A Brief Survey of the Debt-GDP Relationship for Some Modern 21st Century Economies

The Real Problem? The Use of the Debt/GDP ratio Table of Contents
No.
1. 2. 3. 4. 5. 6. 7. 8.

Topic
Summary Introduction Methodology for deducing GDP-Debt relations Type I Behavior, Several Countries (2002-2012) Type II Behavior Type III Behavior Brief Discussion and Conclusions Reference list

Page No.
1 2 6 14 19 22 25 33

1. Summary
A remarkably simple and linear relation between the GDP x and the Debt y is revealed if we analyze the empirical observations on various modern economies of the 21st century. A brief survey is provided here which supports the law y = hx +c where h, the slope of the graph, is the rate of increase of the Debt y as the GDP x increases. The nonzero c means that the Debt/GDP ratio y/x = h + (c/x) will tend to its maximum value h, the slope of the GDP-Debt graph, as the GDP x increases. The nonzero intercept c, which has been called the work function (see earlier articles on the Debt-GDP problem by the present author), is analogous to the work function conceived by Einstein to explain photoelectricity, or the work function of a professional baseball player. The simple linear law that has been deduced here seems to have escaped the attention of all professional economists to date.

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The linear law, as revealed here, implies that both the GDP and the Debt increase simultaneously at all Debt/GDP ratios. Hence, there is no threshold, such as the 90% level, beyond which economic growth is stifled, as revealed in the Reinhart-Rogoff study. The linear law also means that it is not necessary to introduce other economic growth rate parameters such as x/x, the percent change in the GDP, into the analysis. Other difficulties with the use of the Debt/GDP ratio are also discussed, briefly, especially the importance of the unit of time implicitly included in a nations debt (which is the cumulative budget deficits over many years). This too must be recognized and cannot be overlooked when comparing the economic performance of different countries.

2. Introduction
Back in the summer of 1998, when I was trying to understand why GM, and more generally all American (Ford and Chrysler), automotive plants were horribly inefficient compared to the Japanese transplants (the automotive plants owned by the Japanese but located in the US and employing American labor - the Nissan, Honda, and Toyota plants), I discovered an interesting property of a straight line that I had never consciously thought about. From our middle school and high school math classes, we know that the general equation of a straight line is y = hx + c = h(x x0) where h is the slope of the line, c is the intercept made by the line on the y-axis (y = c when x =0), and x0 = - c/h is the intercept on the x-axis (x = x0 when y = 0). Hence, if the straight line does not pass through the origin, the ratio y/x = m = h + (c/x) is not a constant and can either increase or decrease as we move up or down the line. This also means that the maximum value of the ratio y/x = m is equal to h, the slope of the line. The ratio y/x will either increase or decrease and approach asymptotically the limiting value of h for very large x. Mathematically speaking, the ratio y/x = m h as x . Everyone I have spoken to about this property of a straight line, over the last 14+ years, has always immediately agreed with me. There is no arguing or
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debating this point. The only question is what are we doing about this important property of a straight line, and how y/x ratios behave, even when all of our (x, y) observations fall on a PERFECT straight line. Note that the above also means that the graph of y/x, the ratio (or percent), versus x is a falling or a rising hyperbola, depending on the numerical values of the constants h and c. The linearity in the x-y relation implies a nonlinearity in the behavior of the ratio y/x as x increases. And so, since the summer of 1998, I have studied many different problems where we compile huge masses of empirical observations in the form of x and y tables and then compute y/x ratios to analyze our observations, draw conclusions, and also make important (sometimes life changing) decisions and formulate social and political policies. Some examples are: 1. Profits and revenues of corporations, where x is revenues and y is profits and the ratio y/x is the profit margin. Likewise, earnings per share for a company, the P/E ratio for a stock, etc. are simple y/x ratios. 2. Unemployment rate, where x is labor force and y is the number of unemployed 3. Labor productivity where x is the labor hours and y is the labor output (number of vehicles, engines, cellphones, computers, TVs, etc.) 4. Various fatality rates, such as traffic fatalities where x is the number of vehicle miles traveled (VMT) and y is the number of traffic-accident related fatalities; the same applies for many other fatality studies such as cancer death rates, heart disease rates, gun-related deaths, etc. 5. Quality and performance ratings which employ ratios, such as On-Time arrivals for airlines, defects per million opportunities (DPM in Six Sigma analysis), missing baggages, denied boardings, customer complaints. 6. Various ratios used in sports, for example, the batting average (BA) in baseball which is the ratio of Hits (H) to the number of At Bats (AB). 7. The debt to budget ratio, the topic of interest here, used to analyze economic performance of a country.

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This is a very small list. There are literally hundreds and thousands of y/x ratios being used every single day. The world, as we know it, is defined by such y/x ratios. We talk about college admission rates, teenage pregnancy rates, obesity rates, suicide rates, etc. Indeed, a new y/x ratio is being created practically every day to quantify some new observation on the world around us, the latest creations being ratios like comments or replies per view, or likes per view, to assess how internet websites perform! The mathematical property of the straight line, mentioned above, lurks behind each one of these ratios. This will become obvious if one just prepares a x-y graph. Alas, over the last 15 years, I have rarely seen this being done to analyze such problems. This is also the reason I got interested in the analysis of the Debt/GDP ratios, after the coding errors in the Microsoft Excel program of the Harvard economists, Carmen Reinhart and Kenneth Rogoff [1], were publicized, on April 15, 2013, by three economists from UMass-Amherst [2-4]; see also Refs. [5,6] where I have discussed the implications of the property of a straight line as it applies to the Debt-GDP problem. The main purpose here is provide a brief survey of the three important types of x-y graphs observed in the analysis of the Debt-Budget data. Very briefly, as discussed in more detail in Ref. [5], three distinct types of straight lines can be envisioned. Type I: Positive slope, negative intercept (h > 0, c < 0). As the independent variable x increases both the dependent variable y as well as the ratio y/x increase. The limiting value of the ratio y/x is the slope h of the straight line. The Canadian Debt-GDP, after the financial crisis of 2008 provides an example of Type I behavior. This is illustrated in Figures 1 and 2 of Ref. [5]. Type II: Positive slope, positive intercept (h > 0, c > 0). As x increases y increases but the ratio y/x decreases. Again, the limiting value of the ratio y/x is the slope h of the straight line. The recent Canadian Debt-GDP figures, BEFORE the 2008 financial crisis, provide an example of this Type II behavior. Type III: Negative slope, positive intercept (h < 0, c > 0). As x increases both y and the ratio y/x decrease. The Russian data, illustrated in Figure 1 of the present article, is an example of Type III behavior. Again, the limiting value
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of the ratio y/x is the slope h of the straight line. The recent Debt-GDP data for Ireland (increasing debt with decreasing GDP, from 2009 to 2012) is another example of Type III behavior, but with decreasing values of x. Many such examples of Type III behavior can also be found when we analyze the financial data (profits and revenues) for various companies. All three cases described above and their inverses are observed when we analyze the (x, y) observations on many different systems. The term inverse is used here to refer to the case of decreasing x instead of increasing x, e.g. when a positive slope h is observed with a simultaneous decrease in the values of both x and y. Several articles describing these findings can be found on this website; see bibliography list, Ref. [7], and some related articles [8-12].

