The turmoil in the global financial markets and the world economy over the last two years and its profound impact on the economically under-privileged (who were ironically those least responsible for causing it) is a timely reminder about the need to maintain a social safety net that can soften the impact of such adverse shocks on those people. In order for this safety net to provide the requisite insurance against recessions, it is also necessary for it to be dynamic and counter-cyclical.
According to the United Nations Department of Economic and Social Affairs's (UNDESA) recently released World Economic Situation and Prospects 2010, 47 million more people globally became poor or remained in poverty in 2009 than would have been the case at 2008 growth rates, and 84 million more would have been poor at 2004-7 growth rates.
The UNDESA has also some interesting statistics on the impact of the decline in India's GDP growth rate from 8.8% averaged from 2004-05 to 2006-07 to the 6.7% estimated for 2008-09. The 2.1% decline in India’s GDP growth rate has effectively translated into a 2.8% increase in the incidence of poverty. It estimates that the number of India’s poor was 33.6 million higher in 2009 than would have been the case if the growth rates of the years from 2004 to 2007 had been maintained. In 2009 alone, an estimated 13.6 million more people in India became poor or remained in poverty than would have been the case at 2008 growth rates.
The wave of globalization and liberalization of the last two decades unleashed forces that resulted in the closer economic integration among countries. While this has undoubtedly helped millions in the developing countries to take advantage and escape poverty, it has also had the effect of exposing the same people to the full force of the vagaries of the global economic cycle.
Accordingly, volatility in global food, fuel and commodity prices gets transmitted immediately to the domestic markets, hurting both producers and consumers. Similarly, the implications of financial market (which are increasingly getting closely inter-twined with the real economy) troubles are closely and immediately felt by people living in even the remotest areas of the developing world. Further, those at the lower end of the income spectrum are among the worst affected by these shocks. The need for automatic counter-cyclical fiscal support measures for softening the impact on the poorest have, for all the aforementioned reasons, never been more important.
Countries across the world have different levels of social security protection to assist the economically under-privileged. In India these include mainly the near universal Public Distribution System (PDS) and welfare pensions for the old-aged, widows, and physically handicapped. However, these are more in the form of one-time means-tested issuances, which reflect the economic status of the beneficiaries when they are issued, and do not respond dynamically to the changing economic environment.
Economic slowdowns are characterized by diminished purchasing power, greater intensity in the pinch of poverty for even the existing poor, and people falling into poverty in large numbers. It is therefore important that social safety mechanisms have a counter-cyclical dimension that can cushion people from these events. Such mechanisms provide a form of social insurance against the debilitating effects of economic slowdowns.
In developed countries this comes in the form of automatic fiscal stabilizers, which are "taxes and transfers such as unemployment compensation and food stamps that automatically change with changes in economic conditions in a way that dampens economic cycles". Such stabilizers not only mitigates the suffering of individuals concerned but also smooths over spending and thereby prevent deep declines in aggregate demand.
As Mark Thoma put it nicely, such stabilizers kick-in automatically without need for any elaborate political negotiations as soon as the economic conditions deteriorate. Apart from the standard stabilizers like food stamps and unemployment insurance, he also suggests having "payroll taxes that decline automatically when conditions deteriorate, investment tax credits that vary countercyclically, or a continuously updated list of infrastructure projects that can be started ahead of schedule or brought online anew if the economy goes into recession".
The Government of India recently took an adhoc decision to allocate an additional 10 kg of foodgrains (wheat and rice) per month for every family covered under the PDS for January and February. This decision could have been more effective if it was done early last year when the impact of the economic slowdown was more intense.
Other automatic fiscal stabilizers that can most effectively soften the impact of hard times on poor include food for work programs that should kick-in automatically without any legislative or elaborate bureaucratic requirements when the economy slows down below a certain level or unemployment rises above certain figure (though this is a difficult measure to accurately ascertain in Indian context).
Similarly, legislatively mandated automatic increases in the quantity of allocation of foodgrains from the PDS once food price inflation crosses certain level can go a long way towards protecting the economically under-privileged sections from price shocks. Besides, it will also act as an automatically acting open market operation that would contribute towards stabilizing food prices in the larger market.
Such automatic stabilizers assume greater significance for countries like India which experience considerable and frequent headline inflationary pressures that immediately get reflected in the higher prices for foodgrains and fuels.
