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Too Much Debt? Jackson Hole II

This is the second of three posts on some of the papers presented at the Jackson Hole conference held in late August by the Kansas City Fed. The first post is here; the final post will be up later. All the papers from the conference are posted here.

Stephen G. Cecchetti, M. S. Mohanty and Fabrizio Zampolli of the Bank for International Settlements write about \”The Real Effects of Debt.\” They illustrate that a powerful trend during the last few decades toward more debt in a number of high income countries. For example, if one looks at a simple average debt/GDP ratio for 18 OECD economies, including the United States, the combined debt/GDP ratio for government, corporate, and household debt rose from 165% of GDP in 1980 to 310% of GDP in 2010. The biggest increase over this time is debt for the household sector, which tripled in real terms over this period. (Just to be clear, this is non-financial sector debt, so it doesn\’t count what financial institutions owe to other financial institutions in their role as intermediaries.)

While longer-run data on debt across sector isn\’t available for all 18 countries that they examine, they offer a longer-run picture of U.S. debt. As they point out, U.S debt tended to hover around 150% of GDP for most of the time until about 1985, when it started rising. (The bump in debt/GDP ratios in the Great Depression, of course, was because the denominator of GDP in that ratio fell so sharply.) Since the 1980s, household debt has been rising faster than private-sector debt.

With these facts in mind, they raise a broader question: \”At moderate levels, debt improves welfare and enhances growth. But high levels can be damaging. When does debt go from good to bad?\” They use a regression framework that adjusts for many factors and tries to discern threshold effects, which a perfectly reasonable first shot at the issue, although it\’s the kind of approach that always raises questions about whether the correlation is a causation and whether there are omitted variables. They find:

\”Our examination of debt and economic activity in industrial countries leads us to conclude that there is a clear linkage: high debt is bad for growth. When public debt is in a range of 85% of GDP, further increases in debt may begin to have a significant impact on growth: specifically, a further 10 percentage point increase reduces trend growth by more than one tenth of 1 percentage point. For corporate debt, the threshold is slightly lower, closer to 90%, and the impact is roughly half as big. Meanwhile for household debt, our best guess is that there is a threshold at something like 85% of GDP, but the estimate of the impact is extremely imprecise.\”

The financial crisis of 2007-2009 brought home how easily household borrowing or corporate borrowing, when it goes bad, can turn into government borrowing for bailouts. When thinking about the problems of debt burdens facing the U.S. economy, it seems unwise to look only at government borrowing.

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Dani Rodrik on economic convergence: Jackson Hole I

Each year the Kansas City Fed holds a research conference in Jackson Hole in late August that attracts many of the beset and the brightest in the central banking and economic research community. Back in the Paleolithic era, one used to have to wait months until the printed conference volume came out, or try to cadge a copy of working papers from authors. But now, of course, all the papers are posted here. In this post and the next two, I\’ll hit the high spots of three of the papers that particularly struck me.

Dani Rodrik offers a characteristically interesting reflection on \”The Future of Economic Convergence.\”   He starts with some nice figures to show the convergence that has occurred. The first shows growth trends in the world economy from 1950 to 2008. Rodrik writes:

\”The world economy experienced very rapid growth in the decade before the global financial crisis. In fact, once we smooth out the annual variations, growth reached levels that were even higher than those in the immediate aftermath of World War II (Figure 1), which is remarkable in view of the fact that growth in the early 1950s was boosted by reconstruction and recovery from the war.The growth pattern of the world economy since 1950 looks U-shaped: a downward trend from about 1960 until the late 1980s, followed by a strong recovery since then.

