1. America in the Post Meltdown, Upside Down World: Globalizing, Rebalancing and Innovating Professor Peter Brews Kenan-Flagler Business School, University of North Carolina at Chapel Hill World View Partners Program 10 August 2012

2. Outline Globalization America in the post meltdown, upside down world What must we all do? Questions 2

3. Globalization 3

4. The Human Struggle for Productivity 4

5. Pre Industrial Era: Pre 1800 70% of world population Subsistence agriculture No growth Failures Industrial Era: 1800 - 1950 20% of world population Manufacturing Input-led growth Followers Post Industrial Era: 1950 onwards 10% of world population Services Innovation-led growth Leaders The Human Struggle for Productivity: Eras, Population, Economics, Bases of Growth, and Status Time 5

6. The Human Struggle for Productivity: Regional/National Positions 6

7. The Future of the Human Struggle for Productivity: the Life Cycle Model Time 7

8. The Future of the Human Struggle for Productivity: the S Curve Model 8

9. Three scenarios over 21 st Century: Balanced Global Growth Unbalanced Global Growth Global Meltdown 9

10. America in the Post Meltdown, Upside Down World 10

11. Why Upside Down? Country Public Debt* (% GDP) World Rank** National Taxes/Govt. Revenues (% GDP)*** Budget (% GDP)*** Japan208.20233.6 (72)-8.90 (191) Greece165.40442.7 38)-9.60 (194) Italy120.10846.6 (28)-3.90 (125) Singapore118.20915.6 (192)1.30 (32) Ireland107.001034.9 (67)-9.90 (199) Portugal103.301246.4 (29)-4.00 (131) Belgium99.701448.6 (23)-4.20(136) France85.501649.9 (21)-5.40(165) Canada83.501838.0 (56)-5.00(161) Germany81.502043.4 (33)-1.00(61) Great Britain79.502140.8 (46)-8.30 (187) Austria72.102748.3 (24)-3.30 (104) United States69.402915.3 (193)-8.60 (190) Spain68.203036.5 (61)-8.50 (189) Brazil54.404439.2 (49)3.10 (22) India51.604811.7 (206)-6.70 (180) China43.506622.6 (140)-1.10 (62) South Africa35.608825.2 (126)-3.80 (120) World average64.203529.0 (96)-4.10 (134) *Only public debt denominated in home currencies is reported. Private sector debt (regardless of currency of denomination) and government debt denominated in foreign currency are not included. **Drawn from ranking based on 135 countries. ***Figures in parentheses indicate ranking based on 210 countries. Source: The World Factbook 2009, Washington, DC: Central Intelligence Agency, 2009. https://www.cia.gov/library/publications/the-world-factbook/index.htmlhttps://www.cia.gov/library/publications/the-world-factbook/index.html, accessed 30 July 2012. Most estimates based on 2011 data. 11

12. The U.S. is in the worst shape it has been in for generations: 25 years living beyond means have finally caught up Out of balance economically, publically and privately Politically divided, facing legislative gridlock with little convergence at center Some core industries in recent trouble (banking, automobiles, construction, retail) and important support industries face serious funding issues (healthcare, education, military…) and Americans have also executed a series of hospital passes: healthcare, retirement, environment 12

13. Not really a credit crisis but over-consumption/living beyond means crisis: credit symptom, not cause Two propositions: Americans could cut consumption by 20% and probably wouldn’t notice: 20% smaller houses, 20% smaller cars; 20% less food; 20% less clothing etc. In face of global imbalances and global competition/scramble for resources, 2006/7 American consumption levels unsustainable 13

14. U.S. Political Economy: Public Sector Imbalances

15. . U.S. Federal Gross Debt as % of GDP: 1940-2009 Source: zFacts.com 15

16. US Gross Federal Debt is now around 100% of US GDP Source: http://www.usgovernmentspending.com/downchart_gs.php?year=1792_2010&view=1&expand= 16

17. U.S. Political Economy: Private Sector Imbalances

18. Source: http://www.econ.yale.edu/~shiller U.S. Macroeconomic data: Home prices, building costs, interest rates, population: until mid 2007

19. Source: http://www.econ.yale.edu/~shiller U.S. Macroeconomic data: Home prices, building costs, interest rates, population until mid 2011

20. Graph constructed by Professor Christian Lundblad, Kenan-Flagler Business School, University of North Carolina at Chapel Hill. Consumption and GDP data from the Bureau of Economic Analysis (BEA). Mortgage equity withdrawals are measured as the year-over-year change in mortgage debt (from the Federal Reserve Flow of Funds) minus 70 percent of residential investment spending (from the BEA). (Source: L. Josh Bivens, Economic Policy Institute) U.S. Macroeconomic data: Consumption and Mortgage Equity Withdrawals 20