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 3. Methodology for Deducing GDP-Debt Relationships Examples of Brazil and New Zealand (2002-2012)

Let us consider now the examples of Brazil, the first of the so-called BRICS nations (the acronym is used to denote the economies of Brazil, Russia, India, China, and South Africa), and New Zealand to illustrate the nature of the remarkably simple and linear GDP-Debt relationships revealed when we consider the multi-year data that can be obtained readily from the website of The Economist, Ref. [13]; see the extract above for Brazil in 2012. The raw data for Brazil and New Zealand, for the period 2002-2012 has been compiled in Tables 1 and 2, respectively. The GDP values can be deduced from the Debt/GDP ratios (percents) and the public debt values. The x-y scatter graph, see Figure A, for Brazil reveals a nice upward trend with all the (x, y) pairs falling approximately on a straight line. The best-fit line through the data can be deduced using linear regression analysis (method of least squares, see Refs. [14,15]).
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Table 1: The GDP-Debt data for Brazil (2002-2012)

Debt/GDP [%] GDP, x 100 (y/x) $, trillions 2002 70.6 0.514 2003 75.4 0.467 2004 71.2 0.629 2005 68.3 0.786 2006 64.3 0.967 2007 56.9 1.228 2008 57.8 1.441 2009 58.4 1.474 2010 58.7 1.968 2011 53.6 2.246 2012 54.3 2.298 Data source: Global debt clock, The Economist, click here Year Debt, y $, trillions 0.363 0.352 0.448 0.537 0.622 0.699 0.833 0.861 1.155 1.204 1.248

Table 2: GDP-Debt data for New Zealand (2002-2012)

Debt/GDP [%] GDP, x 100 (y/x) $, billions 2002 29.3 57.130 2003 27.4 75.792 2004 25.5 96.035 2005 23.4 108.316 2006 21.7 111.069 2007 19.4 122.861 2008 17.2 127.308 2009 19.2 116.526 2010 24.7 139.101 2011 30.2 152.517 2012 37.5 155.885 Data source: Global debt clock, The Economist, click here Year Debt, y $, billions 16.739 20.767 24.489 25.346 24.102 23.835 21.897 22.373 34.358 46.060 58.457

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1.60 1.40

Debt, y [$, Trillions]

Brazil (2002-2012)

1.20 1.00 0.80 0.60 0.40 0.20 0.00 0.00

y = 0.492x + 0.1298 r2 = 0.994 Type II Behavior

0.50 1.00 1.50 2.00 2.50 3.00

GDP, x [$, Trillions]

Figure A: The GDP-Debt diagram for Brazil, for the period 2002-2012.
80 70

Debt/GDP, y/x [%]

60

50
40 30 20 10 0 2000 2002 2004 2006 2008 2010 2012 2014

Dashed line, joins end points

Time, t [Calendar years]

Figure B: The Debt/GDP ratio (converted to %) for Brazil, 2002 to 2012.
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Although the Debt/GDP ratio reveals a generally downward trend, see Figure B, the GDP-Debt graph exhibits a remarkable linearity. The constant slope h of the graph means that when the debt y increases at a fixed rate as the GDP x increases. If the GDP increases by a fixed amount x, the debt always increases by the same fixed amount y = hx. The New Zealand data reveals a slightly more complex pattern, see Figures C, to F.
40 35

Debt/GDP, y/x [%]

30
25 20 15 10 5 0 2000 2002 2004 2006 2008 2010 2012 2014

Time, t [Calendar years]

Figure C: The Debt/GDP ratio (converted to %) for New Zealand, 2002 to 2012. First, the Debt/GDP ratio decreased from 29.3% in 2002 to its lowest values of 17.2% in 2008 and then started rising again. The GDP, however, kept rising, see Figure D, at a high rate (as measured by the slope of the graph) with the decreasing Debt/GDP ratio and then at a lower rate (as measured by the lower slope of the graph) with the increasing Debt/GDP ratio. The debt also increased, from $16.739 billion in 2002 to $23.835 billion in 2007 and to $58.457 billion in 2012. Thus, the GDP-Debt graph also shows than an upward trend, see Figure E, which can be decomposed into a Type II relation at low GDP to a Type I relation at the high GDP. These Type II and Type I trends are joined by what appears like a Type III adjustment trend between the two.
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180.0 160.0

2012 2008 2007 2009 2002

GDP, x [$, billions]

140.0 120.0 100.0 80.0 60.0

40.0
20.0 0.0 0 5 10 15 20 25 30 35 40

Debt/GDP, y/x [%]

Figure D: Rising GDP with both a decreasing and an increasing Debt/GDP ratio for New Zealand for the period, 2002 to 2012.
80 70

Debt, y [$, billions]

y = 1.436x 165.4 Type I

60 50

40
30 20 10 0 0

y = 0.199x + 5.36 Type II

20

40

60

80

100

120

140

160

180

200

GDP, x [$, billions]

Figure E: The GDP-Debt diagram for New Zealand for the period, 2002 to 2012.
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The overall trend for New Zealand, on the GDP-Debt diagram, can be shown, statistically speaking, to be a Type I trend, see Figure F, with a somewhat low value of the regression coefficient r2 = 0.617. This is considered to be a low correlation coefficient because the most of the other GDP-Debt relations deduced here, from such an analysis, see summary in Tables 3a and 3b, have r2 values in excess of 0.800 and often in excess of 0.900.

70 60

Debt, y [$, billions]

50 40 30 20 10 0 0 -10

New Zealand (2002-2012)

y = 0.326x 8.517 Type I 2 r = 0.617

50 100 150 200 250

GDP, x [$, billions]

-20

Figure F: The GDP-Debt diagram for New Zealand for the period, 2002 to 2012 revealing an overall Type I behavior.

With this general background to the methodology used, the following sections provide a brief discussion of the three main types of GDP-Debt relations observed when we analyze the GDP, Debt, and the Debt/GDP ratios data for various countries.

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Table 3a: Summary of Debt-GDP Equations (2002-2012)

Country
Argentina Australia Brazil Canada Chile China France Germany Greece Iceland India Ireland Israel Italy Japan Kazakhstan Netherlands New Zealand Norway Portugal Russia Singapore UK USA

Period
2002-2012 2002-2008 2008-2012 2002-2012 2002-2008 2008-2012 2007-2012 2002-2012 2002-2008 2002-2012 2002-2007 2002-2008 2009-2012 2002-2012 2002-2008 2009-2012 2002-2012 2002-2012 2002-2012 2002-2012 2002-2012 2002-2012 2002-2012 2002-2008 2002-2007 2008-2012 2002-2012 2002-2008 2009-2012 2002-2008 2009-2012

