Thursday, November 19, 2009

U.S. Share of World GDP Remarkably Constant

Somewhat surprisingly, the Economic Research Service of the U.S. Department of Agriculture has some great international historical macroeconomic datasets. According to its website:

The International Macroeconomic Data Set provides data from 1969 through 2020 for real (adjusted for inflation) gross domestic product (GDP), population, real exchange rates, and other variables for the 190 countries and 34 regions that are most important for U.S. agricultural trade.


The chart above shows the annual shares of real world GDP for four geographical regions (European Union 15, Asia/Oceania, Latin America and the combined share of Africa and the Middle East) compared to the U.S. share of world GDP between 1969 and 2009 (data here). What might be surprising is that the U.S. share of world GDP has been relatively constant for the last 40 years, and is actually slightly higher in 2009 (26.7%) that it was in 1975 (26.3%). It's also interesting that the EU15's share of world GDP has declined from about 36% of world output in 1969 to only 27% in 2009. Further, despite having a large share of the world's oil reserves, the Middle East's share of global output has increased from only 2.23% in 1969 to 3.16% in 2009 (graph shows Middle East combined with Africa).

Bottom Line: World GDP (real) doubled between 1969 and 1990, and has increased by another 60% since then, so that world output in 2009 is more than three times greater than in 1969. We might mistakenly assume that the significant economic growth over the last 40 years in China, India and Brazil has somehow come "at the expense of economic growth in the U.S." (based on the "fixed pie fallacy") but the data suggest otherwise. Because of advances in technology, innovation, and significant improvements in U.S. productivity, America's share of total world output has remained remarkably constant at a little more than 25%, despite the significant increases in output around the world, especially in Asia.

Update: The chart above represents about 91% of the world economy and does not include Canada and the European countries not included in the EU-15.

46 Comments:

At 11/19/2009 6:00 PM, Blogger OA said...

Would be interesting to see tax burden graphed in the same groupings.

 
At 11/19/2009 6:26 PM, Anonymous morganovich said...

i fear this chart would look a great deal less favorable toward the US if we hadn't changed the way we calculate CPI back in the early 90's.

it's amazing how much systematically understating inflation by 5 or 6% can push up your reported real GDP growth...

sorry to be constantly harping on this issue, but the simple fact is that if you believe (as i do) that we have fundamentally distorted the way we track inflation, then most of the rest of even our nominal economic statistics (GDP, productivity, etc) are likewise distorted and anything reported in "real" terms is distorted by definition.

(anything divided by a distorted number = a distorted number)

 
At 11/19/2009 7:46 PM, Blogger PeakTrader said...

Morganovich, so, since the early '90s, you believe we've been in a deep depression, the U.S. money market and bond market have been wrong about interest rates (i.e. lenders and investors were too stupid to realize they were losing money), and U.S. living standards declined.

 
At 11/19/2009 8:18 PM, Blogger PeakTrader said...

There's a related article why U.S. GDP is understated:

Why The Economy Is A Lot Stronger Than You Think
BusinessWeek
FEBRUARY 13, 2006

 
At 11/19/2009 8:54 PM, Anonymous morganovich said...

peak-

i'd urge you to read this:

http://www.shadowstats.com/article/consumer_price_index

then look at this graph:

http://www.shadowstats.com/charts_republish#cpi

this is not some made up tinfoil hat number. it's simply a comparison between the way were used to measure CPI and how we do it now.

the old way took a basket of goods, priced it at time A then again at time B and used the difference to calculate % change.

the new way takes a basket of goods at time a, prices it at time b, adjusts time b's prices hedonically for improvements etc (but somehow only ever downwards, products are presumed to never get worse, which is clearly untrue in many cases), then geometrically weights it to over-emphasize things declining in price and de-emphasize things that are increasing. if the price of steak goes up, it comes out of the basket and more hamburger goes in. you don't have to believe me, go get the methodology from the BLS.

which of these sound like actual inflation to you?

the latter system will create a downward slope even in a data series that doesn't has no net change. imagine a 2 product consumption basket comprised of A and B. you consume a like amount of each. A increases in price 10%. B declines in price 10%. no net inflation, right?

