J Brauer | © Stone Garden Economics

For the years 1929 to 2011, the chart on the left shows the shares of private sector household consumption and of business investment as a percentage of the U.S. economy’s overall size. Thus, the blue line shows that consumption accounted for 71 percent of GDP in 2011 and investment (in red) for about 14 percent. Similarly, the black line shows that the foreign trade sector (exports and imports) netted out to about -3 percent (more monies leaving the countries on account of trade than monies coming in).

The green line traces the economic size of government as a share of GDP. The massive upswing in the early 1940s was due to the expense of World War II. This depressed the shares of consumption, investment, and foreign trade in the economy, but all rebounded in the immediate postwar years.

Government spending did not return to its prewar levels. Instead, it bounced up from a level of about 20 to 25 percent of GDP throughout the 1930s and 1940s (save for the war) and then increased to close to 40% by the early 1950s (the Korean war era). Ever since the end of the Korean war, however, the share of government in the economy has declined. In fact, this share is back to 20 percent, just were it was in the 1930s, some 80 years ago.

To clarify: Government spending refers to all federal, state, and local or municipal spending across all government jurisdictions in the United States. It includes spending only on the functions of government proper and thus excludes transfer payments such as those for social security. For these, the federal government serves merely as a transfer station: 40-year-old twins Paula and Patrick pay into the social security system while their 70-year-old parents, Paul and Patricia, receive monthly social security checks for consumption.

In popular lore, government looms large but that is mostly because it has assumed more and more of these revolving door-type transfer functions, swooping up funds from one side of the private sector to disgorge them on the other side. In contrast, the function of governing itself, and the expense associated with it, has become smaller and smaller since the end of the Korean war. According to the Department of Commerce’s Bureau of Economic Analysis, much of this 20 percent share is spend on the federal government’s military efforts, which includes several hundred billion dollars on Veterans Affairs and a pro-rated portion of the interest due on federal debt.

Thus, those economists who argue for more stimulatory federal government spending to aid the ailing economy do have a point. At issue is not the overall number of dollars shuffled through government accounts: The answer to the question of whether government is “big” or “small” is that it is small by historical standards. Instead, at issue is what portion of these dollars is net of transfers and what portion of the small remainder is spend on directly useful things such as building and maintaining infrastructure and publicly-funded schools, colleges, and universities. That’s the real question voters and policymakers need to debate.

J Brauer is Professor of Economics, James M. Hull College of Business, Augusta State University, Augusta, Georgia, USA.

J Brauer | © Stone Garden Economics

Business people and their financiers face a number of risks: Economic and exchange rate risk, market risk, product risk, operational risk, financial risk, and on and on. Listings of risk categories vary depending on the source one consults. One category of risk pertains to regulatory and political risk. The former refers to the behavior of local, regional, or national polities in regard to issuing laws, rules, and regulations as they affect business, for example labor, environmental, and product safety laws. So long as these are transparently discussed, clearly formulated, and well implemented, business can plan accordingly, taking the rules—such as they are—into account. In contrast, rapidly changing, inconsistent, or arbitrary rules generate uncertainty and make planning difficult.

Political risk—the instability of the political system as a whole—leads to uncertainty as well: Why invest, say, US$100 million if there is uncertainty about the environment into which one places such assets? Why invest in an Argentina or Bolivia or Venezuela when management believes that there exists a substantial risk of expropriation (nationalization)? Often the decision will be not to invest. This deprives an economy of jobs and government of tax revenue even as its outlays increase to cope with an increasing demand for social services. In a word, uncertainty, especially when generated by political risk, is unhealthy.

The chart on the left illustrates the point. For 1930 to 2011, it shows U.S. private domestic net investment (the red line) and private sector growth (the grey line).

For example, the nearly 6 percent fall in private sector growth in 2009 (the grey line) is linked to the drastic decline in private sector investment (the red line). The investment rebound in 2010 and 2011 has been small, and the economy is presently held afloat by government spending to compensate for lacking private sector investment spending.

The recessions of the early 1970s, late 1970s and early 1980s, and of the early 1990s all are linked to politically driven energy crises and wars in the Middle East. The recession of 2001, however, was precipitated by the November 2000 U.S. election which for a long time left unclear just who would be the country’s next president. (In the event, it took a U.S. Supreme Court decision to seat George W. Bush.) The chart shows the huge decline in business investment in 2001. If drawn on a quarterly basis, it would show the investment decline in the fourth quarter of 2000, starting immediately after the election: Why invest even in your own country if, following an election, you still don’t know who your next president will be?

