Wednesday, October 19, 2016

Notes on First and Second Mover Activity in Equilibrium

Primary markets can be thought of as "first movers" in the marketplace. Nevertheless, the follow through activity of secondary markets has been substantial in developed nations, due to the dynamic activity of primary market potential in recent centuries.

When secondary markets can contribute to existing growth patterns, much of their core structural framework exists as societal permission (time based services) and financial services. While government involvement in the economy is often said to detract from private options for growth potential, secondary market activity is associated with both public and private interests. Importantly, private interests in secondary markets could be crowding out the first mover potential of primary markets, for some among their representatives impose substantial and unnecessary limits on both output potential and monetary policy.

Real economy conditions have complete representation in the tradable sector activity of primary markets, whereas real economy circumstance are partially represented in secondary markets which comprise both real and nominal value factors. Primary markets contribute new product which does not need "permission" (on the part of redistribution or existing discretionary income) to take place. While some of today's time based services appear to move the market forward (think state of the art teaching hospitals for instance), their present organizational structure requires a shift of monetary and other resource value, from already existing primary and secondary markets.

How does asymmetric compensation fit into this framework? The asymmetric compensation which occurs for labour in primary markets, also holds a first mover position in terms of newly created wealth. In other words, asymmetric compensation for labour in tradable sector (or primary market) activity, moves marketplace capacity forward - even though asymmetrically compensated labour is a residual function. Whereas the asymmetric labour compensation of secondary markets, could be thought of as a holding pattern for existing marketplace activity. First mover activity generates more output in real market terms, while second mover activity consolidates the resource capacity gains of primary mover activity, and assigns them further value in pricing mechanisms and nominal value.

Even though secondary marketplace activity has the ability to move primary markets forward in the short term, it loses the capacity to do so, once in an overly dominant position. Secondary markets have great capacity to supplement primary market activity in vitally important ways. However, economies can falter if primary market formation becomes too thin in relation to secondary market formation, as has become the case in the present.

It is not always easy to distinguish the wealth of primary versus that of secondary markets, and the imbalance which has resulted between the two, helps to explain why global debt has hit an all time high. Even though one associates government activity with excessive debt, rigid private sector dictates for production and consumption, have also contributed to this unfortunate reality.

Two things need to occur, in order to address the problem of rising global debt. First, less rigid consumption definitions are needed on the part of non tradable sectors, to help ease the burdens of publicly and privately held debt. Further, the purposeful creation of new primary market activity would help to restore economic balance, so that the expectations and responsibilities of today's secondary market activity would no longer be stretched so thin. Regular readers know that I suggest a new marketplace for time value as a basic commodity, for this role. While this would be a long term approach, it could still help to ease the present uncertainty of economic conditions.

Monday, October 17, 2016

Some Thoughts Regarding Economic Uncertainty

Much of general equilibrium is a result of the numerous benefits which accrued from earlier economies of scale. Hence today's expected "standard of living" also includes a high bar for economic access, given the wide array of special interests which have contributed to rigid definitions of equilibrium. Of course this approach has had its costs in terms of public and private economic engagement, along with a substantial backlog of debt structure to make it possible.

Remember when the majority of this structure was built? Only consider those 20th century decades, when inflation was actually a problem for all concerned. The Fed's earlier "party with the punch bowl" (attributed to everyone else? How exactly does that work?) serves as a reminder how opportunistic a credit driven central banking system can be. Some of the central banker overreaction to today's imaginary inflation, comes across a bit self righteous, given the reality of the situation.

Worse, are the excessive complaints about demographics, which are little more than the residual credit driven excuse for economic gridlock. One might call it a "pity party", since there are insufficient high incomes left for credit institutions to "plunder", oh and never mind the plentiful loose change still lying on the sidewalk which seemingly is not worth anyone's time. To put it politely, those excuses for economic stagnation are entirely inappropriate "hand wringing", due to the earlier excessive capture of income by debt creation in the years when it was possible to do so. Today's resulting economic uncertainty, helps to explain why aggregate spending capacity should always be honored with a level target. Instead, citizens are paying the price of imaginary inflation, to a large degree because central bankers and others were unable to resist the bounty of income capture, in the decades of high inflation when Baby Boomers were still young.