Successful roll-out of the UID and TFI initiatives, currently under implementation, will dramatically enhance the ability of state and central governments to deliver such support to those affected. It will become possible to overcome the problems associated with beneficiary identification, targeting and pilferage in delivery that bedevil the administration of such welfare measures in India.
One of the problems with such stabilizers is the political difficulty in withdrawing them once the economic conditions improve. It is therefore important to very clearly define the conditions when it kicks-in, eligibility criteria for beneficiaries, and easily verifiable sunset provisions for such programs.
Update 1 (6/5/2010)
IMF working paper on the utility of automatic fiscal stabilizers. The authors write,
"Results generally provide strong support for the view that fiscal stabilization
operates mainly through automatic stabilizers. By contrast, fiscal policies systematically linked to cyclical conditions—be they pro- or counter-cyclical—do not appear to have a meaningful impact on output volatility."
Update 2 (27/8/2010)
Mathias Dolls, Clemens Fuest, and Andreas Peichl analyzs the effectiveness of the tax and transfer systems in the European Union and the US to act as an automatic stabilizer in the current economic crisis and find that "automatic stabilizers absorb 38 per cent of a proportional income shock in the EU, compared to 32 per cent in the US. In the case of an unemployment shock 47 percent of the shock are absorbed in the EU, compared to 34 per cent in the US. This cushioning of disposable income leads to a demand stabilization of up to 30 per cent in the EU and up to 20 per cent in the US."
Update 3 (17/9/2010)
Mathias Dolls, Clemens Fuest, and Andreas Peichl find that "social transfers, in particular the rather generous systems of unemployment insurance in Europe, play a key role in the stabilisation of disposable incomes".
Monday, February 15, 2010
Sunday, February 14, 2010
Agent-based models and complex adaptive systems
Agent-based models have been at the centre of the emerging field of complexity economics, which explores the interaction between economic agents under varying constraints and rules.I have blogged about such models in earlier posts on school education and residential segregation.
Rajiv Sethi has an informative post on such models which, as he rightly claims, provides "microfoundations for macroeconomics in a manner that is both more plausible and more authentic than is the case with highly aggregative representative agent models". He defines them as "computational models in which a large numbers of interacting agents (individuals, households, firms, and regulators, for example) are endowed with behavioral rules that map environmental cues onto actions". He also writes that they generate "complex dynamics even with simple behavioral rules because the interaction structure can give rise to emergent properties that could not possibly be deduced by examining the rules themselves".
In a recent essay in Nature, Doyne Farmer and Duncan Foley make a strong case for the use of agent-based models in economics on the grounds that the existing econometric and DSGE based models suffer from the fatal flaw that they are fitted to past data and do not account for outlier (tail risk) events. They write,
As Rajiv Sethi writes, one of the major reasons why agent-based models have so far failed to take off relates to the difficulty of defining decision rules for agents under differing conditions, and in evaluating the effects of different factors. Further, creating agent-based models for the whole economy "requires close feedback between simulation, testing, data collection and the development of theory", which in turn demands "serious computing power and multi-disciplinary collaboration among economists, computer scientists, psychologists, biologists and physical scientists with experience in large-scale modelling".
A few popular agent-based models include John Conway's Game of Life, Thomas Schelling's segregation checkerboard, Leigh Tesfatsion's ACE.
Robert Axtell and Joshu Epstein have their silicon-based 'artificially intelligent agent-based social simulation' called the Sugarscape model. The Sugarscape includes the agents(inhabitants), the environment (two-dimensional grid) and the rules governing the interaction of the agents with each other and the environment. Eric Beinhocker provides an simple exploration of complexity economics and adaptively emergent systems in his book, The Origin of Wealth.
Update 1 (25/7/2010)
Economist has a nice summary of the research on ABMs. Unlike conventional models which use "representative agents (identical traders, firms or households whose individual behaviour mirrors the economy as a whole) and where interaction happens only indirectly through pricing, ABMs use a bottom-up approach which assigns particular behavioural rules to each agent (for example, some may believe that prices reflect fundamentals whereas others may rely on empirical observations of past price trends) and agents’ behaviour may be determined (and altered) by direct interactions between them. In an agent-based model you simply run a computer simulation to see what emerges, free from any top-down assumptions. It writes
Rajiv Sethi has an informative post on such models which, as he rightly claims, provides "microfoundations for macroeconomics in a manner that is both more plausible and more authentic than is the case with highly aggregative representative agent models". He defines them as "computational models in which a large numbers of interacting agents (individuals, households, firms, and regulators, for example) are endowed with behavioral rules that map environmental cues onto actions". He also writes that they generate "complex dynamics even with simple behavioral rules because the interaction structure can give rise to emergent properties that could not possibly be deduced by examining the rules themselves".
