Catching Up Part 2

I got a hot new idea for a post this week that looks at how other countries are catching up to the US. The idea stemmed from the thought that the world has changed a lot, and many of the economic relationships between other countries and the US might need to be revisited given the shifts in relative economic success. For example, most of our free trade agreements are pretty old and likely reflect the relative poorness of some countries. So I downloaded a bunch of data and then got this sneaking feeling I had already done this topic before. And lo and behold, I did -- back on December 5, 2017.

Since I spent a good bit of time downloading this data I decided to plow ahead and call this one Catching Up Part 2. In Part 2, I focus on GDP per capita in dollar terms. This means I am focusing on what the average person makes or earns in each country. (Warning -- the next few sentences in this paragraph are basically footnote material. You can easily skip to the next paragraph if this kind of material bores you.)  If GDP per capital increases, that means GDP is growing faster than population and it means the average person is doing better economically. Putting each country's amount in dollars means that changes in the exchange rate are reflected in the resulting numbers. Presumably these exchange rate changes help to purge any impacts of relative price changes. That is, if GDP per capita is growing for a country only because of prices, then its exchange rate would depreciate and essentially nullify the impacts of the price changes. I use market exchange rates instead of so-called purchasing power parity rates. (Talk about boring!)

Part 2 also divides the changes in per capita GDP into two time periods -- from 1960 to 1979 and from 1980 to 2016. The World Bank data starts in 1960. I would have preferred to start earlier but the data isn't there. I chose 1980 because so much happened in the world after that date -- including the break up of the Soviet Union, China's emergence in world trade, and many political and economic changes in Latin America. You might think of these two time periods as Post-World War II and Globalization.

The main question posed here today is to what extent the rest of the world caught up to the US economically since WWII and since the onset of Globalization. I chose 17 countries to compare against the USA. The gorgeous table below has several columns. The first three columns contain the GDP per capita for each country in 1960, 1980, and 2016. The next three columns show the share of each country's GDP per capita relative to the US in each of those years. For example, in 1960 the number for Luxembourg is 0.75 meaning Luxembourg's GDP per capita was about 75% of the US GDP per capita in 1960. Notice that by 2016 it had risen to 1.75 or 175% of US GDP per capita. That's a huge increase. The US economy grew by 19 times over that time period. Luxembourg's economy grew 44 times! Note: Luxembourg is a tiny place and was included because of this spectacular result. It used to be a steel-making dynamo but is now a center for finance, knowledge, and space exploration. Enough about Luxembourg.

• What about China? The table shows that in 2016 China's GDP per capita was barely above $8,000. Yes, China is a huge economy but it also has a huge population. Inasmuch, the average person in China makes a lot less than a German ($42,161) but considerably more than the typical Indian ($1,709). Notice that China's main growth came after 1979 -- the share of US went from 3% in 1960 to 2% in 1979 only to rise to 14% in the Age of Globalization. Clearly there is a huge catch-up of China to the USA between 1980 and 2016. 
• Contrast China to Germany's share of the USA. Germany began in 1960 at 91% of the USA, rose a bit more in 1980 to 96% and then fell to 73% of the USA in 2016. Clearly German growth per capita was less than the USA in the Age of Globalization. Many countries were catching up to both Germany and the USA. 
• Several countries gained against the USA in both time periods -- South Korea, Israel, and Chile. Of those, South Korea's advance was dramatic from 5% to 14% to 48%. 
• Japan is interesting because that country had the highest catch-up for the whole time (up by 52%) but nearly all of that occurred in the 1960 to 1979 time period. Its economy slipped relative to the USA from 1980 to 2016. Several other countries had the same pattern -- first rising, then falling against US growth: United Kingdom, France, Mexico, Iran, Canada, and Germany. 
• Argentina, Canada, and Germany were the only countries among this group to have a lower share of USA in 2016 than in 1960. Argentina's share fell by 17%, Germany's by 18%, Canada's by 3%.
• Showing greater than a 10% catchup were Luxembourg, Japan, South Korea, United Kingdom, Israel, and China. 
• Data for Russia and Japan are not available for 1960 and 1980. See the table notes. Vietnam has shown some catchup since 1985. 

