Why GDP Growth is Good

Most teachers of economics at some point have to address the existential question from students: Is more output always good? Nicholas Oulton does has a nice punchy essay called "Hooray for GDP!", written as an "Occasional paper" for the Centre for Economic Performance at the London School of Economics and Political Science. Oulton summarizes the main arguments against focusing on GDP in this way:

1.  GDP is hopelessly flawed as a measure of welfare. It ignores leisure and women’s
   work in the home. It takes no account of pollution and carbon emissions.
2. GDP ignores distribution. In the richest country in the world, the United States, the
   typical person or family has seen little or no benefit from economic growth since the
   1970s. But over the same period inequality has risen sharply.
3. Happiness should be the grand aim of policy. But the evidence is that, above a certain level, a higher material standard of living does not make people any happier. ...
4. Even if higher GDP were a good idea on other grounds, it’s not feasible because the
   environmental damage would be too great.

Oulton then addresses each question, not attempting any kind of exhaustive review, but by providing a selective sampling of the arguments and evidence. Here are some of  his answers, mixed with my own.

1. GDP is flawed as a measure of welfare. 


 Yes, GDP leaves out a lot that matters, and a lot that should matter. There's no surprise in this: Every intro econ textbook for decades has taught this point. My favorite quotation on this point from a 1968 speech by Robert Kennedy.

 Oulton makes the useful distinction that GDP is a measure of output that is not and was never intended to be a measure of welfare, but that per capita GDP is clearly a component of welfare--that is, when one makes a list of all the factors that benefit people, a higher level of consumption of a wide range of goods and services is an item on that list. In addition, per capita GDP is a broader indicator of welfare because looking around the world, GDP is clearly broadly correlated with health, education, democracy, and the rule of law.

For thinking about social welfare, it is often useful to look at statistics other than GDP. For example, here's one of my earlier posts about economists attempting to estimate "Household Production: Levels and Trends."

My own favorite comment on this point is from a 1986 essay by Robert Solow ("James Meade at Eighty," Economic Journal, December 1986, 986-988), where he wrote: "If you have to be obsessed by something, maximizing real National Income is not a bad choice." At least to me, the clear implication is that it's perhaps better not to be obsessed by one number, and instead to cultivate a broader and multidimensional perspective. But yes, if you need to pick one number, real per capita GDP isn't a bad choice. To put it another way, a high or rising GDP certainly doesn't assure a high level of social welfare, but it makes it easier to accomplish those goals than a low and falling GDP.

2) GDP ignores distribution. 

Yes, it does. Again, GDP is a measure of output, not of everything that can and should matter in thinking about society. I've often noted on this website that inequality of wages and household incomes has been rising in recent decades, and that I believe this trend is a genuine problem.

But even though high and rising inequality is (I believe) a problem, that doesn't mean that high or rising GDP is the cause of the problem It's not at all clear that being in an economy with a higher level of GDP leads to more inequality. From a global perspective, many economies with the greatest level of inequality are in Latin America or in Africa. Many high-income countries in western Europe have much greater equality of incomes than the U.S. economy. Periods of rapid economic growth in the U.S. economy--say, back in much of the 1950s and the 1960s--were not associated with rising inequality.

Oulton writes: "Inequality concerns are real but there is still a case in my view for separating questions of growth from questions of distribution." In my own mind, this analytical distinction started in earnest (although I'm sure there were predecessors) with John Stuart Mill's classic 1848 text, Principles of Political Economy, where the first major section of the book is about "Production" and the second major section is about "Distribution." In Mill's "Autobiography," he writes that  he came to appreciate this distinction, and indeed to view it as one of the central distinguishing features of his book, as a result of discussions with his wife, Harriet Taylor Mill. Mill wrote:

"The purely scientific part of the Political Economy I did not learn from her; but it was chiefly her influence that gave to the book that general tone by which it is distinguished from all previous expositions of political economy that had any pretension to being scientific.... This tone consisted chiefly in making the proper distinction between the laws of the Production of wealth—which are real laws of nature, dependent on the properties of objects—and the modes of its Distribution, which, subject to certain conditions, depend on human will."


