[From Rick Marken (2000.01.25.0900)]

Now that the "baseball" paper is in the publication queue I have

decided to relax for a while with my favorite reading material:

the Statistical Index os the US;-) I've been working on extending

TCP's analysis of the US economy (as described in his book

"Leakage", http://www.benchpress.com/Leakage1.htm) which included

data that went only to 1988. I have now included data to 1998

and there is one interesting surprise. To understand the surprise

you have to know something about the findings reported in "Leakage".

The main finding of interest here is that for the last hundred

years (at least) capital investment (I) in the US (corporate and

government) has been almost exactly 20% of GNP; that is I/GNP

is basically a constant: 0.2. In fact, the lowest I/GNP ratio

reported in "Leakage" occurred in 1951 when I/GNP was 0.18.

TCP reports I/GNP ratios (as percentages) through 1987 (the

latest values available to him from the Statistical Index at

the time he was writing "Leakage", in the early 1990s). Here

are the I/GNP ratios (as percentages) from 1988-1998:

1988 19.4

1989 18.6

1990 17.3

1991 16.5

1992 16.0

1993 16.5

1994 17.8

1995 17.7

1996 17.8

1997 19.6

1998 19.4

The values for 1995-1998 will probably be revised slightly, but

not by much. What's interesting is that starting in 1990 we have

the lowest levels of capital investment (as a proportion of GNP)

ever seen in this country. We seem to have recovered by 1998. But

the numbers for the early 90s are so low that I checked and rechecked

my calculations. I thought I might be getting the wrong data from

the Index. But I'm now pretty confident that the data is correct;

there was a huge decline in capital investment starting in 1990 and

continuing for at least five years.

I think this decline might be a reflection of the banks becoming

very conservative in the early 1990s about loaning money for

any capital investment given all the bad loans and bank failures

at the end of the 1980s. Anyway, these data create an interesting

illusion. If one looked only at the relationship between I/GNP and

average rate of economic growth (dGNP/dt) over this period one would

conclude that capital investment does, indeed, drive economic growth.

Here are the growth date (dGNP/dt) numbers for the 10 years (1988-98)

corresponding to the 10 years of I/GNP shown above:

3.3

1.2

-0.9

2.6

2.3

3.3

2.2

3.3

3.8

3.7

(Note the recession of 1991 = growth rate a negative .9).

The correlation between capital investment (I/GNP) and growth

rate (dGNP/dt) over this 10 year period is .61, not huge but pretty

good. If one looks at the correlation between capital investment at

year t and growth at year t+1 the correlation goes up to .72. So it

looks like, over this 10 year period, capital investment is strongly

related to economic growth, just as conventional economists have

always believed. Indeed, conventional economists think of capital

investment as one of the main independent variables in the economy;

increase capital investment and you increase growth.

But the fact is that the period 1988-1998 is an aberration; if one

looks at the relationship between capital investment and growth over

the entire last half of the 20th century (1951-1998) one finds

that the correlation is -.01 (virtually zero); the lagged correlation

(capital investment at year t with growth at year t+1) goes up to

-.09 (still virtually zero).

In fact, the variable that controls economic growth -- the main

independent variable in the economy -- is leakage (unspent GNP).

I/GNP was correlated with growth from 1988-1998 simply because

the availability of capital was correlated with the Fed's monetary

policies during that period. The illusion is similar to the

"behavior illusion" in psychology and I think it illustrates the

importance of understanding data in terms of working models.

Best

Rick

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Richard S. Marken Phone or Fax: 310 474-0313

Life Learning Associates mailto: rmarken@earthlink.net

http://home.earthlink.net/~rmarken