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G100 Network Notebook | July 2013

The G100 Network Notebook is a monthly memo of news and noteworthy reading for G100 Network members from Daniel Casse, G100 President

The Politics of Approving Keystone

Amy Harder, writing in the The Atlantic, predicts approval of the Keystone XL pipeline this year, only after the US secures commitments from Canada to reduce carbon emissions from oil sands production. Excellent, insider political analysis, including how the president plays off members of his Cabinet:

Obama will publicly repudiate [Secretary of State John] Kerry, akin to how Obama publicly repudiated Lisa Jackson, his first Environmental Protection Agency administrator, two years ago when she asked the White House to let her move forward on a stronger smog standard. On the Friday before Labor Day 2011, Obama announced that he was delaying the standard because of economic concerns. At that point in time, Jackson endured as the champion for disenchanted environmentalists.

Sometime this winter — I predict in December — Kerry will play that same role when Obama decides to approve the pipeline.

Have We Solved the Debt Problem?

Recent news reports suggest that the federal deficit is shrinking much faster than anticipated. But the Peter G. Peterson Foundation – longtime deficit hawks – quickly remind us that the structural debt problem of the US remains unsolved. From their report:

  • Debt will rise to 83 percent of GDP by the end of this decade — that is more than double the postwar average.
  • Over the following two decades (11-30 years from now), debt will rise to over 200 percent of GDP.
  • The number of people receiving Social Security benefits will swell from 58 million today to 95 million in 2043.
  • Even if health costs per beneficiary don’t grow faster than GDP per person after 2023, federal debt will still climb above 200 percent of GDP by 2045.

The Drone Economy

Global drone spending will increase from $6.6 billion in 2012 to $11.4 billion annually over the next decade for a market worth more than $89 billion, says this academic analysis of the political economy of drones. For those interested in the post-9/11 expansion of drones, skip to page 15. Also worth reading. This fascinating profile of the Navy’s X-47B drone – the first robotic airplane to land on an aircraft carrier without a human aviator – provides further evidence that “the pace of innovation in this space continues to accelerate unabated.”

Should Banking Be Boring?

Senator Elizabeth Warren is arguing for a new Glass-Steagall Act to “make banking boring.” Bloomberg’s James Greiff provides a compelling rebuttal:

The public has long been aware of the precarious balance required of bankers, hence the reason that runs by depositors and other creditors have been a recurring feature in financial history — at least until the advent of deposit insurance. Absent a government backstop, it is a high risk-low reward business. What Warren is calling boring is the manifestation — in the past, anyway — of the restraint and discipline inherent in sound risk management.

George Shultz on US-Mexican Integration

Last fall, economist Tyler Cowen told our G100 meeting that the US is more likely to benefit from economic growth in Mexico and Canada than in China over the next decade. Former Secretary of State George Shultz echoes those thoughts in his Wall Street Journal op-ed. This paragraph in particular is worth reflection:

With fertility in Mexico declining, and an expanding Mexican economy that is now more than competitive with China in many ways, net immigration of Mexicans to the U.S. last year was zero. Meanwhile, approximately 70% of the people who work on farms in this country are immigrants, legal and illegal. The U.S. needs them.

How Should Regulation Work?

A wide-ranging interview with Cass Sunstein identifies future opportunities to regulate based on “principles of choice architecture and simplification” – providing individuals and companies with clear, simple choices that encourage desired ends. Sunstein believes the biggest problem with regulation is demonstrating what works:

There’s a lot to be done in terms of testing empirically what works and what doesn’t. We made a good start, but the empiricization of federal government actions is a continuing project and there isn’t anything more important. I would say the structural point to have randomized control trials being conducted by the government and used by the government more pervasively than has been done to date would be a very good development and would help orient a lot of efforts going forward.

Africa’s Obstacle to Growth: Management

At a recent G100 Advisors Dinner in Boston, we heard strongly contrasting views from two veteran global business leaders about whether Africa is worth the risk for business. This NPR nterview with Rebecca Harrison of the African Management Initiative suggests that Africa will have a real challenge managing its growth.

While there’s a huge amount of current growth in Africa, one of the biggest constraints is a lack of talented skilled managers able to make the most of those opportunities. … We think [100] business schools are reaching about 300,000 of [the 10 million African managers]. … Of those hundred [business schools], only a handful really are operating at international standards.

The Energy Geopolitics of Russia

The Economist reports that the shale gas boom “is shaking Russian state capitalism to its foundations”:

[Russia’s] spectre of shale…delivers a timely warning: that if you invest your profits in fattening monopolies rather than promoting innovation you are likely to be humiliated. Messrs Putin and company need to abandon their futile attempt to exorcise the spirit of shale and listen instead to what it is trying to tell them: what is good for Gazprom is not necessarily good for Russia.

Does Technology Drive Income Inequality?

That is one of the conclusions from thought-provoking research by Harvard economics professor Gregory Mankiw. He finds that arguments for greater income redistribution are “valid in principle but dubious in practice.” The fact that the top 1% continues to make so much more money than the middle class, he argues, has less to do with social injustice and more to do with technology:

Skill-biased technological change continually increases the demand for skilled labor. By itself, this force tends to increase the earnings gap between skilled and unskilled workers. … It seems that changes in technology have allowed a small number of highly educated and exceptionally talented individuals to command superstar incomes in ways that were not possible a generation ago.

Expanding Beyond Your Core Business

Green Mountain Coffee Roasters, by leveraging its popular Keurig brewing system, has plans to become an “all-encompassing beverage business,” says this interview with CEO Brian Kelley, a new G100 member. He explains that the company’s ambitious mission “is to get a brewer in every home and in every place of work, and then have a beverage for every occasion.”

Two-thirds of beverages are consumed at home, with one-third consumed away from home. We don’t see that changing. Much of the consumption at home is water, and now you’re giving them a product that they can get as easily as they get a glass of water. All they do is just pop in a pod and put a glass under it.

How to Understand the Asiana Crash

Still an evolving story. James Fallows of the Atlantic, former G100 speaker and amateur pilot, always has the best analysis of any airline incident. Here is his guide on what to read and what to ignore on the San Francisco crash.

How Small US Manufacturers Compete

A superb success story about Marlin Steel, a tiny Baltimore-based company that makes wire baskets used to hold parts made by Boeing, Chrysler, GE, Toyota and others. The company started making baskets for bagel stores. Great transformation lessons. The story shows how advances in US factory productivity have increased the need for speed and quality, making them more important than low Chinese prices. John Shook of Lean Institute explains why this innovation is overlooked:

We have this myth that innovation is something that happens with CAD machines and scientists in a lab, drawing algorithms on whiteboards. The lightning bolt strikes, and everything else is easy. That’s not the way it works. Product and process innovation go hand in hand.

August Reading: The Book You Need to Read on China

Tom Miller, editor of the China Economic Quarterly, has written one of best analyses of China’s growing urbanization: China’s Urban Billion. As others have done, he documents the mass migration into Chinese cities. But unlike others, he gives a balanced perspective on whether China can actually get this historic transformation right.

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