3) Happiness should be the grand aim of policy. 

The question here, of course, is how "happiness" is judged. It's true that on surveys which ask people to rank how happy they are on a scale from 1-10, the happiness level of people in high-income countries isn't much higher than a few decades ago. There is an ongoing argument over how to interpret these results. Is happiness really "positional"--that is, I judge my happiness relative to others at the same time, and so if everyone has more consumption, happiness doesn't rise? Are these kinds of survey results an artefact of the survey itself: that is, someone who answers that they are "7" on the happiness scale in 2010 isn't saying that they would also be a "7" on the happiness scale if they had a 1970 level of income. Here's a post from last May on the connections from economic growth to survey questions about happiness, with some emphasis on how it applies in China.

My sense is that most people actually get a lot of happiness from the goods and services of a modern economy, and they would not be equally happy if those goods and services were unavailable. Oulton makes an interesting argument here that there is a battle between process innovation and product innovation.  If both process innovation and product innovation rise together, then people have higher productivity and incomes, and happily spend those incomes on the new products that are available. If process innovation rises quickly, but product innovation does not, then people would have higher productivity and incomes, but nothing extra to spend them on--and thus might opt for much more leisure. Oulton has a nice thought experiment here:

"Imagine that over the 220 or so years since the Industrial Revolution began in Britain process innovation has taken place at the historically observed rate but that there has been no product innovation in consumer goods (though I allow product innovation in capital goods). UK GDP per capita has risen by a factor of about 12 since 1800. So people today would have potentially vastly higher incomes than they did then. But they can only spend these incomes on the consumer goods and services that were available in 1800. In those days most consumer expenditure was on food (at least 60% of the typical family budget), heat (wood or coal), lighting (candles) and clothing (mostly made from wool or leather). Luxuries like horse-drawn carriages were available to the rich and would now in this imaginary world be available to everyone. But there would be no cars, refrigerators, washing machines or dishwashers, no radio, cinema, TV or Internet, no rail or air travel, and no modern health care (e.g. no antibiotics or antiseptics). How many hours a week, how many weeks a year and how many years out of the expected lifetime would the average person be willing to work? My guess is that in this imaginary world people would work a lot less and take a lot more leisure than do real people today. After all, most consumer expenditure nowadays goes on products which were not available in 1800 and a lot on products not invented even by 1950."

Of course, over the last century or so workweeks have gotten considerably shorter, and in that sense, people have chosen to take some of the rewards of process innovation in the form of more leisure. But most people prefer to follow a path where they can earn sufficient income to enjoy the results of product innovation. As I like to point out, the modern economy offers a fair amount of freedom in terms of work choices.  Throughout their lives, people often have a choice about whether they will choose to follow a job path that is less demanding in time and energy, but also provides lower income. Some people seek out such choices, but most do not.


4) GDP and the costs of environmental damage. 

Oulton quotes from a 2012 Royal Society report that is concerned about overpopulation and a sustainable environment. He writes: "In its preferred scenario GDP per capita is equalised across the world at $20,000 in 2005 PPP terms by 2050 (Report, page 81). The UK’s GDP per capita in 2005 was $31,580 in 2005 PPPs so this would imply a 37% cut. When they think about economic growth natural scientists tend to think about biological processes, say the growth of bacteria in a Petri dish. Seed the dish with a few bacteria and what follows looks like exponential growth for a while. But eventually as the bacteria cover most of the dish growth slows down. When the dish is completely covered growth stops. End of story."

 Of course, the world economy isn't a petri dish, and people aren't bacteria. Economist have been drawing up models of economic growth with fixed amounts of land or minerals, or where economic activities emit pollution, for some decades now. Oulton summarizes the basic lesson: "These models all have in common the result that perpetual exponential growth is possible provided that technical progress is sufficiently rapid."