Debt/GDP Range
41.1% to 143.4% 14.4% to 21.5% 14.4% to 26.9% 70.6% to 53.6% 82.1% to 67.9% 67.9% to 87.2% 4.2% to 8.9% 15.5% to 27.2% 56.7% to 65.8% 59.6% to 82.1% 97.9% to 107.3% 54.2% to 74% 69.2% to 126.9% 49% to 61.5% 34.2% to 24.7% 30.7% to 108.4% 73.2% to 100.2% 103.7% to 120.3% 146.3% to 215.5% 8.1% to 20.2% 46.7% to 66.3% 17.2% to 37.5% 29.7% to 57.3% 52.1% to 116.6% 46.4% to 8.4% 7.0% to 9.0% 88.6% to 106.7% 37.6% to 47.5% 59.2% to 87.6% 32.8% to 37.6% 44.7% to 69.7%

Debt-GDP equation Roman Numeral (Type)

y = 0.195x + 92.56, II y = 0.094x + 0.050, II y = 0.472x 0.310, I y = 0.492x + 0.13, II y = 0.546x + 0.197, II y = 1.335x 0.7796, I y =0.183x -0.0225, I y = 0.124x + 0.218, II y = 0.742x - 0.221, I y = 0.979x 0.825, I y = 1.088x 0.015, I y = 0.434x + 2.845, II y = 3.494x 29.36, I y = 0.449x + 113.83, II y = 0.233x + 0.011, II y = -2.183x + 0.659, III y = 0.477x +0.059, II y = 1.221x - 0.24, I y = 0.293x + 2.338, II y = 0.118x + 0.936, II y = 0.709x - 0.108, I y = 0.326x - 8.517, I y = 0.660x - 0.066, I y = 0.89x 53.14, I y = -0.069x + 0.167, III y = 0.108x 0.041, I y = 1.016x 0.0067, I y = 0.584x 0.357, I y = 3.605x 6.489, I y = 0.341x + 0.326, II y = 2.357x 25.182, I

Alphabetical list of the 24 countries surveyed. With only a few exceptions, all the Debt-GDP equations were determined using linear regression analysis. Two points, typically values for 2009 and 2012, were used in other cases, when there was a discontinuous change in the slope following the financial crisis of 2008. Countries with Debt/GDP ratio over 90% are highlighted in yellow.

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Table 3b: Summary of Debt-GDP Equations (2002-2012)

Country
Australia Canada Chile France Germany Greece Iceland Italy Netherlands New Zealand Norway Portugal Russia Singapore UK UK USA Argentina Australia Brazil Canada China Iceland India Ireland Israel Japan Kazakhstan USA Russia Ireland

Period
2008-2012 2008-2012 2007-2012 2002-2008 2002-2012 2002-2007 2009-2012 2002-2012 2002-2012 2002-2012 2002-2012 2002-2008 2008-2012 2002-2012 2002-2008 2009-2012 2009-2012 2002-2012 2002-2008 2002-2012 2002-2008 2002-2012 2002-2008 2002-2012 2002-2008 2002-2012 2002-2012 2002-2012 2002-2008 2002-2007 2009-2012

Debt/GDP Range
14.4% to 26.9% 67.9% to 87.2% 4.2% to 8.9% 56.7% to 65.8% 59.6% to 82.1% 97.9% to 107.3% 69.2% to 126.9% 103.7% to 120.3% 46.7% to 66.3% 17.2% to 37.5% 29.7% to 57.3% 52.1% to 116.6% 7.0% to 9.0% 88.6% to 106.7% 37.6% to 47.5% 59.2% to 87.6% 44.7% to 69.7% 41.1% to 143.4% 14.4% to 21.5% 70.6% to 53.6% 82.1% to 67.9% 15.5% to 27.2% 54.2% to 74% 49% to 61.5% 34.2% to 24.7% 73.2% to 100.2% 146.3% to 215.5% 8.1% to 20.2% 32.8% to 37.6% 46.4% to 8.4% 30.7% to 108.4%

Debt-GDP equation Roman Numeral (Type)

y = 0.472x 0.310, I y = 1.335x 0.7796, I y =0.183x -0.0225, I y = 0.742x - 0.221, I y = 0.979x 0.825, I y = 0.1.087x 0.0147, I y = 3.494x 29.36, I y = 1.221x - 0.24, I y = 0.709x - 0.108, I y = 0.326x - 8.517, I y = 0.660x - 0.066, I y = 0.89x 53.14, I y = 0.108x 0.041, I y = 1.016x 0.0067, I y = 0.584x 0.357, I y = 3.605x 6.489, I y = 2.357x 25.182, I y = 0.195x + 92.56, II y = 0.094x + 0.050, II y = 0.492x + 0.13, II y = 0.546x + 0.197, II y = 0.124x + 0.218, II y = 0.434x + 2.845, II y = 0.449x + 113.83, II y = 0.233x + 0.011, II y = 0.477x +0.059, II y = 0.293x + 2.338, II y = 0.118x + 0.936, II y = 0.341x + 0.326, II y = -0.069x + 0.167, III y = -2.183x + 0.659, III

This list groups the Type I, Type II, and Type III behaviors with countries listed in alphabetical order within each group.

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 4. Type I Behavior for Several Countries (2002-20012)

Although the incurring of debt is generally considered to be undesirable, we find many examples of leading economies where both the Debt and the GDP are increasing. In what follows here the GDP (x) is plotted on the horizontal axis and the Debt (y) is plotted on the vertical axis. The US, Canada, China, and Germany, are notable examples of countries which show increasing debt with increasing GDP levels. The Debt-GDP diagrams for several countries can be found in Refs. [5,6]. Here we will consider some additional examples, not covered earlier. Type I behavior is observed with several countries and covers the entire range of Debt/GDP ratios, see Table 3b. Type I behavior means that, in all these cases, the debt increases with increasing GDP and the Debt/GDP ratio also increases. This is illustrated in Figures 1 to x. The data being plotted here were obtained from the global debt clock at the website of The Economist [13] and refers to the period 2002-2012, the years before and after the financial crisis in the US, in 2008, the effects of which were felt globally. The Debt-GDP data for Norway, see Figures 1 to 3, and Japan, Figure 4, provide nearly perfect examples of Type I behavior. Both the debt y and the Debt/GDP ratio y/x increase as the GDP x increases. For both countries, the slope h > 0 and the intercept c < 0. The increasing values of the Debt/GDP ratio, with increasing GDP, for Norway, are illustrated in Figures 2 and 3. The hyperbolic law relating y/x and x is sketched in Figure 2. The slopes of the two dashed lines, or rays, in Figure 3, joining an individual (x, y) pair back to the origin (0, 0) equals y/x, the Debt/GDP ratio. Two such rays with slopes of 0.297 and 0.499, corresponding to Debt/GDP ratios of 29.7% (in 2002) and 49.9% (in 2008) are added here. Within the context of the Reinhart-Rogoff errors and the ensuing debates and controversies, and rather surprisingly, it appears that even leading
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economists have been focused only the y/x ratio and have overlooked the implications of the remarkably linear relations that we see here.
0.35 0.30

Norway (2002-2012)

Debt, y [$, Trillions]

0.25 0.20 0.15 0.10 0.05 0.00 0.00 -0.05 -0.10

y = 0.660x - 0.066 r2 = 0.948 Type I Behavior

0.10 0.20 0.30 0.40 0.50 0.60 0.70

GDP, x [$, Trillions]

Figure 1: The GDP-Debt diagram for Norway (2002-2012). Although the Debt/GDP ratios varies over the range 29.7% to 57.3%, the (x, y) pairs fall on a nice upward sloping straight line. The best-fit line through the data was determined using linear regression analysis (the method of least squares) see Refs. [14,15] which also includes a worked example. The significance of the asymptotic limiting value of the Debt/GDP ratio, revealed in Figure 2, in particular, merits further research and investigation. This seems to imply that there is something about the economic, financial, social, and political systems that are in place in a given country that will prevent the Debt/GDP ratio from rising above this limiting value. How is this barrier crossed? How do countries incur higher and higher debts and debt/GDP ratios, as we see for example, with Japan? Its current Debt/GDP ratio of 215.5% is the highest among the advanced and developed economies.