What this trend hides, however, is the divergent performance of developed and developing countries. As Figure 2 shows, developed countries have experienced a steady decline in growth since the 1960s, from around 3.5 percent per annum in per capita terms during the 1950s to below 2 percent in the early years of the new millennium. The recent recovery in global growth is due entirely to a remarkable improvement in the performance of the developing parts of the world. Growth in developing countries nearly tripled from around 2 percent per capita in the 1980s to almost 6 percent before the crisis of 2008. It is China (and the rest of developing Asia) that accounts for the bulk of this performance. But high growth in East and Southeast Asia predates the new millennium, and what is especially noteworthy about the recent experience is that Latin America and Africa were, for once, part of the high-growth club. Growth picked up in both regions starting around 1990, and surpassed levels not experienced since the 1960s …\” 

Rodrik then poses the hard question on which he has been gnawing for a few years now: What caused this convergence to occur and can it be relied upon to continue? He points out that the standard story of why convergence has occurred tends to emphasize good economic housekeepings: factors like getting monetary and fiscal policy under control, opening to international trade, improvements in governance, and the spread of global production networks. But he argues that China and other growth successes are hardly bastions of conventional economic wisdom. Rodrik writes:

\”China’s policies on property rights, subsidies, finance, the exchange rate and many other areas have so flagrantly departed from the conventional rulebook that if the country were an economic basket case instead of the powerhouse that it has become, it would be almost as easy to account for it. After all, it is not evident that a dictatorship that refuses to even recognize private ownership (until recently), intervenes right and left to create new industries, subsidizes lossmaking state enterprises with abandon, “manipulates” its currency, and is engaged in countless other policy sins would be responsible for history’s most rapid convergence experience. One can make similar statements for Japan, South Korea and Taiwan during their heyday, in view of the rampant government intervention that characterized their experience. As for India, its half-hearted, messy liberalization is hardly the example that multilateral agencies ask other developing countries to emulate. Foreign economists advise India to speed up the pace of liberalization, open its financial system, rein in corruption, and pursue privatization and structural reform with greater vigor. India’s political system meanwhile dithers.\”

So what explains why convergence starts at certain times, and why it takes hold in certain places but not in other? Rodrik looks at a sectoral level and finds that certain industries, if a country gets a foothold in those industries, seem to experience a rapid convergence to global productivity standards. These industries often involve tradeable manufactured goods, including cars, machinery and equipment, and motorcycles. He presents a striking result that when these industries are established, their tend to converge almost regardless of the government\’s economic policies–unless those policies are truly terrible.

Rodrik then makes the provocative claim that a difficult issue for many economies is whether they have the flexibility to expand and move labor into these \”escalator industries.\” If labor moves into these industries, overall economic convergence can occur. But in some cases–and he offers examples from Latin America and Africa–rapid productivity growth in one trade-oriented industry has reduced the need for labor in that industry, and thus thrown workers back into lower-productivity industries, a phenomenon he called \”growth-reducing structural change.\”

I\’m not always fully convinced by Rodrik\’s work, but I find it continually intriguing and thought-provoking.

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World Economic Forum Ranks U.S. Competitiveness

The World Economic Forum is an independent organization that has been around since the early 1970s. It\’s perhaps best-known for the annual shindig that it holds in Davos, but the organization also puts out a number of reports on aspects of the global economy. The WEF\’s 2011-2012 Global Competitiveness Report evaluates 142 countries on more than 100 different indicators.

Here, I focus on the WEF evaluation of the U.S. economy. Overall, the U.S. economy ranks fifth in the WEF\’s Global Competitiveness Index–behind Switzerland, Singapore, Sweden, and Finland. Clearly this ranking is one of those weighted averages of a lot of stuff, and one can raise questions about the both individual components and weights used. But it\’s also true that when you look at the indicators as a group, it tells useful story. For the U.S. economy, the story is one of real and deep strengths in areas like the size of its markets, the flexibility of its labor markets, its potential for innovation and technology, the overall competence of business management, and its higher education system. It\’s also a story of real and deep weaknesses in secondary education, making widespread use of web-based and wireless technologies, and macroeconomic problems of too little saving and too much government borrowing.

Here\’s the U.S. story in more detail. The WEF groups its 100-plus indicators into 12 \”pillars,\” with the overall U.S. ranking among the 142 countries for that \”pillar\” shown in parenthesis–and then a few words about the underlying components.

Market size (1st of the 142 countries evaluated)
Many Americans take the benefits of our huge domestic economy for granted, but it allows U.S. firms to take advantage of economies of scale and focus on innovation and productivity. Firms with smaller markets need either to operate at a smaller scale, or else spend the time and money to break into a number of foreign markets.