In other words, it's certainly possible to draw up a disaster scenario where resource or environmental limitations lead to grief at a global level. It's also possible that with a combination of investments in technology and human capital, economic growth can at least for a considerable time overcome such limitations. For an example of analysis along these lines, the United Nations has put out the first of what is intended to be a series of reports on how changes in different types of capital can offset each other (or not), which I posted about in "Sustainability and the Inclusive Wealth of Nations."

As Oulton notes, the practical question here is not whether resource and environment limits must eventually bind at some distant point in the future, "but only whether it makes sense to advocate growth over the next 5, 10, 25, 50 or 100 years." 

In the U.S. economy, 15% of the population is below what we call the "poverty line," and their life prospects are diminished as a result. About 2.5 billion people in the world live on less than $2/day. 
 I do not see a practical way of raising the standard of living for these people, or for their children, unless rising GDP plays a central role.

Does Big-Time Football Reduce College Grades?

 The University of Oregon Ducks football team is undefeated and ranked second in the country after beating Washington last weekend by a score of 52-21. But three economists from the University of Oregon--Jason M. Lindo, Isaac D. Swensen, and Glen R. Waddell--are using data from their school to ask "Are Big-Time Sports a Threat to Student Achievement?" Their analysis appear in the American Economic Journal: Applied Economics 2012, 4(4): 254–274. The journal isn't freely available on-line, but many in academia will have access through library subscriptions.

Here is the approach they take: " Our primary source of data is University of Oregon student transcripts, covering all undergraduate classes administered from fall quarter of 1999 through winter
quarter of 2007. ... We combine these data with readily available reports of the football team’s win-loss records ... Over our sample period, the winning percentage is 69.7 percent, on average, and varies from 45.5 percent to 90.9 percent." Because the researchers have data on individual students, they can make a statistical comparison of how the grade point average for an individual student changes from year to year, and see if it is correlated with the winning percentage of the football team.  They can also do a number of other calculations, like adjusting for a time trend so that grade inflation is taken into account, as well as looking at how responses differ by gender, by income level (measured by which students are receiving financial aid), and by test scores before entering the university.


There's one additional element of complexity here: In most college classes, grades are given according to some explicit or implicit "curve": that is, even if the academic performance of all students was worse one fall in absolute terms, if a certain percentage of students get As, Bs, Cs, and so on, then grade point average might not show the drop in absolute level of performance. This suggests two kinds of comparisons: 1) male students in their data are more likely to watch football than female students, so one can look at the how the grade gap between male and female students is related to the winning percentage of the football team; and 2) one can compare fall grades when the football team is playing to winter/spring term grades. Lindo, Swensen, and Waddell summarize their results this way:

"That is, our preferred estimates are based on considering how a student’s grades deviates from his or her own average grades as the winning percentage varies from its average, and then how this response varies across gender. With our analysis we show that male grades fall significantly with the success of the football team, both in absolute terms and relative to females. There is also pronounced heterogeneity among students, suggesting that the impact is largest among students from relatively disadvantaged backgrounds and those of relatively low ability. ...

"Relative to females, males report being more likely to increase alcohol consumption, decrease studying, and increase partying around the success of the football team. Yet, both male and female students report that their behavior is responsive to athletic success. This suggests that female performance is likely affected by the performance of the football team as well, but that this effect is masked by grade curving. ... [A] 25 percentage point increase in the football team’s winning percentage will increase the gender gap in GPAs ... by 8.5 percent."

After comparing fall and winter academic terms, "only in the quarter we associate with football—the fall quarter—is there movement in the gender gap in academic  performance that varies systematically with athletic success."

I'll spare you a homily on the "true purpose" of higher education, and the extent to which big-time sports supports or undermines that purpose. But for those who hold the misapprehension that college sports provide a financial subsidy to the academic programs of these institutions, Lindo, Swensen, and Waddell toss out one cold fact: "In 2010, 211 out of 218 Division I athletics departments at universities subject to open records laws received a subsidy from their student body or general fund. These subsidies are substantial and rapidly growing. From 2006 to 2010, the average subsidy increased 25 percent, to $9 million."