not according to the BLS post 1992. the BLS will say that you consume more B, less A and that deflation is occurring. amazingly, they could claim deflation even if A had increased 11% in price and the system had clear arithmetic inflation depending upon how they define the elasticities in their geometric weighting.

while price certainly drives demand, demand has already driven price over a given interval of inflation, to go back and reweight again is double counting which may sound sensible, but ultimately makes the data gibberish if you iterate it enough times. run a bounded random walk model with 100 or so commodities over numerous iterations using this kind of geometric system and you'll see the downward bias emerge.

real GDP grew in the 90's. policy was not yet too loose as we were not trying to clean up a bubble and it took a while for the divergence of the map and the terrain to really bite us.

i believe that real GDP growth has never recovered from the 2000 crash and has been negative for much of that time. since then, we have surged from bubble to bubble and run up piles of debt (which is extremely rational if you think inflation is higher than reported)


i think that the systemic misrepresentation of CPI has led to dramatically loose fiscal policy and concatenated asset bubbles that have swamped real growth and skewed the economy substantially and that we are mistaking inflation for growth.
in real terms, we are less well off than in 2000.

it is perhaps worth considering that the reason people complained so bitterly about prices in 2006 is that they were going up so fast.

it is worth considering that the reason so many people feel less well off than in 2000 is because they are.

i realize how preposterous all this sounds. believe me, i do. before dismissing all this as tinfoil hat lunatic ravings, take a serious look at the information. i've tried about 30 ways to poke holes int his thesis, and it pretty much holds water as far as i can tell.

but please, have at it. if you can disprove it, i'd love to see what you come up with.

 
At 11/19/2009 9:30 PM, Blogger PeakTrader said...

Morganovich, the GDP Price Deflator (which isn't a fixed basket of goods) implies the CPI is unbiased. I have more faith in markets than articles. There are seasonal, cyclical, and structural factors. Inflation is too much money chasing too few goods. We've just completed a period of excessive consumption, because of declining prices and diminishing marginal utility. There remains too many goods.

 
At 11/19/2009 9:31 PM, Anonymous Lord said...

What people would be most interested in would be gdp per capita. A falling gdp share is no problem if population share is falling faster, nor is a rising gdp share a benefit if population share is rising faster.

 
At 11/19/2009 9:50 PM, Anonymous morganovich said...

peak-

how do you figure on GDP deflator?

GDP deflator = nominal gdp/real gdp X 100.

without having CPI, how do you get real GDP?

how does it "imply the CPI is unbiased"?

 
At 11/19/2009 11:16 PM, Anonymous Anonymous said...

This does show that some of the crepe hangers about the US are incorrect. This is consistent with the share of world manufacturing being roughly constant in the us. (Not consumer goods but overall)
The issue is that mfg is where productivity is ramping the fastest so that fewer are needed to do the same job. Also true of other areas such as railroads where since the 1920s employment is now 1/10 of what it was.

 
At 11/19/2009 11:52 PM, Blogger juandos said...

Well personally I don't morganovich is off on a tangent...

John Williams on his Shadow Government Statistics does have some seriously interesting nuggets, some of which coincide nicely with other better know publications...

Having said that I would be nervous to base to many arguments on the data Mr. Williams offers up only because 'I' don't have enough other data to call him right or wrong...

 
At 11/20/2009 3:38 AM, Blogger PeakTrader said...

From article:

"When comparing GDP between years, nominal GDP and real GDP capture different elements of the change. Nominal GDP captures both changes in quantity and changes in prices. Real GDP, on the other hand, captures only changes in quantity."

My comment: Changes in both the GDP Price Deflator and CPI have been similar, although one represents total output, while the other represents a small sample. I believe, quality improvements are understated. For example, you can buy a computer worth $1 million 20 years ago for $1,000 today. Also, cell phones didn't exist 20 years ago. Now they do.

 
At 11/20/2009 4:18 AM, Blogger bob wright said...

Is Canada in the data?

 
At 11/20/2009 5:17 AM, Blogger juandos said...

"Why The Economy Is A Lot Stronger Than You Think
BusinessWeek
FEBRUARY 13, 2006
"...

Well PeakTrader now that the Manchurian Cretin has been in the White House 11 month and has equally questionable allies in the House and Senate do you think the folks at Business Week would rewrite that article completely different today?