The world is catching up to the USA in terms of GDP per capita. In some cases, the result is dramatic. Whether it is relations with China or the European Union, these differences can matter. The world has changed and our larger economic relationships should reflect these changes. Perhaps the US has spoiled some countries by letting them bend the rules. It won't be easy to change long-term habits. But it is worth a try.

https://knoema.com/jesoqmb/gdp-per-capita-by-country-statistics-from-the-world-bank-1960-2016?country=United%20States Real GDP Per Capita in 1960,1980, and 2016 In Dollars and  As a Percent of the USA And Change from 1960 to 2016 Source: World Bank

							Change
	1960	1980	2016	1960	1980	2016	60-16
US	3,007	12,598	57,638	1.00	1.00	1.00
Lux	2,242	17,114	100,739	0.75	1.36	1.75	1.00
Japan	479	10,332	38,972	0.16	0.82	0.68	0.52
Korea	158	1,704	27,539	0.05	0.14	0.48	0.43
UK	1,380	10,032	40,412	0.46	0.80	0.70	0.24
Israel	1,229	6,229	37,180	0.41	0.49	0.65	0.24
France	1,338	12,713	36,857	0.44	1.01	0.64	0.19
China	90	195	8,123	0.03	0.02	0.14	0.11
Brazil	210	1,940	8,650	0.07	0.15	0.15	0.08
Chile	533	2,577	13,793	0.18	0.20	0.24	0.06
Mexico	342	2,802	8,209	0.11	0.22	0.14	0.03
Iran	192	2,440	5,219	0.06	0.19	0.09	0.03
India	81	264	1,709	0.03	0.02	0.03	0.00
Canada	2,295	11,135	42,348	0.76	0.88	0.73	(0.03)
Argentina	1,149	2,738	12,440	0.38	0.22	0.22	(0.17)
Germany	2,751	12,092	42,161	0.91	0.96	0.73	(0.18)
Russia	na	3,429	8,748	na	0.27	0.15	na
Vietnam	na	231	2,171	na	0.02	0.04	na
Russia is 1989; Vietnam 1985

Nero Fiddles as Rome Burns

As I was writing last week’s post about Macroeconomic Fuzziness, it occurred to me that there are some things that are not so fuzzy. It not only made me think of Nero but also reminded me of a book written by Herman Hesse titled Journey to the East. A traveler boards a train taking him to a very clear destination. During his travels, however, the traveler gets off and on the train. Somehow the destination got obscured each time, and he found himself lost or moving in the wrong direction. Luckily, he found his way back to the train and moved again towards his destination.

Hesse was writing about spiritual things, but this story says much about macroeconomic policy. There is nothing so fundamental to survival and standard of living as economic growth. Whether the location is Catalonia or California, the truth is that economic growth makes everything easier. This should not be interpreted to say that economic growth is everything. It isn’t. But it is to say that without economic growth, everything else struggles. When the economic pie is growing, we might fight over our share of the increase, but when the economic pizza stays the same, the only way for Jim to get more is for Toni to take less. Like Hesse's traveler, we often get lost and forget that growth is so critical. 

Inasmuch, it is important to keep economic growth on the front burner. It does not have to grow at a lightning pace, but it does have to grow enough to keep us out of each other’s hair. Nowadays, we keep referring to populism. I looked at a couple of definitions of populism and they contained the words “ordinary people”. Populist policy is aimed at improving the lives of ordinary people. It follows that economic growth is a perfect part of populism because there is no way to improve the economic situation of ordinary people without it.

Yet, we hem and haw. Sometimes Republicans appear to be helping rich people at the expense of ordinary people. Sometimes Democrats appear to be assisting minorities at the expense of ordinary people. And these Republicans and Democrats often have good reasons to be doing these things. But if they go too far and ordinary people are injured, then they make their complaints known. And so, we get back on the train and head in the right direction.

That brings us to our present government. I am told repeatedly that this government is populist. But I don’t see it. I do see some smatterings of policy supporting economic growth. I applaud those. But then I see just the opposite. Most recently, the proposals relating to protectionism seem to fly in the face of economic growth. I can’t find a single rational explanation for why one would want to save a few thousand jobs (steel and aluminum) in America while at the same time destroying tens of thousands of jobs (drink and auto manufacturing and other users of steel and aluminum) in America. 

Maybe the political optics of helping some manufacturing workers seems attractive to some politicians but surely this cannot help economic growth. If other countries retaliate against the US, then the gloom spreads to many other US firms that export to those countries.

Or better said, how does protectionism fit the description of populism relating to ordinary people? Or worse, how does protectionism fit in with anything good for the USA?

This story is not hard to understand. Local manufacturers of steel and aluminum want less competition. They want to be freer to charge higher prices. To whom do they charge these higher prices? They charge these higher prices to all those companies in the US that use steel and aluminum to produce Miller Lite beer and Ram Macho Power Wagons. Then these companies pass along these cost increases to ordinary people. But let’s not stop there. Our tariffs on foreign products make countries like Canada and Mexico wonder what it means to have a free trade agreement. Any country wounded by these tariffs will ponder assessing similar taxes against products from the USA. So guess what happens to ordinary people who work to produce goods going to those countries?

The world is a tough place. Companies and countries cheat and skirt the rules of international trade. It is always easy for a politician in any country to promote protectionist policies. But do they really work? We have had subsidies against imported steel in the past. Yet steel is still not viable and needs yet more protection.