In a recent essay in Nature, Doyne Farmer and Duncan Foley make a strong case for the use of agent-based models in economics on the grounds that the existing econometric and DSGE based models suffer from the fatal flaw that they are fitted to past data and do not account for outlier (tail risk) events. They write,
"An agent-based model is a computerized simulation of a number of decision-makers (agents) and institutions, which interact through prescribed rules. The agents can be as diverse as needed — from consumers to policy-makers and Wall Street professionals — and the institutional structure can include everything from banks to the government. Such models do not rely on the assumption that the economy will move towards a pre-determined equilibrium state, as other models do. Instead, at any given time, each agent acts according to its current situation, the state of the world around it and the rules governing its behaviour.
An individual consumer, for example, might decide whether to save or spend based on the rate of inflation, his or her current optimism about the future, and behavioural rules deduced from psychology experiments. The computer keeps track of the many agent interactions, to see what happens over time. Agent-based simulations can handle a far wider range of nonlinear behaviour than conventional equilibrium models. Policy-makers can thus simulate an artificial economy under different policy scenarios and quantitatively explore their consequences...
Agent-based models potentially present a way to model the financial economy as a complex system, as Keynes attempted to do, while taking human adaptation and learning into account, as Lucas advocated. Such models allow for the creation of a kind of virtual universe, in which many players can act in complex — and realistic — ways. In some other areas of science, such as epidemiology or traffic control, agent-based models already help policy-making."
As Rajiv Sethi writes, one of the major reasons why agent-based models have so far failed to take off relates to the difficulty of defining decision rules for agents under differing conditions, and in evaluating the effects of different factors. Further, creating agent-based models for the whole economy "requires close feedback between simulation, testing, data collection and the development of theory", which in turn demands "serious computing power and multi-disciplinary collaboration among economists, computer scientists, psychologists, biologists and physical scientists with experience in large-scale modelling".
A few popular agent-based models include John Conway's Game of Life, Thomas Schelling's segregation checkerboard, Leigh Tesfatsion's ACE.
Robert Axtell and Joshu Epstein have their silicon-based 'artificially intelligent agent-based social simulation' called the Sugarscape model. The Sugarscape includes the agents(inhabitants), the environment (two-dimensional grid) and the rules governing the interaction of the agents with each other and the environment. Eric Beinhocker provides an simple exploration of complexity economics and adaptively emergent systems in his book, The Origin of Wealth.
Update 1 (25/7/2010)
Economist has a nice summary of the research on ABMs. Unlike conventional models which use "representative agents (identical traders, firms or households whose individual behaviour mirrors the economy as a whole) and where interaction happens only indirectly through pricing, ABMs use a bottom-up approach which assigns particular behavioural rules to each agent (for example, some may believe that prices reflect fundamentals whereas others may rely on empirical observations of past price trends) and agents’ behaviour may be determined (and altered) by direct interactions between them. In an agent-based model you simply run a computer simulation to see what emerges, free from any top-down assumptions. It writes
"ABMs, in contrast, make no assumptions about the existence of efficient markets or general equilibrium. The markets that they generate are more like a turbulent river or the weather system, subject to constant storms and seizures of all sizes. Big fluctuations and even crashes are an inherent feature. That is because ABMs contain feedback mechanisms that can amplify small effects, such as the herding and panic that generate bubbles and crashes. In mathematical terms the models are “non-linear”, meaning that effects need not be proportional to their causes."
Nudging on fitness
Recent research in behavioural economics have revealed that people face self-control problems and therefore fail to do or not do things despite firm resolutions to the contrary. I have blogged earlier about use of commitment contracts offered by webistes like StickK.com aimed at among other things, helping people reduce weight.
Now here comes two new tiny wearable motion sensors - Fitbit and DirectLife - backed by web sites graphing the collected data on your daily activities that seek to nudge you towards achieving your pre-defined calorie reduction goal each day. These devices - containing and accelerometer which tallies how much it’s jostled during the day - clipped to your clothes track your physical activities and sleep, and transfers the data on the same to their websites where it is analyzed for the progress made by you towards achieving your daily goals.