 
At 11/20/2009 7:56 AM, Blogger Mark J. Perry said...

Bob: See update on post - the regions in the graph represent about 91% of the world output, and the chart does not include Canada and the European countries not included in the EU-15.

 
At 11/20/2009 8:27 AM, Anonymous Anonymous said...

The question on the inflation front is really about owning versus renting your home. The CPI uses something called owner equivalent rent. Rents did not run up in the bubble areas nearly as much as prices did, this is well documented in the showing that prices were unsustainable. Another reason that CPI is low is the tumble in tech prices. As an example a 1 tb external drive is now less than $100. The metric that needs to be used is hours of work per item, as it takes inflation estimates out of the picture as Dr. Perry has done every so often on this blog, and Forbes did in their 75 anniversary issue a number of years ago.
Take gasoline, in 1939 the minimum wage was .30 per hour and a gallon of gas was .20 so it took 2/3 of an hour, in 1971 before the oil shocks it was .30 and the minimum wage was $1.60 for about 12 mins per gallon, in 1980 gas was about 1.30 and the minimum wage was $3.10 so a bit more than 20 mins/gallon, and today at $2.60 and $7.25 so about 21 mins per gallon. So we had a long period of relative price decline, and a bounce back, and rough price stability since.

 
At 11/20/2009 9:49 AM, Anonymous morganovich said...

peak-

i don't think you understand how GDP deflator is estimated.

the weighting argument you make is circular.

also:

quality increases are already built hedonically into CPI. oddly, quality declines never seem to be. my grandmother's blender still works like new after 50 years. a new plastic one breaks every 3-5. why is that not less valuable? a lot of furniture and clothing is similarly flimsier and less durable.

once you get into this hedonic game of quality comparison, where so you stop? it's inherently arbitrary - therefore it should be avoided. it inevitably injects researcher bias into the data.

 
At 11/20/2009 5:03 PM, Blogger Smoky Mountain Hiker said...

My take on this chart:

The EU has been in a state of decline due to socialistic policies over the last few decades.

On the other hand, Asia has increased due to their embrace of capitalism and free trade principles.

Great blog by the way...

Jeff

 
At 11/20/2009 7:10 PM, Blogger PeakTrader said...

Morganovich, from AmosWEB Webpedia on GDP Price Deflator:

"There are three important points to note about the GDP price deflator, two pro and one con. These points are especially important when comparing the GDP price deflator to the CPI.

First, the GDP price deflator is based on ALL production in the aggregate economy. This is a definite pro. It includes not just urban consumption, as does the CPI, but also investment expenditures for capital goods, purchases by the government sector, and even exports to the foreign sector. It has it all. So for anyone truly interested in a price index for the aggregate economy, this is it.

Second, the GDP price deflator measures the prices of "current production", the prices of goods actually produced during the current year. This also a definite pro. The CPI, in contrast is based on a market basket of goods identified 5 or 10 years earlier. Again, from a macroeconomic perspective, this is a much better way to go.

Third, the GDP price deflator is reported quarterly, every three months, along with other measures in the National Income and Product Accounts. The GDP price deflator for the first three months of the year (January, February, and March) is not available until late April or May. And then, it is only a 3-month average rather than a month-by-month, blow-by-blow price index. From a timeliness perspective, the GDP price deflator comes up short on providing decision makers with the information needed."

Also, I may add, a high quality blender is much cheaper today in terms of buying power. Consumers can not only afford a high quality blender today (if they choose), but also a microwave that'll last 10 years for under $100, a coffee maker that'll work for years for $20, durable coffee cups for $1, and many other items. Quality improvements aren't fully reflected in the CPI. Autos, for example, are more durable, more efficient, with more features and fewer defects, and cheaper in real dollars. They've improved a great deal since the Model T.

 
At 11/20/2009 8:14 PM, Blogger PeakTrader said...

Juandos, I agree with your article. Also, I think, Obama is spending money at an alarming rate and placing massive inefficiencies in the most efficient economy the world has ever seen.

California is already suffering from politicians who spent and squandered way too much money. Article:

November 20, 2009

"Even public schools are too expensive. According to The San Francisco Chronicle, the University of California regents voted yesterday to raise tuition by 32 percent. Meanwhile angry students and protesters pounded drums and blocked exits to the UCLA building where the regents were meeting.