I looked at employment data from the Bureau of Labor Statistics for the primary metals industry. These numbers include employees in the production of iron, steel, and aluminum. Clearly, this is an industry with declining employment. From 1990 to 2017, the number of jobs decreased by 317,000, or 46%. During that same time, all US manufacturing jobs declined by 5.2 million, or 30%. All private sector jobs in the US, in contrast, increased by 33 million, or 36%. It makes one wonder what can be done in the way of tariffs and protectionism to an industry in job decline for more than a quarter of a century. If protectionism is our game, then how do we best help ordinary people?

That brings me to my final point. There are ways we can create growth. There are ways we can augment and develop a skilled labor force that is the envy of the world. But guess what? The more we get diverted into arguing about the pros and cons of protectionism, the more time we are wasting with respect to moving this parade forward. Is anyone seriously putting forth proposals to permanently expand employment opportunities in the USA today?

            Year               Primary Metals

                                    Employment

                                    In thousands

            1990              689

            1995              642

            2000              622

            2005              466

            2010              362

            2015              392

            2017              372

https://data.bls.gov/pdq/SurveyOutputServlet

Out of the Economic Wilderness

Things go in stages. I remember a time when I put a lot of gunk on my hair so it would stand up straight in what was known as a flat top. Then I had a wave. The Air Force preferred something closer to my scalp. Post-Air Force, I let it grow for about four years. My hair had a lot of stages. Today, well, there are a few spots missing here and there.

And so it is with economic thought. I had the luck of taking a wonderful course in the history of economic thought at the University of North Carolina. A main goal of that course was to see that economic thinking evolves over time and very much reflects the natures and problems of a given time or place. This recognition of the temporary nature of economic ideas gives one some confidence that whatever the prevailing wisdom might be today, it is sure to be supplanted by something else in the near future.

As a graying economist, I have seen lots of change during my career. When I was at the University of Arizona getting a masters degree (while stationed in Tucson with the Air Force), the bravado of Keynesians was revealed in their confidence about the accuracy of forecasts of Keynesian models. Keynes had reacted to the failure of previous so-called Classical Models to explain the Great Depression. But it was the eventual failures of Keynesian models that led to a host of competing theories by unreconstructed Keynesians, monetarists, and supply-siders.

Today, we have a mish-mash of models with elements of each of those schools of thought. But there is a very clear and common thread among them that focuses on the apparent short-run instability of advanced industrial (rich) nations. We argue among ourselves about the proper policy in a given country at a given time but the argument is framed within a short-run model that encourages us to focus on moving the economy back to short-run equilibrium. If inflation is running too hot, we try to bring its temperature back down. If the economy is languishing with high unemployment and slow growth, we give it a pep pill. The pill might be designed to alter short-run demand or supply but the focus is always on overcoming an undesirable stage of an economic cycle.

This bouncing around has gone on in the USA at least since the early 1960s when John F. Kennedy announced his famous tax cut that would move us out of a recession. Since then, we have handed the policy ball back and forth between quelling rapid inflation and stimulating recessed spending. One byproduct of this has been a dizzy economic experience. Another offshoot is a national debt that reaches for the sky. There have been a few times when the debt as a share of the economy abated somewhat, but mostly it rises and then rises more. Today, it approaches 100% of the size of the US economy and promises to go even higher than that.

I think the dizziness plus debt is wearing us out. Worse is that it is becoming more and more obvious that this preoccupation with the economic cycle is distracting us from recognizing and treating what has become the new scourge of industrial nations. Today, we debate whether the economy is too strong or too weak. Today, we debate whether or not to have stimulative monetary policy. We argue about the stimulative impact of rebuilding the nation’s infrastructure. Imagine all those workers paving during the day and spending at night! 

But the truth is that short-run policy never seems to accomplish anything as we careen from recession to expansion back to recession. And worse than that is that the experience of industrial nations has changed. Whether this change was brought about by industrialization or by globalization, the result is that we are weakened by modernity. Our ability to grow is at risk. Our main economic challenge has gone from trying to reduce the amplitudes of economic cycles to raising our long-run economic growth path. Last week I used the example of a long distance runner. Let’s try it again. You want to win the marathon. To run 26 miles at a fast enough pace to win, you don’t swallow a handful of sugar. You train hard. You build your wind capacity and your muscles.

We are familiar with the difference between short-run and long-run policies. While the richer nations have been toying with cyclical policies, the poor developing countries knew they could catch up only if they focused on long-run structural issues like energy, transportation, legal systems, and so on. Before they could provide adequate incomes and opportunities for their citizens, they had to build a modern infrastructure. Now it is the industrial countries that need to rebuild to meet the challenges of the day. We should replace our short-term focus with longer-term ideas.

What does that entail? The remedies should mirror the problems. Everyone seems to acknowledge that modern competition has reduced the demand for workers in the US and in other rich countries. Despite the fact that the US unemployment rate is very low, we acknowledge that too many people have dropped out of the labor force, taken jobs beneath their skill levels, or work part-time when they prefer 40 hours per week. This is clearly not a short-term issue especially when we know that technology is bringing robots on that might be smarter and prettier than your average macro professor.

