From blog to working paper: The link between unemployment and real economic growth in developed countries

 The link between unemployment and real economic growth in developed countries

Abstract

Ten years ago we presented a modified version of Okun’s law for the biggest developed economies and reported its excellent predictive power. In this study, we revisit the original models using the estimates of real GDP per capita and unemployment rate between 2010 and 2019. The initial results show that the change in unemployment rate can be accurately predicted by variations in the rate of real economic growth. There is a discrete version of the model which is represented by a piecewise linear dependence of the annual increment in unemployment rate on the annual rate of change in real GDP per capita. The lengths of the country-dependent time segments are defined by breaks in the GDP measurement units associated with definitional revisions to the nominal GDP and GDP deflator (dGDP). The difference between the CPI and dGDP indices since the beginning of measurements reveals the years of such breaks. Statistically, the link between the studied variables in the revised models is characterized by the coefficient of determination in the range from R2=0.866 (Australia) to R2=0.977 (France). The residual errors can be likely associated with the measurement errors, e.g. the estimates of real GDP per capita from various sources differ by tens of percent. The obtained results confirm the original finding on the absence of structural unemployment in the studied developed countries.

From blog to a working paper: Real GDP per capita: global redistribution of economic power

 I published several posts in this blog and found it appropriate to compile a working paper. I did the same trick with other papers in the past. Blogging really helps. 

Real GDP per capita: global redistribution of economic power

Abstract

Growth rate of real GDP per capita, GDPpc, is represented as a sum of two components – a monotonically decreasing economic trend and fluctuations related to population change. The economic trend is modelled by an inverse function of GDPpc with a constant numerator which varies for the largest developed economies. In 2006, a statistical analysis conducted for 19 selected OECD countries for the period between 1950 and 2003 showed a very weak linear trend in the annual GDPpc increment for the largest economies: the USA, Japan, France, Italy, and Spain. The UK, Australia, and Canada showed a slightly steeper positive linear trend. The 2012 revision showed that the positive trends became much lower and some of them fell below zero due to the Great Recession. The fluctuations around the trend values are characterized by a quasi-normal distribution with heavy and asymmetric tails. This research revises the previous estimates and extends the set of studied countries by economies in East Europe, Latin America, BRICS, Africa, and Asia including several positive outliers with extremely fast growth. The change in GDP definitions and measuring procedures with time and economic source is discussed in relation to the statistical significance of the trend estimates and data quality requirements for a consistent economic model. The relative performance of all counties since 1960 is compared according to the predicted total GDPpc growth as a function of the initial value. The performance in the 21st century is analyzed separately as revealing potential and actual shifts in the global economic powers.

Why I fully support Biden

 1. President Biden is supporting and is supported by the liberal community as a perfect representative of Democrats. In the 20th century, the liberal idea was changing from economic to personal sexual orientation rights. One can check the most recent history when the same Dems were nastily joking about homosexuality. We could expect further changes in the liberal ideas with the current approach fully denied. The essence of liberalism is permanent progress. It never stops. I support this evolutionary development. The future is hard to see, and "we do not know what we do not yet know".  Science is all about progress in the understanding of nature, human beings, and society.  

2. As a physicist, I appreciate very much the approach "we choose truth over facts". I would like to join the Biden and Co supporters in the process of truth definition. Hard sciences will be needed in this process in order to avoid choosing "facts" by mistake. Only scientists can be experts in the adequate selection of facts to be rejected in order to have naked truth. 

3. According to J.Haidt, liberals prefer fairness (proportionality) and care (harm) as moral foundations. They do not like authority, loyalty (ingroup), and divinity (purity) as moral foundations. In general, police and army are based on the latter three. Imagine a liberal policeman who chooses his own freedom over the rules and regulations to obey. The army is the same type of organization with the overwhelming dominance of authority, loyalty, and purity (remember the National Guards sleeping on the concrete floor in the Capitol). Interestingly, new defense secretary Austin is an almost full anagram of Stalin who purged the top Red Army command staff just before 1939. It definitely helped to win WWII.  I am sure that the liberal approach to police and the army will strengthen their order and power.

4. Biden is a major part of the geriatric team driving the US. I met some Soviet Politbureau members in the 1970s and found these old gentlemen as wonderful people. I am sure that their wisdom was the best for the Soviet Union to prosper. 

5. I find the measures against Trump supporters as adequate and supporting the integrity of the nation. 

Why I fully support transgender participation in female competitions

This is a clear problem of equality. More transgenders in women's competition will make them more attractive to the broader audience. These competitions will be closer to male versions. The participants of the women's games with transgenders will earn more money. I especially welcome transgenders in tennis where progress and success depend on speed and strength.  I am sorry for the other direction transgenders, who will not have an advantage in the new gender company.  

   

It is highly likely that real economic growth in the USA in overestimated by 26% since 1979

We discussed the problem of inflation definition in the USA in many posts (e.g., this one). The principal finding is that the CPI and GDP deflator, dGDP, started to deviate in 1979 due to the introduction of new price inflation definition. Figure 1 presents the CPI and dGDP and gives a clear understanding that the dGDP is just the CPI divided by 1.22. This is an important observation for an unbiased real GDP per capita estimate in the USA. The new definition is highly likely was introduced to obtain a larger real GDP per capita than was calculated with the CPI. Figure 2 presents the real GDP per capita reported by the BEA and that recalculated using the ratio of the CPI and dGDP. One can see that the GDP per capita in 2019 should be $39,500 instead of the reported value of $49,649, i.e. only 80% of the current level.

