The Future of Houston
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I drove to Houston on Tuesday to attend a presentation at Rice on the demographic and economic future of Houston. The two speakers were Stephen L. Klineberg, professor of sociology, who has overseen a “Houston Area Survey,” tracking economic and demographic changes in the region for 26 years [after using the link, click on “current power point” for demographic information], and Michael Ballases, the Houston chairman of J.P. Morgan Chase bank. I made the trip because I believe, as I wrote in my “Behind the Lines” column in the December issue, that “demographics is destiny.” Unfortunately, our current state leadership seems indifferent to the changes that lie ahead, and Texas will pay dearly for that.
The report that follows is taken from my notes and from the power point presentations of the two presenters.
Klineberg began by saying, the most critical issue facing this state–and if we don’t deal with it, “not a whole lot of things are going to go right”–is a demographic revolution, accompanied by a restructured economy. He traced recent Houston history. From 1970 to 1982, the price of the region’s principal industrial product [oil, of course] tripled. Houston was booming. An astounding 82% of the primary jobs were related to energy. You didn’t need an education to succeed. You could get a job in the oil industry for good money. The biggest employers in Houston in 1970 were Hughes Tool and Cameron Iron Works. Then, in May 1982, what was essentially an 80-year boom suddenly collapsed.
* The resource-based industrial-era economy (land, cotton, cattle, timber, oil) has receded into history. It has been replaced by an increasingly high-technology, worldwide, knowledge-based economic system.
* The traditional “blue-collar path” to financial security has largely disappeared. Most good-paying jobs today require high levels of technical skills and educational credentials.
* “What you earn,” as the saying goes, “depends upon what you’ve learned.”
Klineberg contrasted the quarter century after World War II, which was the height of the industrial boom, with the quarter century that spilled over into the twenty-first century. He showed graphs of the “Percent Increase in U.S. Before-Tax Household Income” during the two periods. The first (1949-1979), he said, was “the rising tide that lifted all boats.” The lowest group on the income ladder — the bottom 20% of earners — saw their wages more than double over that time span (+116%). The smallest increase was enjoyed by the top 5% (+86%). The groups in between posted gains ranging from 114% to 99%.
The period from 1979-2003 is starkly different:
Bottom 20%: +4%
Next to Lowest 20%: +9%
Middle 20%: +13%
Next to Highest 20%: +22%
Top 20%: +48%
Top 5%: +68%
Kleinberg: “The average American’s income doubled between 1950 and 1970. In the last quarter of a century, the average American’s wages stagnated. Wives had to go to work to make ends meet. The rich and the super-rich benefited, based on higher education.”
Then he switched to demographics: “No city and no state have been transformed more irreversibly than Houston and Texas.”
* In 1960, Houston was 74% Anglo. By 1980, Houston was the fourth largest city in the country, but still 63% Anglo. During the eighties, the decade of the oil bust, the Anglo population of Houston increased by just 1%. During the nineties the Anglo population has decreased. The Hispanic population surpassed the Anglo population in Houston three and a half years ahead of Texas as a whole. Now, Texas has joined California as one of two states where the majority of the population is not of European ancestry. (He pointed out that New Mexico and Hawaii have always been in that category.) By 2010 there will be 10 to 12 majority minority states. “Texas is in rapid, fundamental change.”
* The number of older Americans will double in the next 25 years. Among young adults, fewer than 26% are Anglo. “If they are unprepared to succeed, it is not hard to envision the consequences. This is a done deal.”
* One group of immigrants is coming with the highest level of skills — doctors, engineers. 61% of Asian and African immigrants have college degrees, compared to only 47% of Anglos.
Klineberg: “Where is our growth and wealth going to come from? It has to be the best and the brightest. The source of wealth is between the ears.”
* In 2040, Houston will be 80% non-Anglo. HISD today has 209,950 students. 59% are Latino. 29% are African American. 82% qualify for free and reduced lunch.