21. Private sector imbalances: Private consumption expenditure sustained by freely available low cost capital, tax cuts, real estate asset bubble/boom, credit card debt World’s largest ponzi scheme ever operating between U.S. consumers and PRC U.S. private savings rate also very low/even negative over past decade 1990s dot.com boom was investment bubble; in 2000s cheap finance sustained consumption bubble; prosperity borrowed

22. U.S. Personal Savings Rates: 1959 – 2012 (as at 1 June 2012) Source: Economic Research, Federal Reserve Bank of St. Louis, see http://research.stlouisfed.org/fred2/graph/?s[1][id]=PSAVERT, accessed 31 July 2012. http://research.stlouisfed.org/fred2/graph/?s[1][id]=PSAVERT 22

23. Gross U.S. Government Savings: 1947 – 2012 (as at 1 January 2012) Source: Economic Research, Federal Reserve Bank of St. Louis, see http://research.stlouisfed.org/fred2/graph/?id=GGSAVE, accessed 31 July 2012. http://research.stlouisfed.org/fred2/graph/?id=GGSAVE 23

24. Rebalancing adjustments needed: < 5 % in U.S. Consumption as % of GDP > 5 % in federal taxes as % of GDP (medium term) < 5% in entitlements as % of GDP and < 20% in average U.S. body weight This is my 5 5 5 plan for the United States Would you vote for me? 24

25. Key Contingencies Where/when will U.S. housing market bottom be reached? At what level will more careful, de-leveraged Americans spend? (Consumption as % of U.S. GDP: 1953 – 1983, 61- 64%; 1995 67.5%; 2003 beyond >70%) How will U.S. Administration/Congress act To what degree/how quickly will others step in to replace lost American consumers (i.e. what is the Growth story?) 25

26. The U.S. cannot borrow, grow, vote, cut its way out of the current mess; painful adjustment will be required More than likely both future entitlement expenditure as well as living standards of the average American will have to be curtailed Cuts in govt. expenditure as well as tax increases will probably be required 26

27. For the sake of our children/grand children we must deal with our current economic imbalances (short term), as well as with Global Warming/Climate Change (long term) We are currently mortgaging their futures, economically and environmentally… BIG TIME 27

28. But don’t go from irrational exuberance to irrational depression It is only a question of balance... 28

29. What must we all do? 29

30. Why is Economic Globalization important to the State/Citizens of North Carolina? 20 th Century economic globalization was supply seeking enterprise for Americans 21 st Century economic globalization will be more a market seeking enterprise for Americans Can producers in America offer products/services/solutions others in the world want? But most important short term issue is getting America back to work: possibly by Americans, of Americans, for Americans 30

31. Political, community, and education leaders must ensure North Carolinians are ready to compete in the Post Industrial, globalizing, fast moving world… And that NC is an attractive location to live in, work in, invest in, holiday in, and retire in… 31

32. What must educators do? Prepare American human capital for knowledge intensive, creative work, so they can innovate at rates faster than others replicate; high level math and science skills are table stakes Instill discipline and deferred gratification into students so they make the educational investment and learn how to THINK, problem solve, research, imagine, create, connect dots etc. Develop curricula that prepare workers for 21 st Century, high value creative work, or for working with smart machines and systems delivering smart goods, services, or solutions NC K-12 schools must give world class grounding in basic subjects across the spectrum, instill strong work ethic, sensitize students to global issues and cross cultural differences My contract with my children… 32

33. Potential jobs in the future ? New goods, services, or solutions (Post Industrial creative work); Building, maintaining, operating, improving machines that perform physical work (Post Industrial mechanical work); Helping industrial organizations negotiate the transition to Post Industrial status by finding more efficient ways to organize and produce existing products, services, or solutions (Post Industrial transformational work); and Performing manual tasks machines do not do, or manually assisting machines in work they do (Post Industrial manual work) 33

34. All must aspire to join Creative Cores of organizations they work for, and becoming Post Industrial entrepreneurial capitalists Know how to join Creative Core: technical/scientific vs. industry/ business knowledge route Big question for valuable 21 st Post Industrial workers: do they have any ideas worth funding? 34

35. What should we all do individually? Live within our means, and demand our leaders do too Be realistic about situation, realize those who have may need to contribute a little more; those who want expect a little less Keep perspective - though America is out of balance the adjustment needed is not that significant compared to others Show some character, be part of the solution... 35