Thursday, January 19, 2017

Notes On High Skill Transaction Costs Versus the Baumol Effect

What forms of transaction costs have become most problematic? Often, they involve time based product which requires a great deal of knowledge use preparation and investment beforehand, as these costs ultimately need to be shared throughout a broad range of systems. Even though one hears complaints of Baumol's disease in terms of, say, medium skill work which adjusts income levels via coordination alongside higher skills and more productive work; often it is high skill work, which requires a higher level of compensation for individuals wherever they may live, which poses the more substantial societal costs.

How might one think about these productivity differences, in terms of time based product? For instance: even though citizens of prosperous regions pay more for a wide range of skill levels in their vicinity (some of which cost far less elsewhere such as hairdressers), most citizens are expected to travel to prosperous regions to gain the expertise of professionals, and pay the same costs to those professionals as other local citizens - regardless of existing wide variance in the income levels of their own regions.

Again, think about the difference in aggregate. Medium skill levels which are subject to Baumol's disease, can appear unproductive in relation to nearby high skill and other productive work. Yet since local high income levels can still directly coordinate for many of these skills costs via their own means, medium skill levels don't carry the same (societal) cost burdens as the costs of high skill time based product. Nevertheless: even though medium skill levels tend to command less income in less prosperous areas, most high skill work is presently subject to higher costs (income compensation at a multi institutional level) regardless of where or how social coordination takes place.

These transaction costs, which in the U.S. are shared by consumers, governments, municipal budgets and businesses alike, need to at least be addressed at the margins, in order to maintain system viability in the foreseeable future. Might it be possible for regions which are beginning to falter under these circumstance (bankruptcy, etc.), to adopt a new institutional structure which is capable of reducing these otherwise built in transaction costs?

Firms in recent centuries were able to reduce transaction costs, in part because many divisions of labour were more flexible and required less extensive investment, beforehand. In "Theory of the Firm", Wikipedia notes:
According to Ronald Coase, people begin to organize their production in firms when the transaction cost of coordinating production through the market exchange, given imperfect information, is greater than within the firm.
In the present, the more important concern is not one of further divisions of labour for a non market environment to generate separately existing product, but divisions of labour which would allow individuals to coordinate their time via direct free market terms. Hence the equilibrium corporation would be different from the traditional firm, for it would restore local market platforms to make more complex forms of economic activity possible.

Rather than removing divisions of labour functions from the marketplace, the equilibrium corporation would seek to bring multiple time based functions back to the marketplace - albeit in a somewhat changed form. Whereas the single entrepreneur in the Coase model was responsible for the coordinated activity of large groups - so as to facilitate the complicated production processes of tradable sectors, participants in an equilibrium corporate construct would assume entrepreneurial responsibility for their own time value. What makes it possible to take this approach, is the fact these non tradable service sector settings don't involve the numerous level of production processes that have often been required by tradable sector activity.

There's another important factor for the transaction costs which comprise local coordination of time based services. Once a region becomes more prosperous, it often seeks to control local entry and access, so that only a certain amount of medium skill participation remains possible. Indeed, some economists have recently noted this self limiting Baumol effect. Prosperous municipalities can achieve these limits via control over local real estate values.

Whereas lower income regions don't necessarily have the same ability to control local factors for the skills levels they may seek. Since many professional skill sets include considerable sacrifice and investment, individuals who seek these opportunities, may not have the option of locating where lower income levels are hard pressed to compensate them. Areas with lower incomes could especially benefit from a new institutional structure, which would also build new markets for high skill levels which otherwise might not be locally possible.

Tuesday, January 17, 2017

Today's Healthcare: A Missed Opportunity For Trade

Has Washington mostly suffered from a naming rights process, when it comes to the basic gist of Obamacare? It's beginning to appear as though the "wrong" party was in power, for enacting a healthcare policy. Never mind what could have been the use of logic and rationality, to sort out particulars. What an expensive game! Much of what is at stake involves the costs of Medicaid, for which Timothy Taylor provides useful perspective in a recent post.

For me, the real story is that healthcare never got the chance to evolve free market options in the twentieth century. At root, the supply for healthcare in terms of knowledge, skill and other resources is far too restricted for anyone to know its true potential. Consequently, it's difficult to imagine, how producer/consumer choice and personal challenge in these areas might play out, were they given the chance. I thought about these missed opportunities for healthcare, after reading about a computer enactment of a basic economy which took place more than twenty years ago.