Labor Market Efficiency (4)
In this category, the U.S. economy gets credit for flexibility in hiring and firing, and for being an economy with relatively little \”brain drain\”–that is, where highly skilled people want to work. The professionalism of U.S. management also gets some credit.

Innovation (5)
This category emphasizes research institutes, R&D spending, scientists and engineers, patents, and capacity for innovation–all categories where the U.S. ranks among the world leaders.

Business sophistication (10)
This category includes distribution, marketing, quantity and quality of local suppliers, delegating responsibility within firms, and clusters of excellence, where the U.S. economy has considerable strengths.

Higher Education and Training (13) 

From a world point of view, \”higher education\” includes secondary school–not just colleges and universities. And here we begin to see some hard issues for the U.S. economy.When it comes to college (\”tertiary\”) enrollment, the U.S. does well. But when it comes to secondary education, and quality of math and science education, the U.S. slips way down the rankings.

Infrastructure (16)
The U.S. doesn\’t do super-well in roads, railroads, ports, or air transport infrastructure. It falls even a little lower in these rankings in the quality of its electricity supply. And the U.S. has been a slow adopter by world standards of mobile phone technology, which is surely one of the technologies with the broadest implications for re-structuring our economic and personal interactions in the years ahead.  

Technological readiness (20)
Color me skeptical on this one. Sure, the U.S. ranks low in \”Foreign Direct Investment and Technology Transfer,\” but given the huge U.S. domestic economy and the fact that it\’s near the front edge of technology in so many areas, the lower level of getting technology from elsewhere doesn\’t seem all that worrisome. But this list again emphasize that when it comes to connectivity and the internet, the U.S. is not at the tip-top of the world rankings.

Financial market development (22)
This lower ranking is probably a bit misleading, too. Much of this low ranking is because of difficulties with U.S. banks in the aftermath of the housing price bubble collapse, and is certainly less of a worry in 2011 than it was in early 2009. The same with \”ease of access to loans.\” I haven\’t dug into the fine print to see how the WEF ranks \”regulation of securities exchanges\” or \”Legal rights index,\” but these are subjective and potentially controversial. 

Goods market efficiency (24)
The overall ranking here is probably too low, because some of the lower-ranking elements in this category aren\’t as important in the U.S. economy, with its technological edge and its huge domestic market, as they would be for many other economies: imports/GDP, customs procedures, trade barriers, and foreign ownership. But the rankings are flagging the dysfunctional U.S. tax code, which has too many legal loopholes and as a result ends up imposing higher-than-necessary rates. There are also some strengths in this area, like the degree of local competition and the sophistication of buyers.

Institutions (39)
Almost all of the underlying facts in this \”pillar\” are based on an Executive Opinion Survey done by the World Economic Forum. Thus, the rankings are based on the opinions of that group. This approach is fraught with difficulties: business people are being asked about their own countries, and so comparisons across countries are tricky. Also, some will use surveys like this to boost their own country or to bash others. Personally, I\’m not so sure that a business community which is critical of its politicians is such a bad thing. I\’d worry a bit if the business community felt too cozy with the government! But for what it\’s worth, here\’s the breakdown.

Health and primary education (42)
Again, I mistrust some of these rankings of effects of disease because they measure responses of executives on a survey about how these will affect their company, not actual measures of costs. thus, for example, a country in which business executives worry more about the impact of HIV/AIDS shows up here with a lower ranking. But these rankings also show some well-known difficulties of the U.S. in terms of infant mortality, life expectancy, and even primary education.   

Macroeconomic environment (90)This ranking is based on the very low level of U.S. savings, compared with the enormous budget deficits and high levels of accumulated government debt. Oddly enough, what saves this ranking from being even worse is that the U.S. still ranked 9th best in the world for \”credit rating\” at the time these rankings were done. One suspects that particular ranking won\’t last.