Total, undergraduate tuition will spike from $7,788 to $10,302 next fall, not including living expenses.

After the vote, students rushed to the parking decks to stage a sit-in to block regents' vehicles from leaving. Campus police and California Highway Patrol officers in riot gear stood nearby.

As one regent member walked out, students surrounded his path shouted, "Shame on you, shame on you."

My comment: Those students will also be paying for Obama's spending spree and inefficient policies for decades.

 
At 11/20/2009 10:29 PM, Blogger OA said...

PeakTrader said...Total, undergraduate tuition will spike from $7,788 to $10,302 next fall, not including living expenses.
...As one regent member walked out, students surrounded his path shouted, "Shame on you, shame on you."

Oh what a difference from the people protesting Aparteid when I was at Berkeley.

One of the many crazy things about California is illegal aliens can pay resident tuition if they meet the residency requirements. The theory being, they've paid taxes. But of course we have an extremely "progressive" tax rate schedule where low wage earners don't pay taxes and as you go up the tiers, it's not a marginal rate but all or your income is taxed at that rate.

Of course illegal aliens can't legally get work after their state subsidized education, but this is the PRC. So that's just a technicality.

Odds are all those protesters don't vote for small government when they go vote. If they had a clue, they'd go protest in Sacramento.

 
At 11/20/2009 10:54 PM, Anonymous morganovich said...

peak-

you are confusing the map with the terrain.

GDP deflator is a calculated, modified estimate. it's not a real number. it's not like they count bushels of corn and pair of shoes and blenders. it'd derived, not observed. assuming that GDP deflator is somehow a "real" number is going to lead to errors. it's based on a whole set of estimations, assumptions, and adjustments.

since the 90's, the BLS has shifted the CPI calculation to be more like GDP deflator.

so your argument that one can reinforce the other is totally circular.

all you are saying is that if we use a similar methodology in 2 situations, we get similar results.

the fact is that this methodology is broken.

you can test it with randomized bounded variation series data and see this.

and you're missing the point of the hedonics argument - the point is that it's totally subjective. someone makes this stuff up, then they treat it like it's actual data.

any student of a science, even economics, will tell you that you need to be incredibly careful with data like that. once you introduce researcher bias, your set is pretty much shot.

 
At 11/20/2009 11:44 PM, Anonymous Anonymous said...

The main reason European GDP is declining is that European population is aging declining as a share of world population. If one could see the Japanese share of world gdp I suspect the trend there would also be downward. We need to recall that ultimatly Demography is destiny as if you don't have the population you can't compete.

 
At 11/21/2009 10:08 AM, Blogger sethstorm said...


On the other hand, Asia has increased due to their embrace of capitalism and free trade principles.

I would hardly call anything in that region of the world, capitalism. This is especially when government intervention is used by business over there to silence/disappear/marginalize people, or justify blatant knockoffs that appear in First World countries(US/UK/CH/Pre-Expansion EU).

Cross your Audi-driving Communist Party boss(or his non-communist BRIC/developing nation equivalent)? Expect yourself to be involved in an "accident", your organs forcibly harvested, or executed with the bill sent to your family. All of that in the pursuit of smooth transactions.

It's not capitalism or free trade, but something that removes dissent for the purpose of smooth transactions.


Quality improvements aren't fully reflected in the CPI. Autos, for example, are more durable, more efficient, with more features and fewer defects

Explain the shoddiness of parts built in the developing world(BRIC nations for example) for the First World. They're worse than Detroit or Japan on any day.

 
At 11/21/2009 1:27 PM, Anonymous morganovich said...

seth-

certainly, some products have declined in quality, just as some have increased. there can be little argument about that.

but the real key to assessing hedonic adjustments is this: "who can judge and how"?

can anyone really claim to know precisely what % a car this year is better (or worse) than last? this problem is far more challenging with goods like clothing or furniture or restaurant meals.

it amazes me that people (peak trader among them) who profess to believe in markets then go on to reject PRICE as a signal of quality in favor of made up, subjective adjustments made by a few bureau/techno-crats.

presuming that a couple of statisticians can more accurately measure year to year changes in the quality of every product in the country at all, much less better than the mass of consumers making individual decisions seems pretty indefensible to me.

