Variations in the Wealth of Nations

Cause and Effect

With 2013 Update

James A. Cunningham, Ph.D.

July 2009

Variations in the Wealth of NationsCause and Effect

"Wealth is the product of man's capacity to think." …………….Ayn Rand

"The economy is too complex, too nonlinear, too dynamic, and too sensitive to the twists and turns of chance to be amenable to prediction over anything but the

very shortest of terms. Even if we were as rational as possible and had all the information we could want, the computational complexity of the economy is such

that the future would happen before we would have time to predict it."

………….....Eric D. Beinhocker ……………The Origin of Wealth, 2000

…………….London

"Wealth is unnatural." ……………A friend

……………2009

We humans face many mysteries. What could be beyond the end of the universe? How did all the stuff of the universe get crammed into one little ball just before it blew up and made a really big bang? If there is a God, why didn't he grab Robert Mugabe and kick his ass before he torqued his country into starvation? We will never know, but there is one thing we can figure out -- why are some countries so poor. And why are some so rich?

A puzzling aspect of the world's economy is the remarkable range in the wealth of nations—a range particularly dramatic when comparing public and private consumption in terms of the average person -- that is, the per capita Gross Domestic Product (GDP). Values range from over $100,000 per person for the hyper-rich European countries of Liechtenstein or Luxembourg where sophisticated financial services dominate, to impoverished African nations such as The Congo, Zimbabwe or Guinea where the people in some years eek out driblets of less than $200. Thus, the ratio from rich to poor runs as high as a factor of 500, in some years perhaps 1000 (100,000 %.)

In this little study, we are going to determine why this is so.

The origin of wealth has been, of course, a favorite topic of research for economists. For example, Professors William Easterly and Ross Levine in 2002 asked the question "What makes one country richer than another?" [Via The Origin of Wealth, Eric D. Beinhocker, 2006, pg. 251] In order to find out, the authors toiled through a detailed study of 72 rich and poor countries. They concluded that the key was not so much the existence of natural resources, government competence, or the sophistication of industrial technology although these factors did matter. The primary factor was the nation's "Social Technology," that is its reverence for the rule of law, the existence of a viable banking system, property rights, a lack of corruption, economic transparency, and the existence of stable institutions.

With this in mind, it is not surprising that a country in termoil like Zimbabwe, with a per capita GDP of $200, was listed in 2008 as the poorest nation in the world. [CIA World Factbook]

Yet an absence of Social Technology does not explain the vast differences in wealth of countries all of whom have the requisite reasonably well-operating institutions. Consider the per capita GDP of the list below of very wealthy countries and an accompanying list of not so rich ones. Why does this difference exist? What are the governing factors? The object of this study is to discover precisely this.

The very richLuxembourg $80.8kBermuda $69.9kNorway $55.6kSingapore $48.9kU.S. A. $46kHong Kong $43.8k

The not so richArgentina $13kTurkey $9.4kBrazil $9.7kPeru $7.6kAlbania $5.5kJordan $4.7kIndia $2.7k

The impoverishedZimbabwe $0.2kCongo $0.3kBurundi $0.4k

We are not going to resort to mathematical formula, as is the tradition with many modern day Greek-letter economists. We collect data and make graphs. From the resulting charts, we discover how countries become rich and why others seem to forever wallow in mediocrity. We discover where might be or should be the more prosperous places in the world.

The following effects are examined: geography, IQ, religion, freedom, corruption, education, manufacturing, innovation, trust and taxes. The majority of the factors examined are matters of social culture. Although energy use correlates well with the size of an economy, I do not include this because energy consumption is not a causative factor, energy is the cart and the economy is the horse. More on this next.

