this blog, we have discussed already [here
the incompatibility of real GDP data caused by the change in definition of the
GDP deflator, dGDP, (in the USA - in 1977).Figure 1 shows details of the deviation between the dGDP and the consumer
price index, CPI, as expressed by the cumulative inflation rates. One can see
that the CPI inflation rate is approximately equal to the rate of the GDP
deflator change multiplied by a factor of 1.22 since 1978. This allows recovering
the dGDP time series back in time using the strong statistical link between CPI
and dGDP (1.22dGDP = CPI) , as shown in Figure 1.
This observation naturally leads to the
assumption that real GDP in the United States is biased by the change in
definition of the GDP deflator. (According to “Concepts and Methods of the U.S.
NIPA” the growth rate of real GDP is the growth rate of nominal GDP reduced by
the overall change in prices as expressed by the GDP deflator or the
economy-wide price index.) The Bureau of
Economic Analysis warns economists that the real GDP time series is incompatible
over time. What is the consequence of this bias to the long-term economic
trends? One can correct real GDP time series for the definitional change and
estimate the change in trend.Figure
2 shows real GDP and real GDP per capita in the USA from 1929 to 2013. The
latter time series has rather a linear trend since 1929 with Rsq. =0.97. The real
GDP series deviates from the long term exponential trend since 2000 – the year
then the rate of population growth fell below 1% per year.
In Figure 3, we correct real GDP per capita
for the difference between CPI and dGDP after 1977 and compare the original and
corrected time series. One can see that the corrected curve has Rsq.=0.99 and
does not deviate from the long-term trend. Currently,
the corrected growth rate is slightly below the long-term trend. (Obviously, we
could correct the period before 1977 and obtain the same statistical result.Statistically,
the Solow model (constant returns to scale) implying the exponential GDP per
capita growth is wrong.
Figure 1.Cumulative rates of CPI and dGDP inflation,
original and scaled by a factor of 1.2.
Figure 2. Real GDP and real GDP per
capita in the USA from 1929 to 2013. The latter time series has rather a linear
trend since 1929. The real GDP series deviates from exponential trend since
2000 – the year then the rate of population growth fell below 1% per year.
Figure 3. The real GDP per capita time
series corrected for the difference between CPI and dGDP since 1978. Linear
trend is obvious in the corrected time series. Currently, the growth rate is slightly
below the long-term trend.
These days sanctions and
retaliation is a hot topic. The first round is over and we will
likely observe escalation well supported by political rhetoric.In the long run, the system of world trade
falls with acceleration. The problem is
not the current ping-pong with billions lost. The root problem is the political
coup de grace to the overall trust and confidence between business agents. It is not clear how to behave and calculate
risks if the level of loss is out of control.
Dark ages knock the door - claims in WTO will increase in number and
volume. It is not excluded that WTO will be paralyzed in a few months.
When calculating the outcome of sanctions
political leaders focus on some simple figures of immediate loss for both sides. The problem
is that they ignore real economic forces underlying the reaction of complex
economies to any major disturbance.The
first response of the country imposing sanctions might seem minor when expressed
in Euro, but it makes not only immediate harm but changes business risks throughout
the whole economy. The new profile of economic risks affect financial system
by increasing risk premium and slowing business. The whole economic system, especially in the years of slow recovery, might sink into another recession
period before reaching a stable growth path. Political elites feel this
possibility, which is dangerous for them in terms of troubles for elections, and
likely react wrongly by new sanctions mainly supporting the emotional side of punishment. A new round of sanction will likely increase
the level of economic and financial risks exponentially. The only benefit is
that the country under sanctions will suffer more.
As in boxing, the heavy-weight winner is always in
bruises and own blood. But who cares when brain is damaged
A year ago we presented
a description of secular fall in the labor force
participation rate, LFPR, measured by the Bureau of Labor Statistics. The LFPR
(the portion of people in labor force) for the working age population (16 years
of age and over) has been on a long-term decline since 1995. We predicted the
fall down to 59% by 2025. Here we revisit this projection and find that our
forecast was correct – the rate has decreased by 0.6% (from 64.4% to 62.8%). This
is a dramatic drop considering the level of labor force of 155 million.
Following the Kondratiev wave approach
(the Russian economist Kondratiev introduced long-period (50 to 60 years) waves
in economic evolution – see Figure 1) we interpolated the observed LFPR curve
by a sinus function with a period of ~70 years. We added 11 LFPR readings published
since July 2013 and show the updated curve in Figure 2. New data fit the predicted
curve.The trough of the model function
is expected in 2030 and the bottom rate is 58.5%.
Figure 1. The Kondratiev wave
Figure 2. The actual LFPR curve (red) and that predicted
by sinus function with a period of ~70 years.
Definitely, the current events in Ukraine
will affect the evolution of population. The World Bank expects 79% of the 2010
level in 2050, as Figure 1 depicts. Twenty
one per cent of population will be lost.
Figure 1. Depopulation of Russia, Japan, and
Ukraine. All curves are normalized to their respective values in 2010. Ukraine will reach 79% by 2050
Income inequality is a hot topic for professional
economists and lay public. Piketty’s book Capital in the Twenty-First Century
(2013) attracts common attention and discusses income distribution between
labor and capital. The root concern is related to increasing share of capital
income. We made some comments
on this topic showing that capital does not eat from the part of labor income
but converts corporate income into personal income. Piketty projects some further
growth in the proportion of capital income.
Here we present an extremely simple observation which bans any further
growth in the capital ‘s share of income. Figure 1 displays the evolution of
national income (NI), i.e. the sum of labor and capital income, and personal
income (PI), both reported by the Bureau of Economic Analysis. In the 1970s, the difference was 10% and then
stared to decrease. This is the period which Piketty highlights as the era of
capital income, i.e. all increase in the share of personal income was appropriated
by capital. Since 2011, there is no room
for further growth in the share of capital income – all national income is
distributed as personal income. There is no other source of income, except may
be decrease in consumption of fixed capital (CFC). There is nothing to share
Evolution of national income (NI) and personal income (PI) both normalized to
Gross Domestic Product. Currently, they are almost identical.