In "The Origin of Wealth" (2007), Eric Beinhocker describes an experiment called Sugarscape, created by two researchers, Joshua Epstein and Robert Axtell. Was it possible to create an economy from scratch? They began with a fifty-by-fifty computer grid and one resource: sugar. While each square had varying amounts of sugar, there were two mountains in the grid with a range of four sugar units high.

Each person (agent) in the Sugarscape environment could look for sugar, move, eat sugar and also store what they didn't immediately need. Agents were programmed with metabolisms which needed more or less sugar for survival, and not enough would cause an agent to starve or be removed from the game. Some agents were programmed with better vision: they could see up to six squares ahead, while poor vision may only mean being able to see one square ahead. Agents also had randomly assigned lifetimes.

Once 250 agents were dropped on the Sugarscape, some landed on rich sugar mountains, hence born into wealth. Others had bad luck - being born where sugar was scarce. Even though the game appeared chaotic at the start, order soon emerged, and it proved clear how geographic destiny mattered for survival. Many died before they could reach their needed resource. Indeed Sugarscape was efficient, for almost as soon as sugar grew back to capacity, a grazing agent would find it.

Some had real sugar advantages, and distributions of wealth became increasingly skewed. Sure enough, this was an emergent property of the system. It became particularly interesting for me, when Epstein and Axtell introduced a second commodity called spice. From the book:
Each square on the board now had a value for how much sugar it held and a value for how much spice it held. As with sugar, spice was concentrated in two mountains...Epstein and Axtell also tweaked their agents' metabolisms so that they all required some of each commodity to survive. However, some agents needed lots of sugar and only a little spice, while others needed more spice than sugar - again, this was determined by their DNA...
Epstein and Axtell seeded Sugarscape with randomly endowed agents who could now trade, and hit the switch. The agents started to buzz around, and immediately a brisk business in sugar and spice took off. 
Trade made Sugarscape much richer than it had been. They highlighted one extreme case, in which neighboring agents who were close to death came into close proximity with the other which held the resource they needed. Here, trade was the definitive factor in maintaining life. Again, from the book:
Trade has an effect equivalent to increasing the carrying capacity of the landscape, thus making everyone better off.
Of course, I had to wonder: what might have been the effect on output and agent survival, had they programmed a requirement to get permission, before offering or consuming needed resources. How many more agents would die, before they could get to the mountains where "permission givers" lived in sufficient abundance to give the okay for specific resources? Is not healthcare, a missed opportunity for trade?

Poor logic can be involved in the assignment of permission givers, especially if they capture the wealth capacity of what may have been normal life amenities of a given landscape. When societies have little choice but to accept that permission givers are "necessary" for basic economic activities, it becomes more difficult to accept that logic is truly useful, in other areas of daily life, as well. The negating of logic is often a slow process, but finally - like the ripples from a skipping stone - such perceptions spread to the "edge of a pond".

Once, it may have seemed like a good thing, for authorities to assume logic and important decision making "on behalf" of their citizens. But when this process goes on long enough, people can become convinced that logic isn't really necessary after all. In fact, some people become more inclined to dismiss logic at a social level, if the use of logic means a loss of their own degree of control, or has not proven helpful for their peers. Anyone who has lived any length of time where economic complexity is lacking, likely has seen this process firsthand. And should that dismissal of logic and rationality continue, a growing percentage of populations eventually become convinced to elect leaders who also lack faith in the social processes of logic and rationality. Is it still possible to reverse, what is now taking place?

Sunday, January 15, 2017

Market Position Matters, for Output Potential

Why is primary and secondary market positioning so important, in terms of output potential? One thing to consider: when more output and product diversity is desired by both producers and consumers, competition is more likely to be encouraged. In particular, tradable sectors already have high incentives for productive competition. After all, many of these institutions are well organized to benefit, if and when it becomes possible to increase aggregate output.

Whereas increased output is not necessarily a plus for some forms of non tradable sector activity, especially when it is organized in a secondary market position which is dependent on external revenue (such as knowledge use). Here, increased market output and/or product diversity may actually translate into revenue dilution, since time and place linked product cannot be replicated by means of the same (identical) time and place. As I have argued in previous posts, new forms of organizational capacity are needed, to generate similar forms of product which expand the marketplace without directly competing with these fixed scarcities. Yet ultimately, no person - or institution - should have to be completely dependent on the fixed scarcity of (one's own) time value or real estate value, as a sole revenue source. Not only does this form of ownership create excessive vulnerability, but also a natural impulse to decrease additional marketplace formation if it "competes" with personal ownership capacity.