It is highly likely that real economic growth in the US in overestimated by 26% since 1979 

Figure 1. The CPI and dGDP in the USA. After 1979, dGDP=CPI/1.22.

 

Figure 2. The GDP per capita estimates in the USA as published by the BEA and that corrected with the difference between the dGDP and CPI.

USA: Real GDP in 2020 published by the Bureau of Economic Analysis is a deep fake. Actual fall is 21.7%.

 The USA Bureau of Economic Analysis published the estimate of GDP for 2020, including Q4. Figure 1 shows the measured fall of the real GDP by 3.5% in 2020 relative to 2019. The real GDP per capita fell by 4% as Figure 2 demonstrates.  Therefore, the population growth in 2020 was 0.5% relative to 2019. One of the main economic problems in 2020 was the incredible jump in the unemployment and corresponding fall in wages and salaries. However, Figure 3 presents a reasonable drop in the Personal Consumption Expenditures which has to be directly related to personal income. Gross private domestic investment also does not demonstrate too poor performance. The question is – where the money from?

Figure 5 provides a high-level answer – the share of “compensation of employees”, which includes “wages and salaries” as the bigger part experienced 8.1% of the real GDP fall in 2020Q2. At the same time, the share of “Government social benefits to persons” increased by 10.7% of the GDP, i.e. from $3,109 billion in 2019Q4, to $3,189 bn in 2020Q1, and $5,627 bn in 2020Q2.  This gives a jump by $2.438 bn from Q1 to Q2, i.e. the well-known 2.5 trillion virus bill. This money was poured into social benefits and finally was found in the PCE. By virtue of origin, this is debt and cannot be a part of real GDP. It was not taken from the real economy as taxes. This is not the case in the USA and the PCE was calculated as if the source of income is fully internal.

Figure 6 depicts an absolute outstanding curve – the ratio of Personal Income (BEA Table 2.1) and the current dollar GDP between 2001 and 2020. In the second quarter of 2020, the ratio was 1.04 (!) with the level in normal conditions around 0.85. The personal income was above the GDP. This is the first time in the history of measurements since 1947, as Figure 7 shows. Figure 8, displays the PI growth rate: in 2009 it was -3.1% and in 2020 the PI grew by 6.3%.

The real GDP published by the BEA is not correct and one has to subtract the money added to the economy as debt. The total amount of added (debt) money is $3.952 bn if to continue the measured line in Figure 6 at the level of 0.87. For the real GDP calculation, we have to correct for the inflation between 2012 and 2020 and then obtain $3,473 bn in 2020. When subtracted from the estimated real GDP of $18,422.6 bn the corrected real GDP is $14,948 bn. In 2019, the real GDP was $19,092 bn.

 

In reality, the US economy fell in 2020 by 21.7% relative to 2019.

 

Figure 1. The growth rate of real GDP in 2020 is -3.5%

Figure 2. The growth rate of real GDP per capita in 2020 is -3.99%

 

Figure 3. The growth rate of Personal Consumption Expenditures in 2020 is -3.9%

 

Figure 4. The growth rate of Gross private domestic investment in 2020 is -5.3%

 

Figure 5. The share of  “compensation of employees” in the GDP fell from 0.616 in 2020Q1 to 0.535 in 2020Q2, i.e. by 8.1% of real GDP. The share of  “Government social benefits to persons” in the GDP jumped from 0.168 in 2020Q1 to 0.275 in 2020Q2, i.e. by 10.7% of real GDP. 

Figure 6. The share of  Personal Income in the GDP jumped from 0.862 in 2019Q4 to 0.879 in 2020Q1 and 1.048 in 2020Q2. 

Figure 7. Historically, the Personal Income share in the GDP has never been above 0.86 between 1947 and 2020. 

Figure 8. The change rate of the Personal Income. In 2020, the PI increased by 6.3%, In 2009, the fall was 3.1%.

Ovechkin ahead of Gretzky since 31.01.2021

Gretzky has 894 goals between 1978 and 1999. During these seasons there were 18669 NHL games with 62995 goals (recalculated from NHL official table). This makes 3.374 goals per game. Ovechkin plays since 2005 with a total of 18000 NHL games (including 126 in 2020-2021)  and an average of 2.668 goals per game. 

The average goals per game gives a perfect estimate of how it was difficult to score during the period of activity. During the Gretzky era, the average was higher indicating that it was easier to score to everyone in the NHL.  The share of Gretzky in the total number of goals is 1.42%, i.e. his own capability did not influence the total statistics.  Ovechkin has 1.47% of the total goals and is not responsible for the average value of 2.668. Hence, it was harder to score in the Ovechkin era since 2005. This is a direct result of the goalies' better equipment and their improving skills. 

Considering the difference in the scoring conditions for the scorers it is instructive to recalculate Ovechkin's goals to the Gretzky time conditions, i.e. to multiply 707 goals (before the match with Boston on January 31) by the ratio of average goals per game 707*3.374/2.668=894.  Therefore, goal #708  against Boston moved Ovechkin ahead of Gretzky in the equalized scoring count. If playing in the Gretzky era conditions Ovechkin would have 805 goals today. It is the same to say that if playing in the Ovechkin time, Gretzky would have only 707 goals in total.