The New Grand Strategy

Mark Mykleby, Patrick Doherty and Joel Makower are co-authors of The New Grand Strategy: Restoring America’s Prosperity, Security and Sustainability. Mykleby and Doherty are co-directors and Makower a senior fellow at the Strategic Innovation Lab at Case Western Reserve University. Financial Advisor contributor Paul Ellis recently interviewed them on their thoughts for the future of the United States. 

Paul Ellis: As a nation, where do we currently stand in grand strategic terms?

Mark Mykleby: In the context of grand strategy, we’re currently looking in the rearview mirror. The old grand strategy was based on suburban expansion at home and containment abroad—our post-WW II view of the world. That strategy was so successful, for so long, that we now think of prosperity and security, two of our enduring national interests, as separate issues, unrelated enterprises.

Worse, since 9/11, we have allowed threat and risk to become the drivers of our existence. The resulting risk embedded in trying to maintain the economic status quo is enormous. We are, in effect, expending our prosperity in pursuit of security that is mostly defined by our 20th century past, not our 21st century reality.

In contrast, we see the raw ingredients for a powerful new strategy just waiting for public or private leadership. The demand is there, the capital is there, all at a time when investors are looking for new investment hypotheses for America and the world.

Ellis: Could one of you pick up that point?

Why should investment advisors care about grand strategy?

Patrick Doherty: Advisors will be interested in this story because of the incredible upside potential for long-term, sustainable growth in our economy. Many institutional and impact investors are especially concerned about this. Larry Fink, CEO of BlackRock, and Dominic Barton, managing director at McKinsey & Company, have both written and spoken on this topic recently. Everyone is asking the same question: How do we align the demand within the system and the capital that’s available to fuel sustainable long-term growth?

Joel Makower: I’ve been writing about sustainability in business and technology for 25 years. My initial conversations with Mark and Patrick brought a new aspect of sustainability—security—into play. That’s something we had not talked about in the sustainable business world.

Security here is defined pretty broadly. It’s not just about ISIS or crime in the streets, but includes food and health-care security, energy and water security, housing and community resilience related to economic shocks, and political security related to climate change. This piece of the conversation had been missing.

Ellis: That larger context seems essential, but it also makes problems even more daunting. How does grand strategy solve this problem?

Doherty: When America has been most successful in the past we’ve let our economic engine do the heavy lifting. We like to note that the national security budget is large, at $1.5 trillion annually, but it’s a wholly owned subsidiary of the $18 trillion U.S. economy. If we can align the American economic engine to solve our core problem, then the entire American marketplace becomes a wind at our collective backs.

Our 20th century grand strategies built new economic engines by aligning demand and capital and solving for stranded assets. Demand is the call on goods and services, capital is how you finance that production, and stranded assets are things that had value in the previous economic era and cannot be completely amortized in the new era. We think we can do the same today, and by doing so not only survive the coming decades but help Americans and billions of people around the world thrive.

Makower: The most important ingredient in this formula is demand, and it’s coming from three sources:

The first is walkable communities—we are in the early stages of a massive demographic convergence. Baby boomers and millennials are leading a shift in consumer preferences toward walkable, public-transit-rich living and working environments. Sixty percent of Americans now want the smart-growth lifestyle, large enough to power a new economic era. To underscore, that’s three times the level of demand for housing than during the post-WW II boom. It’s historic.

Doherty: The second great pool of demand is for regenerative agriculture—U.N. studies say global food supply must increase 70% by 2050 at the same time that 3 billion additional people become middle class consumers and demand more and better quality food. To participate in meeting that demand, America’s farmers will have to rebuild our soils, clean up our waterways and repair our nitrogen and phosphorous cycles. Continuing business as usual in the U.S. agricultural sector would mean running out of phosphorous in 30 years.

Our current agricultural distribution system is highly inefficient and carbon intensive. A pivot to regenerative agriculture will provide carbon sequestration; local and regional distribution systems; and high tech, 21st-century farming methods. Doing this during a time of high and rising prices for sustainably grown food is a good news story for American farmers. Given that the average age of the American farmer is 59, this could also support a generational transition in the farmer population, bringing new people to the land, and make family farms economically viable again.

Mykleby: The third pool of demand is for resource productivity—the composition of all manufacturing and construction materials has to change. Concrete, aluminum, steel and lumber are too carbon-intensive to produce. We need to shift to less carbon-intensive composite materials and keep trees in the ground to absorb water and sequester carbon. Carbon fiber materials for construction of cars, airplanes, wind turbines and building infrastructure, for example, are 50% lighter and 50% stronger than steel.

That need for a new class of materials is happening at the same time we need to move hydrocarbons out of combustion while avoiding the unburnable carbon trap. A building materials transition can be an elegant way to avoid stranding the oil and gas we cannot burn, which accounts for between $10 trillion and $20 trillion in balance sheet valuation owned in every major institutional and most retail investment portfolios, certainly every portfolio that owns a broad index fund. Changing the end use of oil and gas from combustion to materials could maintain those valuations and avoid another economic collapse.

Makower: I don’t think many people realize that almost 20% of oil taken out of the ground today goes into building materials, polymers and plastics, not combustion for energy. This approach, sending oil and gas up the value chain instead of the smokestack, makes a lot more sense to me because the hydrocarbons in oil are extremely valuable and simply burning them is a waste.

Doherty: And the R&D load is minimal. Most of the products needed already exist and the global demand signal is huge. China needs to move 292 million people into urban environments over the next 20 years. Cracking the code for the built environment provides a huge economic double dip, systemically connecting a large-scale problem with a large-scale opportunity and solving it in a uniquely American way.

Ellis: Besides the strategy itself, what have you three learned as result of writing The New Grand Strategy?

Makower: It’s given me a whole new worldview and informed my work immensely to understand these issues systemically. Entrepreneurs are very good at looking at the technologies and component parts of sustainability, like smart grids, electric cars and solar panels. We tend to be less good looking at the system in which these things operate. Looking at the financing piece and the stranded assets, and including a regional and even a geopolitical point of view puts the components in a different light. They become part of the whole, which also includes the prosperity piece.

How do we revive the American economy in ways that restore some of the manufacturing base, but do it in a 21st century, sustainable way? Part of the answer is by using the technologies that make us more secure as communities as well as stronger economically.

Doherty: I learned a lot about how in 1939-41, business led the mobilization before Congress was willing to act, which is eerily similar to our situation today. If business is going to lead, what we found is that you need to answer two questions. 1) What is the industrial ecosystem that can tap into these pools of demand, and 2) how would it be financed privately, under current policy and under commercial terms?

We identified 10 economic sectors that are developing business models that are lining up extremely well with a rapid transition to sustainability. Some are “native” in the sustainability space, like Tesla and Whole Foods. But many companies, like Ford, Shell and GE, are building new business models that still need a decisive external signal before their boards commit to a full-scale transition.

For example, in January 2015 Ford’s CEO announced that the company would ultimately change its name from Ford Motor Company to Ford Mobility Company, focusing on the business of selling mobility services and not cars and trucks. This business model fits our story extremely well, so we started looking for others.

Royal Dutch Shell is looking at how to move their hydrocarbon assets from combustion to materials, and Walmart has been experimenting successfully with smaller footprint stores in more densely populated areas. These choices may be the key to these firms’ long-term success based on the pent-up demand for walkable communities and resource productivity in the years ahead.

There’s also a confluence of new players in the energy markets, all testing new business models. Companies like Google, Apple and the merger of SolarCity and Tesla are all converging around distributed, renewable energy where generation, storage and distribution all occur at or near the point of consumption.