Wednesday, June 15, 2011

The Wealth of Nations Updated: Total Work by Country using from the Latest data from the BP Statistical Review of Energy

Let me start with the real attention grabbers, and then I'll back up the statements with data from the BP Statistical Review of Energy and graphs created from that data.

1) China's economy is rapidly catching up with the U.S. economy (see below). If they maintain a rate of growth that is 10%/yr larger than the U.S., then in three years, they will be able to generate as much work as in the U.S as measured in [TW-hrs].
2) The GDP values assigned to countries appear to be biased towards the U.S., Japan and Europe.
3) The GDP values appear to be biased against China, India, Canada and most biased against Russia. For example, Russia generates as much mechanical and electrical work as Japan, but the IMF calculates that Japan's economy is four times larger than Russia's.
4) The calculations of GDP do not account for all economic activity within a country. The rural or black market activity in Russia, China and India might explain why the GDP values of these countries are less than for countries that generate similar amount of work.
5) As I stated in a previous post, the Wealth of a Nation is its ability to generate Work [TW-hrs], such as electrical work and mechanical work. This is the means of comparing the relative wealth of a nation. (Like in the Jevon's Paradox, greater efficiency ends up producing more generation of work, not less.)
6) (Opinion Discussed at the end of post) If we want to achieve economic growth rates of over 5%/yr, we probably need to tax luxuries, waste, and pollution rather than taxing income (i.e. productivity)

So, I've updated the graphs from a previous post on the Wealth of Nations using the latest data from BP's Statistical Review of Energy. First off, I've calculated the total amount of work generated per year in each of the major economies. (The data on the E.U. countries is separated because that's how the data shows up in BP's excel files.) I calculated the total amount of work as: the electricity generation plus 20% of the amount oil&biofuels consumed plus 66% times 15% percent of the natural gas consumed. No assumption were required for the electricity generation part because electricity is a pure form of work, but I had to make assumptions on how to calculate the amount of mechanical work each country does. The assumptions are: 1) No coal is used to generate mechanical work (i.e. coal is only used to produce electrical work. So, I didn't need to use the data on coal consumption because BP's excel files give the total amount of electricity produced.);  2) 100% of oil/biofuels consumed goes towards mechanical work (at an average efficiency of 20% for the conversion of oil to work in vehicles in all countries); 3) 33% of natural gas is used by the electricity sector (and hence are already counted elsewhere) and the other 66% of the natural gas is used to generate mechanical work at an efficiency of 15%. (The low value of efficiency was to account for the fact that roughly a third of natural gas is used to heat homes in the US. This low value of efficiency was used because homes can be heated using a heat pump that would consume very little electricity, i.e. with a small amount of work compared with the chemical potential of the fuel used to heat the home.) 4) I also estimated the amount of work done by humans in each country (assuming that each person does 0.13 kW-hrs of work on average each day.) Note that this daily amount of work done by humans in the US is 250 times less than the amount of electricity generated per day. Therefore, one can effectually ignore the amount of work done by humans in the calculation of the total work, which is thousands of TW-hrs each year.
These are the only assumptions made in this study. (Though, it should be stated that my results are dependent on the accuracy of BP's data.)

As seen below, the US generates the most amount of total mechanical and electrical work in the world. It's been roughly 7,000 TW-hrs per year over this last day. On the other hand, China's generation of work has gone from ~2,000 TW-hrs per year in 2000 to over 5,000 TW-hrs per year by 2010. Below China, both Russia and Japan have been steadily generating just under 2,000 TW-hrs per year, and India is slowly moving out of the pack of countries near 1,000 TW-hrs per year into the pack of Russia and Japan (pre-tsunami.)

As an aside, I wanted to discuss what goes into the electrical work portion of the data plotted above. Coal is used almost exclusively for the generation of electricity in the US, and the same is basically true for China; though, there is still a small amount of coal used for home heating and cooking in China. As shown in the BP data this year, China consumed 47% of the world's yearly production of coal. The US consumed 15%. On a coal per year per person basis, the two countries are roughly the same, but they are much higher than most of the other countries in the world. Coal, like oil & natural gas, are not stored forms of work. These fuels are stored potential chemical energy, but the amount of stored potential chemical energy should never be compared with generation of electricity because stored electricity can be converted into mechanical work with near 100% efficiency, but stored chemical energy is typically only able to be converted into work at an efficiency of 15%-30%. This is one of my main problems with how BP or the US EIA present data on 'energy' use. One goal of my blog is to communicate the differences between 'energy', 'exergy', & 'rate of return on work invested' to the public so that the US EIA and other 'energy' agencies are forced by the public to start calculating the figures of merit that actually matter: 'total work generated' and 'rate of return on work invested.'