Now here comes two new tiny wearable motion sensors - Fitbit and DirectLife - backed by web sites graphing the collected data on your daily activities that seek to nudge you towards achieving your pre-defined calorie reduction goal each day. These devices - containing and accelerometer which tallies how much it’s jostled during the day - clipped to your clothes track your physical activities and sleep, and transfers the data on the same to their websites where it is analyzed for the progress made by you towards achieving your daily goals.
Composite country risk index
The Eurasia Group publishes a composite index, Global Political Risk Index (GPRI), that assesses political risk in 24 investable emerging markets by examining 20 indicators grouped into four categories - government, society, security and economy. All indicators are scored on a scale of zero to 100 and higher numbers indicate greater political stability, meaning a greater capacity to respond to shocks and crises. Here is the latest GPRI index as on September 2009
Here is the list of the Group's top ten risks for 2010. Its list of ten countries with fat tail (the tail ends of the distribution curves that measure country-level political risks and vulnerabilities are thickening) risks (on their national-level politics) are Pakistan, Ukraine, Russia, Mexico, Nigeria, Turkey, Argentina, UAE, Japan, Poland.
Here is the list of the Group's top ten risks for 2010. Its list of ten countries with fat tail (the tail ends of the distribution curves that measure country-level political risks and vulnerabilities are thickening) risks (on their national-level politics) are Pakistan, Ukraine, Russia, Mexico, Nigeria, Turkey, Argentina, UAE, Japan, Poland.
Saturday, February 13, 2010
Obama Budget proposals
President Obama's ten year budget proposals reveal the true extent of America's government debt crisis. As the Times reports, by President Obama’s own optimistic projections, federal government's budget deficit will peak at 11% of GDP in 2010 and will not return to what are widely considered sustainable levels (3% of GDP) till next ten years.
The budget projects that the deficit will peak at nearly $1.6 trillion in the current fiscal year (2009-10), a post-World War II record, and then decline to $1.3 trillion in the 2010-11 fiscal (starting October 2010), but will remain at economically troublesome levels over the remainder of the decade. Over 10 years, the budget is expected to save an estimated $1.2 trillion, mainly by ending the Bush tax cuts for the richest Americans and freezing some domestic spending for three years.
Obama's $3.8 trillion budget for fiscal year 2011 incorporates proposals to overhaul the health care system and energy policies, which are languishing in Congress. It also contains a $266 billion proposal on tax credits for hiring and new job-creation investments, and on other short-term stimulus including extended unemployment compensation.
As the Times writes, it does not make the really hard choices about entitlement programs — Medicare and Medicaid, especially — and about taxes that are essential to cut annual deficits and to begin paying down an accumulated debt (both domestic and foreign), which is forecast to equal 77% of GDP by 2020, the highest since 1950. The President has already proposed a widely criticized three year freeze on all non-defense discretionary spending to rein in the spiralling federal debt.
The real deficit picture is likely to turn out to be far worse, as this graphic shows, since in the last 30 years, about 80% of four-year budget forecasts have been too optimistic.
The budget has also been criticized for not doing enough to address the steep unemployment challenge and trying to put deficit reduction (through spending freeze) over short-term fiscal support to pull the economy out of the bottom. In fact, the budget proposals forecast the unemployment rate to be 9.8% at the end of 2010, 8.9% at the end of 2011, and 7.9% at the end of the Presidential election year of 2012.
Economix points to the figures on US government revenues and expenditures recently released by the Office of Management and Budget. Interestingly, even as the shares of individual income tax has remained stagnant, excise and corporate taxes have declined, payroll taxes (which includes Social Security and Medicare taxes) have become a much larger source of revenue for the federal government over the years.
On the expenditure side, the decline in defense has mirrored the worrying increase in health care expenses.
This superb graphic, courtesy Brad de Long, captures the reasons for the steep deficits. The Bush era tax cuts and its impact tower over all others, including the impact of the current recession. The Iraq and Af-Pak wars too have contributed substantially. In contrast and surprisingly, the fiscal stimulus appears to have had very limited impact, adding credence to the increasingly widespread belief that the Obama administration got too much caught up with barking down the wrong tree and not expanding the ARRA for fear of increasing the deficit.