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70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 0.0 0.2 0.4 0.6 0.8 1.0

Debt/GDP, 100(y/x) [%]

y/x h = 66.01%

y/x = h + (c/x) = 0.66 (0.066/x)

Norway (2002-2012)

GDP, x [$, Trillions]

Figure 2: The Debt/GDP ratio and the Debt. With Norway (2002-2012), as the GDP increased, the Debt/GDP ratios also increased. Statistical analysis reveals the hyperbolic law illustrated here. The linear law relating Debt and GDP implies the nonlinear (hyperbolic) law relating the Debt/GDP ratio and the GDP. The Netherlands GDP-Debt diagram is included in Figure 5 to illustrate how fluctuations within a narrow range of debt/GDP ratios , with corresponding changes in GDP lead to the Type I behavior, statistically speaking.

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0.35 0.30

Norway (2002-2012)
y/x = 0.499

Debt, y [$, Trillions]

0.25 0.20 0.15 0.10 0.05 0.00 0.00 -0.05 -0.10

y/x = 0.297

0.10

0.20

0.30

0.40

0.50

0.60

0.70

GDP, x [$, Trillions]

Figure 3: Graphical illustration of the rays indicating increasing Debt/GDP ratios for Norway with increasing GDP levels.
16.00

12.00

Debt, y [$, trillions]

y = 3.275x - 7.289 r2 = 0.958 Type I Behavior

8.00

4.00

Japan (2002-2012)
1.00 2.00 3.00 4.00 5.00 6.00 7.00

0.00 0.00 -4.00

GDP, x [$, trillions]

-8.00

Figure 4: The GDP-Debt diagram for Japan (2002-2012) with Type I behavior.
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0.80 0.70

Debt, y [$, trillions]

0.60
0.50 0.40 0.30 0.20 0.10 0.00 0.00 -0.10 -0.20

y = hx + c = h(x x0) = 0.709x 0.108 = 0.709(x 0.152) r2 = 0.8199 Type I Behavior

Netherlands (2002-2012)
0.20 0.40 0.60 0.80 1.00 1.20 1.40

GDP, x [$, trillions]

Figure 5: The GDP-Debt diagram for Netherlands (2002-2012). The Debt/GDP ratio started increasing between 2007 (46.7%) to 2012 (66.3%) with relatively small changes in the GDP. The ratio was increasing between 2002 (50.6%) and 2005 (52.3%). Thus, statistically speaking, Netherlands reveals the Type I behavior illustrated here. I have prepared similar GDP-Debt diagrams for all the countries mentioned earlier, all of which reveal Type I behavior, either over the entire period, from 2002 to 2012, or over a limited number of years within this period. Canada and Australia show a transition from Type II behavior before the financial crisis of 2008 to a Type I behavior after the financial crisis. In other words, the rate of growth of the debt, relative to the GDP, as measured by the slope h = y/x has increased after the financial crisis. We will return to this discussion later. The Type II behavior is considered in the following section.

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 5. Type II Behavior Kazakhstan and Israel

Kazakhstan is an example of an emerging economy with a very low Debt/GDP ratio. The maximum value of the ratio was 20.2%, in 2002. Between 2002 and 2008, the GDP/Debt ratio decreased to a low of 8.1% and then started increasing again to the current value of 13.3% in 2012. However, a review of the (x, y) data shows that both the GDP and debt were increasing consistently. The x-y graph can again be described adequately by the Type II best-fit line illustrated in Figure 6.
35 30

Debt, y [$, Billions]

Kazakhstan (2002-2012)

25 20 15 10 5 0 0 50 100 150 200 250 300

y = 0.118x + 0.936 r2 = 0.868 Type II Behavior

GDP, x [$, Billions]

Figure 6: The GDP-Debt diagram for Kazakhstan (2002-2012). The Debt/GDP ratio for this emerging economy, a landlocked country carved out of the former Soviet Union, range from 8.1% in 2008 to a high of 20.2% in 2002. However, statistically speaking, the data can be described quite adequately by the Type II best-fit line.

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Individual line segments joining the various (x, y) pairs can be seen to reveal both smaller and higher slopes, indicating fluctuations about the statistical best-fit line deduced here.
0.30

0.25

Debt, y [$, trillions]

Israel (2002-2012)

y/x = 0.986 y/x = 0.732

0.20

0.15

0.10

0.05

y = 0.477x + 0.058 r2 = 0.954 Type II Behavior

0.05 0.10 0.15 0.20 0.25 0.30

0.00 0.00

GDP, x [$, trillions]

Figure 7: The GDP-Debt diagram for Israel (2002-2012). The GDP-Debt diagram for Israel is illustrated in Figure 7. The Debt/GDP ratio for Israel is much higher than for Kazakhstan. Between 2002 and 2004, the Debt/GDP ratio increased from 93.4% to 100.2% and then started decreasing to the 2012 level of 73.2%. However, the GDP and the debt were both increasing during the entire period. Statistically speaking, the data can be described quite adequately by the Type II best-fit line. The two dashed lines in Figure 7, joining individual (x, y) pairs back to the origin (0, 0) have a slope y/x, the Debt/GDP ratio for the year. This slope is decreasing as the GDP increases along with the debt.