This Methodology

Traditionally when plotting data, the independent parameter is on the horizontal or x-axis and the dependent one is on the vertical or y-axis. Better stated, the cause is on the x-axis and the effect is on the y-axis. An example of this is seen below where a fellow named Jeffery A. Glassman, Ph.D., challenges the conventional view on the linkage of carbon dioxide to global warming. He argues that increasing concentrations of the gas occur because the earth's temperature is rising—not the other way around. This places temperature — the cause — on the x-axis. Glassman proposes that when the earth warms dissolved CO2 simply distills into the atmosphere from the oceans. He assumes the actual warming may occur normally in periodic fashion via changes in the sun's output, changes in the earth's orbit or from other factors.

Fig. 1. Temperature change and resulting CO2 concentration in the atmosphere determined from ice core samples from Vostok. [Source: Jeffery A. Glassman]

The analysis of ice core sample from Russian Antarctic research station Vostok provides a well-known contribution towards estimating the earth's temperature and atmosphere as far back as 600,000 years. Removing the usual time element associated with ice core analysis data, Glassman provides Fig. 1 showing simply temperature-changes vs. the CO2 concentration

It is important to point out that a cause and effect relationship is not proved simply by the existence of this plot. The data do not even hint which parameter, the temperature or the CO2 concentration is controlling. This same problem might exist in some of the work on economics presented below. For example, a weak economy might cause a corrupt society instead of corruption itself being responsible. Or a lack of trust might crater an economy, or is it the other way around?

Dr. Glassman had his computer draw a best-fit line through his data. The closer the points cluster around the line the more believable, the more accurate, is the drawn line. Typical for any plot like this, if the data are simply scattered randomly, the computer will often draw a horizontal line or no line at all suggesting there is no cause and effect relationship at work. Thus, in analyzing the economic data below, we consider the slope of a best-fit computer-drawn-line through the data. (The slope is defined here as simply the value for the upper ending extension divided by the lower counterpart.) If the particular factor examined were fully responsible for the vast spread mentioned above for rich and poor nations, we would get a "slope" of 500 or more. But as the various slopes bend toward the horizontal and thus only partially account for the overall GDP effect, smaller numbers result. At the end of this paper, a summary section collects all the calculated slopes for the ten factors studied.

The total of all causes examined does equal roughly 500, suggesting with doubtless premature braggadocio, I have explained it all.

The United States Ranking

Speaking of braggadocio, ask most any American, in say 2007, about where we stand as a nation of wealth and you will hear we are number one. With respect to overall GDP, this is true. We rank fully 66% ahead of our nearest competitor Japan. But if you look closer and possibly fairer and use dollars per person, we rank only 27% ahead of Japan and 3rd behind Luxembourg and Norway in per capita income (2006) and 10th in per capita GDP (2008). [For per capita income see OECD Fact book 2008, GDP and per capita GDP is given CIA World Fact Book or the BEA.]

Per capita GDP

The CIA has pulled so many boners1 in recent years that perhaps they decided it was time to do something useful, so they created the CIA World Factbook. This jewel of the Internet contains details about every country in the world. From this source, I gathered much of the data for this study.

According to the Factbook in 2008, the U.S. ranked 10th in the world in per capita GDP, behind the following countries. Each country's major source of wealth is also listed:Liechtenstein -- manufacturing and financial services--$118,000 ('07 est.)

Qatar—oil -- $103,000Luxembourg—financial services—$81,000Bermuda – international business and tourism -- $69,900 ('04 est.)Kuwait—oil -- $57,400Jersey—financial services -- $57,000 ('05 est.)Norway—oil and hydropower -- $55,200Brunei—oil -- $53,000Singapore -- international business and manufacturing-- $52,000 United States -- $47,100 ('08 est.) – widely varied

Overstated? On a binge of borrowing several trillions most years since 1982, the U.S. per capita GDP is now arguably overstated about 18%. This may be seen in Fig.2 where the yearly increases in public and private debt are subtracted off the GDP. Our total debt reached an astonishing $57 trillion in April 2009. The debt now towers close to $190,000 per capita. [mwhodges.home.att.net/nat-debt/debt-nat.htm]

1 For example, CIA Director George Tenet told George W. Bush in 2003 that the case for WMD in Iraq was "a slam dunk."

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Fig. 2. GDP and GDP minus new yearly-debt in constant year-2000 dollars. Computer linear plot through red data points. Note the divergence. [Source: BEA and Federal Reserve D.3 Debt Outstanding by Sector, and Flow of Funds Accounts.]