Today’s global lack of business investment and consequent economic malaise likewise stems from political uncertainty. Businesses sit on piles of cash, not knowing where to put it. China’s and India’s growth rates are dropping and uncertain political transitions await both countries. The euro zone countries are in an unholy mess, seemingly unable to sort out the euro crisis at the political level. The United States is riven by sectarian politics that seem worse and more polarized than ever, with sharply diverging views on issues ranging from taxation, spending, and federal government deficit and debt positions to provisions for social security (pensions) and health care. If I had a hundred million dollars of cash, I wouldn’t know where to put it either. It is entirely understandable that many businesses adopt a “wait and see” attitude, meanwhile delaying job creation and tax revenue generation.

Instead of growth, the world economy faces another economic collapse coming in late 2012 (euro zone) and early 2013 (the United States). Inevitably, this would drag down the remainder of the world economy as well. (Whom would China export to?) It is not a pretty picture. Although many people blame “business,” the immediate responsibility (and resolution) lies with the political system, not with businesses or private households. But this is just another way of saying that the ultimate responsibility lies with voters who need to make decisive and intelligent choices. Only then will the political ship right itself and provide enough confidence in its stability and longevity for business to invest, and employ, again.

J Brauer is Professor of Economics, James M. Hull College of Business, Augusta State University, Augusta, Georgia, USA.

J Brauer | © Stone Garden Economics

According to World Bank data, in 2011 the world economy was producing goods and services valued at 70 trillion dollars. To account for purchasing power differences and for exchange rate variations, this is measured in purchasing power parity or international dollars, I$, with the base year of comparison being  2005. The chart shows the top-5 trillion dollar economies as of 2011, ordered by size, namely the United States, China, India, Japan, and Germany.

A reasonable projection suggests that by 2016 the world economy will grow to just over I$80 trillion. Of this, the U.S. economy might be expected to grow to a little over I$15 trillion, somewhat less than a 20 percent share. (The U.S. projection is based on a polynomial equation that captures 98% of its data record.) By then, however, the United States may just have been eclipsed by China whose economy could reach I$16 trillion (the trend for which is based on an exponential equation which captures very nearly 100% of its data record).

Given that the Chinese population is nearly four times that of the United States, the average U.S. American will still be vastly better off in per capita terms than the average Chinese but in terms of sheer economic heft, China could well be the king of the hill by the time of the 2016 Olympic Games.

If China takes the economic gold and the United States the silver, then India—already London 2012′s economic bronze medalist—will solidify its third-place ranking with an economy forecast to reach about I$5 trillion in size (the third trend forecast in the top chart). Japan and Germany will stay at around I$4 trillion and I$3 trillion, respectively, simply because their economically active populations are stagnant or falling.

A second group of trillion dollar economies consists of Russia, the United Kingdom, Brazil, France, and Italy. As the second chart shows, except for Italy, which is suffering from an ongoing ten-year-long slump, the others are bundled at the I$2 trillion mark, with Brazil perhaps having the greatest forward momentum, again largely because of the underlying and growing size of its population. Russia’s prospects tend to ride on the energy markets with relatively little filtering down to its population. France appears to grow slowly as one would expect of a mature economy with relatively little population growth. The United Kingdom—or should one say London?—saw an excellent ten years from the mid-1990s to the mid-2000s, and it remains to be seen whether its growth path from a I$1.5 trillion to I$2 trillion economy can be recovered.

Then there is a third group of trillion-dollar club economies. It consists of Mexico, South Korea, Spain, Canada, and Indonesia and Turkey. The most interesting is perhaps South Korea which moved from near-parity with Indonesia and Turkey in 1980 to second-place, just behind Mexico, by 2011. Of the six economies in this third group, one images that if not by 2016 then perhaps by 2020, Spain and Canada will be at the bottom, having been surpassed by Indonesia and Turkey. Since the candidate cities for the 2020 Olympics are Istanbul and Madrid (and Tokyo), I would not find it surprising if Istanbul were to be selected. An Istanbul Olympics would be another modern “coming of age” event, akin to Tokyo in 1964, Seoul in 1988, Beijing in 2008, and Rio de Janeiro in 2016.

Because its huge riches are distributed over relatively small populations, the people of the “Western” countries—the U.S., Japan, Germany, the U.K., France, Italy, Spain, Canada, and surely now South Korea as well—will still experience comfortable standards of living. Similarly, because of its vast populations the “emerging” economies—China, India, Russia, Brazil, Mexico, Indonesia, and Turkey—will still experience deep pockets of poverty and even of deprivation. Nonetheless, the balance in world economic power keeps shifting.