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The Type II behavior illustrated here is the reason why we encounter bewildering and puzzling situations such as: Unemployment rates decreasing while the number of unemployed keeps increasing. (This was observed in Ohio in 2000 and reported prominently in an article in The Wall Street Journal). The number of traffic-accident related fatalities increasing even as the fatality rate is decreasing. (This was observed in the US in the 1960s, before Congress was forced to enact the Highway Safety Act in 1966, under President Lyndon Johnson, due to the epidemic of traffic accident related deaths.) The number of delayed flights increasing even as the On-Time arrival percent for the airline is increasing! Just check the data compiled in Table 1 for Americas best airline in 2013, Virgin American, see more detailed discussion in Ref. [8]. Table 4: On-Time Arrivals Data (Jan 2012) for Virgin America Airport Number of On-Time OT arrival % Delayed flights, x arrivals, y 100(y/x) flights (x y) Palm Springs, CA 31 26 83.87 5 Orlando, FL 58 51 87.93 7 Boston, MA 121 109 90.08 12 Las Vegas, NV 249 226 90.76 23 Data source: Bureau of Transportation Statistics, for January 2012. The graph of OT arrivals y versus number of flights x is a straight line (Type I). Also, the graph of delayed flights versus number of flights is a straight line (Type II). Hence, delayed flights increase even as OT-arrival % increases. Many mythologies soon develop relating to the unemployment rates, the communities where such rates are observed and even the methodology used by the government to determine the unemployment rates. Likewise, airline service, especially for the larger airlines, becomes the butt of jokes. And, all of this to explain the apparently contradictory behavior of the y/x ratios! However, in each case there is a Type II law that we are overlooking.
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Both Type I and Type II behavior as illustrated here simply mean that when the variable x, here the GDP, increases by a fixed amount x, the variable y, here the debt, always increases, statistically speaking, by the same fixed amount y = hx with h being the slope of the line. The situation is similar to the fixed rate of increase in distance of a car traveling unimpeded on a highway, at a fixed speed of, say, 60 mph. The car will be found to travel the same fixed distance of 1 mile per minute, or 60 mile per hour (assuming all other conditions are constant, like no traffic jams, car does not run out of gas, or encounter a flat tire, etc.) In the same way, we find the debt increasing as the GDP increases, at a fixed rate. Or, if we switch the quantities plotted on the x and y axes, the empirical observations on various leading economies of the 21st century, with a wide range of Debt/GDP ratios, suggest that the GDP increases at a fixed rate even as the debt increases. The individual rates, as quantified by the slopes h differ for each country but the general conclusion of debt and GDP being strongly and positively correlated is inescapable. One of the most important economic debates of the present time, since the financial crisis of 2008, in the US, which was also felt globally, is the cause and effect relationship between debt and the GDP. Is the higher GDP achieved by many countries due to the fact that the country was able to, or willing to, incur a higher debt (as might be the case with Netherlands and Kazakhstan)? This would be like the willingness to borrow money and secure a loan in order to grow a business and increase its sales revenues. Some people have a distaste for incurring debt while others are willing to take risks and incur debt, in the hope of an improved future. The GDP-Debt graphs here do not settle the debate about causation but do provide at least one key insight that has been missing in the current controversies. Regardless of the cause and the effect, there is a strong positive correlation between these two variables. That is an inescapable conclusion.
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Does the debt, or should the debt, always increase with increasing GDP? Is the opposite true? The examples of Russia and Ireland, see Figures 8 and 9 provide some additional insights. This is the Type III behavior noted earlier.

6. Type III Behavior Russia and Ireland

Russia appears to be the only country, among those studied that has been able to reduce its debt, with increasing GDP.
0.20

Debt, y [$, trillions]

0.16

Russia (2002-2012)
2012 2002

0.12

0.08

2007

0.04

0.00 0.00

0.40

0.80

1.20

1.60

2.00

2.40

GDP, x [$, trillions]

Figure 8: The GDP-Debt diagram for Russia, revealing Type III behavior before the financial crisis, followed by a Type I behavior after the crisis. The slope h is negative since y < 0 with x > 0, between 2002 and 2007. The data for New Zealand also reveals a similar pattern, between 2005 and 2009; see Table 2. The GDP increased from $108.316 billion to $127.308 billion and the debt decreased from $25.346 billion to $21.897 billion before
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the Type I trend of Figure E was established. The change from Type II behavior to Type I behavior required an adjustment period when Type III behavior was observed. This Type III behavior is very pronounced with Russia, for the period 2002 to 2007. Unlike the US economy, the model for free enterprise, formerly Communist Russia now has an economy with a very low Debt/GDP, in the single digits, only 8.2% in 2012. Between 2002 and 2012, Russia was able to reduce its Debt/GDP ratio from 46.4% to 8.2%, along with a growing GDP and a reducing debt, between 2002 and 2007, as seen in Figure 8, followed by a reversal. The debt started increasing with increasing GDP after the financial crisis of 2008.
0.35 0.30

Ireland (2002-2012)

Debt, y [$, trillions]

0.25 0.20 0.15 0.10 0.05 0.00 -0.05 0.00

2008

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

GDP, x [$, trillions]

Figure 9: The GDP-Debt diagram for Ireland, revealing Type II behavior with increasing GDP and debt, followed by an inverse Type III after the finan cial crisis of 2008. The slope h is negative since y > 0 with x < 0, after 2008. An inverse Type III behavior is observed with Ireland, after the financial crisis. The slope h is negative since GDP is decreasing with increasing debt.
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 7. Brief Discussion and Conclusions

As emphasized, at the very outset, in two earlier discussions of the Debt-GDP problem, see Refs. [A,B] highlighted below, I am not an economist. I got interested in this problem, after the coding errors of Reinhart-Rogoff were publicized on April 15, 2013, mainly because of my long standing interest in the behavior of y/x ratios and the mathematical property a straight line that has been emphasized here; see also bibliography list included in Ref. [C]. A. An MIT Non-Economists View of the Harvard-UMass Debt/GDP Ratio and Economic Growth Debate, Published April 26, 2013, http://www.scribd.com/doc/138076426/An-MIT-Non-Economist-sView-of-the-Harvard-UMass-Debt-GDP-Ratio-and-the-EconomicGrowth-Debate B. Iceland Votes Against Austerity: Analysis of Icelands Debt-GDP, Published April 28, 2013,
http://www.scribd.com/doc/138345921/Iceland-Votes-Against-AusterityAnalysis-of-Iceland-s-Debt-GDP-Data-2002-2012

C. Bibliography, Articles on Extension of Plancks Ideas and Einsteins Ideas beyond physics, Compiled on April 16, 2013, http://www.scribd.com/doc/136492067/Bibliography-Articles-on-theExtension-of-Planck-s-Ideas-and-Einstein-s-Ideas-on-Energy-Quantumto-topics-Outside-Physics-by-V-Laxmanan D. A Brief Survey of the Debt-GDP Relations for Some Modern 21st Century Economies, Published May 1, 2013, http://www.scribd.com/doc/138912093/A-Brief-Survey-of-the-DebtGDP-Relationship-for-Some-Modern-21st-Century-Economies Thus, with all due deference to the great economic thinkers of our times, it seems to me that the Reinhart-Rogoff errors and the ensuing debates and controversies can only be resolved by appreciating some of the basics that seem to have been, surprisingly, overlooked by professional economists.
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It is often noted that Galileos discovery of the law of falling bodies, in the 17th century (Two New Sciences, 1634), marks the beginning of the modern era in science (click here and here). Galileo did not offer any explanation for why bodies fall the way they do. He only described how they fall and offered a mathematical analysis of his own observations on the distance and time measurements with bodies of different masses rolling down an inclined plane. There was no theory of motion. That came later when Newton conceived the theory of universal gravitation in the 18th century. (Newton was born the year Galileo died, according to the pre-Gregorian calendar, which was still in use in Protestant England. And so, Newton was born on Christmas day 1642 instead of 11 days later as the rest of Europe believed! Thursday Oct 4, 1582 was followed by Friday Oct 15, 1582, according to the Papal Bull issued by Pope Gregory to institute his calendar reform.) The speed, or velocity, v, of the falling body could be computed from the tables of distance traveled (or space covered) s and the time t taken to travel the distance. Thus, v = s/t where s is the additional distance traveled in the additional time t. This is the formula we use even today to determine the speed of a moving object, like a car. Using purely mathematical arguments, Galileo showed that the simplest law that describes all the observations is the law v = at where a is the acceleration of the body. He also showed that this acceleration a is a constant and is independent of the mass of the body rolling down the inclined plane. This led to the overthrow of the centuries old Aristotelian doctrine that heavier objects fall faster than lighter objects. What has this got to do with economics, the debt and the GDP? That would be like asking what has baseball got to do with economics? Everything, really!. Just ask Herndon, the lead author of the paper that started all this, see Ref. [3]. The simple linear law deduced here is also an empirical law, like the law of falling bodies. It is NOT a theory. It is NOT a postulate. It is NOT a conjecture. It is NOT a hypothesis. It is a FACT of economics; just like the laws of supply and demand, or the law of diminishing returns. It is a fundamental law deduced from empirical observations. There is no denying it. There is no escaping it.