 
At 11/21/2009 6:28 PM, Blogger PeakTrader said...

Morganovich, you haven't proven the data is biased one way or the other. Yet, you believe inflation is much higher than reported.

It's rather amusing you believe I contradict myself on markets and reject price when the goods market, money market, and bond market disagree with your theory about inflation. Your implications don't add up, e.g. U.S. GDP contracting at full employment. It's much more likely inflation is overstated than understated, given the rise in living standards.

 
At 11/21/2009 7:25 PM, Anonymous morganovich said...

sure i did peak, you just didn't read the piece. go back to my first response to you and read it.

again, this is not some made up number. it's just a comparison of the old BLS methodology to the new.

i've run the geometric BLS methodology iterative and it creates a downward slant from random price movements in a data set despite the set having no net arithmetic inflation.

since you clearly won't take my word for it, try it yourself. any half decent econometrics modeling package will let you do it in a couple hours.

go get the BLS methodology before and after the boskin/grrenspan changes.

you clearly contradict yourself. hedonics is utterly, irretrievably anti market. it is, by definition, inventing adjustments to the price that emerges from goods markets to attempt to account for real or imagined differences in products based upon the estimations of some economist or bureaucrat.

that's not accepting a market signal, it's twisting one.

the goods market has been increasing in price well ahead CPI if you look at a given basket of goods. that's undeniable.

the bond and money markets are awash in liquidity and trade as you'd expect in such a situation.

your argument doesn't make any sense.

all these markets are behaving precisely as you'd expect if there was too much liquidity and too little growth.

how else to you explain 10%+ gains in gold, bonds, and equities over a 3 month period?

you really believe that we can have rampaging increase in virtually every asset class simultaneously and a constant commodity index up 29% YTD and retail deflation?

you are also confusing nominal and real gdp. you can create jobs in a nominal growth environment. but you'll notice that employment never got back down to the levels of 1999-2000. not that many jobs were created. u-6 dropped from 10% to 8%. only 2 of 3 jobs that disappeared in the 2000 crash came back. have you given any thought to why that might be if growth is so good?

 
At 11/21/2009 10:56 PM, Blogger PeakTrader said...

Morganovich, inflation can be overstated or understated using a simplistic and static model that has no meaning. I stated above, there are seasonal, cyclical, and structural factors. There were several major structural breaks, starting around 1980, including the U.S. becoming an open economy, the Information Revolution, the Great Moderation, and the breakdown between money and GDP, which had huge impacts on inflation. The adjustments seem to be unbiased. Anyway, as I stated before, markets, economic fundamentals, and related data all support those adjustments.

 
At 11/21/2009 11:17 PM, Blogger PeakTrader said...

Morganovich, you stated: "...you'll notice that employment never got back down to the levels of 1999-2000. not that many jobs were created...only 2 of 3 jobs that disappeared in the 2000 crash came back. have you given any thought to why that might be if growth is so good?"

Yes, because the U.S. economy become more efficient. The U.S. created 17.6 million jobs between 1993-98, and created only 3.7 million jobs between 2001-06. However, U.S. real GDP growth was only slightly higher from 1993-98 than from 2001-06. So, the U.S. became much more productive in the 2000s, i.e. using fewer inputs to produce more output. A structural bear market began in 2000.

The quick and massive U.S. Creative-Destruction process, generally between 2000-02, freed-up resources, e.g. labor, capital, raw materials, energy, etc. Freed-up capital was redeployed into firms that generated even more capital.

 
At 11/22/2009 12:18 AM, Anonymous morganovich said...

there was also a huge break in 1992 when we changed the calculation...

and my point is not that you can over or understate inflation with a simple model, my point is that if you plug random data with no arithmetic net change into the BLS methodology, you get a downward trend.

that's pretty much the definition of a downward bias in a methodology.

your real growth comparison only holds if we use the new CPI calculation. using the old one, there was no real growth from 2000-present

and you duck the key question:

you really believe that we can have rampaging increase in virtually every asset class simultaneously and a constant commodity index up 29% YTD and retail deflation?

seriously, think back to 1999. prices of everything were rampaging. we had some of the lowest unemployment on record. you really think inflation was 2.6% that year? 1.6% the year prior? could it be that the massive failure of the short run phillips curve to function was not because we entered a magic land of productivity and overcapacity but because we were miscalculating inflation?

