EUCOM Economic Analysis - Part I

[Surferbeetle]

You seem to have misunderstood something.

Ok

Let's look

The technological progress I mentioned is vastly more general, not more narrowly defined than 'better machines'.

I suggest that we have a continuum of definition here ranging from industrial revolutions/exogenous inputs to better machines/technological progress. I think that we might be at different places along that continuum with our respective definitions.

The introduction of timestamps to reduce absentee rates would contribute to it, for example.

I see this example as a 'better machine', i.e. management controls

Also legislative changes affecting productivity.

'Better machine', i.e. policy controls.

Nice weather in a given year.

Unpredictable exogenous input - 'act of god'

Even higher world market prices for crops contribute to it (minus their effect on domestic inflation).

Mixture....'act of god' plus 'better machine' - farming techniques

It's so general that so many factors are placed in this leftover aggregate that it's useless in the short term.

Going to my point that exogenous inputs are unpredictable and thus difficult to model.

Nevertheless, it's great for long-term analysis.
It makes sense to calculate the rate of this technological progress of the 60's, 70's, 80's, 90's and 00's. This is the terrain of Kondratieff's long waves and seems to be exactly the same terrain as the stuff I replied to.

I would classify this as being able to be modeled, and, thus defined as 'better machine'

To use the technological progress variable I referred to may appear to be an excessive aggregation, but the topic is about technological progress caused over decades and in more than even only the entire Western world. You need a huge aggregation to match this. You cannot investigate the productivity effects of individual tools or technologies in many years and in many countries in parallel. There aren't enough man-years available for such an approach.

Look at the technological progress variable (relatively easy to get) for the G7 countries instead.

Although I am not currently aware of any papers, I wonder how long until 'big data'/cheap computing power/huge databases will sufficiently expand modeling frontiers in order to help tighten the definitions used when discussing this topic...components of economic growth...exogenous inputs vs technological progress.

I would offer Thomas Savery's work (invention of the steam engine) as an exogenous input/industrial revolution and James Watt's work as an example of a technological progress/better machine. Similarly for electricity Ben Franklin (arguable considering the recent rediscovery of the Baghdad Battery) for the exogenous input and Nikola Tesla and Thomas Edison for technological progress. Finally Alan Turing's work for the exogenous input and Steve Jobs for the technological progress description with respect to computing.

When thinking about this topic I contrast the often qualitative answers provided by economics with the quantitative answers provided by science & engineering. Although exogenous inputs are an example of a nonlinear stochastic process, IMO economics still has a ways to travel yet before it can provide satisfactory answers to the questions we pose.

[Surferbeetle]

Are there significant western governance failures in designing, gaining acceptance, and implementing changes to the social contract? Would this lead to measurable (peer reviewed) social instability? A global estimate of 60 year olds has risen from 200 million in 1950, to 760 million in 2009, and is projected to hit 2 billion people by 2050. Youth unemployment & underemployment - if nothing else - detracts from the ability to care for the 60+ demographic by reducing the amount of time to gain & hone skills and fund, via taxation, a portion of the costs the 60+ cohort has not saved for (or subjected to pension shortfalls). It would seem to follow that taxation rates would need to at least meet a transparent cost breakout of items of social value that a democratic society has agreed to fund (rule of law, education, infrastructure, vulnerable demographic cohorts, security, etc). Are there examples of western governance directly engaging the population at large in a substantive discussion regarding these topics? Switzerland perhaps?

WEF Global Risks Report, 2012, http://www3.weforum.org/docs/WEF_Glo...eport_2012.pdf

Restoring Fiscal Equilibrium in the United States, by William R. Cline, Peterson Institute for International Economics, June 2012, http://www.petersoninstitute.org/pub...esearchID=2144

How the [US] Tax Burden Has Changed [1980-2010], NYT Graphic, 29 Nov 2012, http://www.nytimes.com/interactive/2...ax-burden.html

[Fuchs]

(...), a portion of the costs the 60+ cohort has not saved for (or subjected to pension shortfalls).

It makes little to no sense to speak of savings of elderly when looking at demographic problems. My country had this fallacy in its public discourse about the topic a decade ago as well (and sticks with it), but it's still a fallacy in most contexts it's being used in.