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Economists must understand this if we are to move forward with one of the most important economic crises that we have faced since the Great Depression. Icelanders have already let us know what they think about the Reinhart-Rogoff conjecture of the 90% threshold and the need to reduce the debt to ensure long term economic growth. Icelanders, as discussed in Ref. [B], have made it clear that it is the short term that matters. The debate about austerity has met its Waterloo in Reykjavik. It is over! Nevertheless, we must still understand this Debt-GDP relation. The GDP-Debt law is deduced here, via a simple and transparent mathematical analysis, can be understood even by a layperson with no background in economics and with a knowledge of just elementary statistics, such as the linear regression analysis. This law tells us how the debt increases with increasing GDP, or vice versa if we switch debt and GDP in the x-y diagrams presented here. The linear law tells us that the Debt/GDP ratio can either increase or decrease as the GDP increases (in a confusing manner) and actually lead us down the road to needless controversies. The linear law, thus far overlooked by economists, also tells us that there is no need to introduce additional measures of economic growth such as x/x, the percent change in the GDP between any two periods of interest. Such measures are indeed superfluous since the idea of growth of the GDP and/or the debt is built into the linear law. All we need to do is to consider how the absolute magnitude of the GDP and/or debt increases, or decreases, not in relation to time, but relative to each other. The failure to recognize this linear law is also, it will be clear with some reflection, at the root of the Reinhart-Rogoff prescription of a threshold Debt/GDP ratio above which economic growth is stifled. As we see here from the survey of a number of leading economies, there is no limit to the growth of either the GDP or the debt, because of this linear law. They both increase, or decrease, together, even when the Debt/GDP ratio has crossed the threshold of 90% as we see from the GDP-Debt graphs for Japan, Israel, Iceland, Portugal, Greece, and so on. (The reader can readily prepare the graphs for the countries that have not been included here.) Russia, and New Zealand, provide the only examples (in my analysis to date) where we
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find the debt actually decreasing with increasing GDP (Type III behavior). However, in both these cases, the trend reversed itself following the financial crisis of 2008, the effects of which were felt worldwide. The predominant trends observed is either a Type I or Type II behavior, both of which imply a simultaneous increase in the both the debt and the GDP. This also means that there is no threshold level for the Debt/GDP ratio beyond which economic growth will slow down. In brief, the Reinhart-Rogoff Debt/GDP threshold of 90% is fundamentally inconsistent with the linear law and arises from: a) The belief that the GDP and the Debt are independent quantities which can be compared using a y/x ratio. b) The introduction of superfluous parameters such as x/x, the percent changes in the GDP to measure economic growth c) Failure to recognize the fundamental significance of the measure of time that is implicit in the ratio Debt/GDP which is not a pure number like the profit margin, or the marginal tax rate. d) Failure to recognize the linear law

Table 5: The GDP-Debt data for the USA (2002-2012)

Debt/GDP [%] GDP, x 100 (y/x) $, trillions 2002 69.7 15.174 2003 64.3 14.555 2004 56.8 14.079 2005 44.7 14.179 2006 37.6 14.021 2007 36.5 13.403 2008 36.8 12.677 2009 36.8 11.921 2010 36 11.197 2011 34.2 10.687 2012 32.8 10.326 Data source: Global debt clock, The Economist, click here Year Debt, y $, trillions 10.576 9.359 7.997 6.338 5.272 4.892 4.665 4.387 4.031 3.655 3.387

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The national debt for the US is the cumulative value of all the budget deficits since 1835. The same applies for other countries - there is a starting date for the reckoning of the national debt but the time over which the debt has grown is NOT the same for all countries. This discrepancy in the time factor is not properly accounted when we use the Debt/GDP ratio and therefore makes any analysis that involves the comparison of different countries on the basis of the Debt/GDP ratio highly suspect.

16.00 14.00

Debt, y [$, trillions]

USA (2002-2012)

12.00 10.00 8.00 6.00 4.00 2.00 0.00 0.00

y = 2.357x - 25.18 Type I

y = 0.341x + 0.324 Type II

2.00

4.00

6.00

8.00

10.00 12.00 14.00 16.00 18.00

GDP, x [$, trillions]

Figure 10: The GDP-Debt diagram for the US, revealing Type II behavior with increasing GDP and debt, followed by a Type I behavior after the financial crisis of 2008. The (x, y) pairs for 2005 and 2007 were used to fix the Type II slope h = 0.341 before the financial crisis of 2008 The (x, y) pairs for2010 and 2012 were used to fix the Type I slope after the crisis. Some nonlinearity is evident prior to the crisis.

