Impelled by the problems with China’s economy that people have been speculating about subsequent to the declines in the Chinese stock market, I’ve been thinking a lot about the inadequacies of present economic models. Consider, for example, total world GDP, illustrated in the graph above, which was sampled from this post in The Economist from March of 2014. It depicts the rate of change in the world economy over time.
Here’s how I interpret that graph. The U. S. economy has been growing at a depressingly slow rate for the last half dozen years. It’s been growing but just barely. More of the increase in the rate of growth has come from China, which has contributed just about a full percentage point, year after year. By far the greatest amount of the increase, however, has come from “other emerging economies”. What does that mean? I interpret it to mean Brazil, Russia, and other countries from which China has been importing the raw materials they need to fuel the over-production they’ve been relying on for their own growth. Without that growth would have been very phlegmatic indeed.
But what if the Chinese growth has been systematically overstated? Or, as seems to be happening, China slows its purchases from “other emerging economies”? Now consider this graph:
It already looks very much as though 2015’s growth will be substantially below the projection and, with China’s growth slowing, projections farther into the future will drift ever further from the projected path.
IMO globalization has put us very much in the bad old days of boom and bust. Our economy can’t be managed in isolation from the rest of the world and we don’t have the tools to regulate the world’s economy and it’s hard for me to imagine that we will do so in our lifetime.
Being the risk averse person that I am my predisposition is that we should be attempting to mitigate the risks posed by the actions of people half a world away over whom we have practically no influence. That involves insulating ourselves from their actions. Of course no great fortunes will be made that way. What’s happening is that the great fortunes are being concentrated while we all share the downside risks.
… I’ve been thinking a lot about the inadequacies of present economic models. …
I would suggest that they are totally broken.
If every time you ride in an elevator you sing Dixie going up and Battle Hymn of the Republic going down, you may actually believe this model is functional until a power outage, but after a few hours, you will only be hoarse. You can try tweaking your model by altering the pitch of your voice, but until the power returns, you ain’t gonna move.
If after 8 years you continue to insist your broken model is functional, it might be time to see a specialist (the mental kind).
As I’ve suggested from time to time, I think that many of the problems with predictions about the U. S. economy are because they’re trying to predict the behavior of a subsystem without taking into account the subsystem’s interactions with other subsystems. Said another way, the exogenous processes aren’t exogenous any more.
That’s a funny model of elevator operation, TB, but I’d suggest neither singing nor whistling Dixie in the present climate!
That sounds suspiciously like America for Americans! That’s a thought crime, you know.
And we should all be grateful for that. [See, that’s how to NOT crimethink.]
I see it more as he who sups with the devil should have a long spoon.
@Icepick
I was trying to juxtapose two things, and that was the fastest thing I could think of. Maybe I had The Outlaw Josey Wales on my mind.
I think he who sups with the devil should bring their own food.
HIS own food. I do miss the power to edit.