Today’s trillion-dollar economies—16 countries in all—account for nearly three-quarters of world production. This is a different kind of heft, a seeming oligarchy of the fat against the mass of the thin. Fortunately, economics is not politics and on a per capita basis small economies—from Chile to Uruguay, from Belgium to Luxembourg, and from Singapore to Taiwan—can expect to do just as well as their over-sized companions. Still, average living standards notwithstanding, heft alone is important. Whereas in 2011 the whole of the euro zone economies still were performing below their 2007 level, China’s economy has grown over the same time period by 44 percent. At I$10 trillion each, its size now matches that of the entire euro zone.

J Brauer is Professor of Economics, James M. Hull College of Business, Augusta State University, Augusta, Georgia, USA.

J Brauer | © Stone Garden Economics

The chart on the left shows that for the immediate prospects of the U.S. economy it matters little who will be the next President of the United States.

The bold black line, labeled GDP actual, plots the development of the inflation-adjusted gross domestic product (or real GDP) from the first quarter of 2000 through the second quarter of 2012, i.e., through 30 June 2012. The current malaise started in late 2007, with the collapse lasting until the second quarter of 2009. Since then the U.S. economy has technically been in recovery. In fact, as the economy stands now, we are back this year to just above the level of five years ago, when the crisis started.

So we lost at least five years of economic progress. But where are we headed?

The economic trend since the beginning of the current turnaround is plotted as the dotted black line (labeled GDP trend 2009) through the end of 2020 , i.e., essentially through the next two presidential terms. But the trend line is based on the seemingly much lowered base due to the recession. In contrast, the general feeling in the country seems to be that the U.S. economy should get back to some prior base-line trend such as those indicated by the blue and red lines in the chart.

The blue line (GDP trend 1982) projects the economy through 2020 on the basis of its trend from 1982 to 2007, and the red line (GDP trend 1991) is the projection taken from the economic performance of 1991 to 2007. Because the 1990s, and the late 1990s in particular, were unusually successful economic years, the red line should perhaps be disregarded were it not for two facts. One is that after the recession of the early 2000s the economic performance through 2007 appears to fit the red trend line very well. So, shouldn’t we be entitled to take the red trend line as the standard of expected economic performance? And second, those who are in their 40s and early 50s came of economic age in the early 1990s and have never experienced anything but what is suggested by the red trend line. Understandably, the drop-off in economic performance since 2007 must be disconcerting for them.

Even those who came of economic age as from the 1980s could view at least the blue trend line as the standard to be achieved and, on that score, the current trend runs merely parallel to the blue trend and will not catch up to it. In fact, the difference between the dotted black and the blue trend lines amounts to an annual trillion dollar shortfall, enough to account for half of the current unemployment and all of current underemployment (part-timers seeking full-time work).

In a word, the majority of the current U.S. work force can be forgiven for believing that there’s something fundamentally wrong about their economy.

The question simply is: What standard does one use to form appropriate economic expectations? The answer to this question is somewhat subjective but looking back further in history may help.

The second chart shows the record for U.S. real GDP since 1950. The bold black portion of the line goes through to the recession of the early 1980s—at the time the biggest recession since the Great Depression—and the red portion is the performance since then. If one were to draw two straight lines, one through the black, the other through the red portion, it would appear that the post-early 1980s (red) record shows far more rapid economic growth than does the pre-1980s (black) one. But if one draws a curved line just through the pre-1980s (black) portion—a line that mathematically fits the data better than a straight line does—and then extends it through 2020 (labeled Poly. (GDP actual 1)), one comes to a different conclusion.

That conclusion is that the Reagan/Bush Sr.-years through 1991 and the first Clinton/Gore term, through 1995, were mere continuations of the economic trend inherent in the 1950s, 1960s, and 1970s. And so does the record since 2009! This suggests that the economy is exactly back on track, and that it was the second Clinton/Gore and the two Bush Jr.-terms that constitute the economic aberration.

If this view of historical economic forces is correct, then the collapse of the dot.com bubble in 2000 should have brought the U.S. economy back to the dotted black trend line by about 2005. But this potential transition to trend was interrupted by the Iraq-war and housing-market booms, fueled by unsustainable public and private-debt bubbles.