Look, the quote is talking about the global population, so there's a perfectly closed economy (as quite safe assumption even for 2050, 2070 etc).
The elderly may have savings or not, but that's merely an indicator for allocation issues. What would they do with their savings? They would buy the period's economic output (or output that's not much older).

It makes thus little sense to discuss savings in the context of demographic change; it's much more reasonable to speak about natural GDP growth paths, capital stock, depreciation rates (share of very durable goods in capital stock) etc.
______________

My view on demographic change etc is the view of someone who has read too much about history:
Forget about the supposed problem. Humans adapt easily to changes, and especially so to slow changes. The problem almost solves itself because it's so creeping.
We might be able to consume more per capita if a larger share was working. Not going to happen. Instead, we won't get used to this 'more' consumption and thus won't really miss it more than we would miss 'even more' consumption if we had 'more'. We won't be satisfied anyway.

When thinking about this topic I contrast the often qualitative answers provided by economics with the quantitative answers provided by science & engineering. Although exogenous inputs are an example of a nonlinear stochastic process, IMO economics still has a ways to travel yet before it can provide satisfactory answers to the questions we pose.

Maybe the problem is with the questions.
Very, very, very much can be answered with economic theories older than I am. Most often economic science can say "this would be stupid because ..." and there's no real need to calculate how stupid it would be.

The problem is in my opinion more that people cannot make good use of existing economic theories. It's perfect routine for politicians to ignore economic science advice and listen to charlatans instead.

[Surferbeetle]

Fuchs,

Appreciate the discussion on growth & development. 2013 is shaping up to be a very interesting year in that the struggle over (scarce?) resources by various factions becomes ever more visible. Apparently, Malthus may be alive and well.

Europe: Burnt and abandoned, by James Fontanella-Khan, January 2, 2013 6:44 pm, Financial Times, www.ft.com

Between 2007 and 2011, annual investment in the 27 countries of the EU dropped by more than €350bn, vastly outpacing falls in other economic indicators, according to a study published last month by McKinsey, the US consultancy. The decline was 20 times the fall in private consumption, for example, and four times the decline in the overall economy.

That lost investment means companies in Europe will not generate €543bn in revenues they would otherwise have churned out between 2009 and 2020, the study estimated.

Obama Fights Republicans on Debt as Investors Seek Growth, By Mike Dorning - Jan 3, 2013 6:19 PM MT, Bloomberg News, http://www.bloomberg.com/news/2013-0...ek-growth.html

Fresh from a budget fight so raw that the Republican speaker of the U.S. House cursed the Democratic leader of the Senate outside the Oval Office, President Barack Obama and Congress are heading for an even bigger confrontation over raising the nation’s debt limit.

U.S. Treasury bond investors -- who most directly bear the risk of a government default -- aren’t alarmed. In a sign of the disconnect between Washington and Wall Street, investors remain confident the two sides will compromise rather than inflict what Obama called “catastrophic” consequences. Yields on long-term U.S. debt are near record lows.

“Heretofore, they’ve been playing with a cherry bomb in economic terms,” said Steve Bell, a former Republican Senate budget aide. “When they start playing with the debt ceiling in February, they are starting to play with C-4,” he said, referring to the powerful plastic explosive material.

The decline of western dominance, by Samuel Britton, January 3, 2013 5:31 pm, Financial Times, www.ft.com

Indeed, what has to be explained is not the west’s looming relative decline but its temporary pre-eminence. Of a world population approaching 7bn, the US and western Europe together account for a mere 770m. Their gross domestic product per head – a very approximate guide to living standards – is three times the world average. Such discrepancies can hardly be expected to last in an increasingly globalised planet. In 1500, just after Christopher Columbus’s voyages of discovery, China and India were both estimated to have had a total GDP considerably higher than western Europe’s and GDP per head only slightly lower. Earlier still, in about 1000, living standards were fairly uniform – and low – throughout the world but the estimates show China slightly in the lead.

Many commentators see the reverse flow out of developing countries as unnatural, by which they mean immoral. There are clearly special factors at work such as state management of the Chinese economy and the large surpluses of oil producers. But these do not look like going into reverse at all soon, and we had all better learn to live with the new direction of capital flows, which is apparently known in academic literature as the Lucas Paradox.