Jobs: A World Bank Perspective

The theme for the 2013 World Development Report from the World Bank is one word: "Jobs." The discussion reaches usefully beyond the issue of recovery from the Great Recession (although that topic is covered as well) and looks at issues of job creation in the long run. At least to me, much of the underlying message is not so much about the raw numbers of jobs that need to be created, but is the idea that stable relationships between employers and employees, with shared benefits for both, are part of a broader web of social institutions and interrelationships.

"As the world struggles to emerge from the global crisis, some 200 million people—including 75 million under the age of 25—are unemployed. Many millions more, most of them women, find themselves shut out of the labor force altogether. Looking forward, over the next 15 years an additional 600 million new jobs will be needed to absorb burgeoning working-age populations, mainly in Asia and Sub-Saharan Africa. Meanwhile, almost half of all workers in developing countries are engaged in small-scale farming or self-employment, jobs that typically do not come with a steady paycheck and benefits.

The problem for most poor people in these countries is not the lack of a job or too few
hours of work; many hold more than one job and work long hours. Yet, too often, they are not earning enough to secure a better future for themselves and their children, and at times they are working in unsafe conditions and without the protection of their basic rights. Jobs are instrumental to achieving economic and social development. Beyond their critical importance for individual well-being, they lie at the heart of many broader societal objectives, such as poverty reduction, economy-wide productivity growth, and social cohesion. The development payoffs from jobs include acquiring skills, empowering women, and stabilizing post-conflict societies."

Here's a figure showing on the left  how much absolute job creation is needed in various regions of the world by 2020, given population growth, and on the left, the annual rates of job creation needed. The challenge of creating jobs with decent and growing compensation at these rates is an enormous one.

In much of the world, it's important to remember that those counted as having a "job" have neither an employer nor a regular paycheck.

"To many, a “job” brings to mind a worker with an employer and a regular paycheck. Yet, the majority of workers in the poorest countries are outside the scope of an employer-employee relationship. Worldwide, more than 3 billion people are working, but their jobs vary greatly. Some 1.65 billion are employed and receive regular wages or salaries. Another 1.5 billion work in farming and small household enterprises, or in casual or seasonal day labor. Meanwhile, 200 million people, a disproportionate share of them youth, are unemployed and actively looking for work. Almost 2 billion working-age adults, the majority of them women, are neither working nor looking for work, but an unknown number of them are eager to have a job."

As the figure shows, 70-80% of those who are have jobs in sub-Saharan Africa have nonwage employment. The figure illustrates that the prevalence of wage employment is actually closely associated with economic development, and more broadly with whether the society is one in which organizations called private firms have the ability and flexibility to create themselves and to expand.

World Bank reports always make me smile a bit when they discuss the role of the private and the public sector. My sense is that many of the readers of such reports are skeptical of free market economics. Thus, the economists at the World Bank find themselves needing to straddle the fence: on one side, they do speak up for the importance of the private sector and free markets; on the other side, they spend a lot of words pointing out that government has an important role to play, and leaving the door open for the possibility that certain government interventions might be useful. Thus, here's the report on the centrality of the private sector in creating jobs:

"[T]he private sector is the main engine of job creation and the source of almost 9 of every 10 jobs in the world. Between 1995 and 2005, the private sector accounted for 90 percent of jobs created in Brazil, and for 95 percent in the Philippines and Turkey. The most remarkable example of the expansion of employment through private sector growth is China. In 1981, private sector employment accounted for 2.3 million workers, while state-owned enterprises (SOEs) had 80 million workers. Twenty years later, the private sector accounted for 74.7 million workers, surpassing, for the first time, the 74.6 million workers in SOEs. In contrast to the global average, in some countries in the Middle East and North Africa, the state is a leading employer, a pattern that can be linked to the political economy of the postindependence period, and in some cases to the abundance of oil revenues. For a long period, public sector jobs were offered to young college graduates. But as the fiscal space for continued expansion in public sector employment shrank, “queuing” for public sector jobs became more prevalent, leading to informality, a devaluation of educational credentials, and forms of social exclusion. A fairly well-educated and young labor force remains unemployed, or underemployed,and labor productivity stagnates."