Factors Affecting the Economics of Nations

1. Geographical position vs. per capita GDP

A well-known and often observed peculiar phenomenon upon moving across the planet in a direction away from the equator is that countries become richer. Such a phenomena is starkly apparent when traversing northward into and across Europe starting from the dry desert regions of Algeria and Libya in North Africa. Similar effects occur when moving northward toward Japan from Borneo, or moving southward from the jungles of Brazil, or southward from The Congo in Africa toward South Africa. It's even quite noticeable when moving north from the southern tip of Italy up into Germany.

Fig. 3. GDP per capita vs. the average latitude of 101 countries.

Although a great deal of scatter appears seen in Fig. 3, the minimum at the equator is clear. And the downward plunge toward the frozen poles beginning on the positive side is obvious -- nobody wants to go into business in a steaming bug-invested jungle or on top of ice. But the effect seems to operate well before reaching these extremes. This may seen in Fig. 4 below, which ignores the north/south polarity of the various country latitudes.

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Why the trend seems to extend well into the very cold regions beyond 50 degrees latitude seems inexplicable. On the other hand, perhaps over countless generations, the cold bred hardier if not more ingenious individuals.

Fig. 4. Distance from the equator without regard to direction vs. per capita GDP for 101 countries. Computer fitted straight-line curve.

By grouping and averaging the countries according to latitude, the geographical effect is even more remarkable.

Latitude 15-30 degrees. Average 19 countries.............$11k GDP per capitaLatitude 30-45 degrees, Average 20 countries..............$20k GDP per capitaLatitude 45-60 degrees, Average 21 countries..............$30k GDP per capitaLatitude 60-75 degrees, Average 6 countries................$39k GDP per capita

In any case, if any young ambitious young people might be reading here, my advice is this: Please do not move to Columbia or Indonesia to seek your fortune. Or, said another way, go north young man.

(In this and the following analyses, the high oil revenue countries such as Qatar and Kuwait are not included in the data points.)

2. IQ vs. Per Capita GDP

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If the people of one nation were actually substantially more intelligent than in another, that nation would have a comparative advantage and should then have a more robust and successful economy. In other words, their per capita GDP should be higher. This appears to be the case.

Intelligence quotients (IQs) of persons in 81 countries were measured by two professors: Dr. Richard Lynn, Professor Emeritus of Psychology at the University of Ulster, Northern Ireland, and Dr. Tatu Vanhanen, Professor Emeritus of Political Science at the University of Tampere, Tampere, Finland. Their findings are reported in IQ and the Wealth of Nations in a controversial book published in 2002. As would be expected, such work has been challenged by many. You can read some of these tirades yourself at "Intelligent Quotient" in Wkipedia, a long article with over 100 references.

It has been my understanding for many years that IQ was not a function of race. Whether this newer data is valid or not, I take no position.

The book by Lynn and Vanhanen also shows that differences in national income (or per capita gross domestic product) correlate with differences in the average national intelligence quotient.

Somewhat supportive of this work is a more recent study appearing in the June 2005 issue of Psychology, Public Policy and Law, a journal of the American Psychological Association. The paper, "Thirty Years of Research on Race Differences in Cognitive Ability," by J. Philippe Rushton of the University of Western Ontario and Arthur R. Jensen of the University of California at Berkeley, argues for a strong genetic linkage to IQ scores. [See summary in: The Medical News, "Race differences in average IQ are largely genetic".]

The authors claim: "Neither the existence nor the size of race differences in IQ are a matter of dispute, only their cause...[hard to believe] The Black-White difference has been found consistently from the time of the massive World War I Army testing of 90 years ago to a massive study of over 6 million corporate, military, and higher-education test-takers in 2001."