Overall, here\’s the two-paragraph summary about the U.S. economy from the WEF report:

\”The United States continues the decline that began three years ago, falling one more position to 5th place. While many structural features continue to make its economy extremely productive, a number of escalating weaknesses have lowered the US ranking in recent years. US companies are highly sophisticated and innovative, supported by an excellent university system that collaborates admirably with the business sector in R&D. Combined with flexible labor markets and the scale opportunities afforded by the sheer size of its domestic economy—the largest in the world by far—these qualities continue to make the United States very competitive. On the other hand, there are some weaknesses in particular areas that have deepened since past assessments. The business community continues to
be critical toward public and private institutions (39th). In particular, its trust in politicians is not strong (50th), it remains concerned about the government’s ability to maintain arms-length relationships with the private sector (50th), and it considers that the government spends its resources relatively wastefully (66th). In comparison with last year, policymaking is assessed as less transparent
(50th) and regulation as more burdensome (58th).

A lack of macroeconomic stability continues to be the United States’ greatest area of weakness (90th). Over the past decade, the country has been running repeated fiscal deficits, leading to burgeoning levels of public indebtedness that are likely to weigh heavily on the country’s future growth. On a more positive note, after having declined for two years in a row, measures
of financial market development are showing a hesitant recovery, improving from 31st last year to 22nd overall this year in that pillar.\”

I\’ve noted some of my qualms about this index. But taken as a whole, this seems to me a fair-minded broad sketch of the strengths and weaknesses of the U.S. economic situation.

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Optimism in a Terrible Economy from John Maynard Keynes

In 1930, John Maynard Keynes wrote a remarkable little essay called \”Economic Possibilities for our Grandchildren.\” Stock markets have collapsed all over the world, but amidst the opening blasts of the Great Depression, Keynes dared to offered an optimistic view of where the standard of living was headed over time. The full essay, which is short and readable, is available here and there on the web. As the U.S. economy staggers through a time when recession technically ended in June 2009, but robust growth is nowhere in sight, it\’s intriguing to look at some snippets of his essay, and consider the modern echoes.
Here\’s Keynes:

\”We are suffering just now from a bad attack of economic pessimism. It is common to hear people say that the epoch of enormous economic progress which characterised the nineteenth century is over; that the rapid improvement in the standard of life is now going to slow down –at any rate in Great Britain; that a decline in prosperity is more likely than an improvement in the decade which lies ahead of us.

I believe that this is a wildly mistaken interpretation of what is happening to us. We are suffering, not from the rheumatics of old age, but from the growing-pains of over-rapid changes, from the painfulness of readjustment between one economic period and another. The increase of technical efficiency has been taking place faster than we can deal with the problem of labour absorption; the improvement in the standard of life has been a little too quick…

At the same time technical improvements in manufacture and transport have been proceeding at a greater rate in the last ten years than ever before in history. In the United States factory output per head was 40 per cent greater in 1925 than in 1919. In Europe we are held back by temporary obstacles, but even so it is safe to say that technical efficiency is increasing by more than 1 per cent per annum compound. …

For the moment the very rapidity of these changes is hurting us and bringing difficult problems to solve. Those countries are suffering relatively which are not in the vanguard of progress. We are being afflicted with a new disease of which some readers may not yet have heard the name, but of which they will hear a great deal in the years to come–namely, technological unemployment. This means unemployment due to our discovery of means of economising the use of labour outrunning the pace at which we can find new uses for labour.

But this is only a temporary phase of maladjustment. All this means in the long run that mankind is solving its economic problem. I would predict that the standard of life in progressive countries one hundred years hence will be between four and eight times as high as it is to-day. There would be nothing surprising in this even in the light of our present knowledge. It would not be foolish to contemplate the possibility of afar greater progress still.\”

Of course, no economic moment is precisely the same as any other economic moment, but Keynes\’ perspective is worth reflecting on today. Of course, his essay was not about short-term economic optimism. Things can and often do get worse before they get better. He is writing about the long run.

To some, a prediction that the standard of life will be four to eight times as high in 100 years may seem foolhardy. But remember the arithmetic of compound growth. The old rule-of-thumb is that if you want to know how many years it will take something to double, take 72 and divide by the annual growth rate. Thus, if you have $100 and can get an 8% rate of return, your money will double in (roughly) 72/8=9 years.