As this excellent editorial in the Times points out, to seriously address the debt problem, President Obama will have to fix health care, broaden and raise taxes and reform social security. It estimates that given the rising health care costs and an aging population (and its impact on Medicaid, Medicare, and Social Security) without these serious reforms, federal debt in the United States would grow from 53% of GDP in 2009 to more than 300% by 2050.
The graphic above also clearly indicates that the stimulus spending has contributed only a miniscule share to the increased public debt burden. This also goes against the growing chorus that another round of stimulus spending will be suicidal in the efforts to unwind the debt burdens. As Joseph Stiglitz recently wrote, "The US economy needs another stimulus, and it needs it now."
Mark Thoma draws the distinction between the need for a short-run deficit to boost demand and reduce unemployment now, with the need to implement health care reforms to address the long-run imbalance in the budget. He writes, "Whether we spend more or less to fight the employment problem that exists right now has little to do with solving this (health care and long run imbalance) problem, and there's no reason at all for concern about the long-run problem to stop us from doing more now. No reason except deficit fetishness that refuses to separate the long-run health care cost problem from the largely independent short-run needs of those who are struggling to find employment in an economy that is still losing jobs."
Paul Krugman points to the annual President's Economic Report which shows that the stimulus fades out fast starting in fiscal 2011 (which starts in October 2010), even as unemployment being around as high as it is now. He feels that a premature stimulus exit (or not having another round of stimulus) has the danger of repeating 1937 when the FDR administration exit the stimulus when the economy had barely started to recover, thereby deepending the recession.
Update 1
The San Francisco Fed's economic outlook forecasts the persistence of economic output gap well into 2012.
Unemployment and GDP forecasts for the next two years are also available.
Update 2 (7/3/2010)
CBO report on the Budget and Economic Outlook is available here (see also a presentation here, pdf here)
Update 3 (17/3/2010)
David Leonhardt has an excellent summary of the need to balance between increasing taxes (increasing marginal tax rates etc) and cutting expenditure (health care reforms etc) in order to meet America's unsustainable public debt. Taxes fell from 21% of GDP in 2000 to a 60-year low of 15.1% in 2009.
This superb graphic clearly captures the difference between expenditure and revenues with projections for the next fifty years. As can be seen, the solution has to necessarily involve Medicare and Medicaid.
See also this NYT graphic and article on how the trillion dollar deficits were created during the last decade.
Update 4 (16/4/2010)
Via Mark Thoma
Update 5 (29/9/2010)
David Leonhardt summarizes the fiscal situation facing the US, "The bulk of the deficit problem instead comes from three popular programs, Medicare, Social Security and the military, and they happen to be the ones the Republican pledge exempts from cuts. But it’s impossible to fix the deficit without making cuts to these programs or raising taxes. To suggest otherwise is to claim that 10 minus 1 equals 5."
The budget projects that the deficit will peak at nearly $1.6 trillion in the current fiscal year (2009-10), a post-World War II record, and then decline to $1.3 trillion in the 2010-11 fiscal (starting October 2010), but will remain at economically troublesome levels over the remainder of the decade. Over 10 years, the budget is expected to save an estimated $1.2 trillion, mainly by ending the Bush tax cuts for the richest Americans and freezing some domestic spending for three years.
Obama's $3.8 trillion budget for fiscal year 2011 incorporates proposals to overhaul the health care system and energy policies, which are languishing in Congress. It also contains a $266 billion proposal on tax credits for hiring and new job-creation investments, and on other short-term stimulus including extended unemployment compensation.
As the Times writes, it does not make the really hard choices about entitlement programs — Medicare and Medicaid, especially — and about taxes that are essential to cut annual deficits and to begin paying down an accumulated debt (both domestic and foreign), which is forecast to equal 77% of GDP by 2020, the highest since 1950. The President has already proposed a widely criticized three year freeze on all non-defense discretionary spending to rein in the spiralling federal debt.
The real deficit picture is likely to turn out to be far worse, as this graphic shows, since in the last 30 years, about 80% of four-year budget forecasts have been too optimistic.
The budget has also been criticized for not doing enough to address the steep unemployment challenge and trying to put deficit reduction (through spending freeze) over short-term fiscal support to pull the economy out of the bottom. In fact, the budget proposals forecast the unemployment rate to be 9.8% at the end of 2010, 8.9% at the end of 2011, and 7.9% at the end of the Presidential election year of 2012.