"Race differences show up by three years of age, even after matching on maternal education and other variables," said Rushton. "Therefore they cannot be due to poor education since this has not yet begun to exert an effect. That's why Jensen and I looked at the genetic hypothesis in detail. We examined 10 categories of evidence."

"The Worldwide Pattern of IQ Scores: East Asians average higher on IQ tests than Whites, both in the U. S. and in Asia, even though IQ tests were developed for use in the Euro-American culture. Around the world, the average IQ for East Asians centers around 106; for Whites, about 100; and for Blacks about 85 in the U.S. and 70 in sub-Saharan Africa."

In any case, whether the IQ work cited is valid or not, Fig. 5 below shows a strong correlation with the reported IQ data and 2008 GDP per capita by country.

Fig. 5. GDP per capita vs. IQ for 80 countries. Sources: IQ data "IQ and the Wealth of Nations," Richard Lynn, and Tatu Vanhanen, Praeger Publishers, 2002. GDP data CIA World Fact Book. Curve, computer generated.

Regional groupings of average per capita GDP values do not correlate well with the above racial IQ numbers. The following data for GDP per capita for 2006 was reported: [See "Earthtrends"]

North America $43,000 IQ about 100Europe $22,511 IQ about 100Central America $6017South America $5126Asia w/o Middle East $2891 IQ 106Sub-Saharan Africa $920 IQ 70

But as is well known, Asian economies are growing much faster than those of the "West." The GDP advantage of North America over Asia may be short lived.Indeed, the North America (U.S.) number is probably overstated, as reviewed above, by about 18% due to support of the economy through massive borrowing over the past 25-odd years. This would bring the North America number to about $36,000 -- comparable to countries like Belgium, Denmark, Spain, U.K., Sweden, Netherlands, Finland, and France.

2008 GDP percapita. ($k)

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The countries with the top IQs are: Hong Kong 107, South Korea 106, Japan 103, Taiwan 104. The four on the bottom are: Guinea 66, Zimbabwe 66, Congo 65, and Sierra 64. The U.S. scored 98.

3. Religion vs. Per Capita GDP

As if IQ wasn't controversial enough, let's forget our PC training and consider effects of religion. It is straightforward to envision how a country obsessed or significantly preoccupied with matters of religion might neglect the seemingly more mundane activities of economics, finance, business, manufacturing, capital formation, and innovation.

Clearly, business endeavors are diluted in a theocracy such as the Islamic State of Iran, or the Taliban's hold on Afghanistan in the late 1990s. Even perhaps in Catholic-dominated Ireland of a few years ago. The legacy of religion in the words of Christopher Hitchens has been one of "an enemy of science and inquiry." Doubtless a philosophy less than positive for industrial innovation.

In order to examine the effects, if any, of religion on a nation's economy we need a measure of "religiosity." The Gallop Company provides just what we need in a poll of 67 countries taken in 2005 and 2006. A "religiosity index" was generated based on respondent's answers to questions about whether religion is an important part of their daily lives, if they attended a place of worship in the week prior to polling, and whether they have confidence in religious organizations. The data is plotted below against per capita GDP for each country. [http://www.gallop.com/poll/108625/more-religious-countries-lower-suicide –rates.aspx]

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Fig. 6. Gallop's religiosity index vs. per capita GDP for 67 countries.

The top-four more religious countries are: Kuwait 83, Mauritania 81, Philippines 79, and Paraguay 79. The four on the bottom are: Russia 28, Czech Republic 26, Sweden 23, Estonia 21. The U.S. scored 61. The Islamic nations Iraq, Iran, Egypt and etc. were not evaluated—there, maybe the polltakers were afraid to ask.

The Pew company estimates approximately 1/4 of Americans are evangelicals.

4. Freedom vs. Per Capita GDP

A study on the level of freedom in 179 countries, "The 2009 Index of Economic Freedom," was recently updated by The Heritage Foundation and The Wall Street Journal, both organizations traditionally leaning to the Right. The numbers refer to no freedom at zero and to complete freedom at 100. Eight business-oriented criteria were defined: freedom of business, fiscal, size of government, monetary policy, investment, property rights, freedom from corruption, and labor freedoms.

