General Equilibrium Capacity: Rising, or Falling?

Might general equilibrium capacity be lost within a relatively short period of time, in the U.S.? Let's hope not, especially if Kevin Warsh is chosen to chair the Fed. And even if we are fortunate enough to gain someone who understands the danger of excessive monetary tightening: Without a level nominal target in place, supply side shocks could still mean more inappropriate responses from central bankers that may negatively impact equilibrium potential.

However, supply shocks are somewhat different, from the real economy effects of tradable and non tradable sector dynamics. While supply side shocks often lead to short term economic effects, the dynamics of sector formation are more likely to contribute to long term effects. And the present organizational structure of non tradable sector activity, includes a crowding out effect which - if not addressed - could eventually lead to equilibrium loss.

General equilibrium capacity can be expected to rise, as has been the case in recent centuries, so long as tradable sector activity continues to expand. Even though much tradable sector activity has moved well beyond its earlier beginnings in today's advanced economies, national income is greatly supplemented through direct investment links with tradable sector capacity around the world.

Nevertheless, the extent of general equilibrium capacity at a national level can be difficult to discern, for much of it is supplemented with the time based product of non tradable sector activity - especially through redistribution and governmental debt structure. A nation's asset formation in particular, can reflect the equilibrium circumstance of multiple nations. Since the Great Recession, general equilibrium capacity in advanced nations has been somewhat reduced, since central bankers shifted nominal income to lower growth trajectories. Even though the process is occurring in slow motion, general equilibrium capacity continues to be reduced in advanced economies.

The growth potential of service based economies can be misleading, since today's time based services lack a resource based point of wealth origin. Fortunately, it is not necessary for entire service structures to be supported via debt and fiscal means which lack the ability to contribute to real economy growth. If rising equilibrium capacity is on the horizon, we need a better approach to aggregate skills potential. In the meantime, our institutions continue to cherry pick from vast quantities of skills potential, in ways that would only deplete general equilibrium dynamics in the long run.

Time value could also become a point of resource and monetary origination, in the form of a recognizable commodity. This process would actually allow time value to function as a locally tradable good, which is why time arbitrage would become a direct contributor to equilibrium capacity. By allowing time based units to function as vessels for the storage and activity of knowledge and skill, advanced nations could gradually regain equilibrium capacity, via the active use of human capital. Indeed, the sooner the process can begin, the better, so we can finally return to the long term growth trajectory which - prior to the Great Recession - was our monetary means for a more inclusive society.

Practical Healthcare Markets are Still Possible

Today's healthcare has become one of the more important economic factors which exacerbate political division in the U.S. But how has healthcare's present organizational capacity, contributed to this result? These thoughts were on my mind as I recently began reading "The Social Transformation of American Medicine". Even though the book was published more than thirty years ago, much of what it details, still appears relevant now.

Lester King in the above JAMA link, gave a favourable review of Paul Starr's book, and his quibbles were mostly minor. Among King's concerns, was Starr's generalization of certain historical factors, Likewise, my first impression is that Paul Starr may have overly generalized healthcare's level of authority over citizens and other disciplines. Nevertheless, enough authority exists, that more citizens now seek healthcare as defined by professional specialization and deep learning, than practitioners are actually able to provide.

Little more than a century ago, scarce anyone had reason to complain about supply side limits, since lay practitioners from all walks of life were still at work - especially in rural regions where doctors were few. Among the lay practitioners who were most effective, were those who emphasized the botanical remedies which were ultimately absorbed by the healthcare of our time. While botanical remedies were once a major aspect of rural self sufficiency, the practitioners who continue to emphasize botanical remedies now, are mostly found in prosperous cities with little access to rural America.

Individual autonomy has preserved the ability of physicians to undertake deep learning which requires extensive education and commitments for human capital investment. I certainly respect their desire for autonomy, their ability to provide a quality product, and their wish to live and work wherever they desire. However, the healthcare marketplace which exists today, is mostly available for individuals who are still able to assume active roles in city life. Since our government is quickly becoming less able to reimburse individuals who cannot fully reciprocate for healthcare, and many rural citizens remain in an excessively dependent state, physicians may eventually seek means to deal with this major societal issue.