And on the other side of the fence, here's the report on the importance of government, along with implications that a great many types of government interventions in labor markets can be justified.

"While it is not the role of governments to create jobs, government functions are fundamental for sustained job creation. The quality of the civil service is critically important for development, whether it is teachers building skills, agricultural extension agents improving agricultural productivity, or urban planners designing functional cities. Temporary employment programs for the demobilization of combatants are also justified in some circumstances. But as a general rule it is the private sector that creates jobs. The role of government is to ensure that the conditions are in place for strong private-sector-led growth, to understand why there are not enough good jobs for development, and to remove or mitigate the constraints that prevent the creation of more of those jobs. Government can fulfill this role through a three-layered policy approach:
 • Fundamentals....  Macroeconomic stability, an enabling business environment, human capital accumulation, and the rule of law are  among the fundamentals. ... Adequate infrastructure, access to finance, and sound regulation are key ingredients of the business environment. Good nutrition, health, and education outcomes not only improve people’s lives but also equip them for productive employment....
 • Labor policies. ...  Labor policy should avoid two cliffs: the distortionary interventions that clog the creation of jobs in cities and in global value chains, and the lack of mechanisms for voice and protection for the most vulnerable workers, regardless of whether they are wage earners. ...
• Priorities. Because some jobs do more for development than others, it is necessary to understand where good jobs for development lie, given the country context.

This mildly split personality--between emphasizing the private sector and markets on one side and looking at possible roles for government on the other side--is probably an occupational hazard for economists. I doubtless suffer the affliction myself. But that said, I fear that the World Bank report may understate the difficulties of large-scale private-sector job creation in many countries around the world. Ultimately, true job creation occurs when an employer does not rely on government subsidies or handouts, and instead is producing a product at a price that customers actually want to buy. It requires letting firms fail, when they prove incapable of meeting this standard. And it requires letting firms continue and grow when they do meet this standard, even though a successful and growing firm can become a potential source of political and economic power that might in some way challenge the existing government. All of this is a long way of saying that when 40%, 50%, or 80% of the workers in an economy are involved in non-wage employment, the transition to a situation in which private-sector firms are numerous and large enough to offer wage employment to a very large proportion of the adults in a country is an enormous and difficult task.

Working From Home: Census Estimates

I try to work from home a couple of days each week: it saves me the commuting time, and I can be home when the children get off the school-bus in the afternoon. Thus, I'm also intimately aware of the temptations of working from home, like a sudden overpowering urge to re-arrange the living room furniture or to bake a batch of cookies. In its report on "Home-Based Workers in the United States: 2010," a group of U.S. Census Bureau analysts (Peter J. Mateyka, Melanie A. Rapino, and Liana Christin Landivar) steer clear of the gains and losses from working at home, and lay out the statistics on how widespread the practice is. The underlying data comes from two sources that are not directly comparable, because they ask about home-based work in somewhat different ways: the Survey of Income and Program Participation (SIPP) and the American Community Survey (ACS). That said, here are a few facts that jumped out at me. 

The proportion of workers who work from home has increased in the last decade or so, but it remains relatively low. "The percentage of all workers who worked at least 1 day at home increased from 7.0 percent in 1997 to 9.5 percent in 2010, according to SIPP. During this same time period, the population working exclusively from home in SIPP increased from 4.8 percent of all workers to 6.6 percent ... The percentage of workers who worked the majority of the workweek at home increased from 3.6 percent to 4.3 percent of the population between 2005 and 2010, according to the ACS."