The intriguing question is what the emerging nations will do with their accumulating surpluses. There are already many signs that they have had their fill on holdings of dollars and other western currencies that earn low or even negative real interest rates. The next stage is both portfolio investment and direct investment in areas such as Africa, but also in America and Europe. For the moment, they can be assured of a welcome but what will happen as their stake grows?

There are almost bound to be tensions. Zillions of words have already been written about the declining real power of western governments. Even more will need to be written as they become responsible for ever smaller proportions of their own economies. The main sufferers are not likely to be ordinary citizens, but the hitherto governing and business classes.

Why doesn’t Capital Flow from Rich to Poor Countries? An Empirical Investigation, Laura Alfaro, Sebnem Kalemli,-Ozcan Harvard Business School, University of Houston, and NBER, Vadym Volosovych, University of Houston, November 2005, http://www.people.hbs.edu/lalfaro/lucas.pdf

We examine the empirical role of different explanations for the lack of flows of capital from rich to poor countries—the “Lucas Paradox.” The theoretical explanations include differences in fun- damentals across countries and capital market imperfections. We show that during 1970−2000 low institutional quality is the leading explanation. For example, improving Peru’s institutional quality to Australia’s level, implies a quadrupling of foreign investment. Recent studies em- phasize the role of institutions for achieving higher levels of income, but remain silent on the specific mechanisms. Our results indicate that foreign investment might be a channel through which institutions affect long-run development.

[Firn]

Sorry for not doing much discussing recently, I had to enjoy my holidays.

Economic history makes for an interesting read. One has to keep in mind that the data is very very limited for most of our history and often biased for a certain bono. The growth we witnessed in Europe and in the US in the last hundred years was indeed a great ride. Last year I bought a neat volume on European Econhistory and read a little bit about our local area. It reminds one once again that the massively increased yields/productivity gains in agriculture are the basis of our current living standards.

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To be honest it is also a bit amused to read things like Europe: Burnt and abandoned when you too had a great ride in the stock markets. I did of course not match the DAX, as I had invested more broadly and bonds were a drag but it was a fine year indeed. While some companies did cut the dividends, sometimes completely, the earnings are still strong compared to the price in many instances. A very high ratio of 75% in stocks payed off also in asset growth while I personally invested more with an eye on dividends*. Of course one should not be fooled by success so I have to think if I have to adjust something. Sadly I could not balance away a high percentage of the capital gains by selling stocks at a loss so I will have to do an additional contribution on the budget front.

*For the reasons posted a couple a times in this thread I did not buy a single fresh bond in the last two years. Dividends of good companies have been beating them handily for a couple of years now. This can and will of course change!

[Surferbeetle]

Firn,

No worries on time, the conversation is good and moves at it's own pace.

Thought this article was interesting and it seems to speak to our global adventures in a variety of fields :

Learning to Create the Perfect Cup of Coffee, By MATT RICHTEL, Published: December 31, 2012, NYT, http://www.nytimes.com/2013/01/02/di...general&src=me

The essence of good espresso, of good coffee in general, revolves around three numbers: the amount of quality dry coffee used, the amount of time water flows through it and the amount of coffee that comes out the other end. When the ratio is right, the process extracts the best flavor. If it is wrong, the good flavor never surfaces or is watered down. A mistake in seconds or grams, I am coming to learn, is the difference between something wonderful and awful.

Mr. Baca explains that you have to experiment to find just the right balance of these three elements for each coffee machine and coffee grind, and then replicate them. He has tested the machinery at Sightglass and determined that we want to use 17 grams of high-end coffee and run water for 25 seconds to yield about 30 grams of coffee.

---------

Economic history makes for an interesting read. One has to keep in mind that the data is very very limited for most of our history and often biased for a certain bono. The growth we witnessed in Europe and in the US in the last hundred years was indeed a great ride. Last year I bought a neat volume on European Econhistory and read a little bit about our local area. It reminds one once again that the massively increased yields/productivity gains in agriculture are the basis of our current living standards.