 
At 11/22/2009 1:16 AM, Blogger PeakTrader said...

Morganovich, your model doesn't explain anything. It's a static model that shows accelerating inflation using obsolete information.

Your own statement proves the old method is obsolete: "Your real growth comparison only holds if we use the new CPI calculation. using the old one, there was no real growth from 2000-present."

Do you really believe, U.S. real GDP growth was zero at full employment? Also, why would anyone lend or invest at 5% when inflation is higher than 5%?, and why would foreigners invest in a stagnant or contracting economy?

When there's excessive economic slack, there's deflation. That's the case today. A higher level of productivity is disinflationary, which was the case beginning in the mid-'90s. Imports are also disinflationary when prices fall to induce demand, and real income rose in the second half of the '90s.

Gold seems to be replacing the dollar as the world's reserve currency, since the dollar has depreciated, and it's uncertain whether or not the Fed can eventually drain enough dollars to preempt inflation. Commodity prices rose, because developing countries are growing faster. They're producing heavier goods, unlike the U.S. economy.

 
At 11/22/2009 1:34 AM, Blogger PeakTrader said...

Also, I meant to say, real wages rose in the second half of the '90s, and there's an inverse relationship between profits and wages. Anyway, I believe, what ended the first superbubble from 1995-00 were budget surpluses or contractionary fiscal policy (mostly through more taxes as the economy expanded), the end of an 18-year bull market much of it based on demographics, and a correcting mechanism to keep future labor supply and demand in equilibrium (because the economy cannot support too many workers retiring early). It was remarkable, the U.S. had a second superbubble, in a structural bear market, from 2002-07, after the Creative-Destruction process, which not only made high-tech firms more efficient, but also old economy firms, although the second superbubble was based more on consumption than production.

 
At 11/22/2009 1:58 AM, Blogger PeakTrader said...

Moreover, I may add, there's no way there can be zero real growth in the middle of a homebuilding boom. Housing starts and new home sales can be counted (and larger houses were built based on square feet). Furthermore, domestic auto units produced can be counted (and roughly half were SUVs, light trucks, and minivans, rather than smaller autos). New homeowners tend to buy furniture and appliances for their homes, and there was also over $300 billion a year in home improvements during much of the 2000s. Units and dollars can be measured.

 
At 11/22/2009 2:25 PM, Blogger Thai said...

Normally I really like your posts but I think posting this chart without also adjusting for changes in these regions as a % of world population is grossly misleading as an individual reader would view the issue.

Here is the Wiki on % world wide population by region.

Europe's population as a % of the world's population in 1969 was about 18&, today it is about 11% which means that if all other things were equal, one would expect Europe's economy to be 1/3 small as a % of world wide GDP which means it is really flat on a per person basis.

The 1-2 % reduction in North American GDP as a % of world population is hard to compare with a chart that does not include Canada, Mexico, etc... but the implication is that America is about flat on a per person basis as well.

Readers are certainly interested in whether America is larger/richer, etc... AND I suspect they are also interest in whether they personally are richer, etc...

If it was the former but not the latter, that does not personally benefit them much now does it?

 
At 11/22/2009 2:27 PM, Blogger Thai said...

Sorry, typo.

I meant the 1-2% reduction in North American population...

 
At 11/22/2009 3:45 PM, Blogger sethstorm said...


certainly, some products have declined in quality, just as some have increased. there can be little argument about that.

but the real key to assessing hedonic adjustments is this: "who can judge and how"?

Those who know the products.

Price and:
* Goods that do not use tons of tradeoffs.
* Minimal/non-use of the "unwanted customer we can afford/want to lose" concept during the design phase with regards to quality.
* Country of origin vs final destination customer, favoring minimal mismatch.


The quick and massive U.S. Creative-Destruction process, generally between 2000-02, freed-up resources, e.g. labor, capital, raw materials, energy, etc. Freed-up capital was redeployed into firms that generated even more capital.


That's only sugarcoating and de-individualizing the truth.