Economix points to the figures on US government revenues and expenditures recently released by the Office of Management and Budget. Interestingly, even as the shares of individual income tax has remained stagnant, excise and corporate taxes have declined, payroll taxes (which includes Social Security and Medicare taxes) have become a much larger source of revenue for the federal government over the years.
On the expenditure side, the decline in defense has mirrored the worrying increase in health care expenses.
This superb graphic, courtesy Brad de Long, captures the reasons for the steep deficits. The Bush era tax cuts and its impact tower over all others, including the impact of the current recession. The Iraq and Af-Pak wars too have contributed substantially. In contrast and surprisingly, the fiscal stimulus appears to have had very limited impact, adding credence to the increasingly widespread belief that the Obama administration got too much caught up with barking down the wrong tree and not expanding the ARRA for fear of increasing the deficit.
As this excellent editorial in the Times points out, to seriously address the debt problem, President Obama will have to fix health care, broaden and raise taxes and reform social security. It estimates that given the rising health care costs and an aging population (and its impact on Medicaid, Medicare, and Social Security) without these serious reforms, federal debt in the United States would grow from 53% of GDP in 2009 to more than 300% by 2050.
The graphic above also clearly indicates that the stimulus spending has contributed only a miniscule share to the increased public debt burden. This also goes against the growing chorus that another round of stimulus spending will be suicidal in the efforts to unwind the debt burdens. As Joseph Stiglitz recently wrote, "The US economy needs another stimulus, and it needs it now."
Mark Thoma draws the distinction between the need for a short-run deficit to boost demand and reduce unemployment now, with the need to implement health care reforms to address the long-run imbalance in the budget. He writes, "Whether we spend more or less to fight the employment problem that exists right now has little to do with solving this (health care and long run imbalance) problem, and there's no reason at all for concern about the long-run problem to stop us from doing more now. No reason except deficit fetishness that refuses to separate the long-run health care cost problem from the largely independent short-run needs of those who are struggling to find employment in an economy that is still losing jobs."
Paul Krugman points to the annual President's Economic Report which shows that the stimulus fades out fast starting in fiscal 2011 (which starts in October 2010), even as unemployment being around as high as it is now. He feels that a premature stimulus exit (or not having another round of stimulus) has the danger of repeating 1937 when the FDR administration exit the stimulus when the economy had barely started to recover, thereby deepending the recession.
Update 1
The San Francisco Fed's economic outlook forecasts the persistence of economic output gap well into 2012.
Unemployment and GDP forecasts for the next two years are also available.
Update 2 (7/3/2010)
CBO report on the Budget and Economic Outlook is available here (see also a presentation here, pdf here)
Update 3 (17/3/2010)
David Leonhardt has an excellent summary of the need to balance between increasing taxes (increasing marginal tax rates etc) and cutting expenditure (health care reforms etc) in order to meet America's unsustainable public debt. Taxes fell from 21% of GDP in 2000 to a 60-year low of 15.1% in 2009.
This superb graphic clearly captures the difference between expenditure and revenues with projections for the next fifty years. As can be seen, the solution has to necessarily involve Medicare and Medicaid.
See also this NYT graphic and article on how the trillion dollar deficits were created during the last decade.
Update 4 (16/4/2010)
Via Mark Thoma
Update 5 (29/9/2010)
David Leonhardt summarizes the fiscal situation facing the US, "The bulk of the deficit problem instead comes from three popular programs, Medicare, Social Security and the military, and they happen to be the ones the Republican pledge exempts from cuts. But it’s impossible to fix the deficit without making cuts to these programs or raising taxes. To suggest otherwise is to claim that 10 minus 1 equals 5."
Financial market share
I had blogegd earlier about the disproportionately large influence of the financial sector in the economy and the hugely overpaid employees in that sector.
Catherine Rampell has a nice post which draws attention to the recently released annual Economic Report of the US President which amplifies these aforementioned concerns.
This graph compares the trend growth of the size of the American banking sector in relation to the US GDP. From 1952 to 2009, nominal output increased by 4,000% while financial sector assets exploded 16,000%.