Those who work at home part of the time and at a workplace part of the time typically have higher incomes either than those who are at a workplace all the time or those who are at home all the time. "Median personal earnings for mixed workers were significantly higher ($52,800) compared with onsite ($30,000) and home ($25,500) workers. While home workers had lower personal earnings than onsite workers did, respondents that reported working at least 1 day at home had significantly higher household incomes than respondents that reported working only onsite."

The prevalence of home-based work has followed a U-shape in recent decades, falling in the 1960s and 1970s but rising since then. "In the 1960s, home-based workers were primarily self-employed family farmers and professionals, including doctors and lawyers. Home-based work in the United States declined from 1960 to 1980, driven by changes in market conditions and the agriculture industry that began decades prior and favored large specialized firms over family farms. In 1980, the multiple-decade decline in home-based work reversed, led partly by self-employed home-based workers in professional and service industries."

The most rapid

"Between 2000 and 2010, there was a 67 percent increase in home-based work for employees of
private companies. Although still underrepresented among homebased workers, the largest increase in home-based work during this decade was among government workers, increasing 133 percent
among state government workers and 88 percent among federal government workers.

Those "mixed" workers who are partly at home and partly at the office are more likely to work at home on Mondays and Fridays (a fact that seems to me creates some suspicion about how much work is actually getting done). "About 90 percent of home workers reported working
Monday through Friday at home, compared with less than 40 percent of mixed workers. The most
popular days worked at home for mixed workers were Monday (37.6 percent) and Friday (37.8 percent) ..."

The top three cities for home-based work are Boulder, CO, Medford, OR, and Santa Fe, NM. Two of the top ten areas are in my home state of Minnesota--small cities with a branch of the state university system about an hour's drive from Minneapolis and St. Paul.

Brazilian Soap Operas and Fertility Rates

There's always a chicken-and-egg question about the interrelationship between television and social values. Does the behavior shown in television shows change social values, or does it just reflect changes in social values that have already happened? Eliana La Ferrara, Alberto Chong, and Suzanne Duryea offer one example in which television does seem to have altered social values in "Soap Operas and Fertility: Evidence from Brazil." The paper appears in the most recent issue of the American Economic Journal: Applied Economics (2012, 4(4): 1–31). The journal isn't freely available on-line, but those in academia will often have on-line access through their libraries. 

To disentangle the cause and effect of television and social values, the ideal experiment would be to have some random selection areas with television, and other nearby areas without television--and then to compare across areas. While a pure random experiment of this kind is hard to come by, many developing countries saw a dramatic expansion in the availability of television from the 1970s up through the 1990s. Thus, researchers can look at what happened in different areas as television coverage arrived. La Ferrara, Chong, and Duryea start their discussion this way:

"In the early 1990s, after more than 30 years of expansion of basic schooling, over 50 percent of 15 year olds in Brazil scored at the lowest levels of the literacy portion of the Programme for International Student Assessment (PISA), indicating that they could not perform simple tasks, such as locating basic information within a text. People with 4 or fewer years of schooling accounted for 39 percent of the adult population in the urban areas, and nearly 73 percent in rural areas as measured by the 2000 census. On the other hand, the share of households owning a television set had grown from 8 percent in 1970 to 81 percent in 1991, and remained approximately the same 10 years later. The spectacular growth in television viewership in the face of slow increases in education levels characterizes Brazil as well as many other developing countries. Most importantly, it suggests that a wide range of messages and values, including important ones for development policy, have the potential to reach households through the screen as well as through the classroom. ..."

"We are interested in the effect of exposure to one of the most pervasive forms of cultural communication in Brazilian society, soap operas or novelas. Historically, the vast majority of the Brazilian population, regardless of social class, has watched the 8 pm novela. In the last decades, one group, Rede Globo, has had a virtual monopoly over the production of Brazilian novelas. Our content analysis of 115 novelas aired by Globo in the two time slots with the highest audience between 1965 and 1999 reveals that 72 percent of the main female characters (age 50 and lower) had no children at all, and 21 percent had only one child. This is in marked contrast with the prevalent fertility rates in Brazilian society over the same period."

