02 September 2015
The graph below is self-explanatory. The data are from the World Bank web site.
26 August 2015
The graph below shows real interest rates from January 2001 to July 2015. It is derived by subtracting the annual inflation rate (using the Consumer's Price Index for all Urban Consumers, all items) from Moody's Seasoned Aaa Corporate Bond Yield.
It shows the real interest rate in May, June and July 2015 was 4.02%, 4.07% and 3.98%.
By way of comparison, in October 2006 the real interest rate touched 4.2%. Just a few months later the financial crisis began unfolding. In February 2007, Freddie Mac announced that it would no longer buy the most risky subprime mortgages and mortgage-related securities.
It is useful to compare this with the graph of Corrected Money Supply below, reproduced from my May 2015 post.
20 August 2015
Darwin is considered the father of evolution so it is more than a little surprising that the word 'evolution' does not occur at all in the 1st edition of The Origin of Species (1859). Nor in the 2nd, 3rd, 4th or 5th. It is only in the 6th edition (1872) that the word makes an appearance and even then it may have been only because Thomas Huxley and others regularly used the word to describe the process that Darwin had in mind.
So why was Darwin himself so reluctant to use the word? First of all there is a grammatical problem. When one talks of a person eating we mean of course that the person eats. When one talks of a person jumping we mean that the person jumps. By extension, when one talks of the evolution of a creature one means that the creature evolves. But of course creatures do not evolve. Darwin was very clear about that.
There is only one variant of the word 'evolution' in the 1st edition of Origin. It is the very last word of the book. "There is grandeur in this view of life, with its several powers, having been originally breathed into a few forms or into one; and that, whilst this planet has gone cycling on according to the fixed law of gravity, from so simple a beginning endless forms most beautiful and most wonderful have been, and are being, evolved."
Note how carefully Darwin uses the word. Creatures do not "evolve". They "have been, and are being, evolved".
Darwin is not the father of evolution. The idea of evolution, meaning the idea that the plants and animals we see around us did not always have the forms they do but were modifications of previous forms, is very old. It goes back more than two millennia. Closer to Darwin's time Jean-Baptiste Lamarck and his own grandfather, Erasmus Darwin, were evolutionists. In their view of evolution creatures "evolved". The ancestors of giraffes stretched their necks higher and higher trying to reach scarcer and scarcer tree leaves in times of drought, and their longer necks were passed on to their descendants. In Darwin's theory individuals did not change at all. It was the species that "was evolved" and this did not happen because of anything they did. By the time of the 6th edition of Origin Darwin may have felt confident that it was his idea of evolution that had triumphed and that he could safely use the word without being misconstrued. Species evolve, not individuals.
But how can species evolve without the members of the species themselves changing? Consider an example, totally imaginary of course. There is a certain deep-dwelling species of fish in the Amazon. Light penetrates with difficulty to the bottom of the muddy river, so the fish are bright red in colour, because it helps them to find their mates. One year it so happens that the Amazon shifts its course. The next year it returns to its original course, leaving a large but shallow lake in the path where it had shifted before.
The red colour of the fish which was a huge advantage earlier now becomes a big disadvantage, making them easy picking for a large population of water birds in the vicinity.
Assume that the population distribution of the fish in the lake is in the shape of the bell curve shown below.
A few fish at the extreme right are bright red. A few fish at the extreme left are nearly colourless. The rest fall in between. All are red, but of varying shades of red.
Now assume that the water birds eat up the reddest fish in the population, so that the population distribution is as below.
It is the same as the first graph but with a small chunk of fish at the extreme right end eaten up; you have to assume that they are eaten before they can reproduce. Now if you assume that the birds migrate for a few months allowing the fish population to recoup, the new population distribution will be as below. The peak of the curve and every point on it are just a little less red than before.
After this has gone on for a few tens of thousands of years the fish will have become nearly colourless. Click on the image below to see this happen.
The fish are changing colour over a period of time and this is happening although no individual fish is undergoing a change. The change in colour is being accomplished not by the fish but by the predators. This of course reminds us that Darwin's book is titled "On The Origin of Species by Means of Natural Selection" and not, as some people seem to think, "The Improvement of Species through Personal Endeavour".