Too many people and institutions are now dependent on revenue that is directly linked to the fixed scarcities of time and place, which understandably leads to widespread protection of market definition and share. Since these crucial differences in ownership incentive are not well understood, they are adversely affecting aggregate output, so as to negatively impact tradable sector capacity. Meanwhile, the forms of capitalism which are already well aligned to embrace competition, have become confused with negative "competition", which instead seeks to "crush" those who dare "threaten" the fixed scarcities of time and place.

These differences in ownership incentive are important, at a very basic economic level. Without the organizational capacity that would encourage non tradable sector output and product diversity, future growth potential could be jeopardized. Organizational factors in primary and secondary market positioning matter, for marketplace outcomes. In the meantime, some of today's secondary market patterns will continue to diminish marketplace capacity, due to NIMBY responses re fixed product scarcities as aligned with time and place. Unfortunately, the way institutions now approach these fixed scarcities, also plays psychological havoc with the public psyche.

But how does one know, whether a secondary market position is aligned so as to prompt the suppression of potential aggregate output? It depends on whether ownership is mostly in terms of fixed scarcity product limits (time and place), or if ownership more closely represents product in a related capacity. An apt illustration of the difference, comes from a post by Arnold Kling (re higher education), in which he stated:
The Kling theory of Public Choice is that public policy will always choose to subsidize demand and restrict supply.
Indeed, plenty of examples come to mind, since government economic activity tends to be closely linked to product which includes fixed scarcities - particularly time linked healthcare and place linked real estate/housing. But supply of education isn't exactly limited. What gives? As some of Kling's commenters noted, the subsidy (which increases the cost of access) is mostly a response to the limited platform of participation, as represented by the best educational institutions. In this instance, it's the platform for knowledge use participation, which is the most obvious fixed scarcity, in terms of productive agglomeration at an aggregate level.

Additional options for higher education, are not unlike other secondary marketplace components which exist in abundance - particularly financial activity. Secondary markets such as these can afford to be competitive and expansive in outlook, because they serve as further support for economic access, instead of access as it is actually put to use in the marketplace. And even though financial activities have at times fallen victim to their own excesses, they have nonetheless proven capable of expanding the output of general equilibrium in productive ways. In this sense, they are a positive association for competition that one may not always expect.

Friday, January 13, 2017

More Money Chasing Fewer Goods...

Economics can get confusing indeed, when neither monetary or fiscal policy is well positioned to provide sufficient economic stimulus. If neither appears necessary, does that mean an economy is already close to its "full potential"? If this be so, then why do so many problem areas and pockets of low labor force participation, remain?

While structural factors continue to inhibit the effectiveness of fiscal and monetary policy, it's not clear how they do so. Mostly evident, is the fact ordinary forms of stimulus are increasingly off the mark, given present circumstance. Supply side issues contribute to these problems in ways which leave many scratching their heads. Sure, the prospect of cronyism has become even stronger than before. But what, specifically, about favoritism, stands in the way of progress and long term growth?

Like the monetary inflation that central bankers are so determined to "destroy", cronyism contributes to its own internal form of inflation. In other words, pro business policy - as opposed to pro market policy - often leads to "more money chasing fewer goods" as well, with time based services and housing among the more egregious examples. If an already constrained marketplace weren't enough, recent suggestions for fiscal stimulus would likely be subject to monetary offset by the Fed, as Scott Sumner noted in a recent post.

Unfortunately, the Fed is not equipped to respond to what is essentially a real economy equivalent of monetary inflation. However, that does not mean a response is not needed. Why so? Over time, the real economy equivalent of more money chasing fewer goods (in spite of Fed inflation targets) begins to crowd out the marketplace options of our most productive sectors, particularly those associated with tradable sector manufacture. Yet the problem goes well beyond crowding out, for this process is occurring in terms of limits on primary market formation, or original wealth. Consequently, gradual losses in primary market representation, lead to gradual deflation, as secondary market crowding has to adjust to the gradual losses of primary market revenue which these sectors depend upon. The result is a gradual - but consistent - negative form of deflation.

Some of the retro trade policies presently being proposed in Washington, could also result in more money chasing fewer goods for tradable sectors as well. However, it is the long trajectory of NIMBY non tradable sector activity, which has constrained output (in product diversity) to such an extent the process now distorts general equilibrium conditions.

Structural problems can no longer be ignored, because disallowing inflation at the level of national economies is only making things worse. It is dangerous to assume that central bankers are actually capable of providing good deflation on behalf of their citizens. Good deflation is purely a real economy construct, and fortunately it is still possible to organize markets in ways that provide positive incentive for more output, instead of less. Without more marketplace choice, the present retreat to authoritarian "solutions" may only continue.