I would agree. As we have discussed, Jeremy Grantham has been providing some thoughtful 'realtime' analysis on this and continues to do so. Along these lines, I received a copy of James J. O'Donnell's 'The Ruin of the Roman Empire' for the holidays. I find it to be very well written with some excellent insights into economics, governance, war, and the human condition in general. Who is your European Econo-history author?

To be honest it is also a bit amused to read things like Europe: Burnt and abandoned when you too had a great ride in the stock markets. I did of course not match the DAX, as I had invested more broadly and bonds were a drag but it was a fine year indeed. While some companies did cut the dividends, sometimes completely, the earnings are still strong compared to the price in many instances. A very high ratio of 75% in stocks payed off also in asset growth while I personally invested more with an eye on dividends*. Of course one should not be fooled by success so I have to think if I have to adjust something. Sadly I could not balance away a high percentage of the capital gains by selling stocks at a loss so I will have to do an additional contribution on the budget front.

*For the reasons posted a couple a times in this thread I did not buy a single fresh bond in the last two years. Dividends of good companies have been beating them handily for a couple of years now. This can and will of course change!

Newspaper article titles can be, shall we say, 'eye-catching'. The article itself was meat & potatoes analysis to me, but I also keep in the back of my mind the 'micro' (with macro implications) - UK in or out of the EU question that is playing out in the UK media, as well as the macro East & West economic convergence theme being examined.

Equities are fun and familiar, yet it's always good to gain additional perspective. Sheldon Natenberg's book Option Volatility and Pricing has been/continues to be a very thoughtful/exceptional look at things. Derivatives are an exotic & theoretical tool for me at this point, even after a number of years of thinking about them. Bonds are an even further bridge. I still rely on bond index funds for diversification. Any suggestions regarding bond books? Perhaps I will have to look at the FT Guides for bonds...I have some on finance, risk modeling, options, and forex and find them all to be insightful and helpful for my equities focus. School is always good...but i find that i still gotta keep exercising my brain cell in order to survive out here in the retail trading & investing world. Successfully running money out in the professional world has to be another order of magnitude leap...

Going back to the coffee analogy, overall I think much of life is about quality, timing, and a bit of luck. 08' - '12 has been very educational and I made a profit for that time period, primarily on quality Euro stocks. I hope to continue to do so.

[Firn]

Equities are fun and familiar, yet it's always good to gain additional perspective. Sheldon Natenberg's book Option Volatility and Pricing has been/continues to be a very thoughtful/exceptional look at things. Derivatives are an exotic & theoretical tool for me at this point, even after a number of years of thinking about them. Bonds are an even further bridge. I still rely on bond index funds for diversification. Any suggestions regarding bond books? Perhaps I will have to look at the FT Guides for bonds...I have some on finance, risk modeling, options, and forex and find them all to be insightful and helpful for my equities focus. School is always good...but i find that i still gotta keep exercising my brain cell in order to survive out here in the retail trading & investing world. Successfully running money out in the professional world has to be another order of magnitude leap...

Going back to the coffee analogy, overall I think much of life is about quality, timing, and a bit of luck. 08' - '12 has been very educational and I made a profit for that time period, primarily on quality Euro stocks. I hope to continue to do so.

"Live is about Quality, timing and a bit of luck". I think Kahneman got it right when he stated that success = talent + luck and great success = a little more talent + a lot of luck. One of my profs teaching sociology opened once his lecture by stating that he was glad to see such a bunch of winners of evolution. (Had to write a paper about the selfish gene ) And indeed we are just the last in a long line of organisms who arguably had overall a little more talent and a massive lot of luck. If you are an American or a Westernish European all the luckier.

The situation for many in Europe is indeed worse then in the last decade and the Italian South lost just last year, IIRC over 100.000, mostly young. I hope they will have a better future here in the North or elsewhere. It might be heartless but this mobility is needed to make the idea of of a Eurozone (or Italian state) work.

I hope you too will continue to do well and enjoy the mental fun. My maternal grandfather was mentally sharp till his death by swimming his ten km a week and by following the markets. There are worse vices for your brain cells.

In a strange way this song pretty fitted in his case. The name of course especially. This song does so only partly, luckily. For those who were not so lucky I will raise the last beer.