This labor supply challenge is constantly on our minds but we process the information with old and worn-out models of the short-run. We continue to ask for more of the same policy gruel – juice up the money supply or give the middle-class a tax break. But we are not in a recession and we don’t need policies that cause the national debt to grow even more. What we need is to reorient the way we think. 

Tending the economic cycle does not create more sustainable economic growth. Economic growth is the salve that soothes but economic growth requires an understanding of how to compete in a high- tech world that wants to replace human hearts with robot brains.

We had to figure out how to evolve from an agricultural to an industrial economy. The transition was not pretty but we had to quit thinking about wooden plows and mules and focus on tractors. Now it is time to figure out how to move from the tractor to the driver-less, sun-powered robot. Arguments about traditional monetary and fiscal policy while creating mountains of debt, are not going to help. Where do we find someone to lead us out of the wilderness? Who understands that in the long-run we are not dead?

Economic Growth Confusion

Mixing apples and oranges doesn’t sound too bad until you start making an apple pie. That’s the way I feel about the careless use of terms like "economic growth". Economic growth has so many meanings that it is easy to confuse people. These misunderstandings are particularly troubling today, because of the implications for growth-caused inflation and interest rates.

It is common to discuss the growth of the economy. You can talk about national growth last quarter or last year. Or you can average it over many past years. Forecasters discuss economic growth in the coming year. All that is fine.

What is not fine is mixing these popular uses of the term economic growth with the outcomes of an economic growth model. An economic growth model’s output is probably misnamed. What it ought to be called is JD. No, that’s not right. It ought to be called "long-run economic growth". 

A growth model is a simple mathematical expression that posits that economic growth is equal to the sum of the growth rates of the labor force plus the growth of labor productivity. (Note there is something called a two-factor economic growth model but that complicates matters beyond my meager goals today). Let’s write the economic growth equation:

  Long-term Economic Growth Rate = 

  Growth Rate of the Labor Force

                         

  + Growth Rate of Labor Productivity

Don’t you just love equations?

I use the word "long-term" to make a point. This equation is NOT meant to explain or predict changes in a nation’s output (real GDP) from day to day or from year to year. It is meant to explain how our permanent or sustainable capacity to produce changes over fairly long periods of time.

You could ask, How will economic growth in the next 10 years differ from the previous 10 years? That would be an acceptable use of the growth model described above. When answering that kind of question, the growth model ignores lots of short-term distractions and focuses on what it takes to permanently alter the capacity to produce goods and services. It is inherently supply-side-oriented. Clearly how much labor you have available is critical to sustain an ability to produce. The productivity of labor matters too, and that productivity is very much influenced and determined by how the quantity and quality of capital (plant, equipment, software, etc) change.

The trouble comes when people use discussions of the economic growth equation to talk about the next year or two. Capacity growth is important to next year but so are a lot of other things. For example, low labor force participation might endanger economic growth in 2018 but to focus too much on that one indicator is to not be playing with a full deck of cards.

What is the full deck of cards? Macroeconomic models we use to explain and forecast short-term changes in output (and prices) generally focus on events and factors that impact both the demand and supply of goods and services. A tax cut for moderate income people might encourage them to spend more and therefore impact demand. An increase the energy prices in 2018 might cause the cost of running factories to increase and lead to impacts through the supply of goods and services.

The full deck of cards includes Jokers, Queens, and Kings – and anything and everything that might influence our desires to buy and to sell. Thus, it is possible and desirable to intertwine long-run supply-side factors with the many short-term factors that will impact economic growth. To ignore the short-term changes is to imperil our judgment about the short-run.

The upshot of this is that output growth next year could be much faster or much slower than the long-run model predicts. When we hear the words "capacity output", we think of some kind of physical wall or constraint. But the truth is that for a year or two, output can grow much faster or much slower than capacity. How is that possible? 

Think of a distance runner who knows his sustainable pace for the long race. Call that long-run capacity growth. But think what happens at mile 17 when his arch rival moves ahead of him. For a time, he may run much faster than his overall pace to psychologically attack that rival. If he tries to sustain this high rate, he will run out of gas. But he can dig deep for a little while. Similarly, capacity might be growing at 2% per year but the economy could grow faster than that for a little while.

In the economy, labor force and productivity determine the sustainable long-term pace. But in the short run you can jam more workers into stores and factories than can be sustainable. Think of December when so much output gets sold. That’s not sustainable over the whole year.

The main confusion today is about how faster economic growth might influence such things as inflation and interest rates. Suppose spending kicks into higher gear while capacity moves like a snail. In that case, one might predict stresses leading to higher interest rates and inflation. Instead, suppose spending grows faster while short-run supply does the same. In this case, the economy is not stressed and there may be no additional pressures on inflation and interest rates.