Wednesday, January 11, 2017

Rent Seeking: "Baked" in the Costs of Economic Access

At a recent ASSA conference in Chicago, one of the panels included discussion regarding rent seeking. While this ProMarket article is worth reading in its entirety, I'll focus on some remarks from Angus Deaton:
To the very considerable extent that inequality is generated by rent seeking, we could sharply reduce inequality itself, if rent seeking were to be somehow reduced...I don't think that rent seeking, which is incredibly profitable, is very sensitive to taxes at all. I don't think taxes are a good way of stopping rent seeking. People should deal with rent seeking by stopping rent seeking, not by taxing the rich.
He also notes that healthcare - in particular - has been notorious in this regard. I agree with Deaton, that taxation is not a well suited approach for what is an important aspect of today's inequality. That said, there are hierarchical divisions for non tradable sector labor and compensation, which make it difficult to approach inequality as a rent seeking problem. How so?

Whereas abundance in tradable sector activity often consists of "windfalls" which contribute to endogenous resource flows, the revenue sources of non tradable sector organization has been defined quite differently. Understandably, these institutions are intended to provide long term employment security, but thus far they have sought to fulfill this purpose via exogenous monetary flows. Relying on these flows requires plenty of "proof" as to one's "worthiness" for knowledge use. If this were not reason enough for the high investment costs required to gain knowledge production rights, career stability is also included as part of the package.

Unlike the wealth of tradable sector activity, which still has a relative degree of freedom to respond to consumer choice and preference, healthcare as non tradable sector wealth, has become a specific component of general equilibrium valuation. Some of this rent seeking structure, is a holdover from days when information and knowledge weren't widely available. Extensive investment for educational costs was understandable, when critical knowledge was scarce. Even as budgetary constraints limit healthcare output, this skills investment structure will continue to require a significant portion of general equilibrium income.

Fortunately: even though it is impractical to "dismantle" the high costs of today's healthcare, there are means by which to (eventually) disperse valuable and practical knowledge on new sets of terms. Even though inequality is likely to remain problematic in the decades ahead, the bigger problem is unnecessarily low levels of labor force participation, which in turn limits the forms of knowledge and time based product that appear in the marketplace. Inequality can gradually be eased by tapping into the technological potential of the present, so that more individuals can participate in knowledge based activities once reserved for those with the highest skill levels.

There's nothing wrong with having some time value that is reimbursed on terms which go well beyond normal levels of skill and intellect. Still, we shouldn't expect a mostly meritocratic framework to be a "permanent" norm for knowledge use at all levels of society, as is presently the case. In many instances, knowledge use also needs to close the loop of reciprocity at local levels, so that more citizens can take part in the important activities which contribute to their own destinies.

Monday, January 9, 2017

Could "Futures Studies" Address Regional Decline?

Even though unemployment levels are (supposedly) no longer a concern, regional decline belies the "all is well" refrain, which economists and policy makers have been inclined to agree upon. While a certain degree of regional decline can be inevitable at times, this phenomenon is becoming too prominent a feature in the economic landscape, to ignore.

Reasons for regional decline are numerous, and yet one element defines them all: earlier forms of economic complexity have been displaced. Nevertheless, recent losses in the U.S. have also contributed to the gains of other regions and sectors, since the Great Recession. Indeed, today's positive aggregate indicators only add to the confusion, of sorting out economic problems which have not gone away since the Great Recession. According to The Atlantic:
The employment rate in rural areas was actually 2.9% lower in mid-2016 than it was in early 2007.
In all of this, there's a real possibility of eventual employment losses in prosperous regions as well, due to automation. Why, then, is public dialogue still caught in a preliminary position, regarding the "unlikelihood" of further significant losses in labor force participation?

Of course, as usual: I'm entering an area of discussion which is speculative. And many in the blogosphere, don't consider speculation particularly helpful. When the WSJ recently ran an article about "futurology", their paywall prompted me to do a bit more searching for related articles and posts. Sure enough, it was easier to locate negative reactions against futurology, than articles in support of this relatively new area of study.

Granted, some continue to suggest imaginary scenarios which aren't much more than the usual refrains of doom and gloom. But what if positive actions could be taken, to counter the possibility of further negative outcomes? Wouldn't experimental plans of action be a better approach, than simply insisting no such preparations are necessary? In other words: what if it's actually a good idea, to craft viable responses to the pressures of economic uncertainty? Perhaps time spent preparing for a range of scenarios, could serve a productive purpose. Might futures studies help to reduce the possibility, of further regional decline?