Fortunately, it is possible to generate a more practical healthcare marketplace, even as physicians seek to preserve their hard won autonomy. We could create new organizational patterns which make divisions of "labour" that require deep and extensive learning, less of a necessity. One way to accomplish this is through time arbitrage, in which the purchase of time value for time value, does not pose issues for the price points and human capital investments of today's healthcare.

Addressing supply side deficiencies is vitally important, especially for those who lack for the resource capacity or income to fully compensate deep learning requirements. Given the fact automation proceeds apace with both deep learning and learning specific methods, learning specific methods for individuals would certainly be a reasonable approach. Since only about a quarter of today's workforce has the well compensated work with benefits that is capable of supporting deep learning, and insurance can't absorb the difference, it's time for a new approach, to practical forms of knowledge use.

Wrap Up for September 2017

At the level of general equilibrium, today's urban networks continue to drift towards resource use imbalances. For instance, Kevin Bryan posts on urban stickiness: "...owners of land have used political means to capitalize productivity gains into their existing, tax-advantaged asset."

Is pure-ecommerce the endangered model?

Which rural areas are more conducive to mobility?

A heartfelt call from Brink Lindsey for greater economic inclusion.

Making introductory economics more relevant

One would think that the U.S. is more exposed to international trade, than is actually the case.

Lars Svensson:
Tight monetary policy as intended for financial stability, can lead to a weak economy.

Adam Ozimek talks up "Philadelphia momentum" as worthy of a new Amazon headquarters.

Will blockchain technology make central banking obsolete?

"For every $100 increase on taxes at the poverty line, we saw...a quarter of a percentage point decrease in high school completion."

Russ Roberts: "It feels as if we're in a very dangerous moment."

"...median household today is more impacted by higher inflation costs pertaining to necessary non-discretionary expenditures than median household in 1999."

"The excesses of IP law are now a serious obstacle to innovation and economic growth."

"A monetary regime change has occurred that has lowered the growth rate and growth path of nominal demand." http://macromarketmusings.blogspot.com/2017/09/monetary-regime-change-mission.html

"There has been no recent (real) growth acceleration."

The Fed needs to abandon its floor system and reduce the IOER rate.

"Going off the gold standard did the opposite of what many people think" (FT Alphaville)

It's becoming more difficult to locate and develop ideas through standard organizational means.
http://voxeu.org/article/ideas-aren-t-running-out-they-are-getting-more-expensive-find

The Fed has become anxious to "downsize"

A closer look at the industrial heartland.

A new approach to self driving vehicles would bypass some of the deep learning algorithms which autonomous vehicles now face. "The approach could lead to self driving vehicles that are much better equipped to deal with unfamiliar scenes and complex interactions on the road." This article is an apt reminder that we could also benefit from the exploration of ideas which apply beyond the bounds of "necessary" deep learning (for human capital investment), so as to make time based service product more accessible.

Whatever happened to the "empty nest" syndrome?

"It's notable that the rates expected to prevail over the long run have been systematically reduced."
Clearly the Fed has bought into secular stagnation.

Why are economists stumbling into some of the same macroeconomic mistakes which contributed to the severity of the Great Depression? What's more, economists did not have the same (hard won) monetary guidelines for economic stability back then, which decades of research have since brought to light.

Why we (still) have QUERTY: "It is not that once-off switching costs are that high. It is that on-going switching costs are."

Not every country can compensate skills via the same monetary terms, which is among the reasons I've promoted the internal coordination of skills preferences in a time based framework.

Headline unemployment rates are no longer reliable for labour market slack.

Non Tradable Sector Dominance Has Economic Effects

More specifically, this historically recent sectoral dominance, includes dramatic effects on wage structure and long term growth potential, which have yet to be addressed. A recent Brookings article, "Thirteen Facts About Wage Growth", provides useful framing in this blog post for what continues to transpire, particularly since the turn of the century. From the article:

Fact 1: The share of economic output workers receive has generally fallen over the past few decades.