Energy, business deregulation, some of the elements of tax reform, as well as the residual impacts of a global surplus suggest a national supply response that will not bring along the usual increases in wages, interest rates, and inflation. At least not right away. All this could change in a year or two and then we have plenty to worry about. It might be a good idea for policymakers to goose the long-run growth model faster. We will need that extra permanent capacity to keep the economy from strangling itself. 

Notice this implies nothing for the usual monetary and fiscal policy and everything about how a country improves its labor force –  its size, its quality, and its productivity. 

Confessions of a Two-Handed Economist

President Truman is famous, among other things, for saying he wanted a one-handed economist who would not say “on the one hand this, but on the other hand, that.” In other words, he didn’t always want a complete and balanced analysis – he wanted to know where things were headed. No hemming and hawing!

Truman would have hated me. I love to tell the whole story no matter how much my audience falls asleep.  I am probably a nine-handed economist. So today I am stopping all that. Today, I am one-handed, and today I will tell you what I really think. Today is the day I am part of a panel at Big Arts on Sanibel Island. So I am killing two birds with one stone – writing this blog and using this lunacy as my presentation to the grey-haired audience at Big Arts.

Sanibel Island is an absolutely wonderful place. Thanks to Chuck and Nancy Bonser, who will remain unnamed, we were introduced to this paradise located off the coast of Fort Myers, Florida. We have been going there off and on for the last 30+ years. It not only has wonderful birds to watch, shells to collect, and seafood to eat, Sanibel has a warm and wonderful group of locals who always make us feel incredibly welcome whether we are bellying up to the bar at the “office” (Sanibel Grill) or arguing politics and economics at the Sanibel Café or listening to incredible music at George & Wendy’s Restaurant and the Keylime Bistro.

Thanks to Chuckie B, I have been teaching a course and also participating in panel presentations at a place called Big Arts. I will be teaching again at Big Arts in 2018 but before that class begins, I am part of a panel today! I am supposed to talk about the future of the US economy and think I have 15 minutes to deliver a totally persuasive forecast.

So here goes. My forecast is that the US economy will grow faster in 2018 than it did in 2017. That means a growth rate in the range of 3.5% to 4.5%. All you Never-Trumpers can hang up on me now. You have better things to do than to read or listen to this. I know you were hoping for a feeble growth forecast but I am not a politician, and I am trying to be a one-handed economist today. It’s all about the economy, and as usual, you can take it or leave it.

Below are my bets that underlie this forecast. But first are the risks. Just kidding. I am not going to discuss the risks. I have only one hand today and even though there are trends that argue against me, I am going to ignore them. Take that President Truman!

First is brother Mo. Mo is short for momentum. Most of the time forecasters bet on Mo. It’s like knowing that Uncle Jason always stops at the local grocery store on his way home from work and buys one can of Rainier. He never deviates. But sometimes unexpected factors cause him to alter his pattern. Ashley might want him to stop at the Whole Foods. Whatever. On a given day it makes sense to bet on Jason's Rainier and on the economy pretty much performing like it has for the last few years. Go Mo!

Second is gathering confidence. Each year in which the economy does not fall into a recession and employment rises and inflation seems a little less likely to fall creates a floor of confidence that allows the economy to not only continue growing but to grow even faster. Confident consumers are more willing to buy and firms are more willing to produce.

Third is what is happening in the rest of the world. The US led much of the world out of the last recession and is now ready to step back and let some of the other countries pull the wagon. As many of the hardest hit countries recover and as Europe and Japan strengthen, it creates a global environment of growth to which the US benefits.

Fourth is interest rates. Many people worry that rising interest rates will nip my last three points in the bud. But I doubt that will happen. The interest rates we know and love are not controlled by the Fed. The Fed may plan to raise interest rates but that doesn’t mean that rates will behave. Telling your child that you are going to cut his allowance does not always elicit the desired change in behavior. As in the case of the errant child, interest rates are impacted by many things. While the world is getting stronger, it is still typified by an overcapacity in which supply is greater than demand. Output can expand greatly without the usual cyclical factors that raise prices, price expectations, wages, and interest rates. The data supports this view. Last week I showed a graph that questions if and when a new Fed policy to raise interests will actually lead to that result. It's definitely not a slam dunk.

Fifth is geopolitical. My observation as a kid was that bullies loved to harass kids who would not fight back. Bullies often stay away from kids who will dish out at least a little punishment. The US is saying some tough things to the world’s bullies – I don’t need to name them since it is pretty obvious who these bullies are. Some of you worry that this will lead to war and some really horrible consequences. I don’t. I don’t think our government wants war any more than previous governments did. But our government is doing some things that make us less easy to bully. So I am betting that there will be a lot of noise about US defense and security and very little negative reaction that might put my growth forecast in jeopardy.