It was a gradual circumvention and penalization for having a US citizenship. For the large part, it was sub-optimally allocated afterwards. It would be better to kill offshoring, then start over from scratch with a more citizen focused model.

 
At 11/22/2009 4:38 PM, Blogger PeakTrader said...

Seth, that's what happens in a most dynamic economy. Workers are displaced. Otherwise, most of the labor force would still be in agriculture.

Older U.S. firms gained greater market power, since they focused on higher quality "core" products, while offshoring less profitable goods to Third World countries for larger profits (rather than discontinue operations of those products). Consequently, U.S. corporations generated double-digit profit growth for a record 20 consecutive quarters in the 2000s, which resulted in strong balance sheets. Much of the redeployed capital flowed into business start-ups, which helped keep the U.S. unemployment rate low. U.S. Information and Biotech Revolution firms continued to lead the rest of the world combined (in both revenues and profits) after the Creative-Destruction process. The only way to move from one economic revolution into the next is through efficiencies, which free-up limited resources. It's all interrelated, and inevitable, which is why the U.S. leads the world in the Agricultural-Industrial-Information-Biotech Revolutions.

The gains of U.S. assets increased faster than the gains of U.S. liabilities. Similarly, the increases in U.S. output exceeded the rises in U.S. inflation, which induced demand and raised living standards. Export-led economies needed to accept small gains of trade to spur export growth (which imply the U.S accepts large gains of trade). Also, while the U.S. dollar depreciated, export-led economies were required to accept even smaller gains of trade to maintain export-led growth. The U.S. had abundant capital from foreign capital inflows and capital creation of U.S. firms.

So, both U.S. consumers and U.S. firms benefited from offshoring high-cost or heavy goods, importing them at lower prices and for higher profits, and shifting limited resources into emerging industries or older industries with market power.

 
At 11/22/2009 4:54 PM, Blogger PeakTrader said...

Also, I may add, those new jobs are higher-paying and higher-skilled jobs. In 2007, 20% of U.S. households earned at least $100,000 a year, and U.S. median family (household) income was $60,000 (half earned more and half earned less), including $50,000 from wages and salaries.

 
At 11/22/2009 5:13 PM, Anonymous morganovich said...

peak-

you're really not getting this so i'll put it as simply as i can:

take the current BLS methodology for CPI.

instead of price data, use random price fluctuations that have a zero average (which is to say 0% inflation using an arithmetic measure).

run the model 30 times iteratively.

you will get a downward slope in CPI. this is the nature of automatically overwieghting things that decline in price and underweighting those that rise.

this tells you the model is biased to the downside.

this means the current CPI measure understates inflation.

by how much is an interesting and open ended question, as the simple fact is that all inflation measures are estimates.

you can bluster all the pop econ books you want, but the fact is that the CPI model is demonstrably broken.

you think the 2000 bubble burst due to budget surpluses? that's so bizarre i don't even know where to start. you really are a bubble baby.

if you think housing drives the economy, you haven't been watching healthcare and services industries. they utterly swamp home building. furniture comes from overseas. so do most appliances etc.

lending decisions are driven as much by cost of capital and access to leverage as inflation.

if i can borrow at 25 bp, i'll happily lend at 5% if i can do it with leverage. the current situation of borrow at 25 bp and buy us bonds at 10 or 15 to 1 makes for a pretty tidy profit at a money center bank, no?

notice that commercial lending still sucks for all but the largest companies? this is because you can't lever up those loans the same way.

further, what do you think drove the insane borrowing bubble here in the US if not negative real interest rates? the whole mortgage market thrived on it.

we have repeatedly tried to cure the first bubble by inflating new ones. you seem surprised that they keep occurring, but so long as we keep monetary policy this loose, nothing's going to stop them.

also: thai is absolutely correct with the demographic analysis.

it also raises an interesting issue: if you take out population growth and look at per capita real gdp growth, the numbers get quite a bit uglier. that would take 86bp/year out of the number over the last decade.

so that's about 8%. add in 34% CPI increase (assuming we accept the BLS number you recommend)

in 1999 gdp was 9.22 tn. this year will be about 14tn. that implies that adjusting for demographics and inflation, you're left with about 1% real gdp growth per capita in the last decade.

this hardly seems like a massive productivity surge...

all it would take is for CPI to be 1% too low and all the real per capita growth is gone.