While this is true, there's a contextual issue in the above statement, which - if not taken into account - can obscure missing clues re both wage structure and economic stagnation. Due to imbalances (human capital requirements) in required inputs as contrast with outputs, the relative output potential of non tradable sector activity, is dramatically less than tradable sector output. Consequently, less output takes place which could otherwise accrue to either nominal wage aggregates or real wage benefits. That said, contextual framing for missing output is important not just because of its implications for wages, but also the renewed expectations of Washington, for increased revenue through legislative tax cuts.

In the centuries when tradable sector activity remained dominant, for instance, innovation often led directly to consequent gains in both wage growth and actual marketplace dimensions. Yet innovation that corresponds with non tradable sector time based product, tends to be more important for the relief of budgetary burdens, then the support of wage aggregates or marketplace capacity.

Since the structural dominance of input intensive activity leads to less output overall, entire economies bear the additional costs. Even though central bankers clumsily attempt to reduce non tradable sector internal inflation, via less than complete monetary representation, the main effect is instead a slow but steady reduction of a society's total economic commitments. Thus the central banker response to non tradable sector crowding, unfortuantely intensifies the initial crowding effect. Meanwhile, the lack of flexible income options for time based services, has made it difficult for lower income levels to fully participate in non tradable sector activity, in spite of its present dominance.

Fact one required a long response, since the lost potential output of non tradable sector activity is by far the most important consideration, for either lost consumption capacity or sufficient revenue sources for governmental needs. However, I also want to touch on some of the other points raised by Brookings:

Fact 2: Wages have risen for those in the top of the distribution but stagnated for those in the bottom and middle.

When tradable sector formation was dominant, more revenue was composed of income which derived from total output. Management shared this revenue with workers, for workers shared in the creation of the product. Whereas in non tradable sector activity, it is simpler for business owners to assume ultimate responsibility, for the knowledge based product they represent. Given these conditions, today's time based service providers are under no obligation to share output revenue with employees, and may choose to compensate employees according to other criteria.

Consequently, much of today's non tradable sector knowledge based work has wide income variance by system design. While skills variance among employers and employers may not be as wide as income variance implies, there's little room for skills egalitarianism, given the revenue streams which these forms of organizational capacity rely upon. Likewise, much of today's dominant pass through businesses, derive income from non tradable sector activity, which in turn limits potential growth gains from tax cuts.  Again, from the initial Brookings article:

Fact 3: The education wage premium rose sharply until about 2000, contributing to rising wage inequality.

Non tradable sector activity dominance was just beginning to make its full effects known, at the turn of the century. One notes - for instance - when some of the initial losses took place in marketplace share, for a wide range of tradable sector product. Among these were tradable product as represented in my own workplace (at that time), for alternative healthcare OTC remedies.  As revenue claims for non tradable sector time based product began to displace the market share of tradable sector product, less overall output was the result. In aggregate, this also meant that fewer individuals would gain full monetary compensation from either tradable sector or non tradable sector employment.

Fact 7 from Brookings, also warrants a mention:

Workers have become less likely to move to a different state or to a different job, reducing wage growth.

Mobility is more closely associated with tradable sector activity, in large part because its organizational capacity and product definition, is dynamic and still evolving. Whereas, too much of today's non tradable sector activity - especially time/knowledge based product and housing - are rigidly defined. This lack of flexibility only adds to the perception of non tradable sector product as lacking in mobility, rooted in geographic preferences and too closely tied to specific revenue flows.

While most points made in the first Brookings article have relevance, some are more important for economic outcomes than others. However, the second Brookings article (re pass through businesses) reminded me how non tradable sector dominance would reduce growth potential from recently proposed tax reductions. When economies were still tradable sector dominant, reductions in taxes were far more capable of contributing to economic vitality via additional capital to increase output. Today, additional income gains from tax reductions, are relatively more likely to accrue to what is already well compensated skills capacity. The problem? Time based product - regardless of compensation - cannot multiply itself to create additional output and marketplace capacity.