The data presented in the figure above is also summarized in the graph below which plots the average yearly rate of return on work invested, i.e. the rate of growth in the ability to generate work in the countries. The equation used to determine the rate of return was:   [(Work Generated in 2010 / Work Generated in 2000) ^ (1/10)] -1

We can clearly see that China has the largest rate of return on investment, followed by India, then Brazil, and finally Russia. (Hence the term B.R.I.C.) None of the other countries have a rate of return on work invested greater than 1%/yr.  

This graph shows that the economies in all of the other major countries have been stagnant over the last decade. Yes, I would call a 0.5%/yr rate of return on investment a poor showing for the US. This has been a lost decade economically. There's a 10%/yr difference in the growth rates in the US and China. For comparison with what the real GDP values in the US, you can visit the following site in this link. It shows that the 'real' (i.e. inflation adjusted) average yearly rate of growth in the GDP in the US (using 2000 $'s) is [($13,380.7 / $11,334.5 ) ^(1/10)] -1 = 1.7 % per year. There is a slight difference between the rate of return on work invested and the rate of growth on the GDP, but this might be explained by the following: (1) IMF & World Bank including more and more rural activity towards the GDP; and (2) changes in the efficiency of converting stored chemical energy into work. [As for (1), see discussion below on how the GDP does not account for non-market transactions.] Either way you show it (0.5%/yr or 1.7%/yr), this rate of growth is unacceptably low. (For example, the average yearly rate of change in the US GDP between 1990 and 2000 was 3.6%/yr.) We should be aiming for at least 5%/yr. (Remember that if we implement a zero-inflation currency such as a work or electricity-backed currency, then we can lower taxes when we are growing because the Federal Reserve is allowed to print money for the government when the economy is growing so as to maintain zero inflation in the consumer price index. More growth = less taxes while maintaining a balanced budget. )

The following graphs shows the percentage of work generated in a country that comes from electricity, i.e. the ratio of the amount of electricity generated to total work. I'm showing this graph because, in my most recent post, I discuss how to implement a work-backed currency when electricity is not 100% of the total work generated in that country. China's economy is the closest to a pure electricity-backed economy (~78%) while Russia's economy (~57%) is the farther away because of the large of amount of mechanical work generated in the country. France's economy is the second most as far as the ratio of electrical work to total work generated (~70%). The US economy is just over 60% electrical and ~40% mechanical. As mentioned earlier, only a small percentage of the total work is due to the movement of human or animal muscles. (300 yrs ago this would not have been the case)

If the US decided to implement a work-backed currency, then the currency would have to account for both the electricity generation and mechanical work done within the US. If you're interested in learning more about how and why to implement a currency that is backed-up by work, check out any of my previous posts on this topic by clicking on these links or others in this post.

Finally, I've plotted below the Total amount of Work generated on the x-axis and the IMF's value of the GDP in 2010 dollars. The International Monetary Fund's values of GDP are pretty similar to the World Bank values. Ideally, there should have been a perfect correlation between the GDP and the amount of work generated. However, this was not the case, as seen below.
The GDP values assigned to countries appear to be biased towards the U.S., Japan and Europe. And the GDP values appeared to be biased against China, India, Canada and most especially biased against Russia. For example, Russia generates as much mechanical and electrical work as Japan, but the IMF calculates that Japan's economy is four times larger than Russia's. It's hard to believe that Japan's economy is really four times larger than Russia's because each country produces nearly the same about of mechanical and electrical work. If Japan's economy were really four times larger: where's the money? Show me the money! If Japan's economy were really four times larger, then there would be signs, such as the generation of work, as all of the wealth were spent or re-invested into processes that require work. (This is an example of Jevon's Paradox.)