 
At 11/22/2009 8:35 PM, Blogger PeakTrader said...

Morganovich, inflation reflects exponential growth (a 3% rise in inflation is a rise from the prior year). So, the arithmetic mean would overstate inflation. You can see this using a compound annual growth rate calculator. Type 140 for ending value, 100 for beginning value, and 4 for number of periods. The answer is 8.78% (not 10%). The more periods, the lower the rate, e.g. 180, 100, and 8 is 7.62% (not 10%).

 
At 11/24/2009 1:45 PM, Blogger Steve Roth said...

Here's one simple fact that any off-the-street reader (i.e. me) will agree with:

Peak Trader consistently refuses to address morganovich's central argument.

The reverse is not true.

This doesn't mean morganovich is right. But it's damned suggestive.

Steve
http://asymptosis.com

 
At 11/25/2009 12:43 AM, Blogger sethstorm said...


Seth, that's what happens in a most dynamic economy. Workers are displaced. Otherwise, most of the labor force would still be in agriculture.

Indeed. However, that does not address the issue when the displaced are far from being able to take advantage of the opportunities that you say exist.


Also, I may add, those new jobs are higher-paying and higher-skilled jobs. In 2007, 20% of U.S. households earned at least $100,000 a year, and U.S. median family (household) income was $60,000 (half earned more and half earned less), including $50,000 from wages and salaries.

Nice, but it doesn't help the displaced when they're offshored by the time they've got their education.




So, both U.S. consumers and U.S. firms benefited from offshoring high-cost or heavy goods, importing them at lower prices and for higher profits, and shifting limited resources into emerging industries or older industries with market power.

In other words, use adverse selection on quality by going to the Third World.

No thank you, but I'd rather put an end to the Third World(BRIC, Central & South America) sourced junk. Start by making adverse selection favor, not inhibit quality. Next, develop & manufacture(not assemble from prefabricated parts) First World destined goods in the First World nations that will use them. Same with the Third World.

 
At 11/30/2009 7:27 AM, Anonymous vimothy said...

Shadow Stats is pure fantasy.

 
At 12/02/2009 9:44 AM, Anonymous Politically Homeless said...

Great work, I'll link it from my anti-partisan blog.

I see something else, perhaps because I'm writing how we emerged from WWII as a powerhouse -- mostly because every other industrial base had been bombed into rubble.

As soon as war production spending ended, New Deal tax rates became dominant again, as our equipment eroded as everyone else was rebuilding. Then Kennedy.

Anyhow, as more of the world "industrializes" it would almost be expected for our share to decline - no longer being the only kid on the block.

Staying constant, in that context, is one hell of an achievement. More important, I suggest, than whether China's growth came at our expense.

 
At 12/02/2009 9:52 AM, Anonymous Anonymous said...

Peak trader: "Morganovich, so, since the early '90s, you believe we've been in a deep depression, the U.S. money market and bond market have been wrong about interest rates (i.e. lenders and investors were too stupid to realize they were losing money), and U.S. living standards declined."

Very intelligent reply, Peak Trader. Those who continue to argue that inflation has been grossly undersrtated, and that GDP has thus declined, are just tiresome. Your very first comment on this thread contains all the argument that should be required for their assertion.

My suggestion: ignore them. They are too stubborn to accept the reality you accurately presented.

 
At 12/21/2009 3:30 PM, Anonymous Anonymous said...

An interesting discussion on calculating inflation.

To calculate quality improvements one might take a basket of goods from 2009 and price the equivalent from say 1980.

I do not know anyone who would say that quality has decreased in the industry they work in.

 
At 1/14/2010 1:32 PM, Blogger Bruce said...

Whoops, sorry Mark. I got here via Grg Mankiw's blog and forgot who I was commenting for (dumb, as Mankiw doesn't have commenting turned on).

BTW, in a Mea Culpa mode, I'll grant you one 'extra credit' for the US. A fair amount of the population rise in the US has been immigrants, more than Europe. For us to absorb those and keep the same growth rate does give a certain edge here, but certainly not like the chart suggests.

 

Post a Comment

Links to this post:

Create a Link

<< Home