The top three countries were Hong Kong 90, Singapore 87.1 and Australia 82.6. The U.S ranked sixth at 80.7. The bottom three were Cuba 22.7, Zimbabwe 22.7 and North Korea 2.0. France scored 63.3, for example, but received high marks over 80 except for the size of government

Hong Kong has won this freedom prize at around score of 90 from these guys for years. So, just a word about that place. Their crowded population is about a million under that of New York City. Government employees constitute about 3.3% of the population vs. our 5.9% in the Federal Government. Supervisors in manufacturing earn a measly $18k per year and those in finance about $26k per year. The government pays health care costs for the poor, and a University education is at government expense. Corporate tax rates are about 25%. Like Singapore, the weather in the summer is like swimming through soup. It's nice in the winter.

So, why are they dong so well? They are smart, well educated, reasonably free and they work cheap.

Fig. 7. shows the freedom data for 65 countries plotted against per capita GDP. The effect is quite strong.

Fig. 7. The Index of Business Freedom vs. per capita GDP.

Reporters Without Borders for Better Freedom publish a yearly index of press freedom. This is plotted below for 2004 against the per capita GDP for 71 companies. As would be expected, the scatter of data is greater than the plot above for business. Nevertheless, the data points move in the expected direction—the more the freedom, the more robust the economy.

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Fig. 8. Index of Press Freedom vs. Per capita GDP.

5. Corruption vs. Per Capita GDP

A study by Transparency International was published in 2008 on public sector corruption. The company determined a "Corruption Perception Index" for 180 countries. Each score involved combining 3 to 8 separate surveys. A score of ten is "highly clean" and a zero is "highly corrupt. The top three countries were Denmark, Sweden and New Zealand all scoring 9.3. The bottom three were Iraq 1.3, Myanmar 1.3 and Somalia 1.0. The U.S. scored 7.3, 18th from the top. [http://www.transparency.org/policy_research/survey_indicies/cpi/2008]

This data is ploted below against per capita GDP for 80 countries. The resulting data fit reasonably well against a computer generated curve fit.

Fig. 9. An index of public corruption vs. per capita GDP.

The top least corrupt nations were: Denmark 9.3, Sweden 9.3, New Zealand 9.3, and Singapore 9.2. Most corrupt were: Haiti 1.4, Iraq 1.3, Myanmar 1.3, and Somalia 1.0. The U.S. scored 7.3, 18th from the top.

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6. Education vs. Per Capita GDP

For the study of education effects, we consider data measuring: levels of University Education, test scores in science. and the number of years in school.

Fig. 10. Percent population with a University education vs. per capita GDP.

The slope of the above data is only about 10 or 15. This suggests that a University education today has less leverage across the world than it once did. This is not to suggest it is not valuable, but the rest of the world may be doing the same thing.

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Fig. 11. Science test scores of 15-year old students vs. per capita GDP. Data for 43 countries. [Source: Programme For International Student Assessment (PISA) , 2006]

The slope of the line is about 15.

The Federal Reserve Board of Dallas presented the plot below referring to it as "Ignorance is Misery; Knowledge is Bliss" The average years of schooling is given for 108 countries. Three groups are shown representing three levels of freedom, the upper one in green being the higher level. The slopes for each color line from no schooling to about 12-years are only a factor of about 10- times improvement in GDP per capita.

Fig. 12. Average years of school completed for various countries vs. GDP per capita in 2000. [Source: "What D'Ya Know", Federal Reserve Bank of Dallas, 2004 Annual Report]

In terms of per cent University education, the top countries were U.S 27, Norway 24, Netherlands 24, and Canada 19.

7. Manufacturing vs. Per Capita GDP

Fig.13 plots the value-added from manufacturing revenues vs. per capita GDP for 71 countries. The data points are highly scattered, but a least-squares computer plot does show a positive trend in the direction of the manufacturing size being proportional to per capita GDP.

