Political Calculations, a site that develops, applies and presents both established and cutting edge theory to the topics of investing, business and economics.
How fast is the world's economy growing?
That's an easy question to ask, but not an easy question to answer. Much of the economic data used to answer that question that we take for granted in what's called the "developed world" is often either absent or of very poor quality when you get to the nations of the "developing world". Worse, the official economic statistics produced by the economic powerhouses of the so-called developing world, such as China and India, are considered to be highly unreliable, which is especially problematic when you consider that these two nations by themselves account for just shy of 36% of the world's population.
That's a lot of people for whom simply adding up national GDP numbers won't produce anything close to an accurate answer in calculating the growth of the world's economy.
Two years ago, we launched a project to develop a global economic indicator, where we looked to the measurement of the concentration of carbon dioxide (CO2) in the Earth's atmosphere as a tool to get better insights into the relative health of the Earth's economy. Here, because most of the carbon dioxide that accumulates in the Earth's atmosphere gets there specifically because of productive human activities, such as the burning of carbon-rich fossil fuels to produce energy, changes in the concentration of CO2 should be correlated with those productive activities.
The following chart shows the level at which those measurements have been recorded at the remote Mauna Loa Observatory in Hawaii, from March 1958 through November 2017.
What we see first is that the level of CO2 in the Earth's atmosphere follows a seasonal pattern, which is smoothed out using a trailing year average. The trailing year average shows a generally rising trend over time, although one where the amount of CO2 in the air sometimes accelerates and sometimes slows, which should correspond to changes in the world's economic growth rate."Should" being the operative word, because not all the carbon dioxide that finds its way into the Earth's atmosphere gets there because of human activities. Periodically, large scale natural phenomena are responsible for large quantities of carbon dioxide entering into the air, which makes using atmospheric CO2 as an economic indicator somewhat problematic. For example, during strong El Niño events, lots of additional CO2 that isn't generated through productive human activity gets into the Earth's atmosphere, where the challenge lies in isolating that contribution of atmospheric CO2 from the portion generated from human economic activities after it has been thoroughly mixed in the air.
We've been working on that problem behind the scenes over the last couple of months. Here's how we cracked it.
We started by focusing on the annual seasonal cycle for atmospheric carbon dioxide. The following chart takes the data shown in our previous chart and shows it month by month, where each line in the chart corresponds to an individual year.
Here, we can quickly see the annual seasonal pattern for atmospheric CO2 measured at the Mauna Loa Observatory, which typically hits its lowest annual value in October each year and reaches its highest annual value in May of each year.
Our next step was to index each month's CO2 value with respect to the level measured in the preceding October, which we expressed as a percentage, where the value for October in each year would be set to 100%. Our next chart shows the result of that math for all the data from October 1958 through November 2017.
We next focused on those years where we know that lots of additional carbon dioxide enters into the Earth's atmosphere as a consequence of natural phenomena like strong El Niño events. Our next chart filters out all years but those that contained the five strongest El Niño events on record, where we've marked the two most recent, 1997-1998 and 2015-2016, which also happen to be the strongest on record.
We may be able to use the difference between in the mean seasonal variation and the actual seasonal variation during El Niño to extract their surplus contribution of CO2 into the Earth's atmosphere, which should just leave behind the CO2 contributed through productive economic activity around the world. In the following animated chart, we've illustrated how that would work by showing the unadjusted values of the trailing twelve month average of the year over year change of atmospheric carbon dioxide with respect to the adjusted values for the 1997-98 and 2015-16 El Niño events, all against the backdrop of some of the world's more significant economic events from January 1960 through November 2017.
We still have some refining work to do for our methodology, where we also need to isolate the contribution of older El Niño events to fully update the chart. Never-the-less, for what we've done so far, the results appear to be promising, where in the case of the 2015-16 El Niño event, it looks like we're reasonably close to the best estimates that we've seen for accounting for the full amount of surplus CO2 that was not generated through productive activity.
And that is how we're marking our anniversary this year, with the advancement of a surprisingly viable global economic indicator!
Our anniversary posts typically represent the biggest ideas and celebration of the original work we develop here each year. Here are our landmark posts from previous years:
We marked our 2013 anniversary in three parts, since we were telling a story too big to be told in a single blog post! Here they are:
Resuming our list of anniversary posts....