Power Point Presentation: Education Attainment in Five Houston Communities, 1994-2006 (based on % of respondents)
Asian Immigrants in Houston:
Less than high school: 7%
High school diploma: 15%
Some college: 19%
College degree: 36%
Less than high school: 5%
High school diploma: 19%
Some college: 30%
College degree: 29%
Less than high school: 12%
High school diploma: 27%
Some college: 37%
College degree: 16%
Less than high school: 19%
High school diploma: 33%
Some college: 31%
College degree: 13%
Less than high school: 50%
High school diploma: 25%
Some college: 15%
College degree: 7%
Klineberg: “It’s so obvious, and yet we Texans, we Houstonians, have done little about it.”
Three big trends in my business career:
1. Globalization. The economy went through huge shocks in the early seventies entering the global economy. It started early in the century, when we dropped tariffs for the income tax. The U.S. is exporting jobs. But in the last five years, there have been only two economies in the world that contracted, Lebanon and one country in Africa. The Shanghai index doubled in less than a year.
2. Private equity ownership didn’t exist 30-35 years ago. There were people who had money. We called them “deal guys.” It was derisive. Now, the private equity groups are forcing — and helping — companies to become more productive. They are not going away.
3. Going green: The Conoco and Shell CEOs are going on a 25-city tour.
The Liquidity Crisis
On sub-prime loans: “The philosophy behind them seems to have been, these borrowers can’t afford to pay 7%, so we’ll charge them 12%, and if we do enough of them, somebody will think we’ve created something of value and will pay us for them.”
June 2007: U.S. Foodservice had to postpone its LBO — there was no buyer for the debt.
August: commercial paper markets dried up. Even AAA-rated assets may be risky.
“Today, if you want to buy a $2 billion company, there’s no money available. If someone were to come to Chase, we’d say, ‘No way.'”
Middle-market loans of 3, 4, 5 hundred million, that’s open.
“Forty billion dollars has been written off. That money is gone! That’s a big number. In the eighties, the FDIC insured the entire banking system for $6 billion. Is it going to get better? No, it’s going to get worse.”
The currency is collapsing — that leads to inflation. Fortunately, inflation is relatively benign. The chance of two more 1/4 point rate cuts are about 90%.
Chase, Wells Fargo, and Goldman Sachs made money while most were losing due to sub-primes. Chase didn’t do sub-primes because it was exploitation. Goldman Sachs made lots of money because they hedged sub-primes. Wall Street loved them. We did well too. It didn’t do us any good. “They were smart,” we were told. “You were lucky.”
The Energy Outlook
Power Point: Proved Oil Reserves 2006
Middle East: 743 billion barrels
United States: 211 billion barrels
Russia: 144 billion barrels
Africa: 117 billion barrels
South America: 116 billion barrels
Total world oil demand (million barrels per day): 85.4 mbd
Told world oil supply: 85.7 mbd
“Demand and supply are right at the razor’s edge. The market is very tight. Any kind of disruption drives the price.”
“There is more demand for paper barrels than for wet barrels.”
Proven Natural Gas Reserves
Russia 2,264 trillion cubic feet (TCF)
Middle East 2,593 TCF
Indonesia 523 TCF
Africa 501 TCF
United States 268 TCF
South America 256 TCF
U.S. gas production has been declining since 2001 even though drilling is increasing.
Houston energy dependence: 80% of jobs 1982. Lost 180,000 jobs in 18 months. Today 50% of jobs are energy-dependent. The annual growth in energy-dependent jobs is 6%.
2.41 million total employment in the Houston region
248,650 estimated unauthorized workers, around 10%
Gross regional product per undocumented employee: $65,702
Total undocumented workers’ contribution to Gross Regional Product: $27.28 billion
“There is no way that undocumented workers take more out of the system in government benefits than they contribute in tax revenue.”
These numbers do not include contributions to GRP from the approximately 22,000 workers employed in agriculture and private households.