Fertility rates have been dropping in Brazil in the last few decades, as in many other countries. "The total fertility rate was 6.3 in 1960, 5.8 in 1970, 4.4 in 1980, 2.9 in 1991, and 2.3 in 2000. It is noteworthy that this decline was not the result of deliberate government policy. In Brazil no official population control policy was enacted by the government and, for a period of time, advertising of contraceptive methods was even illegal. The change therefore originated from a combination of supply factors related to the availability of contraception and lower desired fertility." Of course, there is a standard argument among economists and demographers that as a country go through a "demographic transition," as the economy become wealthier and life expectancies increase, fertility rates decline. The estimates in this study suggest that receiving the TV signal can account for about 7 percent of the overall decline in fertility. They write: "Globo coverage is associated with a decrease in the probability of giving birth of 0.5 percentage points, which is 5 percent of the mean. The magnitude of this effect is comparable to that associated with an increase of 1.6 years in women’s education."

Their investigation also turned up a number of supportive connections. For example: " The (negative) effect of Globo exposure is stronger for households with lower education and wealth, as one would expect given that these households are relatively less likely to get information from written sources or to interact with peers that have small family sizes. the effect of exposure to soap operas in Brazil." "We find that decreases in fertility were stronger in years immediately following novelas that portrayed messages of upward social mobility, consistent with the desire to conform with behavior that leads to positive life outcomes." "Also, we find that the effect of Globo availability in any given year was stronger for women whose age was closer to that of the main female characters portrayed that year."

And most striking to me: "[W]e estimate the probability that the 20 most popular names chosen by parents for their newborns in a given metropolitan area include one or more names of the main characters of novelas aired in the year in which the child was born. This probability is 33 percent if the area where parents lived received the Globo signal and only 8.5 percent if it did not, a statistically
significant difference. Since novela names tend to be very idiosyncratic in Brazil, we take this evidence as suggestive of a strong link between novela content and behavior."

Eyeballing the World Economy

Like most people in  my professional universe, I try to carry around in my head some basic facts and comparisons. Here are some basic tables and figures about the world economy, which I have edited and adapted (by leaving out some smaller countries) from the 2012 edition of "Charting International Labor Market Comparisons" published by the U.S. Bureau of Labor Statistics. 

As a starting point, make a mental list of the large economies in the world--say, those with GDP larger than $1 trillion. Here's a figure listing them, where GDP calculated in 2010 U.S. dollars using purchasing power parity exchange rates. For most people, it's not a big surprise to see the U.S. at the top, followed by China and Japan. But seeing India ahead of Germany and the United Kingdom is a bit unexpected, as is seeing Brazil ahead of Italy, Mexico ahead of Spain, and South Korea ahead of Canada.

One aspect of that omnibus term "globalization" is that the U.S. economy plays a smaller role in the world economy, while China and other nations are playing a larger role. Here's a figure showing the shift in what countries are producing what share of global GDP from 1990-2010. The decline in Japan's importance is more than offset by the rise of China. The U.S. and European share of world output is falling, and the "rest of the world" share is rising.

Of course, comparisons across countries don't take population differences into account. As a final test, form a mental picture of what per capita GDP or per capita GDP per worker would look like for 2010. Again, it's no shock to see the U.S. economy near the top of the list (although Norway, not shown here, is actually a little higher in both categories).  At least to me, it is a modest surprise to see the western European countries outranking Japan so decisively, and a bigger surprise to see that South Korea is now so close behind Japan. Mexico considerably exceeds Brazil, with both Latin American countries lagging behind eastern Europe. And China remains quite poor on a per capita basis. As the BLS reports: "Gross domestic product (GDP) per capita in the United States was approximately six times larger than the GDP per capita in China." Of course, this also suggests that China has the potential, with appropriate policies, for at least several decades more of very rapid economic growth. 