If the standard of living grows at 2% per year on average over time, then it will double in 36 years, quadruple in 72 years, and octuple in 108 years–about eight-fold growth in a century. If the standard of living grows at 1.5% per year, then it will double in 72/1.5=48 years, and will roughly quadruple in a century. Thus, Keynes prediction in 1930, in the teeth of the Great Depression, was nonetheless for a long-run growth rate of 1.5-2% per year. It\’s a reasonable prediction for 2011, in the teeth of the Long Slump that has followed the Great Recession, as well.

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The Coming Urban World

A standard pattern in economic growth is that a rise in per capita GDP is accompanied by a larger share of the population living in urban areas. Thomas Nechyba and Randall Walsh describe the U.S. experience in a Fall 2004 article on \”Urban Sprawl\” in my own Journal of Economic Perspectives: \”Only slightly more than 5 percent of the U.S. population lived in urban areas in 1790, a figure that had tripled by 1850 and surpassed 50 percent by 1920. By the 2000 Census, 79 percent of all Americans lived in areas designated as “urban” by the Census Bureau.

 But the trend toward urbanization is international, as the UNFPA noted in its 2007 State of World Population report on the theme: \”Unleashing the Potential of Urban Growth.\” \”In 2008, the world reaches an invisible but momentous milestone: For the first time in history, more than half its human population, 3.3 billion people, will be living in urban areas.\”

The McKinsey Global Institute has published a couple of interesting reports on global urbanization recent months. \”Urban world: Mapping the economic power of cities,\” came out in March 2011.
\”Half of the world’s population already lives in cities, generating more than 80 percent of global GDP today. But the urban economic story is even more concentrated than this suggests. Only 600 urban centers, with a fifth of the world’s population, generate 60 percent of global GDP. In 2025, we still expect 600 cities to account for about 60 percent of worldwide GDP—but the cities won’t be
the same. … Today, major urban areas in developed regions are, without doubt, economic giants.
The 380 developed region cities in the top 600 by GDP accounted for 50 percent of global GDP in 2007, with more than 20 percent of global GDP coming from 190 North American cities alone. … Over the next 15 years, the makeup of the group of top 600 cities will change as the center of gravity of the urban world moves south and, even more decisively, east. … By 2025, we expect 136 new cities to enter the top 600, all of them from the developing world and overwhelmingly (100 new cities) from China. These include cities such as Haerbin, Shantou, and Guiyang. But China is not the only economy to contribute to the shifting urban landscape. India will contribute 13 newcomers including Hyderabad and Surat. Latin America will be the source of eight cities that include
Cancún and Barranquilla.\”

Here are predictions from McKinsey on the world\’s top 25 cities in 2025, ranked by GDP, per capita GDP, GDP growth, and Total population. Cities in blue are in the developing world, and they dominate the last two columns.

Cities in economic terms are bundles of economies of scale and agglomeration. For example, cities can act as a hub for economies of scale in production and lower transportation costs. They can provide a density of potential workers, employers, and customers, in a way that reduces risk for all parties and enables a greater division of labor. They can facilitate spillovers of information and skills, and serve as a breeding ground for entrepreneurship. However, the power of  scale and agglomeration have a negative side, as well. The cost of living and especially housing is typically higher in cities. Agglomeration can lead to pollution and stress on infrastructure, including congested transportation facilities and issues in providing water and electricity. Urban networking can can also facilitate criminal activity. Cities often create extremes of wealth and poverty rubbing shoulders, which can create political and social stresses. (For an exposition of cities along these lines, see Edward L. Glaeser\’s article \”Are Cities Dying\” in the Spring 1998 issue of the Journal of Economic Perspectives, which is too far back to be freely available on-line, but can be downloaded if you have access to JSTOR).

