Wednesday, October 12, 2016

Secular stagnation (or not?)

Fig 1 World  per head income
Regression based on recent data
One item for heated debate amongst economists is the so-called secular stagnation. The economics tribe seems to agree on the fact that world growth is at a lower growth trajectory and that a substantial output.
Figure 1 provides some data for Earth's per capita income in constant prices. The figure seems to support the concensus view. A simple linear trend has been added to recent data up to but not including the great recession. The drop in output due to the financial crisis and the departure from trend are evident: Earth is in a serious depression.
Figure 2, however, provides an alternative longer run perspective that questions this concensus of economists.
Fig. 2 World income per head
Regression based on 1960-2007 data
In Figure 2 we use the same data (source: World Development Indicators), but extend the period of observation (1960 is earliest reported number for world per capita GDP in the WDI). Now the picture changes quite dramatically. Yes the growth rate of per capita income has slowed down, but it is still above long term trend. Clearly the consensus view is blurred by the perspective of the recent past (the decade before the Great Recession) and by the fact that the advanced economies experienced a bad time.

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