Simulating the U.S. Economy: Where will we be in 100 years?

William Strauss is the President and founder of FutureMetrics. He brings more than thirty years of strategic planning, project management, data analysis, and modeling experience into the company’s stock of knowledge capital. Bill’s professional history includes executive positions as director, president, and senior vice president, as well as positions as senior analyst and field coordinator. He has an MBA (specializing in Finance) and a PhD (Economics).

Dr. Strauss will present a case study at the 2009 the 2009 Palisade Conference: Risk Analysis, Applications, & Training. The conference is set to take place on 21 – 22 October at the Hyatt Regency in Jersey City, 10 minutes by PATH from Manhattan’s Financial District.

See the abstract for his case study below, and see the full schedule for the Conference here.

Simulating the U.S. Economy:
Where will we be in 100 years?

There is an assumption that drives all of our expectations for how our economy will be in the future. That assumption is one of endless economic growth. Clearly endless exponential growth is impossible. Yet that is what we base all of our expectations upon. We all agree that zero or negative economic growth is bad (just look around now at the effects of the Great Recession). But we also know logically that 2% or 4% annual growth every year leads to an exponential growth outcome that is unsustainable. 

To see where this growth imperative will take us we first have to see how we go to where we are today. This work first models the 20th century. The model is both complex and simple. The basic schematic of the model’s relationships is easy to understand. Furthermore, the core of the model is a simple production function that combines capital, labor, and the useful work derived from energy to generate the output of the economy. Complexity is contained in the solutions to the internal workings of the model. What is unique is that there are no exogenous economic variables. Once the equations’ parameters are calibrated, setting the key outputs to "one" in 1900 results in their time paths very closely predicting the U.S. GDP and its key components from 1900 to 2006. 

The experiment in this work is about the future. If the model can very closely replicate the last 100 years, what does it have to say about the next 100 years? From 1900 to 2006 there are periods in which there was parameter switching. (The optimal parameters and the years for the switching were found using a constrained optimization technique.) That suggests that in the future there will also be changes. The experiment uses @RISK’s features to generate new combinations of parameters for each of tens of thousands of runs of the simulation. Changes in the parameters represent potential exogenous policy choices.

The "doing what you did gets you what you got" scenario leads to a surprising and unsettling outcome. The experiments using @RISK do find a path that works. Obviously if it is not "business-as-usual" that leads to a stable outcome, it is some other way. The policy choices that lead to a stable outcome suggest that the future of capitalism is not going to be what we expect it to be.

Please join us in October in New York for software training in best practicies in quantitiative risk analysis and decision making under uncertainty, real world case studies from risk services consultants and experts, and networking with practicioners from many different fields including oil and gas, pharmaceuticals, academics, finances, Six Sigma, and more.

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