It is quite hypocritical to pretend high inflation is even an issue, when younger generations are still struggling for economic access. The fact that today's central bankers are reluctant to acknowledge the importance of nominal income representation, is just one reason why I'd like to see wealth creation which exists independently of the credit function now responsible for economic prosperity, or the lack thereof. I must admit that I dislike wealth creation which is entirely credit driven and discretionary, because it still allows central bankers to throw entire generations under the bus - only to (finally) throw a big party with all the attendant inflation (that of excessive lending capacity) when the "right" generation comes along. When that finally happens, what about today's posturing as to inflation being "just around the corner"? Ah who cares, it will all be forgotten by then.

Particularly problematic, is that political constituents are becoming less willing to honor mutual understandings for both economic and political obligations, as they presently exist. One could say there is an increasingly open challenge to present day equilibrium monetary needs, which also belies a lack of understanding, how important it is to maintain the wealth structures of the present, before societies find new systematic means for the wealth creation of the future.

When political leaders challenge monetary policy, they also do not understand the degree to which central bankers are already holding back, in the representation of already existing mutual economic agreements. No question, central bankers have already been reacting, to what some believe to be an excessive amount of liquidity. How else to explain recent Fed communications about running the economy "hot" for a time, when this would not take place under any circumstance? Hence some confuse the pricing levels of artificially constrained assets, with the monetary flows which are required to maintain business as usual.

Today, it seems many people reserve their anger for the "wrong" candidate or the "wrong" political response. As it turns out, most of my anger is still directed at the structural circumstance that were allowed to continue for far too long.

Saturday, October 15, 2016

Secondary Markets: Some Growth Considerations

Why have today's purveyors of credit, so greatly reduced their presence in the marketplace? Banks in the U.S. had long since cut back on providing support for local business formation - a pattern which now extends to housing as well. The "parked" mechanism of interest on reserves is not just a problem for reduced credit access in the U.S., but also for other nations. Of course, central bankers are hardly the only the only institution "sitting" on money, instead of putting it to better use. Could some of the lack of interest in lending, be due to secondary market constraints? This post is in part further thoughts from a recent discussion, as to the coordination difficulties of services capacity.

Consider the widespread arguments about a lack of investment opportunities. Besides the standard explanations of economic gridlock, how might one think about this problem? After all - as long as anyone could remember - the ample investment opportunities of primary markets for tradable sector activity, meant plenty of investment opportunities for secondary market formation and its associated non tradable sector activity. The 20th century in particular, experienced vast opportunities for growth and development in the latter: markets which included financial product, valuable formats for knowledge application, and of course the asset formation which followed nominal income potential.

Even though (at least until the Great Recession) services appeared to have a bright future, it is becoming apparent, how dependent their present structure remains on the fortunes of primary market formation. Indeed, the fact that knowledge use and service formation are not (yet) organized to generate first mover roles as primary markets, greatly contributes to the present global backlash. So long as populations do not have a true marketplace for time value, future policy makers could become more likely to treat the existing trade of manufacture, as a zero sum reality for economic policy. Hence the challenge, to create organizational capacity for human capital on primary market terms, so that the existing global structure of tradable sector wealth is not lost.

However, changes in organizational capacity, also means knowledge based divisions of labour which are not dependent on meritocratic structure. In order for primary market formation to be possible, knowledge use needs to be as interchangeable as any factory component, in local organizational capacity. The good news is that this process can take place without need of additional debt formation, which is all the more important given the reticence of today's central bankers and their lack of support for continued growth. Instead, wealth can be built incrementally, as formal education is gradually integrated into monetarily compensated mutual assistance.

In many ways, it was the widespread availability of credit which lent further credence to the meritocratic structure which prevailed for knowledge use, in the 20th century. One reason it was so difficult for emerging economies to evolve towards services in times of premature industrialization, was the fact that so much human capital investment was required for every individual in a secondary market time based services formation. An incremental growth pattern for knowledge use, could make it possible for emerging economies to continue their path towards prosperity, even though premature industrialization has already begun.