 Wikipedia also provides detail, regarding futures studies:
Futures studies (also called futurology) is the study of postulating possible, probable, and preferable futures and the worldviews and myths that underlie them...Futures studies (colloquially called "futures" by many of the field's practitioners) seek to understand what is likely to continue and what could plausibly change. Part of the discipline thus seeks a systematic and pattern-based understanding of past and present, and to determine the likelihood of future events and trends. Unlike the physical sciences where a narrower , more specified system is studied, futures studies concern a much bigger and more complex world system. The methodology and knowledge are much less proven as compared to a natural science or even social science like sociology.
While this BuzzFeed article was written some years earlier, not everyone is familiar, with the work that people engaged in futures studies have already provided. From "What It's Like to Be a Corporate 'Futurist'":
They work for large companies, large energy companies and oil companies, they'll do work for the government and militaries definitely, and you'll have some product people. I know General Mills and Ford both have futurists as well as Proctor and Gamble...It's not hugely popular yet, but because of what capabilities technology has given us, we can have more and more.
Consider what today's employment uncertainties entail, and how these issues are not easy to capture in primary statistics. Presently, there are few reliable policy approaches, for what has become one of the greatest problems of our time. Too many individuals are well aware, that they may not gain the level of economic access which is necessary to fully function in today's economy. Will their numbers only continue to grow?

Saturday, January 7, 2017

Fiscal Policy: Too Much of a Good Thing?

Oddly, it seems that fiscal arguments become an easier sell, when it's difficult to tell whether economic activity is actually in a strong position. Ed Dolan notes in a recent post that Republicans are anxious to once again ramp it up with fiscal policy. Should this in fact occur, would it be a "good thing"? Dolan responds:
Too much, in my opinion. Republicans like to portray themselves as the party of fiscal responsibility, but their record says otherwise. In practice, GOP budget policy so far this century has been consistently procyclical - expansionary when it should show constraint, contractionary when it should support a weak economy. All signs point to another procyclical episode in the making.
He provides a summary of recent fiscal policy, and adds:
Is the stage set now for the strongest dose of procyclical fiscal policy yet? That is a very real possibility. Tax cut fever is in the air. Despite the rhetoric of fiscal hawks, Congressional Republicans have, in the past, found it hard to resist demands to spend the revenue generated by economic expansion rather than using it to pay the debt. A bad record of fiscal policy may be about to turn ugly.
Should it all turn ugly as Dolan fears, how much procyclical fiscal policy might be due to an incoming president with an especially dominant personality? His post reminded me of an earlier dominant presidential personality, who allowed procyclical fiscal policy to become too much of a good thing, as well. Of LBJ, John Steele Gordon wrote in "An Empire of Wealth":
A decade older than Kennedy, Johnson was fully a son of the New Deal, one with deep faith that government could solve social and economic problems. He also possessed what were perhaps the most surpassing legislative skills of any American president. These skills had made him the most effective majority leader in the history of the Senate, and he was determined to use them to achieve what he saw as the completion of the New Deal of his political hero, FDR.
Gordon continues:
With the help of an overwhelming electoral victory in November that year, Johnson prodded Congress to pass bill after bill...Had the economy been underperforming as it had been in the 1930s, the result of all this new spending would have been stimulating. But the economy in the mid-1960s was near full employment, so the inevitable result was that inflation began to increase. A vicious circle quickly developed. Increased inflation caused interest rates to rise as lenders wanted protection from the inflation. But the Federal Reserve, operating on a Keynesian model, was afraid that increased interest rates would cause economic growth to end, and so it expanded the money supply to keep interest rates low. An increased money supply, relative to the goods and services the money could buy, ineluctably caused further inflation.
One has to wonder, if the Federal Reserve were as worried about potential for stalled growth in Lyndon Johnson's time, as Gordon assumed. Nevertheless the Fed doesn't appear particularly worried about stalled growth now. After all, it has announced intentions to raise interest rates several times this year, apparently, irrespective of how Trump might affect economic conditions.

Perhaps the inflation question is also difficult to answer, since fiscal approaches are subject to wide variance in outcome. For one, government efforts this time around may prove more likely to benefit business interests, than demographic groups. That said, inflation could be more extensive, should infrastructure investment turn out to be mostly additional options to what the intended recipients already rely on. Yet growth and greater productivity is more likely to occur, if fiscal policy benefits groups who consequently gain more economic access, than they had prior to fiscal stimulus. Might the Fed also doubt the ability of fiscal stimulus to translate into real economic gains? A quote from a recent Atlantic article, could provide a clue:
Policy is much better at redistributing money to individuals than it is at revitalizing regions.