Some writers, mostly of a creationist bent, have argued that evolution violates the laws of thermodynamics because more evolved life forms embody less entropy than more primitive life forms. But this is true only if you believe in a non-Darwinian kind of evolution. A refrigerator that is cooled from 30o to 0o Celsius undergoes a reduction in entropy. But for this to happen a compressor has to do work and throw heat into the surrounding atmosphere, so that the entropy of the universe as a whole is higher than before.
It is the same with evolution. Even if it is accepted that a more evolved life form contains less entropy than a more primitive life form, the reduction does not come without a cost. As our example above shows, any kind of evolution requires Nature to do a lot of work. To change the redness of our fish just a little bit, tens of thousands of water birds had to work for tens of thousands of years. Evolution is an energy-intensive process, requiring a huge increase in entropy of the universe as a whole. Biology does not contradict physics. And this follows from the fact that creatures do not evolve, but are evolved.
(Thanks to Nikhil George for help with images.)
29 June 2015
Stephen Roach, former chief economist of Morgan Stanley, has been puzzled by what he calls the "productivity paradox". "Over the past five years," he notes,"from 2010 to 2014, annual US productivity growth has fallen to an average of 0.9%. It actually fell at a 2.6% annual rate in the two most recent quarters (in late 2014 and early 2015). Barring a major data revision, America's productivity renaissance seems to have run into serious trouble."
The graph of Year-on-Year growth of Nonfarm Business Sector: Real Output Per Hour of All Persons illustrates what he says.
But if you look at the right parameters there is no puzzle or paradox. The numbers are perfectly logical as we shall now see.
As economics textbooks never tire of telling you, a worker with a backhoe can dig more mud than a worker with a shovel. The backhoe of course costs much more than a shovel, which is to say that if you want productivity you need to make capital investments. And capital investment is exactly what has been lacking in the US economy since 2007, as the graph of real net private investment to real GDP shows.
If you consider an investment of 5% of GDP the minimum required to get the economy chugging properly, then the shortfall in investment since 2007 amounts to a total of 17.5%.
When unemployment is high and the labour participation rate low, low investment does not matter so much, because there is enough capital per worker to go around. Consider, for example, a factory with 10 employees and 10 CNC lathes. When the recession began the factory let one worker go. So it could cannibalise one lathe to provide spare parts for the other nine. Or it could use two lathes to provide spare parts for the other and run the eight lathes for nine shifts a week instead of eight.
But as workers are rehired this leeway vanishes. Meanwhile, the machines that have been flogged cry for maintenance or replacement. Naturally productivity per worker falls. The fall in productivity is actually a sign that the economy is returning to normal.
Roach quotes Robert Solow's comment in 1987 that "you can see the computer age everywhere except in the productivity statistics." He then goes on to add: "The productivity paradox seemed to be resolved in the 1990s, when America experienced a spectacular productivity renaissance. Average annual productivity growth in the country's nonfarm business sector accelerated to 2.5% from 1991 to 2007, from the 1.5% trend in the preceding 15 years. The benefits of the Internet Age had finally materialized. Concern about the paradox all but vanished."
But when you look at the graph of real net private investment to real GDP you realize that the high productivity simply reflected investment that ran above the normal rate for a long time.
24 June 2015
The history of the US since 2001 is beautifully captured by the graph below. Personal Disposable Income fell after the crash but personal consumption expenditures fell even more. And seven years later the gap is not narrowing. The reason is that a large part of the US population lost years of accumulated saving in the crash and has raised its saving rate to recoup that loss. (According to the Fed's Survey of Consumer Finances 2010, the median US household's net worth fell that year to levels last seen in 1992).
Atif Mian and Amir Sufi in their book, House of Debt, ascribed the gap to households paying down debt contracted during the boom years. But as the graph below shows, the ratio of household debt service payments to disposable personal income is at its lowest level in 35 years. And still personal consumption expenditures have not recovered. So debt is clearly only part of the story.
My new ebook Macroeconomics Redefined has the full story.
P.S. The difference between the saving rates now and before the recession is about 3%. Household consumption accounts for about 70% of US GDP. Multiplying the two we get 2.1%, which is roughly the size of the gap between actual and potential GDP as per Congressional Budget Office estimates