Sixth is "da Market". The past changes in stock market indexes cannot be ignored. A lot of wealth has been created. While uncertainty about the future means we won't go on a spending spree, it is hard to ignore those trillions of dollars accumulating in our financial statements. Spending some of those wealth increases will add to the party. Another aspect of rising stock prices is the falling cost of capital. The higher are stock prices the lower is the cost of raising a given amount of capital. With interest rates stalling and stock prices rising, it will be a great time to buy plant and equipment. 

Finally, I like that the pendulum is swinging. Government financial regulation, climate change policy, other EPA rules, and other government regulations on business can move a wee bit away from where they were heading in the past eight years without causing the world to explode. I know some of you want ever more progress on various social policies and government regulation. You have good hearts and smart minds. But I don’t think you know enough about the effects of economic growth on all the things you cherish. I am, therefore, happy to see the pendulum swing back a bit with the hope it will generate growth without harming the future of the US and the planet.

Notice I didn’t say much about tax reform. In my humble opinion it might be eighth in the list of seven I just discussed. It should help economic growth but it is such a hodgepodge of good things and gimmicks, I am not ready to pronounce the tax reform as the greatest thing since sliced bread. No, I am not crazy about its implications for the national debt. 

I stuck my neck out. You are invited to chop away. Hope you have a wonderful 2018!

Catching Up to the USA 1990 to 2017

Happy December!

I had so much fun last week with data I decided to do even more this week. This time I have some tables to discuss and they need a little explaining. But first, a little background. The idea today is to shed some light on how much the world has changed in the last 28 years. My data starts in 1990 and looks at changes through 2017. The data come from the International Monetary Fund; it's their measure of real GDP per capita. RGDP per capita is one way to measure changes in the economic welfare of the average person.

This sort of cross-country comparison is not easy. I chose per capita real GDP because it seems closest to the buying power of people in these countries. Country comparisons usually require conversions of non-US currencies to the dollar so all the GDP figures below have been translated to dollars. It is traditional for longer-run comparisons to use an exchange rate called the purchasing power parity value of the exchange rate to the dollar. The IMF used the 2011 PPP value of the dollar for these comparisons. Yes, using PPP is highly debatable but I am sticking with it!

Much has happened in the world since 1990. The Soviet Union imploded, and the Berlin Wall came down. Globalization re-started. Many free trade agreements were consummated. The year 1990 was a time when the USA had a considerable lead on most countries in terms of economic size and competitiveness. Home Alone was the most popular film in 1990, and Windows 3 was released by Microsoft.

Table 1 lists 36 countries I selected to compare with the US. In 1990, real GDP per capita in the USA was nearly $37k. Right behind the USA in 1990 were Germany, Italy, Canada, France, and Japan. Saudi Arabia was ahead of all these countries with a value of $46k. Among those at the bottom in 1990 were two countries freed from the Soviet Union (Lithuania and Latvia) and three Asian countries (China, India, and Vietnam).

Table 2 measures the growth of real GDP per capita of these same countries between 1990 and 2017.  During that time period US per capital GDP increased to almost $54k and grew about 2.5 times. Twenty-two of these countries grew faster than the USA. But three stick out in the list for growing more than the rest, with China growing 10 times between 1990 and 2017. You might say that since the per capita real GDPs of those countries were small in 1990, they had the chance to grow faster and that would be true. But notice that not all of those countries with lower incomes in 1990 grew so fast. Obviously the speed demons had something special going on that helped assist the growth. Latvia and Estonia took advantage of the dissolution of the Soviet Union. Several Asian countries -- especially China, Vietnam, and India -- showed remarkable ability to change and grow.

Table 3 focuses on how fast this group of 24 is closing in on the per capita RGDP of the US. I did a double-take and then some research just to check the top line of Table 3 that shows Ireland's per capita real GDP was $66K in 2017. Ireland's value went from 60% of the US in 1990 to 120% in 2017. Now that is catching up! Where's the Irish whiskey? I am ready to drink to that. No offense intended to JD.

The order of countries in Table 3 is in terms of how much each country caught up to the US. Taiwan is second in the table because it went from 40% to 80% of US per capita RGDP. Countries that closed the gap on the US the most were Ireland, Taiwan, S. Korea, Lithuania, China, Latvia, Poland, Turkey, Vietnam, India and Israel.

Mexico is one of the countries that did not close the gap with the US. Mexico's per capita RGDP was about 30% of the US in 1990 and it remained at 30% in 2017. Canada's values were larger than Mexico's but Canada did not gain on the US either, remaining at about 80% of the US in 2017.

Some countries slid downward. For example, the bottom of the chart is taken by Saudi Arabia whose per capita RGDP was 120% of US in 1990 and fell to 90% in 2017. Other sliders were Italy, Venezuela, Greece, Japan Russia, France, S Africa, Brazil, Haiti, and Germany. Recall, the US grew by 2.5 times in those 28 years. These last countries grew slower than that.

