country public-debt defaults or inflation. It is recession, bankruptcies, and unemployment, along with inflation." ---- "Wolf surely knows that the proper remedy is for rich-country central banks to bring interest rates back down. Yet he doesn’t want to say it. He seems to be caught up, possibly against his better judgment, in bond vigilantes’ evergreen campaign against the remnants of the welfare state."
Nov 27th 2023
EXTRACT: "The first Russia, comprising those living in Russia’s two biggest cities, Moscow and Saint Petersburg, can pretend there is no war at all." ---- "Then there is the other Russia, the one you find in small towns and villages scattered across the country’s massive territory. Here, the Ukraine war is a source of patriotic pride,"
Nov 27th 2023
EXTRACTS: "I interviewed Wilders in 2005 " ---- "Frankly, I thought he was a bore, with no political future, and did not quote him in my book. Like most people, I was struck by his rather weird hairstyle. Why would a grown man and member of parliament wish to dye his fine head of dark hair platinum blond?" ----- "His maternal grandmother was partly Indonesian" ----- "Eurasians, or Indos as they were called, were never fully accepted by the Indonesians or their Dutch colonial masters. They were born as outsiders." ---- "Ultra-nationalists often emerge from the periphery – Napoleon from Corsica, Stalin from Georgia, Hitler from Austria." ---- "Henry Brookman founded the far-right Dutch Center Party to oppose immigration, especially Muslim immigration. Brookman, too, had a Eurasian background, as did another right-wing politician, Rita Verdonk, who founded the Proud of the Netherlands Party in 2007." ---- "A politician who might fruitfully be compared to Wilders is former British Home Secretary Suella Braverman. As a child of immigrants – her parents are double outsiders, first as Indians in Africa and then as African-Indians in Britain – her animus toward immigrants and refugees “invading” the United Kingdom may seem puzzling. But in her case, too, a longing to belong may play a part in her politics."
Nov 19th 2023
EXTRACT: "The good news is that the San Francisco summit was indeed an improvement on last year’s meeting. Above all, both sides took the preparations far more seriously this time. It wasn’t just the high-level diplomatic engagement that resumed in the summer, with visits to Beijing by US Secretary of State Antony Blinken, US Treasury Secretary Janet Yellen, US Secretary of Commerce Gina Raimondo, and climate envoy John Kerry. Equally important was identifying in advance the key issues on which the two leaders could cooperate and eventually agree."
Nov 11th 2023
EXTRACT: "It would be naive to hope that the Russian government or US diplomatic outreach would prevent nuclear war in the event of a serious threat to Putin’s political survival. The risk that Russia’s Ukraine misadventure could culminate in nuclear nihilism demands nothing less than a systemic review of America’s options."
Nov 11th 2023
EXTRACT: " Hamas’s barbaric massacre of at least 1,400 Israelis on October 7, and Israel’s subsequent military campaign in Gaza to eradicate the group, has introduced four geopolitical scenarios bearing on the global economy and markets. As is often the case with such shocks, optimism may prove misguided."
Nov 10th 2023
EXTRACT: "The last two years have been catastrophic for investors in US Treasury bonds. By one measure, 2022 was the worst year for such investors since 1788. Bond prices are poised to fall again in 2023, making this the first time in US history that they declined for three consecutive years. But now the “smart money” is jumping back in."
Nov 6th 2023
EXTRACTS: "China’s economic slowdown could lead the CPC to embrace a militant form of Chinese nationalism in an effort to maintain public loyalty. This would spell trouble for Taiwan, the Asia-Pacific region as a whole, and China itself in the long run. Given the threat posed by China’s assertiveness, it is no surprise that Japan is increasing its defense budget and that other countries have decided to follow America’s lead and explore ways to support Asia’s liberal democracies." .... "The difference between China’s and Japan’s economic trajectories raises the question: Can a corrupt Leninist regime outperform a free society? Whatever the answer, China is facing an uphill battle."