Monday, February 29, 2016

Explaining America's Growing Vote Gap

In the current election cycle, we hear repeated reports about how certain presidential candidates of both parties are appealing to certain demographics by both age and ethnic background.  For example, although Bernie Sanders is old enough to be their grandfather, his appeal among millennials (those aged between 18 and 34) is undeniable, particularly when compared to Hillary Clinton.  Changing American demographics are having an impact on the political scene and, as shown in a study by Pew, will have a growing impact on who will be most electable in the future and, ultimately, the direction that the United States will take.

Here are two figures that show the America of today and the America of the future:

America is feeling the impact of two demographic changes at one time; age and ethnicity.  The United States is and will continue to become older and less white.  This demographic change is affecting the way that Americans vote; one party (the Republicans) skews older, whiter, more religious and more conservative and struggles to understand the dramatic changes in society that have taken place in the last decade while the other party (the Democrats) tend to be younger, more diverse ethnically, more secular and more liberal when it comes to social issues like gay rights, abortion and immigration.  This is increasingly leading to a divided America.

As I noted above, age is increasingly having an impact on the votes of young and old Americans.  In the 1970s, there was basically very little difference in how voters, both young and old, voted.  That small vote gap began to grow in the 2004 election when John Kerry ran against George W. Bush and changed even more significantly in 2008 when 66 percent of 18 to 29 year olds voted for Barack Obama compared to only 45 percent for Americans aged 65 and above as shown on this graphic:

Not only have demographic changes had an impact on voting, they have resulted in a substantial shift in party philosophy and increasing political polarization as shown on this graphic:

On a ten item scale of political issues, back in 1994, only 64 percent of Republicans were to the right of a median Democrat on key economic, political and social issues.  In 2014, this had risen to 92 percent.  In the same way, in 1994, 70 percent of Democrats were to the left of a median Republican on the same issues as above; by 2014 this had increased to 94 percent.  This has gone well past "political distaste"; a growing number of Republicans see Democrats as a threat to America's well being and vice versa as shown on this graphic:

After contemplating this information, I wondered what a political map of the United States would look like and whether the United States could be neatly geographically divided into a red portion and a blue portion as we see on this typical election map:

This next map which shows the voting results from the 2012 Presidential election, created by Mark Newman from the Department of Physics and Center for the Study of Complex Systems at the University of Michigan, goes well beyond the state-by-state red and blue map that we are accustomed to seeing in the mainstream media:

By using popular vote percentage rather than a binary representation (i.e. either red or blue), it shows us that the actual results are much more blended than we would expect, given the political polarity that appears to be the order of the day in the United States in 2016.

While it's not terribly surprising, the political shift to both sides of the spectrum has significantly impacted the candidates' message in the 2016 election cycle and accounts for some of the surprising popularity of candidates that would have been seen as long-shots in the past.  As the ethnic and age factors increasingly come into play over the coming years, candidates of both parties will have to chase a moving target and a growing vote gap.

Friday, February 26, 2016

The Disappointing Global Growth Scenario - The Economic Performance Gap

In the recently released 2016 version of the Economic Report of the President (of the United States), we find a handful of interesting graphs that look at the poor performance of the global economy since the Great Recession of 2008 - 2009 and how the situation has deteriorated over the past five years.  The report also provides us with the reasons why this recovery hasn't really felt like the economic recoveries of the past.  

While the United States economy has performed moderately well in recent years, the same cannot be said for the global economy as a whole.  Those of us that follow the mainstream financial media have noticed a consistent downward shift in economic growth projections for both emerging and advanced economies over the past five years in particular.  This is particularly obvious on this graphic which shows how the global economy has continued to produce disappointment after disappointment:

The solid black line represents the actual global growth for each year and the dotted lines show the forecasts made between September 2011 and January 2016 for real global GDP growth out to 2020.  It is quite clear that, since 2012 in particular, global economic growth has been increasingly under pressure.  As well, since the Great Recession, for the most part, global economic growth has been well below the pre-crisis average of between 4 and 5 percent.

Not only does the IMF have problems getting its growth forecasts to reflect the new global economic reality.  In November 2015, the Organization for Economic Co-operation and Development (OECD) projected that global growth would be 2.9 percent in 2015 and 3.3 percent in 2016, down significantly from their projections of 3.8 percent and 3.7 percent made just one year earlier.  The slowing global growth, particularly among the nations that the United States trades with, is having a substantially negative impact on the American economy. 