If we are in fact back to trend, then the next four years will see a steadily improving job market and commensurate economic growth. However, while the private sector has begun to work off its debt-load, the (federal) public sector remains deeply troubling. While a rising economy will reduce certain government outlays and bring in more tax revenue, the underlying structure of federal finances is unhealthy. The next President and Congress still need to sort out this problem.

J Brauer is Professor of Economics, James M. Hull College of Business, Augusta State University, Augusta, Georgia, USA.

J Brauer | © Stone Garden Economics

Born in Liverpool in 1910 and trained at Oxford, Chicago, and Harvard, Kenneth Boulding was an accomplished economist and recipient of the 1949 John Bates Clark Medal—the highest honor awarded by the American Economic Association whom he eventually served as its president, in 1968. He worked at Edinburgh, Iowa, and Stanford and, for much longer stints, at the University of Michigan and the University of Colorado, Boulder. In 1980, he also presided over the American Association for the Advancement of Science (AAAS), perhaps the world’s premier science association. (AAAS is the publisher of Science). Acknowledged as a founder, co-founder, or prime mover of general systems theory, of peace research, and of ecological (as distinct from environmental) economics, Boulding burst disciplinary boundaries. (For reviews of his life and work, click [here] and [here].)

In his mature work, again and again Boulding refers back to his 1956 book, The Image. The book’s claim is that all “behavior depends on the image” that humans—and ultimately their organizations and societies—construct about themselves and others. Images are created by messages. Indeed, the “meaning of a message is the change which it produces in the image.” Messages can leave an image unaffected of course. They also can reinforce or update an image. Or they can revolutionize an image, overthrow it, and lead to its replacement by another image.

Images come in a variety of forms: Our image of time (e.g., circular versus linear time), of space (e.g., from the flat, two-dimensional to the spherical, three-dimensional world), of how things are ordered or related (e.g., from Newton’s to Einstein’s physics), of the assignment of values (e.g., national vs global identity), and so on. Constraints permitting, changes in images lead to changes in behavior. Some messages and images are biologically-based and affect behavior unconsciously or subconsciously, often in distinct contrast to what we may think or say about our own behavior. In all this, Boulding anticipates much scholarship and science yet to come, including the now fashionable field of behavioral economics (see, e.g., Dan Ariely’s recent popular books, Predictably Irrational and The Upside of Irrationality.)

For example, regarding the theory of consumer demand, Boulding offers two “revised laws of economics.” First, “we will do today what we did yesterday” and, second, behavior changes when there is “dissatisfaction with what we did yesterday.” Call them the laws of inertia and discontent. (There might be a third law, the law of novelty-seeking.) Yes, income and prices are important external (‘objective’) constraints on demand, but the motivation relies on the images we have (the ‘subjective’ realm). With this, Boulding reduces the debate over rational choice theory to how people form preferences. No, people are not ‘rational’ in regard to the preferences they form for wearing brown shoes or black shoes. But once they have an image of what their preferences are, they then are reasonably consistent in arranging their lives in accordance with the images of their likes and dislikes. Introductory and even intermediate-level economics textbooks still mostly ignore the issue of how preferences are formed, and what are the implications of image formation for actual human behavior. Boulding saw this clearly nearly 60 years ago.

The Image also elucidates some puzzles in economic development (the image of human advancement and betterment), business cycle analysis and economic growth (the image of business prospects as transmitted by news media), oligopoly analysis (the image of one’s rivals’ likely actions), entrepreneurship and technological advance (the image of the possible), and the role of nonconformist subcultures (the imagining of otherness). In addition, Boulding clearly perceives the law of increasing returns to public knowledge, and he examines political messaging, the role of mass media, expectations (i.e., image) management, and their roles in depressing or advancing individuals and societies. All this, and more, in 1956!

The Image develops a foundational framework with which to examine commonalities across psychology, economics, sociology, and politics. Only half-jokingly, Boulding wondered if he had stumbled upon a possible new science, “Iconics” (as in “icon”). In a review, G.L.S. Shackle, no mean economist himself, wrote: “The reader sits agape while the whole nature of man is unfolded before him, swiftly, seductively, with homely illustrations, vivid strokes of irony and an unfailing verve and coruscating wit … The content of this book is a single profoundly suggestive idea developed with brilliant virtuosity and the fertile play of wit over an impressive store of modern culture.” Yes. The Image is still in print at the University of Michigan Press.

J Brauer is Professor of Economics, James M. Hull College of Business, Augusta State University, Augusta, Georgia, USA.