Instead, what I think is happening is that the IMF and World Bank are under calculating the amount of economic activity in Russia (especially in a country as large as Russia, it's easy to mess up the calculation of GDP.) Another problem is that a significant portions of Russia's farms are still collectivized (as absurd as this sounds today). 7% of all arable lands in the world are either owned by the Russian state or are collectivized. This means that the IMF and World Bank might not be correctly accounting for economic activity that stays within Russia. (Their calculations would correctly account for any sale of food or fuel overseas.) So, I'm guessing that the IMF and World Bank calculations are underestimating the economic activity in countries with large rural populations, and in economies with significant black market economies. Japan has an industrial, export-driven economy, and therefore, there is less chance for the IMF or World Bank to underestimate the amount of economic activity.

I propose using the total generation of work [in TW-hrs per yer] as the figure of merit for the wealth of a nation. As I've mentioned above, it's not a simple calculation because of the need to know the efficiency of converting potential chemical energy into mechanical work (as well as having all of the data given by BP each year on electricity generation and consumption of fuels.) Ultimately though, [TW-hrs] will be a easier way of comparing the wealth of a nation than GDP because there's no need for currency conversion to year 'X' US dollars. This means that a government, like the US's, can't hide its ~1%/yr growth rate by inflating its currency. (When you hear the government quote growth rates of 4%/yr, remember that inflation is roughly 3%/yr.)

So, now that we have the data in front of us. What do we do with this knowledge? As stated by R. Rorty, "Inquiry that does not achieve coordination of behavior is not inquiry but simply wordplay."

I'd like to know what you think about the data above. Suggestions on the assumptions I made?  Thoughts on how to implement a zero-inflation currency? Thoughts on how to achieve a real growth rate of over 5%/yr?

Below our a few of my thoughts on how to achieve a growth rate of at least 5%/yr. I'll expand on them in future posts.

1) Consumer spending on luxuries does not grow the economy. The luxuries are nice, but they are means to an end, i.e. the luxuries are the carrot at the end of the stick. The goal is to grow society and to grow its capability to do work. If we're not growing in the US, then we have to lower the number of luxuries until we start growing again. Then, once we start growing, we can increase consumption of luxuries. (Note: we will still want to produce large amounts of luxuries here, but we'll focus more on selling them overseas in economies that are growing.)

2) Though, there may be ways to sustain the consumption of luxuries in the US if we are willing to: a) sell massive amounts of government resources or b) open up significant amounts of federal, state, & municipal land to drill for oil, natural gas and coal. (After passing a CO2 cap&trade bill that would then allow us to capture CO2 from the sources that make most sense economically, such as Coal Gasifiers. I will expand on the topic of a greenhouse gas cap&trade program in future posts.)

3) Luxuries are a Catch 22. They are like the peacock's fancy feathers. Luxuries are often a sign that a countries economy is doing well, and when it is, luxuries are a great way of showing off. It's really good PR. There's nothing like making flashy movies and TV shows to show the rest of the world that we're doing something right because we have plenty of time to hang out at the beach and blow up cars! But movies and TV lose their PR value for recruiting people to want to work in the US if there's no jobs!!! There's no point for the peacock to have fancy feathers if he doesn't have legs!  What I mean is, luxuries are supposed to be a sign that you're doing well. Luxuries aren't supposed to be hiding the fact that you're stagnating. If you're stagnating, then you have to limit the luxuries until you fix the problems...or else you end up losing the luxuries anyways because you eventually have to pay back your debts (or else people won't continue to lend you money.) This is what we're doing right now!

4) I suggest incrementally eliminating the tax on productivity (i.e. on income) and incrementally increasing taxes on luxuries (such as expensive cars, music, movies, alcohol, cigarettes, luxury boats) and significantly increasing taxes on waste/pollution (such as solid waste, NOx, SOx, GHGs, coal ash ponds, and water contamination.) (I'm going to go out on a limb here and suggest legalizing and heavily taxing marijuna by adding it to the list of luxury items that get taxed.)
The goal here would be to eliminate more total income tax than the total amount of taxes brought in by luxury taxes. In the first few years of such a shift from taxing income to taxing luxuries, we could make up for any short fall by selling US reserves of gold&silver and by selling government assets and land rights. And as point out before, if the economy is growing, then the Federal Reserve would be allowed to print money in order to maintain a 0% inflation in the consumer price index. I think that this is a great way to grow our economy, and I'll discuss this more in future posts.

In summary, we should tax luxuries and waste rather than taxing productivity.

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