Revenues might show a more positive effect, but such data across many countries is not available. U.S. manufacturing industry revenues ($4.98 T) as a percent of GDP (44%) is much higher than the value-added number (14.4%.)

Fig. 13. Manufacturing value added vs. per capita GDP for 71 countries... [Source for value added: The World Bank 2008 via EarthTrends.

The manufacturing leverage on per capita GDP suggested in Fig. 13 is diluted by globalization and the advent of strong free market forces. These forces tend to reduce manufacturing wages around the world, an effect that has brought considerable havoc to the U.S. industrial economy.

In any plot of a parameter against per capita GDP over many countries, in order to discover a trend other factors must be held constant. In manufacturing, they are not. Various counties engage in manufacturing in widely varying characteristics.

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Some countries such as China, Vietnam and Mexico capture high labor content manufacturing by encouraging their people to work for extraordinarily low wages. Other countries, such as the U.S., are busily outsourcing all high labor content operations leaving behind only those that are highly automated. A third category is those nations such as Switzerland, Italy and France who have developed very high-priced low-volume high-status brand-named products. Thus, when we create data plots such as Fig. 13 above, we see data scatter, and poor correlation.

Not well supported in the above chart, is the requirement of an adequate level of manufacturing. This is critical in order to reduce a possible large negative balance of trade, such as the unsustainable situation that currently festers in the U.S.

8. Innovation vs. Per Capita GDP

The Economist Magazine published a study on global innovation in April 2009. By counting patents from each country that were filed during 2004 to 2008 in three offices -- U.S, Japan, and Europe -- they calculated an index of innovation for 81 countries. The top and bottom three countries, including scores are:

Japan 10.00Switzerland 9.71USA 9.5-----------------------Nigeria 2.01Angola 1.44Libya 1.44

Oil rich Libya's data point is not included in Fig.14 below.

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Fig.14. Index of Innovation derived from patents filed in three offices around the world during 2004-2008 vs. GDP per capita. [Source: The Economist]

Regarding a people's ability to innovate, Beinhocker puts it well, "...a culture needs to be tolerant of heresy and experimentation, as strict orthodoxy stifles innovation...it is important that the culture be supportive of competition and celebrate achievement, since only egalitarian cultures reduce the incentives for risk taking.

9. Trust vs. Per Capita GDP

Economist Beinhocker informs us that numerous studies have shown that trust in people varies widely across cultures as occur in various countries. For example, in Harrison and Huntington's book "Culture Matters: How Values Shape Human Progress" an important correlation between trust and economic success was demonstrated. Beinhocker writes, "High trust leads to economic cooperation, which leads to prosperity which enhances trust in a virtuous circle."

Data from 54 countries was collected in 1999 by asking in their native language, "Generally speaking, would you say most people can be trusted, or that you cannot be too careful in dealing with people?" Data from the study for 51 countries is plotted below with GDP per capita for the same year. The correlation to the trend line is not very good; the curve shown is a least-squares linear fit. The three more trusting countries were Norway, Denmark and Sweden. The least trusting three Brazil, Peru and the Philippines were far less economically successful.

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Fig. 15. Percentage Who Trust People in General vs. GDP per capita. Data for 1999. [Source: "Culture Matters: How Values Shape Human Progress," Lawrence E. Harrison and Samuel P. Huntington, 2000, GDP data www.geographic.org]

Beinhocker argues that social capital dealing with trust is on the wane in America. He points out:

"Trust in the U.S. government has fallen by half from it peak of 40 per cent in 1966 to 20 per cent in 2003...trust in business is down from 55 per cent to 16 per cent, and trust in religious institutions has fallen in half to 23 per cent.. The percentage of Americans agreeing with the statement, "Most people can be trusted" dropped from over 50 per cent in 1968 to just over 30 per cent in 2003. "

My take on this statement is, considering our recent past, I am surprised our trust hasn't completely crapped out. Consider what has happened past 45-odd years:

1. The Catholic Priest sexual abuse flap. 1960s -- ?2. The first unnecessary war. Vietnam, 1963 --19643. Watergate. 1972 -- 19744. Globalization. Early 1980s -- today

The end of high rates of inflation and high interest rates Lower prices for manufactured goods The decline and eventual end of corporate pensions plans and the

rise of 401(K)s Painful dislocations of many millions of factory workers Wholesale disappearance of various domestic manufacturing

industries such as consumer electronics. 5. The first S&L crises. 1981—19896. The universal denial by economists that globalization represents serious problems for the U.S. Early 1980s -- today7. The new era of easy money and massive debt. 1982--20098. Cigarette makers deny their product causes cancer, is additive, and targets young people. Early 1980s -- late 1989s.9. Domestic automakers deny Japanese cars are more reliable. Early 1980 -- early 2000s10. The Jim Baker / Tammy Faye fiasco. 1987 – 200711. The new era of grossly overpaid CEOs. 1990s -- today12. The rise of opinion-based news further polarizing the Right / Left divide. 1996 beginning with Robert Murdock's FOX news -- today13. The overt manipulation of markets. Enron. 200114. The second unnecessary war. Iraq, 2003 -- ?15. The easy money and bad-mortgage meltdown. 2008 -- ?16. The astonishing greed of con man Bernard Madoff. 2009

17. The rapid growth of politcal polarization.

And the rise of rapid communications and all-pervasive media making all of the above dirty messes immediately visible.

Alternatively, Harvard Professor of public policy Robert Putnam focuses on other factors to explain our loss of trust. These include rising divorce rates and births to single mothers, the entry of women into the workplace, suburban sprawl, and the isolating effects of mass media.

Putman explains the Italian North / South economic conundrum on the basis of trust. He concludes the necessary social networks and wide spread social connections are lacking in the South. This leads to lack of trust and negatively impacts the creation of large-scale cooperation necessary for economic performance. Putman reasons the South inherited this culture from medieval times when they were monarchist, hierarchical, closed and dominated by the church. Such structures viewed business networks as threatening. By comparison, the North was more egalitarian, communal, and open to trade. There, social networks more easily grew and flourished as they still do today.

Leading countries in the trust survey were Norway 65, Denmark 60, Sweden 57, and Netherlands 53. On the bottom were Puerto Rica 6.5, Philippines 6, Peru 5.5, and Brazil 3. The U.S. scored an unimpressive 37.5

10. Tax Rates vs. Per Capita GDP

A recurring myth, still adamantly promulgated by most Republicans, is that the economy is or would be greatly benefited by lower tax rates. Despite the obvious political appeal for such a position, any evidence for its validity is unsupportive or unpersuasive. Consider the following plots from my tax rate paper on the Internet [Google: Tax Rate Reduction Myths]. Both plots use data from 2005 -2006.

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Fig. 16. Per capita income vs. upper tax bracket percent for years 2005 and 2006. Data for 48 countries.

Fig. 17. Tax revenue as a percent of GDP vs. per capita GDP for countries around the world. 2005-2006.

Both Figs. 16 and 17 show no trends or general effects on per capita GDP over a broad range of tax revenues up to about 50% of GDP. The reason is straightforward -- tax revenues in virtually all countries plow quickly back into the economy. Arguably not in the most efficient way, but apparently efficiently enough such that no negative trends are apparent.

In other words, tax revenues plus no small amount borrowing, much to the consternation and extreme annoyance of the politically Right, are redistributed. But redistributed to whom? In America to:

About 22-million government and military people.About 37-million seniors getting Social Security and Medicare moneyAbout 50-million on Medicaid

Whom have I left out? Oh yes.

About 270,000 firefighters

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About 600,000 police officers About 80,000 prison guards, oops, I mean correction officers (busily correcting 7.3- million prisoners)About 6.2-million teachers About 6-million receiving unemployment compensation

And what do all these people do when the government checks arrive? They do what Americans do best—they consume. What else?