There are many factors that contribute to a country's growth in real purchasing power. Today's blog post does not explain why some countries grew faster than others. But it does show quite a disparity in performance over a 28-year time period. We are not all the same in relative terms as we were when we watched Home Alone in 1990. These differences will reflect the bargaining positions and powers as trade and other relationships are fashioned in the years ahead. Understanding changes in economic power might be useful as we negotiate in the future.

Real GDP Per Capita (Purchasing Power Parity)

Source: IMF: World Economic Outlook Database October 2017

Table 1

Country	1990	2017
Argentina	11,225	18,844
Brazil	10,562	14,127
Canada	31,411	43,875
China	1,515	15,151
Colombia	7,523	13,174
Egypt	6,848	11,842
Estonia (1995)	11,003	28,684
Ethiopia	644	1,926
France	30,421	39,691
Germany	32,067	45,757
Greece	21,442	25,314
Grenada	7,210	13,470
Haiti	2,027	1,650
Hungary	17,015	26,348
India	1,802	6,538
Iran	11,571	18,255
Ireland	21,208	66,196
Israel	20,065	33,037
Italy	30,969	34,606
Japan	30,362	38,878
Korea	11,633	35,897
Latvia (1995)	8,298	24,873
Lithuania (1995)	9,307	29,105
Mexico	12,411	17,753
Poland	10,163	26,658
Puerto Rico	22,286	34,537
Russia	20,801	25,427
Saudi Arabia	45,643	50,365
South Africa	9,899	12,215
Spain	23,662	34,788
Taiwan	15,546	45,412
Turkey	10,834	24,109
UK	27,077	39,755
US	36,999	54,223
Venezuela	14,786	11,290
Vietnam	1,473	6,267
Table 2
Country	1990	2017	Change
China	1,515	15,151	10.0
Vietnam	1,473	6,267	4.3
India	1,802	6,538	3.6
Lithuania (1995)	9,307	29,105	3.1
Ireland	21,208	66,196	3.1
Korea	11,633	35,897	3.1
Latvia (1995)	8,298	24,873	3.0
Ethiopia	644	1,926	3.0
Taiwan	15,546	45,412	2.9
Poland	10,163	26,658	2.6
Estonia (1995)	11,003	28,684	2.6
Turkey	10,834	24,109	2.2
Grenada	7,210	13,470	1.9
Colombia	7,523	13,174	1.8
Egypt	6,848	11,842	1.7
Argentina	11,225	18,844	1.7
Israel	20,065	33,037	1.6
Iran	11,571	18,255	1.6
Puerto Rico	22,286	34,537	1.5
Hungary	17,015	26,348	1.5
Spain	23,662	34,788	1.5
UK	27,077	39,755	1.5
US	36,999	54,223	1.5
Mexico	12,411	17,753	1.4
Germany	32,067	45,757	1.4
Canada	31,411	43,875	1.4
Brazil	10,562	14,127	1.3
France	30,421	39,691	1.3
Japan	30,362	38,878	1.3
South Africa	9,899	12,215	1.2
Russia	20,801	25,427	1.2
Greece	21,442	25,314	1.2
Italy	30,969	34,606	1.1
Saudi Arabia	45,643	50,365	1.1
Haiti	2,027	1,650	0.8
Venezuela	14,786	11,290	0.8
Table 3
Country	1990	2017	Rel to US	Rel to US	Chg Rel
Ireland	21,208	66,196	0.6	1.2	0.65
Taiwan	15,546	45,412	0.4	0.8	0.42
Korea	11,633	35,897	0.3	0.7	0.35
Lithuania (1995)	9,307	29,105	0.3	0.5	0.29
China	1,515	15,151	0.0	0.3	0.24
Latvia (1995)	8,298	24,873	0.2	0.5	0.23
Estonia (1995)	11,003	28,684	0.3	0.5	0.23
Poland	10,163	26,658	0.3	0.5	0.22
Turkey	10,834	24,109	0.3	0.4	0.15
Vietnam	1,473	6,267	0.0	0.1	0.08
India	1,802	6,538	0.0	0.1	0.07
Israel	20,065	33,037	0.5	0.6	0.07
Grenada	7,210	13,470	0.2	0.2	0.05
Argentina	11,225	18,844	0.3	0.3	0.04
Colombia	7,523	13,174	0.2	0.2	0.04
Puerto Rico	22,286	34,537	0.6	0.6	0.03
Egypt	6,848	11,842	0.2	0.2	0.03
Hungary	17,015	26,348	0.5	0.5	0.03
Iran	11,571	18,255	0.3	0.3	0.02
Ethiopia	644	1,926	0.0	0.0	0.02
Spain	23,662	34,788	0.6	0.6	0.00
UK	27,077	39,755	0.7	0.7	0.00
US	36,999	54,223	1.0	1.0	0.00
Mexico	12,411	17,753	0.3	0.3	-0.01
Germany	32,067	45,757	0.9	0.8	-0.02
Haiti	2,027	1,650	0.1	0.0	-0.02
Brazil	10,562	14,127	0.3	0.3	-0.02
Canada	31,411	43,875	0.8	0.8	-0.04
South Africa	9,899	12,215	0.3	0.2	-0.04
France	30,421	39,691	0.8	0.7	-0.09
Russia	20,801	25,427	0.6	0.5	-0.09
Japan	30,362	38,878	0.8	0.7	-0.10
Greece	21,442	25,314	0.6	0.5	-0.11
Venezuela	14,786	11,290	0.4	0.2	-0.19
Italy	30,969	34,606	0.8	0.6	-0.20
Saudi Arabia	45,643	50,365	1.2	0.9	-0.30