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The only difference between the Type I and the Type II trends is the rate of growth, as measured by the slope h of the GDP-Debt graph. The Type II slope is typically smaller than the Type I slope, which means that the debt is growing at a smaller rate with increasing GDP. This is illustrated in Figure 10 with the GDP-Debt diagram for the US (2002-2012). Similar trends are also observed with most leading economies like Canada, Australia, and UK, see Ref. [A] above. Iceland, at the center of the austerity debate now, has reveals the same change from Type II behavior to Type I behavior, following a financial crisis. (Germany, China, Japan, are examples of countries where either the Type I or the Type II trend continued even after the financial crisis.) Why does the slope change after a financial crisis? Notice that the nonzero intercept c has also changed along with the slope h. The intercept c was positive before the crisis and has become negative after the crisis. As discussed in the article on Iceland, Ref. [B], this change in the intercept is like the change in the work function in Einsteins photoelectric law, or to use the sports analogy, like the change in the work function for a baseball players. This can be understood as follows. If we consider the game-by-game batting logs of an top player like Babe Ruth, we will find scores (x, y) scores of (0, 0), (1, 1), (2, 2), (3, 3), (4, 4) where x is the number of At Bats (AB) and y is the number of Hits (H). The player therefore has the PERFECT batting average BA = H/AB = y/x = 1.000 for these games. However, as we make more observations, we will also find scores like (1, 0), (2, 1), (3, 2), (4, 3) and even (6, 5) for an exceptional player like Babe Ruth, see more detailed discussion in Refs. [11,12]. Thus, y = x 1 = x + c where the constant c = - 1 is related to the number of missed hits. Hence, the BA = y/x = 1 (1/x) deviates from the PERFECT values of 1.000. The slope h is still equal to one. We will also find scores like (2, 0), (3, 1), (4, 2), (5, 3) etc. or y = x 2, and so on. If we aggregated the scores over a month, or a whole season, we find that the general law is y = hx + c and the BA = y/x = h + (c/x) keeping changing as the number of At Bats x increases. The slope h < 1 and the nonzero intercept c is related to the missing hits. The slope h is the limiting value of the BA any player will achieve. An analysis of the batting stats for many players shows that the constant c can be either positive or negative.
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This depends on the skill of the player. For example, in the 1927 season, when Babe Ruth established the (then) home run (HR) record of 60 HR per season, Ruth had a value of c < 0 but his Yankee team-mate, Lou Gehrig had a work function c > 0. For Ruth, with c < 0, the more the AB the higher the BA but for Gehrig, with c > 0, the more the AB the lower the BA. As we know, Gehrig lost the race for the HR record in 1927. Also, if we examine his batting logs, we see that Gehrig had higher number of AB for the same HR. With a little imagination and inspiration, we can now see that the same applies to the economy as whole. It too has a work function, the cumulative effect of the performances of many micro level economic units and produce the GDP and also lead to the debts incurred which are related to the deficits, which means additional costs for the economy, which is like the missing hits (or home runs) in the baseball batting stats. Finally, am I just a hopeless and foolish linearist who can only draw straight lines and should consider getting a job painting parking lots? (If so, I want to be the best parking lot painter! ) Far from it. There is no empirical evidence here for anything other than a simple linear law at work. However, as discussed in many other articles (see Ref. [C] or Ref. [7]), the three types of straight lines taken together imply a nonlinear law, given below, which can be deduced using a generalization of the arguments first used by Max Planck when he developed quantum physics in December 1900. Briefly, Planck was trying to determine the average value of a property of a very complex system. The property denoted by the mathematical symbol U is called energy in physics. However, we can just as easily think of U as any other property of interest to us when we deal with a complex system, like the economy, with millions of subunits, or microstates. In Plancks case, the subunits were called particle, molecules, oscillator, resonators, etc. We can just as easily think of other types of subunits with properties other than energy. Thus, as I have stated elsewhere, energy in physics is just like money in economics, or vice versa. A brief discussion of this point may be found in Ref. [A], see also the reference list. Equation 1 below is the generalized statement of Plancks blackbody
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radiation law. Einstein uses the simpler version, y = mxne-ax, also known as Wiens law to develop his theory of the quantum nature of light. The linear law follows as a special case of equation 1 (with n = 1, a = 0), which was then applied by Einstein to explain photoelectricity. Generalized Plancks law: y = mxn [e-ax/(1 + be-ax)] + c ..(1)

The simplest type of nonlinear law is the power law y = mxn. For n = 1 this reduces to the linear law y = mx, the equation of a straight line passing through the origin. As noted earlier, there is some evidence of nonlinearity in the pre-2008 GDP-Debt growth data for the US. However, the linear law seems adequate considering the limited range of data. The power-exponential law, y = mxne-ax, used by Einstein, is useful when we see deviations from the power law. The power-exponential law also implies a maximum point on the x-y graph, at x = n/a. For x < n/a, the slope of the graph, given by the derivative of the function, dy/dx = (n ax)(y c)/x, has a positive value (as for Type I or Type II behavior). For x > n/a, the slope is negative (as for Type III behavior). Hence, there is a maximum point. So, if one chooses to take a nonlinear view of the world, since we think straight lines are too simplistic, the power-exponential law, used by Einstein recommends itself since it is a law that can be used using the quantum physics arguments about averaging any property of interest in a very complex system. Perhaps, if we take the long term view and compile data for a single country, over many decades (only one decade, actually 11 years has been considered here), we might see evidence for a nonlinear Debt-GDP relation. Is there a maximum point on the Debt-GDP nonlinear curve? That is an interesting thought and should be pursued by some Ph.D. student of Economics. This then is my humble view of the great Harvard-UMass Debt/GDP ratio debate, emerging mostly from what I have understood after I got interested in the property of ratios in the summer of 1998. I am not qualified to get into any discussions on causation which engage the economists on both sides of one of the greatest economic debates of our times.
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Or, may be there are three sides to this debate a la the great triangulation that one of more popular recent President was known for there is always a third view point head, tails and sideway views of a coin! . Nonetheless, I hope, I have been able to at least get the squabbling economists, as they pursue their dismal science (cheers, we need an icon for tongue-incheek!), to pay attention to that great property of a straight line, and hopefully also to what Galileo did back in the 17th century to found Two New Sciences.

Reference list
1. Growth in a Time Before Debt, by Carmen Reinhart and Kenneth S. Rogoff, http://www.nber.org/papers/w15639.pdf NBER Series, Working Paper 15639. On page 11, Over the past two centuries, debt in excess of 90 percent has typically been associated with mean growth of 1.7 percent versus 3.7 percent when debt is low (under 30 percent of GDP), and compared with growth rates of over 3 percent for the two middle categories (debt between 30 and 90 percent of GDP). Of course, there is considerable variation across the countries, with some countries such as Australia and New Zealand experiencing no growth deterioration at very high debt levels. It is noteworthy, however, that those high-growth high-debt observations are clustered in the years following World War II. And, on page 23, Why are there thresholds in debt, and why 90 percent? This is an important question that merits further research, but we would speculate that the phenomenon is closely linked to logic underlying our earlier analysis of debt intolerance in Reinhart, Rogoff, and Savastano (2003). As we argued in that paper, debt thresholds are importantly country-specific and as such the four broad debt groupings presented here merit further sensitivity analysis. A general result of our debt intolerance analysis, however, highlights that as debt levels rise towards historical limits, risk premia begin to rise sharply, facing highly indebted governments with difficult tradeoffs.