The McKinsey Global Institute makes this point as well: \”As urban centers grow, they benefit from agglomeration—or economies of scale—that enable many industries and service sectors to have higher productivity than they do in a rural setting. It is also much less expensive to provide goods and services in concentrated population centers. Our research indicates that the cost of delivering basic services such as water, housing, and education is 30 to 50 percent cheaper in concentrated population centers than it is in sparsely populated areas. Very large cities attract the most talent and inward investment, and they are often at the center of a cluster of smaller cities, which creates network effects that spur economic growth and productivity.\”

But as McKinsey also argues that while huge cities are engines of economic growth, they can become so large that their diseconomies begin to slow them down. The largest future growth may not be in the largest cities: \”Contrary to common perception, megacities have not been driving global growth for the past 15 years. In fact, many have not grown faster than their host economies, and we expect this trend to continue. We estimate that today’s 23 megacities will contribute just over 10 percent of global growth to 2025, below their 14 percent share of global GDP today. Instead, we see the 577 fast-growing middleweights in the City 600 contributing half of global growth to 2025, gaining share from today’s megacities.\”

The McKinsey Global Institute has takes up these issues of how the cities can contribute to growth, but also how the size of cities can limit their growth, in a series of reports, including a February 2009 report on cities in China, and an April 2010 report on urbanization in India. 
The latest report on this subject from August 2011 discusses: \”Building globally competitive cities: The key to Latin American growth.\” A few snippets from the report:

  • \”Cities are critical to Latin America’s overall economy. The region’s 198 large cities—defined as having populations of 200,000 or more—together contribute over 60 percent of GDP today. The ten largest cities alone generate half of that output. Such a concentration of urban economic activity among the largest cities is comparable with the picture in the United States and Western Europe today but is much more concentrated than in any other emerging region. China’s top ten cities, for instance, contribute around 20 percent of the nation’s GDP.\”
  • \”Yet Latin America has already won a large share of the easy gains that come from expanding urban populations. Today, many of Latin America’s largest cities are grappling with traffic gridlock, housing shortages, and pollution, all symptoms of diseconomies of scale. For the region’s largest cities to sustain their growth, they need to be able to address challenges not only to their economic performance but also to the quality of life experienced by their citizens, sustainable resource use, and the strength of their finances and governance.\”
  • \”Between 2007 and 2025, we expect the region’s top ten cities to display below-average growth in both population and GDP, while the rest of Latin America’s large cities are likely to expand their populations at an above-average rate. These cities are projected to generate almost 40 percent of the region’s overall growth between 2007 and 2025, almost 1.5 times the growth the top ten cities are expected to generate. What accounts for this shift in the balance of economic power? In Latin America’s largest cities, signs of diseconomies of scale such as congestion and pollution have started to outweigh scale benefits, diminishing the quality of life they can offer citizens and sapping their economic dynamism. At the same time, economic liberalization across the region has reversed the centralizing bias that concentrated economic activity in the largest cities. The more decentralized economic approach has given middleweight cities a boost. These medium-sized urban centers lag behind larger cities in their per capita GDP today, but many have not yet run into the diseconomies of scale faced by larger cities.\”

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Economic Growth: Why We Need It, What We\’re Not Doing

Michael Greenstone and Adam Looney put together a background paper for a Hamilton Project conference called \”A Dozen Economic Facts About Innovation.\”

Why is innovation and increased productivity important? Two of the main measurable reasons are how it increases incomes and life expectancy. It may be that the worst economic event to befall the U.S. economy in the last 40 years is not relatively recent shock of the Great Recession, terrible though that has been, but the productivity slowdown that hit in the early 1970s. Greenstone and Looney write: \”If TFP [total factor productivity] had continued growing at the pre-1973 trend and that productivity gain were reflected in workers’ compensation, compensation could be 51 percent higher, or about $18 per hour more than today’s average of $35.44 per hour. This calculation highlights that small changes in innovation and annual TFP growth lead to large differences in long-run standards of living.\”

Economic growth and innovation have also helped to generate longer life expectancies, partly through reductions in  infectious disease, but also through better diets and cleaner water and sanitation. The gains in health have huge value. Kevin Murphy and Robert Topel estimated the long-term value of gains in health in a 2006 article in the Journal of Political Economy (pp. 871-904).From their abstract: \”Cumulative gains in life expectancy after 1900 were worth over $1.2 million to the representative American in 2000, whereas post-1970 gains added about $3.2 trillion per year to national wealth, equal to about half of GDP. Potential gains from future health improvements are also large; for example, a 1 percent reduction in cancer mortality would be worth $500 billion.\” Here\’s a Greenstone-Looney figure on gains in life expectancy and reductions in infectious disease.