Another graph illustrates the source of this explosive growth within the financial sector - the shadow banking sector. The makeup of financial sector assets has changed drastically, shifting from a concentration of assets in banks (which include commercial banks, bank-holding companies, thrifts and credit unions) toward other institutions, including mutual funds, government-sponsored enterprises (like Fannie Mae and Freddie Mac) and issuers of asset-backed securities. Today, banks still represent the largest component of the financial sector, 26.7% as of June 2009, but back in 1952, banks accounted for 53.2% of financial sector assets.
In an indication of the lack of transparency in the markets, this graph does not contain the shares of hedge funds since accurate information about their size is not even available.
All this growth got initiated in the mid-eighties (under Republican administration) and took-off in the mid-nineties (under democratic administration). This bipartisan nature of its growth atleast partially explains why the financial services sector managed to consistently outrun its government overseers in the last couple of decades.
Catherine Rampell has a nice post which draws attention to the recently released annual Economic Report of the US President which amplifies these aforementioned concerns.
This graph compares the trend growth of the size of the American banking sector in relation to the US GDP. From 1952 to 2009, nominal output increased by 4,000% while financial sector assets exploded 16,000%.
Another graph illustrates the source of this explosive growth within the financial sector - the shadow banking sector. The makeup of financial sector assets has changed drastically, shifting from a concentration of assets in banks (which include commercial banks, bank-holding companies, thrifts and credit unions) toward other institutions, including mutual funds, government-sponsored enterprises (like Fannie Mae and Freddie Mac) and issuers of asset-backed securities. Today, banks still represent the largest component of the financial sector, 26.7% as of June 2009, but back in 1952, banks accounted for 53.2% of financial sector assets.
In an indication of the lack of transparency in the markets, this graph does not contain the shares of hedge funds since accurate information about their size is not even available.
All this growth got initiated in the mid-eighties (under Republican administration) and took-off in the mid-nineties (under democratic administration). This bipartisan nature of its growth atleast partially explains why the financial services sector managed to consistently outrun its government overseers in the last couple of decades.
World economic update
Floyd Norris has an excellent graphic which nicely captures the broad snapshot of how global manufacturing output is recovering and even accelerating after V-shaped falls in 2008 and 2009, though manufacturing employment continues to remain weak in some countries.
The chart above reflects the monthly surveys of manufacturers in 10 countries around the world, focusing on output and employment. The US GDP has been estimated to have grown at an annualized rate of 5.7% for the final quarter of 2009, while unemployment rate declined to 9.7% in January. The Indian economy is also forecast to grow at a fast clip. The advance estimates of CSO has put GDP growth rate for 2009-10 at 7.2%, RBI at 7.5%, and the Finance Ministry at 7.75%.
More evidence of a robust recovery in India comes in the form of the IIP figures for December which shows that industrial output grew 16.8% from a year earlier, its fastest pace in at least a decade. This is higher than the revised annual rise of 11.8% in November and also above analysts forecast for a 12% rise. Consumer durables goods output continued to surge on the back of fiscal spending, growing an annual 46%, manufacturing production rose 18.5%, while capital goods output was up 38.8% and mining rose 9.5%.
Update 1 (22/3/2010)
Paul Krugman uses the IMF’s World Economic Outlook Database to highlight the depth of Great Recession for the advanced economies.
Update 2 (2/4/2010)
WSJ points to the Purchasing Managers Index which indicates a strong manufacturing growth across the world.
The chart above reflects the monthly surveys of manufacturers in 10 countries around the world, focusing on output and employment. The US GDP has been estimated to have grown at an annualized rate of 5.7% for the final quarter of 2009, while unemployment rate declined to 9.7% in January. The Indian economy is also forecast to grow at a fast clip. The advance estimates of CSO has put GDP growth rate for 2009-10 at 7.2%, RBI at 7.5%, and the Finance Ministry at 7.75%.
More evidence of a robust recovery in India comes in the form of the IIP figures for December which shows that industrial output grew 16.8% from a year earlier, its fastest pace in at least a decade. This is higher than the revised annual rise of 11.8% in November and also above analysts forecast for a 12% rise. Consumer durables goods output continued to surge on the back of fiscal spending, growing an annual 46%, manufacturing production rose 18.5%, while capital goods output was up 38.8% and mining rose 9.5%.
Update 1 (22/3/2010)
Paul Krugman uses the IMF’s World Economic Outlook Database to highlight the depth of Great Recession for the advanced economies.
Update 2 (2/4/2010)
WSJ points to the Purchasing Managers Index which indicates a strong manufacturing growth across the world.
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