IMF says Global Economic Upswing Creates a Window of Opportunity

The International Monetary Fund publishes a world economic outlook every six months. The latest one was just published this month (https://blogs.imf.org/2017/10/10/global-economic-upswing-creates-a-window-of-opportunity/ ) and is entitled "Global Economic Upswing Creates a Window of Opportunity".

This report is not for the faint-of-heart as it is long and treacherous and filled with words and phrases like "raising potential output" and "strengthening international cooperation". Far be it for me to summarize the most current document but I thought I would copy a key table (see the bottom of this post) and then go on and on a bit about some of that.

First, notice that the title of the table says the global recovery is continuing at a faster pace. Yet, the top of the table says that after growing at 3.6% in 2017 (technically this is a forecast since we have not yet shopped for Halloween much less Thanksgiving or Christmas in 2017) we will grow at 3.7% in 2018. For those of you who know a little about statistics, I doubt that 3.7 is statistically different from 3.6.  For those of you who were never punished by a Stats class and don't know a standard deviation from your local neighborhood deviant, this means that the entire publication is suspect. While the thousands of words in the report support this view of faster growth, we all know that the main table of the report says the world will not grow faster next year. It might grow faster. It might grow slower. And Humpty Dumpty had a great fall.

Read down farther and you will learn the following world areas/countries will grow slower in 2018 than in 2017:

Advanced Nations
Euro Area         
Germany               
Italy                       
Spain                     
Japan                     
UK                       
Canada                 
Russia                   
China                   
Emerging Europe 
Mexico 

Given the title of the report and table say that world  growth will be faster, there must be some places that will grow faster in 2018.   The table says these places will grow faster -- the US by a smidge, France, CIS less Russia, India, Brazil, Saudi Arabia, Nigeria, South Africa, and Low Income Developing Countries.

How you can average the growth rates of the slower list with the faster list and come up with faster world growth is a mystery to me. If I was writing this report based on this table I would say that the world seems to be on its last JD of the night. Or maybe -- "While growth in our bigger world markets is stuck in first gear, we see some hopeful spots for growth in some developing countries."
         
Second is the part of the title that claims that 2018 is a window of opportunity. I recall being in high school and thinking that my bedroom window provided a great opportunity to escape in the wee hours of Sunday morning. But when was my bedroom window not a window of opportunity? And so it goes for the IMF -- why is 2018 going to be a window of opportunity that wasn't there in 2017? And the answer is that  the IMF thinks we have kicked the policy can down the road long enough because growth was too weak in too many countries. But now that so many countries are doing so much better, they will button down, quit kicking cans, and attend to important things like economic growth.

Wow --- what is the IMF smoking because I would like some of it. No, the world is not growing any faster according to their own numbers and mostly is growing faster in places like Kokomo (fictional one of the song and not the one in Indiana), Gotham, and Atlantis. And in what places will politicians in 2018 resoundingly decide that long-term economic growth is their number one priority? Watch France. Their child Prime Minister is trying such things and every union in France is suggesting that statues of Emmanuel Macron be broken into tiny little pieces.

If that isn't enough, the IMF has the audacity to imagine that this is a great opportunity for countries to get together in a pro-growth fit and further reduce trade barriers and expand international economic cooperation. Really? Have they looked around? What part of the world is not cracking up? Have they read about Spain or Brexit?  What free trade agreement is universally loved?

From the above you would think that I am either into my third JD of the morning or that I am pessimistic about 2018. I won't comment on the former since children might be reading this but I am not pessimistic. My reading of the world economy is that modest growth is good since it doesn't create huge imbalances and threaten high inflation. Momentum is our friend as more and more countries attach to a slightly stronger world economy. The biggest risks arise from the absence of what the IMF predicts -- that we will continue to kick the growth policy can down the road and countries will outdo themselves with counterproductive protectionist policies. That is -- the economy is fine -- it is the politicians that we have to worry about. Let's hope they take an extended vacation.