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Government investment on the decline

U.S. government fixed asset investments are shrinking as a fraction of GDP

One role of government is to invest in public infrastructure: roads, bridges, public water and sewage, the military, etc. The FRED graph above shows this investment in fixed assets (by all levels of U.S. government) as a percentage of GDP.

We see several clear phases: 6-7% in the 1950s and 1960s, 5% in the 1970s and 1980s, 4% in the 1990s and 2000s, and around 3.5% since 2010.

As noted above, this includes military investment, which can explain the higher levels that coincide with the height of the Cold War. The subsequent decline, however, can possibly also be explained with military expenses: National defense as a percentage of GDP has declined, as our second graph shows.

This graph includes consumption expenditures for national defense: These expenditures are for services or things that don’t last more than a year, such as fuel, wages, and contractor costs.

It’s also possible that the non-defense components of fixed assets declined. Or not. We can’t come to any conclusions from just these data.

How these graphs were created: Search FRED for “government fixed assets.” From the “Edit Graph” panel, use “Edit Line 1” to add a series for nominal GDP (as the fixed assets series is nominal) and apply the formula a/b*100. For the second graph, repeat the exercise by searching for “defenses expenses.”

Suggested by Christian Zimmermann.

Why manufacturing declines, at least in relative terms

Data on the stages of economic development

As economies develop from their agrarian roots into modern societies, they invariably go through a similar transition.

  • Agriculture: First, everyone works in the primary sector—agriculture—simply to survive. Food comes first.
  • Industry: As subsistence farming becomes more productive through innovation, some labor is free to engage in other productive activities. And this secondary, industrial sector rises in importance, with manufacturing as a major component. Consider the Industrial Revolution!
  • Services: Finally, as productivity in the industrial sector also improves, labor can be devoted more and more to the tertiary, services sector. It doesn’t produce anything tangible, but services are clearly still useful.

The FRED graphs in this post show the fraction of the labor force devoted to each of these three sectors for five countries: Japan, Chile, the United States, South Africa, and Mexico.

Some of the transitions from one sector to the next can be seen even in the relatively short period that FRED data can cover. It’s more noticeable, however, if you compare countries: The more advanced countries have a small primary/agricultural sector and a large tertiary/services sector. The importance of industry (e.g., manufacturing) really depends on the state of the economy. Poorer countries (with less data available from FRED) and richer countries both have much less industry; it’s the middle-income countries that have a fair share.

How these graphs were created: Start from the OECD Main Economic Indicators by country release table, click on the country of choice, find the labor survey (if available), select quarterly seasonally adjusted data, check the three sectors, and click on “Add to Graph.” Finally, from the “Edit Graph” panel, use the “Format” tab to chose graph type “Area” with “Percent” stacking. Sample dates may need to be adjusted in cases of missing data.

Suggested by Christian Zimmermann.

An update on Venezuela’s troubled economy

Venezuela has all but vanished from the news as the rest of the world grapples with its own problems. In this blog post, we document the state of Venezuela’s economy through FRED graphs. This has been no easy task, since recent data are actually quite scarce. And we’ll explain a second reason below.

Even just glancing at our first graph reveals there’s trouble. The economy has been in an unprecedented decline, with GDP below the level it was in 1970. That kind of economic suffering indicates major problems.

One problem is clearly inflation—or, more accurately, hyperinflation. Our second graph shows the exchange rate of the Venezuelan currency against the U.S. dollar. For most of the time period shown, the line cannot be distinguished from zero because the recently skyrocketing rate has rendered previous changes minuscule in comparison.

Also note the blip in 2018, which was a rapid increase from about 10 bolivares to the dollar in January to about a quarter of a million bolivares by August. Clearly, an economy with such price increases has been structurally disrupted. Hyperinflation also makes it even more difficult to measure economic activity, as measurement at these price levels becomes misleading. This is our second obstacle, which we alluded to above. While it’s clear economic activity has slowed down in Venezuela, there’s no way to say with any precision by how much exactly.

Our next graph shows total factor productivity—in short, a measure of how much is produced with a constant level of capital input and labor. Clearly, Venezuela’s problems are not recent; they date back to the 1970s. Again, while any measurement must be taken with a grain of salt, it’s extremely rare for an economy to show a decline over decades. Something is impeding productivity.

The clear loss of population in recent years also affects the Venezuelan economy. The graph includes a red “what if” trend line showing that the population would have been 4 million (or 14%) higher in 2020. Obviously, the direction of the causality between population loss and output loss is not clear: That is, did the bad economy cause lower population or the reverse? Either way, an economy with that many fewer people will produce much less.

To make things worse, fewer people are working among those who remain in Venezuela, with the labor force participation now below 50%. With all these economic hardships, it’s not a surprise Venezuela is one of the few countries in the world where cellular subscriptions are in decline, as shown in our last graph.

How these graphs were created: Search FRED for Venezuela, sort results by observation end, then click on series titles of interest. The only graph that requires additional adjustment is the one for population: To add the trend, go to the “Edit Graph” panel and open the “Add Line” tab; click on “user-defined line,” and enter values defining start and end of the new line.

Suggested by Christian Zimmermann.

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