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2. Does High Public Debt Stifle Economic Growth? A Critique of Reinhart/Rogoff, by Thomas Herndon, Michael Ash, and Robert Pollin, http://www.peri.umass.edu/236/hash/31e2ff374b6377b2ddec04deaa63 88b1/publication/566/ April 15, 2013. 3. Guest Post: The Grad Student who took down Reinhart-Rogoff Explains Why Theyre Fundamentally Wrong, Business Insider, by Thomas Herndon, April 22, 2013, http://www.businessinsider.com/herndon-responds-to-reinhart-rogoff2013-4 4. Guest Post, Reinhart/Rogoff and Growth in a Time Before Debt, by Arindrajit Dube, April 17, 2013, The Next New Deal, The Roosevelt Institute, http://www.nextnewdeal.net/rortybomb/guest-postreinhartrogoff-and-growth-time-debt See also references to internet blogs cited by Dube. 5. An MIT Non-Economists View of the Harvard-UMass Debt/GDP Ratio and Economic Growth Debate, Published April 26, 2013, http://www.scribd.com/doc/138076426/An-MIT-Non-Economist-s-Viewof-the-Harvard-UMass-Debt-GDP-Ratio-and-the-Economic-Growth-Debate 6. Iceland Votes Against Austerity: Analysis of Icelands Debt-GDP, Published April 28, 2013, http://www.scribd.com/doc/138345921/Iceland-Votes-AgainstAusterity-Analysis-of-Iceland-s-Debt-GDP-Data-2002-2012 7. Bibliography, Articles on Extension of Plancks Ideas and Einsteins Ideas beyond physics, Compiled on April 16, 2013, http://www.scribd.com/doc/136492067/Bibliography-Articles-on-theExtension-of-Planck-s-Ideas-and-Einstein-s-Ideas-on-Energy-Quantum-totopics-Outside-Physics-by-V-Laxmanan 8. Airline Quality Report: An Analysis of On-Time Percentages, Published April 18, 2013, http://www.scribd.com/doc/136760664/Airline-QualityReport-2013-Analysis-of-the-On-Time-Percentages 9. Airline Quality Rating 2013, Purdue University, e-Pubs, April 8, 2013, by Dr. Brent D. Bowen (Purdue University, College of Technology) and Dr. Dean E. Headley (Wichita State University, W. Frank Barton School of Business) http://docs.lib.purdue.edu/aqrr/23/
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10. Airline Quality Report 2013: An Analysis of On-Time Percentages, Published April 18, 2013, http://www.scribd.com/doc/136760664/Airline-Quality-Report-2013Analysis-of-the-On-Time-Percentages 11. Babe Ruths 1923 Batting Statistics and Einsteins Work Function, Published April 17, 2013, http://www.scribd.com/doc/136489156/BabeRuth-s-1923-Batting-Statistics-and-Einstein-s-Work-Function 12. Babe Ruth Batting Statistics and Einsteins Work Function, To be Published April 17, 2013, http://www.scribd.com/doc/136556738/BabeRuth-Batting-Statistics-and-Einstein-s-Work-Function 13. The global debt clock, The Economist, See example of data for Canada, for 2012, http://www.economist.com/content/global_debt_clock 14. Legendre, On Least Squares, English Translation of the original paper http://www.york.ac.uk/depts/maths/histstat/legendre.pdf 15. Line of Best-Fit, Least Squares Method, see worked example given http://hotmath.com/hotmath_help/topics/line-of-best-fit.html The formula for h used in this example is an actually approximate one and was used, before the advent of modern computers, since it only involves the determination of x2 and xy and the sum of all the values of x, y, x2 and xy. The exact formula, is given below, with xm and ym denoting the mean or average values of x and y in the data set, and ym = hxm + c since the bestfit line always passes through the point (xm , ym). h = (x xm)(y ym)/ (x xm)2 Determine the deviations of the individual x and y values from the mean, or average, (x xm) and (y ym). Determine the product (x xm)(y ym) and their sum. This gives the numerator in the expression for h. Determine the square (x xm)2 and the sum. This gives the denominator in the expression for h. This also fixes the intercept c via ym = hxm = c . Then, using the regression equation, determine the predicted value yb on the best-fit line and the vertical deviation (y yb) and the squares (y- yb)2. The sum of these squares is a minimum. This can be checked by assigning other values for h (using any two points) and allowing the graph to pivot around (xm, ym). The regression coefficient r2 = 1 - { (y- yb)2 / (y- ym)2 } is a measure of the strength of
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the correlation between x and y (or y/x versus x). For a perfect correlation, when all points lie exactly on the graph, r2 = +1.000. 16. Plancks Blackbody Radiation law rederived for more general case, May 30, 2012, http://www.scribd.com/doc/95329905/Planck-sBlackbody-Radiation-Law-Rederived-for-more-General-Case 17. What is Entropy? June 3, 2012, Discussion of example given by Boltzmann in 1877 http://www.scribd.com/doc/95728457/What-is-Entropy 18. Money in Economics is Just like Energy in Physics: Extending Plancks Law Beyond Physics, Published Jan 14, 2013, Introduction to the generalized statement of Plancks radiation law and application to describe the maximum point on the profits-revenues graph of a company (the old, GM, Ford, Yahoo), http://www.scribd.com/doc/120324960/Money-inEconomics-is-Just-like-Energy-in-Physics-Extending-Planck-s-law-beyondPhysics 19. Reinhart-Rogoff economic study got it wrong and so did the political reaction, Louis D. Johnston, May 1, 2013, http://www.minnpost.com/macro-micro-minnesota/2013/05/reinhartrogoff-economic-study-got-it-wrong-and-so-did-political-react

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About the author V. Laxmanan, Sc. D.

The author obtained his Bachelors degree (B. E.) in Mechanical Engineering from the University of Poona and his Masters degree (M. E.), also in Mechanical Engineering, from the Indian Institute of Science, Bangalore, followed by a Masters (S. M.) and Doctoral (Sc. D.) degrees in Materials Engineering from the Massachusetts Institute of Technology, Cambridge, MA, USA. He then spent his entire professional career at leading US research institutions (MIT, Allied Chemical Corporate R & D, now part of Honeywell, NASA, Case Western Reserve University (CWRU), and General Motors Research and Development Center in Warren, MI). He holds four patents in materials processing, has co-authored two books and published several scientific papers in leading peer-reviewed international journals. His expertise includes developing simple mathematical models to explain the behavior of complex systems. While at NASA and CWRU, he was responsible for developing material processing experiments to be performed aboard the space shuttle and developed a simple mathematical model to explain the growth Christmas-tree, or snowflake, like structures (called dendrites) widely observed in many types of liquid-to-solid phase transformations (e.g., freezing of all commercial metals and alloys, freezing of water, and, yes, production of snowflakes!). This led to a simple model to explain the growth of dendritic structures in both the groundbased experiments and in the space shuttle experiments. More recently, he has been interested in the analysis of the large volumes of data from financial and economic systems and has developed what may be called the Quantum Business Model (QBM). This extends (to financial and economic systems) the mathematical arguments used by Max Planck to develop quantum physics using the analogy Energy = Money, i.e., energy in physics is like money in economics. Einstein applied Plancks ideas to describe the photoelectric effect (by treating light as being composed of particles called photons, each with the fixed quantum of energy conceived by Planck). The mathematical law deduced by Planck, referred to here as the generalized power-exponential law, might
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actually have many applications far beyond blackbody radiation studies where it was first conceived. Einsteins photoelectric law is a simple linear law and was deduced from Plancks non-linear law for describing blackbody radiation. It appears that financial and economic systems can be modeled using a similar approach. Finance, business, economics and management sciences now essentially seem to operate like astronomy and physics before the advent of Kepler and Newton. Finally, during my professional career, I also twice had the opportunity and great honor to make presentations to two Nobel laureates: first at NASA to Prof. Robert Schrieffer (1972 Physics Nobel Prize), who was the Chairman of the Schrieffer Committee appointed to review NASAs space flight experiments (following the loss of the space shuttle Challenger on January 28, 1986) and second at GM Research Labs to Prof. Robert Solow (1987 Nobel Prize in economics), who was Chairman of Corporate Research Review Committee, appointed by GM corporate management.

Cover page of AirTran 2000 Annual Report

Can you see that plane flying above the tall tree tops that make a nearly perfect circle? It requires a great deal of imagination to see and to photograph it.

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