What has caused this substantial and unexpected (at least to the IMF and OECD) slowdown in the rate of growth for the global economy?  Here is a figure that shows the growth of GDP per working-age person from 2011 to 2014 compared to the period between 2002 and 2007 (prior to the Great Crisis) with the 45 degree line marking unchanged growth rates between the two periods:

The United States and Japan are the only two major, advanced economies that are growing at the same rate both before and after the Great Recession.  While low income countries have seen their per capita real GDP growth rate increase since the Great Recession, the Euro Area, high income economies, middle income economies, India, Brazil and China have all experienced slower post-crisis real GDP growth rates.  This slackness has led to a significant gap between actual growth between 2010 and 2015 and the projected economic growth from October 2010 as shown on this figure:

Overall, the level of output from G-20 nations is 6 percent smaller in 2015 than what the IMF had predicted in 2010 (using the pre-Great Recession economic performance yardstick of 4 to 5 percent growth as noted above)  and growth in the last five years has fallen short of what was predicted in 18 out of the 20 G-20 economies with only Turkey and Saudi Arabia showing slightly better performance than was predicted (although, with low oil prices, it is highly unlikely that Saudi Arabia is still on the positive side).  As we can see, the economic performance gap is very significant for both China and India, two of the world's largest economies; these two nations alone account for about half of the 6 percent underperformance of the G-20 economy.  Even the United States with its good growth levels in terms of GDP per working-age person has shown a growth shortfall of 3.2 percent.

In addition to the slowing growth of GDP per working-age person that I noted above, global economic growth levels have been negatively impacted by dropping labor productivity growth which is defined as the ability of nations to produce more output from the same amount of labor inputs.  During the last half of the 20th century, G-7 nations had average labor productivity growth rates near or above 2 percent annually.  These rates have all dropped and, in some cases to nearly zero.  In fact, labor productivity growth for for Japan is predicted to be one-sixth of its annual rate from 1999 to 2006 and for the euro area, one-third of its pre-Great Recession average.

One additional factor that has led to a slowing growth rate in the economy is the slowing growth in the labor force of various nations as you can see on this figure:

As the population ages, the labor force participation rate has continued to decline; the proportion of the population that is working-age peaked at 66 percent in 2012 and is projected to drop continuously as the world's population ages.  This has created additional headwinds to economic growth levels since a major contributor to a nation's real GDP growth is simply its population growth since growing populations provide additional demand for goods and services.  Aging populations put significant pressure on government budgets at the same time as they are contributing less to economic growth, a situation which has already taken hold in Japan which has faced stagnant economic growth for the past two decades.

As we can see, there are significant global economic headwinds that have appeared since the Great Recession.  It really is different this time.  These headwinds which include lower per capita GDP growth rates, dropping labor productivity growth rates and a slowing in growth of the labor force are issues that unprecedented central bank intervention have been completely incapable of defeating.  This suggests that the next recession could be more painful than average and that the post-next recession economic expansion will be even more modest than the post-Great Recession recovery....which, really hasn't felt like much of a recovery to millions of people around the world.  

Thursday, February 25, 2016

Ross Douthat vs. Donald Trump

New York Times columnist, Ross Douthat, has tweeted that he knows how the Donald Trump campaign ends:

Here's a screen grab of the tweet in case it disappears:

For those of you who are not Stephen King fans, Douthat's tweet refers to a 1983 movie, The Dead Zone, which features a lead character with psychic abilities who feels a compulsion to kill a toxic presidential candidate.

I wonder how long it will be until Mr. Douthat finds men dressed in black, driving black vehicles paying him a little visit despite the fact that he considers himself to be a "conservative"?

Wednesday, February 24, 2016

The Export Conundrum

As we have seen over the past few months, the global economy is showing increasing signs of weakening at the same time as the U.S. economy is showing signs of modest strength.  In today's global economy, this makes little sense; with global trade, when one nation's economy sneezes, others catch cold.  There is, however, one indicator that is showing what lies ahead for the American economy.

Here is a graph showing the value of U.S. exports over the past five years:

Exports reached a peak of $197.8 billion in October of 2014 and have fallen to $181.5 billion in December 2015, a decline of 9 percent.

Let's look at the ten year record of U.S. exports:

As we can see, the value of U.S. exports dropped markedly during the Great Recession, recovered quite quickly through to the beginning of 2012 then levelled off during the remainder of 2012 through to late 2014 when the level began to drop.

Here is a chart showing the nominal value of U.S. exports from 1950 to the present:

You can quite clearly see the drop in exports that took place during both the 2001 recession and the 2008 Great Recession.  You can see that the current drop in exports that I have outlined above is quite unusual.

This decline in exports is a reflection of the poor state of the global economy.  The economies of both Europe and China, two of the world's major traders and consumers, are weak at best.  This weakness and the ongoing interest rate meddling by the Federal Reserve has resulted in a rising U.S. dollar which makes U.S. products far more expensive to foreign consumers.  Here is a chart showing how the U.S. dollar index has risen in value since mid-2014 when the Fed began to telegraph its higher interest rate policy:

With U.S. exports showing significant weakness and no sign of accompanying weakness in the United States dollar, we have an interesting explanation about why the economy simply doesn't feel like it is still in an expansion phase.