First, Abandon the Concept of Labour...

Would it be irrational to sideline the concept of labour, from the workplace of the future? Especially given the fact that some forms of physical labour will remain necessary, that are repetitive, difficult, and even dangerous. Fortunately, however, these kinds of labour are no longer needed in the quantities they once were.

Nevertheless, nations which lack economic complexity, continue to expect their citizens to perform an excessive amount of physical labour, in relation to more desirable forms of work. As Timothy Taylor recently noted, for instance, children still bear too much of this burden. Alas, for some nations, better forms of organizational capacity are needed, which can finally give these populations more hope for the future.

For advanced nations, however, the conceptual environment for labour is quite different, and has been for some time. Here, the challenge is to insure that no group of individuals should be left out of economic participation, or else expected to perform all of the work of a society which is necessary, but not intellectually stimulating. In particular, when physical labour becomes the primary economic choice for older citizens (as other skills become less relevant), the result is akin to the child labourer who bears too extensive a daily burden, to realistically pursue a well lived life.

Why has the concept of labour, proven so confusing? In developed nations, the work that a majority of individuals seek (when they have the chance to do so), is not just a matter of necessary production. Meaningful work includes many activities which also function as forms of personal, time oriented consumption. In order to gain such work, individuals became willing to expend considerable sacrifice and human capital investment. This fact alone, helps to explain why it isn't helpful to place stimulating and desirable work, in the same framing as mind numbing yet necessary work.

One reason it is important to distinguish these categories separately, is that people are often well compensated for work they already wanted as a form of psychic consumption. While there is nothing wrong with this, more people need a chance to partake in work as psychic consumption, even if and when they aren't compensated via high incomes. Many of us would be more than willing to perform such work with minimal monetary compensation, whenever internally shared costs of assets and time based services (defined equilibrium), make it possible to do so.

The work that is especially sought in the near future is less about labour, and more about improving how we experience shared time with others in workplaces and marketplaces. An important feature of time based services, is that production and consumption are part of the same "package", or service product. Likewise, the practical often blends with the experiential, in terms of what is sought by all who are involved in the process.

Part of abandoning the concept of labour, includes acknowledging the fact that our time is a scarce and hence precious resource. Today's institutions treat aggregate time potential as excessively abundant, which is why they can't tap into time based resources so as to allow this natural commodity to come into its own.

Even though formal education attempts to improve the quality of the time we offer to others, these institutions weren't constructed so as to make use of one's personal time offerings in a broadly relevant framework. Instead, both not for profit education and for profit education, were constructed to gain profits as the primary marketplace in which human capital investments could be purchased. The problem? A lack of organizational platforms in workplaces and marketplaces, which could consequently make full use of these extensive personal commitments.

More platforms for human capital potential, are greatly needed. And by recognizing the reality of desirable work as a form of consumption, we can also safely sideline the concept of labour, so that future work might finally be conceived and applied in more meaningful terms.

Why Are Normative Healthcare Arguments So Confusing?

Normative approaches for the distribution of time based product, especially in its most basic constructs, don't work at the level of general equilibrium. These discussions can quickly turn into cultural quicksand, given the lack of thoughtful consideration re supply side architecture. Yet there's little incentive to make things less confusing, when policy makers need to please everyone and generate a one size fits all healthcare result.

Regular readers by now are familiar with my rationale in this regard. Why aren't normative arguments for healthcare "redistribution", a reasonable approach? One cannot redistribute a supply side factor that does not actually exist. And when institutions use the revenue of existing wealth to compensate time value as a random component of available skill capacity (as opposed to total time/skills capacity), the result isn't representative of time aggregate potential. Hence I have argued for local and decentralized time arbitrage systems, which would focus on the wealth generation potential of any entire set whose common component is human resource capacity.