One of the most striking areas of innovation in recent years, of course, is the electronics industry. Here\’s a graph showing what it would have cost to buy the computing power of an iPad 2 over recent decades. Notice that the vertical scale is a logarithmic graph: that is, it is descending by powers of ten as the price of computing power halves and halves and halves over and over again.

What\’s to be done to improve the prospects for innovation and economic growth for the future? There is a broad productivity agenda of improving human capital, investing in plant and equipment, and getting America\’s financial and budgetary problems under control. But there is also a more narrow technology-focused agenda. For example, every politician in the U.S. talks has been talking about the importance of technology for decades–but government spending on research and development has actually been sinking. Corporate spending on R&D has taken up some of the slack, but government R&D is far more likely to be focused on the basic research that generates new industries, not the tightly-focused process companies often use to update their products.

Another issue is to have America\’s higher education system focus more heavily on the so-called STEM fields: that is, science, technology, engineering, and mathematics. The share of total U.S. degrees being granted in these fields has fallen since the mid-1980s, and compared to other countries, the U.S. higher education system grants a lower proportion of its degrees in STEM fields.

A final issue is to improve the U.S. patent system. There are lots of subtle issues about what kind of innovation deserves a patent, or what doesn\’t, and how much a patent is really worth in an intellectual property showdown. But at a more basic level, a slow patent system is less useful for everyone–and the time to get a decision from the U.S. Patent Office has been rising.

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Will Emerging Economies Dominate the World Economy?

Start with the G-7 countries: that is, the United States, Japan, Germany, France, Italy, United Kingdom, and Canada. Now compare them with the largest 7 \”emerging\” economies: the E-7 would beChina, India, Brazil, Russia, Indonesia, Mexico and Turkey. A January 2011 report from pwc offers some projections comparing where these two groups are headed by 2050.

First, compare the total size of the G-7 and the E-7 economies, in 2009. At market exchange rates, the E-7 is about one-third of the G-7 in 2009. In purchasing power parity exchange rates (which help to account for the fact that money can often buy more of certain goods in low-income countries), the E-7 is about two-thirds of the G-7 in 2009. \”In our base case projections, the E7 economies will by 2050 be around 64% larger than the current G7 when measured in dollar terms at market exchange rates (MER), or around twice as large in PPP terms.\”

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This change represents a remarkable shuffling of the economies of the world. To get a sense of the change, compare the rank order of the economies of the world in 2009 and 2050.  In 2009, the U.S. is the world\’s largest economy. By 2050, U.S. economy will be about 2.5 times as large–and is projected to be in third place in absolute size, behind China and  India.  What other countries move up the rankings notably by 2050? Brazil, Mexico, Indonesia, Turkey, Nigeria, and Vietnam. To my 20th century mindset, some of those countries just don\’t seem like global economic heavyweights. Time to start adjusting my mind to the coming realities.

Of course, per capita GDP looks quite a bit different.  China and India have vastly larger populations than the United States. After 40 more years of rapid growth, per capita GDP in China will by 2050 roughly reach the U.S. per capita GDP in 2009. But by that time, U.S. per capita GDP will have more-or-less doubled. On a per capita GDP basis, China won\’t come close to catching any of the G-7 countries even by 2050–in fact, on these projections, China doesn\’t catch up to Mexico in per capita GDP by 2050.

In an earlier post, I discussed China\’s Will China catch up to the U.S. economy? 

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2010 Years of economic output and population in one chart

The Economist has an elegant picture, describing \”Two thousand Years in one chart.\”

Over the last 2010 years, 55% of total economic output happened in the 20th century, and an additional 23% of the total in just the first 10 years of the 21st century.

About 28% of the total years of human life lived in the last 2010 years happened during the 20th century, and about 6% of total years of human life lived in the last 2010 years happened in the first 10 years of the 21st century.