Summary.This Study and the Update

Approximate overall positive change in “slope” in per capita GDP from the several factors studied. This slope is simply the ratio of the change from low to high GDP per capita. The results of an update usung 2012 data is shown as well.

Study 2009 2013

Geography. Distance from the Equator 20 about 20Higher IQ 100 not studiedLess Religion 20 20-30More Business Freedom 200 about 50More Press Freedom 20 not studiedLess Corruption 100 about 40More Education 2 to 15 30-40More Manufacturing 5 about 50 More Innovation 20 about 50More Trust 15 about 40Tax Rate Reduction 0 30-40 in oposite direction Size of Government not studied no clear trend

The above analysis indicates that from the first analyses the more important factors for economic success are high IQ, high business freedom, and a lack of corruption.

Overall, the new study suggests moderation or leveling of the factors. This may be due to the continuing world acceptance of globalization -- a major force of nation economic-leveling. Today the major factors controlling economic strength are business and press freedom, freedom from corruption, excellence in education, a strong manufacturing base, social trust, and the ability to innovate. Other somewhat less important factors may be religion and latitude. Of little or no effect are tax rates and the size of government. Charts for these last named trends and manufacturing are given below. The IQ data may be largely a measurement of education and was not studied again.

So -- young person -- find yourself a country with a pro-business government free of corruption, a nation populated with intelligent, trustful, and well educated people who are not hung up on religion, who enjoy freedom of the press and property ownership, are not afraid of change and love to innovate, and for goodness sake are nowhere near latitude zero. Then go there and get stinking rich.

P.S. When you find such a place, please let me know where it is.

Selected data from the 2013 study.

Below is shown data on the possible affects of tax revenues on per capital GDP for 144 countries. One conclusion might be that the data is so scattered that no trends are operative. But the data-group does generally trend in the direction of the greater the tax revenue the stronger the economy. However this is probably not a cause and effect correlation. It may be that the stronger the economy the greater is the acceptance of higher taxes. This is probably especially true in the highly successful Scandinavian countries. In any case, the Republican party position that high tax rates are extremely harmful to a nation’s economy is not supported by reality.

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Fig.18. Tax revenue collected by the central government as a percent of GDP vs. per capita GDP. Source: Wikipedia, CIA Fact book and the World Bank. Data for 2012. Data for 144 countries.

The chart below presents data representing the size of government as measured by its spending as a percent of GDP. Again, we see a high degree of scatter over the numbers for the 141 countries. However, as a group it seems that the more it

spends the stronger the economy. This is, as memtioned above, also probably not a cause and effect relationship. It probably means that strong economies have the ability to spend more and therefore make an attempt to take better care of their people,

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Fig. 19. Government spending as percent of GDP vs. per capita GDP. Sources: As in Fig.18. Spending data for 2011. Data for 141 countries. U.S. is the red point

Finally, below is plotted the current account balance against per capita GDP. This is a reasonable measure of the strength of domestic manufacturing for each country. Although again the data are scattered, the overall trend is clearly in the direction of greater economic strength when manufacturing has sufficient strength to ward off high trade imbalances,

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Fig. 20. The current account balance or the approximate value of the trade balance as percent of GDP vs. per capita GDP. Computer drawn curve. Source: Wikipedia

Summary. Average Country Scores from the Charts from the First Study

Weighted average scores for all the above factors found the following, for the maximum in expected per capita GDP:

Number 1 Hong KongNumber 2 U.S.Number 3 Japan

Ranked number 2 in the World, the U.S. was still performing relatively well. Even with the recession still under way in 2009, the per capita income in constant dollars rose 6% over the 40-month period from January 2006 to April 2009. Caveat: About 2.6% of this rise is due to the extraordinarily rare effect of deflation in late 2008 / early 2009

Regarding predictions, Albert Einstein once said, "I never predict the future, there is too much of it."

Best of Luck,

Jim Cunningham

jincsname@comcast.net