Expanding U.S. Exports of Services

When I'm asked (usually with deep suspicion) about how globalization benefits the U.S. economy, I of course have my pre-packaged explanation about comparative advantage, specialization, and gains from trade. But I've found that another answer is often more powerful. The main growth in the world economy in the next few decades is, by all accounts, most likely to be in nations like China, India, Brazil, and others. The U.S. economy should be looking for ways to hitch itself to this growth locomotive--and globalization is one name for this process.

Pedro Amaral and Margaret Jacobson offer some encouraging recent news about U.S. exports in a short article in  Economic Trends from the Federal Reserve Bank of Cleveland. "In fact, despite the recovery’s frustratingly slow growth, exports have averaged 8 percent yearly growth since the beginning of 2010 and continue to reach record levels in terms of total nominal and real dollars. The ratio of exports to GDP has been growing at a far faster rate in the current recovery than in an average one." They point to strong demand from abroad--and it's not from high-incomne countries like Europe or Japan!--as well as to a lower foreign exchange rate of the U.S. dollar as driving the rise in exports.



But how can the high-wage U.S. economy hope to compete in the lower-wage world economy? J. Bradford Jenson offers a nice discussion of "Opportunities for U.S. Exports of Business Services" in some recent Congressional testimony that I ran across at the website of the Peterson Institute for International Economics.

I liked Jenson's discussion because it pushes all of us to see international trade and the U.S. economy as it operates today, not through a gauzy nostalgia for the role played by manufacturing in the U.S. economy of a  half-century ago.  He writes :

"When we think of trade, most of us envision wheat, copper, crude oil, and manufactured goods such as clothing, furniture, consumer electronics, cars, and jet aircraft. We need only visit a port, border crossing, or big-box superstore to find an abundance of such goods from virtually every country in the world. By contrast, many believe the service sector is largely insulated from the international economy. Because many services require face-to-face interaction between buyer and seller, the prevailing assumption is that most services are not tradable. This belief has always been a misconception, and in today’s economy, it is an increasingly inappropriate one. The falling costs of travel and increased ease of communications, thanks to the Internet, have vastly expanded opportunities for services to be traded across long distances, including across borders."

He focuses in particular on "business services." "This group includes the information, finance and insurance, real estate, professional, scientific, and technical industries; management, administrative support, and waste remediation industry groups; and industries such as software, engineering services, architectural services, and satellite-imaging services. ... The business service sector accounts for about 25 percent of the US labor force—two and a half times the size of the manufacturing sector. Moreover, the business service sector is growing. Over the past decade or so, manufacturing sector
employment has decreased by about 20 percent, while business services have increased by about 30 percent. And business service jobs are good jobs: Average wages in business services are more than 20 percent higher than average wages in manufacturing.

"Many people hold an outdated view of the US economy. Just as an example, consider the relative size of one service industry, engineering services, relative to two important manufacturing industries: the automotive industry (including assembly and parts) and the aerospace industry. It might surprise you to learn that engineering services is the largest in terms of employment. Engineering services (NAICS 541330) employed 980,000 people in 2007—more than the automotive industry (910,000), and more than twice as many as aerospace (440,000), according to the most recent economic census. Average earnings in engineering services ($73,000) are significantly higher than in auto production ($52,000) or even in aerospace ($68,000)."

Here's a figure from the ever-useful FRED website at the St. Louis Fed showing the trade surplus that the U.S. economy has been running in the service sector as a whole.  The figure shows monthly data, so the U.S. trade surplus in services has been was running about about $5-6 billion per month for much of the 1990s and first half of the 2000s--call it $60-$72 billion per year. But since early 2011, the monthly trade surplus in services has been more like $15 billion per month--call it a services trade surplus of $180 billion per year.



Jensen's testimony focuses in particular on how world trade talks could bring down barriers to exports of U.S business services, and while that is important, I suspect it is at least as important that U.S. business services providers have been orienting themselves more toward international markets. As the U.S. government and economy struggles to get its debt burdens under control in the years to come, export growth in services is one of the most promising sources of additional demand for U.S.-made output.