I thought about the downfalls of a normative approach for general equilibrium healthcare, after noting some of the puzzled commenter responses to a recent post from Tyler Cowen in which he opened his argument with this:

1. The strongest argument for redistribution is when redistribution boosts economic growth and benefits all or most of society.

Since compensated skill (via general equilibrium distribution) is not representative of aggregate skill potential, even the "best" Obamacare result could not make a positive marketplace contribution. Based on what we surmise regarding resource utilization, when might government best contribute to citizen support and marketplace stability at the same time? After all, besides the logical public good of general equilibrium physical infrastructure, governments once held a larger role in the wealth creation of tradable sector activity; the success of which which has understandably reverted to private interests, since economies became vastly more complex.

The problem is that governments - so as to gain the support of their most successful constituents - have inadvertently undermined local economic settings where normative approaches have a reasonable chance of positive outcomes. Once Washington began to subsidize healthcare providers (with all the lack of redistributive transparency this implies), many onlookers concluded that healthcare now belonged to - and could be negotiated in - a broad normative platform.

Despite this extensive societal assumption and also paradoxically: Economists often approach public policy as though it should merely support a non-normative or spontaneous marketplace. But in doing so, they give up the possibility of contributing to effective normative institutional responses which might generate positive outcomes. Consequently, economists who reflexively defend the supply side as it already exists, give up the possibility of powerful and valuable input, into supply side organizational potential.

Meanwhile, healthcare would scarce appear any different should it devolve to state levels, so long as any legislation continues this unfortunate history of granting favours through limits on supply side production. What's interesting is that existing original limits on supply side sources, hardly even enter serious discussions. Meanwhile, as the effects of original sin limits spread across the larger political spectrum, the normative debates of philosophers, sociologists and others, only make the matter more divisive than it was to begin with. How could this be the level of discourse, where supposedly practical and results oriented economists, find it beneficial to engage?

And what our government has yet to recognize, is that by granting oft permanent institutional privileges to particular associations, the New World is following the same familiar path of hereditary advantage which was associated with the Old World. In the future, as governmental legislatures contemplate their participation in economic matters, they might recognize the extent to which they limit economic opportunity, and the future destinies of every citizen, whenever they are tempted to bestow permanent prestige on those they believe to be most deserving.

Trust and Class Commonality

Are societal trust issues affected by widening differences in income level? As populations continue to sort both geographically and monetarily according to skill and merit, it becomes more difficult to coordinate basic time use functions across groups. Plus: When high income groups compensate low income groups for economic activities, doing so sometimes involves a degree of risk - particularly when time based services occur within one's home. Nevertheless, in part due to new digital means which make it simple to monitor the transaction, Walmart is now willing to offer at home grocery delivery, straight to one's refrigerator.

Walmart is betting that today's high tech reality, can generate sufficient trust so that strangers might enter when we aren't home. Their advertising approach includes an interesting low cost/low skill twist, given the usual appeals to trustworthiness so often observed. In countless television commercials, local service providers assure potential customers that services will be carried out by someone whose professional level is "top notch".

Yet the local service provider approach has proven effective for good reason: Commonality between those who hire, and those who would be hired, implies less risk involved in the transaction. People are most comfortable coordinating personal activities with those who share similar income levels and backgrounds, since there tends to be less reason for theft in these circumstance. Normally, whenever groups come together which hold wide variance in skill and income levels, public settings tend to be preferred, so that more eyes can see what takes place.

Hence shared preference for class commonality, suggests that a different approach to work coordination is ultimately possible. We could build upon greater class commonality, by coordinating a wide range of skill sets in our daily routines with others. Our openness to sharing the most sought after workplace challenges of our time, would make it possible to coordinate a wider range of economic activity at much closer range. When individuals and groups are willing to share a full range of skill levels that are related by proximity, group commonalities could eventually be constructed, that are more amenable to mutual trust.

Why might skills sharing be such an efficient approach? For one, it would greatly minimize today's commuting and real estate issues which otherwise increasingly stand in the way of multi skill coordination. Even better, the willingness to share a full range of skills sets with others, could be one of the best means we have, to restore societal trust.