Time to Hack the Macroeconomy?President of Long Haul Capital Group Co-director, Strategic Innovation Lab at Case Western Reserve University Chairman and Executive Editor of GreenBiz Group
Brexit is shaking the foundations of the EU. Institutional investors are screaming for long-term growth. America’s infrastructure is falling apart and out of date. Climate change is disrupting lives, property and commerce. Three billion people are entering global markets and stressing every system. Worse, all these challenges are fundamentally intertwined.
This perfect storm is not some over-the-horizon threat. It is already actively lashing at our markets and our social fabric. While kinetic attacks from extremists grab headlines, these larger strategic antagonists are corroding the foundations of global prosperity and security and will continue to do so in all likelihood.
In theory, federal policy should be leading the effort to address such externalities and ensure diverse, efficient and productive markets. Yet even in the rosiest of electoral scenarios, Washington is not preparing to address these kind of low-speed, high-mass vectors as a system. Assuming the 45th President wanted to take on this challenge, the Congress will be hard-pressed to pass even watered-down half-measures, like a cap-and-trade regime for carbon emissions or a change in the capital gains rules to encourage longer-term thinking.
If federal policy is effectively off the table, it falls on private citizens and business leaders to rethink our approach to change: Instead of pushing our elected officials to do the right thing, we must pull them. This is one of the conclusions from our book, The New Grand Strategy: Restoring America’s Prosperity, Security and Sustainability in the 21st Century.
It falls on private citizens and business leaders to rethink our approach to change.
The question is, what can be done privately, under current policy, to trigger a decisive transition to sustainable growth? Based on our research, we conclude that there is enough demand and capital to support a macroeconomic “hack” of America’s obsolete and unsustainable economic engine, but it must be done at scale and fast.
If demand, investment and science are tightly aligned in the marketplace, the private sector can use this hack to override the current political dysfunction under commercial terms because demand is shifting favorably. In fact, we see historic levels of demand setting up in three categories perfectly suited for this challenge: walkable communities, better food systems and more efficient stuff.
- First, 60 percent of Americans want a walkable lifestyle, according to the National Association of Realtors, which means living closer to work, school, shops, transit and services. This is an enormous sea change from post-war suburbia, amounting to three times the demand for housing after World War II.
- Second, the world needs to increase food supply 70 percent by 2050, according to the OECD, and 100 percent of that has to be regenerative—that is, in a way that rebuilds our soils, cleans up our waterways and sequesters carbon. This means new methods of production and food systems with more regional production and distribution.
- Finally, with three billion people entering the middle class in the next 20 years, we need to build communities and goods out of new materials that are lighter, stronger and more efficient, not to mention more affordable. We simply cannot continue to build out of carbon-intensive materials such as concrete, steel, aluminum and lumber and have any hope to stay within planetary boundaries.
Altogether, we estimate that this represents $1.3 trillion of annual demand waiting to be tapped. To do so, long-term actors in the private sector must begin to take steps in four directions:
- Invest Long in Rail and Housing. To deliver walkable, livable communities, we must first create them. Streetcars and light rail are proven drivers of energy-efficient and high-quality communities, smart-growth mortgages can help capture their value for investors and homeowners alike and, if we return to freight over rail, we can accelerate our emissions reductions.
- Shift oil and gas out of combustion and into materials. We need to stop burning fossil fuels and redirect hydrocarbons into advanced structural polymers if we are to create the building materials of the future. In fact, we cannot continue to build using incumbent materials such as portland cement, steel, aluminum and lumber and stay within planetary boundaries. It’s an unexpected win-win for the environment and big oil.
- Direct equity investment into companies committed to a new industrial ecosystem. BlackRock CEO Larry Fink called on the Fortune 500 to develop strategies for long-term growth. That’s necessary but insufficient. Those strategies need to be integrated, mutually reinforcing, and oriented toward the three pools of 21st century demand.
- Back regenerative agriculture and regional food systems. Private funds helping American farmers get off corn-soy-wheat subsidies, like FarmLand LP, are yielding 8 percent or higher returns. Combined with a Silicon Valley approach to innovation in motorized equipment and sensing, the opportunity for growth is enormous.
Each of these four actions can be undertaken by private actors and will, separately and together, launch a new era of sustainable growth. Putting capital back to work will put people back to work. Investing in a sustainable industrial ecosystem will drive entrepreneurship and real growth. Ending the stalemate with big oil will unleash a new era of innovation.
Who might lead the leaders? We’re most bullish about the early adopters coming from large institutional investors, many of which have started to band together in groups such as Focusing Capital on the Long Term or the Investor Network on Climate Risk.
Why institutional investors? The most obvious reason is that they have both a fiduciary obligation to look at long-term systemic risk as well as the scale to move markets. There’s another reason that has to do with a glaring flaw in modern portfolio theory: Traditionally, investment risk has been reduced through diversification. This assumes that the federal government does its job by tending to the foundation of the broader economy—things like investing in sustainable infrastructure and backstopping the kind of homeownership that people actually want. This assumption is no longer valid. After decades of poor federal performance in macroeconomic management, growth has effectively stopped, putting all asset classes at risk, negating the protection of a diversified portfolio.
That leaves large institutional investors—and all of us—with two basic choices: push Washington harder or start pulling.