Thursday, October 13, 2016

Notes on Services Capacity and Coordination Difficulties

As more individuals gradually became employed by today's institutions, time based services also became associated with meritocratic reasoning for monetary compensation. Even though merit based compensation seems imminently reasonable, it is nonetheless a coordination dilemma, for time based services as a whole.

So long as the majority of economic activity consisted of tradable sector formation, mutual coordination for group activities - whether economic or not - was more clear cut, for all concerned. In these settings, individuals with higher incomes were most likely to account for time based services on economic terms, and this group - at least in the U.S. - was the first to pay taxes for what were once minimal government contributions to knowledge based endeavor. Today, most income levels bear responsibility for taxation, at least in terms of government assisted coordination of time based services. Even though (non economic) family coordination provides partial remedies, by no means is this the cultural option it once was, in the U.S.

Earlier patterns of cultural, or non economic coordination, were gradually disrupted, as secondary markets for time based services supplanted primary market activity in developed nations. In many instances today, if either high and low skill activities can't take place on economic terms, often they don't happen. However, this dramatic shift in group forms of time use, places undue strain on monetary flows that were designed in environments where money had only gradually came to represent the majority of coordinated activity. Many important monetary valuations for time based services were already designated in terms of general equilibrium demand, long before secondary market activity began to take precedence over primary market activity.

Even though meritocratic arguments (for limits on supply of knowledge based skill) seemed reasonable at the outset, it has become difficult to expand time based activity of any skill level to the extent of societal expectation, on general equilibrium terms. When time based services are organized as secondary market activity, they can't contribute to output gains in the same capacity as has been possible for tradable sector activity.

Consequently, when secondary markets make further demands within a partial equilibrium construct, the earlier monetary values they were able to command (particularly on high income level terms), no longer correspond well with low incomes and in some circumstance, middle class incomes. Still, economies continue to be structured, as though time based services can be apportioned for the consumption patterns of all income levels.

Consider the dilemma of day care workers, whose incomes are particularly difficult to coordinate with other time based service sets. Meritocratic arguments for more pay (in the form of higher skilled workers for "better" child outcomes) can also be contrast with a historical reality in which a majority of the population tended to young children on non economic terms. Service coordination for young children is all the more difficult, when both parents need to work, for more calendar time is required for this service than just about any other, except for K-12 education. And should daycare workers gain the higher wages that help to pay their bills, life becomes easier for them, even as overall possibilities for time based coordination on economic terms become further diminished.

Meritocracy arguments can distort general equilibrium in unexpected ways. A prime example of course is physician necessity for the practice of medicine in the 20th century. Much as societies tended to childcare on non economic terms, so too lower income levels had a long history of what is now referred to as alternative healthcare. Once professional medicine ruled out many alternative options, it also reduced an entire supply side structure of healthcare possibilities. Yet governments and citizens alike assumed that physicians would be able to tend to the needs of all income levels. This was never possible, given the fact professional medicine already had a built in investment structure, that was made possible by the high income levels which contributed to this form of healthcare from its earliest beginnings.

Time based services examples such as this, help to explain why lower income levels need options such as time arbitrage, for important time based services. Even though hard choices would occasionally have to be made, when individuals coordinate time on an equal basis, at least it immediately becomes easier to understand the supply and demand issues at stake, given existing time scarcities. By looking closer at time scarcities in group context, groups are better able to construct environments in which individuals become better able to take conflicting sets of preferences into consideration. There would be a lot of stumbling about in the dark to find more opportune means for services coordination. But understanding the true scarcity of time use potential, is a good start.

Monday, October 10, 2016

Growth Potential: A General Equilibrium "Constraint" Example

Does increased educational capacity still contribute to long term growth? It depends, and as Ryan Avent emphasized in "The Wealth of Humans", there's still room for emerging markets to benefit from education investments in terms of added long term growth. In particular, the knowledge intensive nature of high skill work provides the "social-capital infrastructure" which emerging markets need. Given fortuitous circumstance, social-capital infrastructure can move emerging markets toward greater economic complexity and higher income levels.

However, Avent also notes how increased educational attainment for developed nations, now faces somewhat diminished returns. Interestingly, some of his explanations in this regard, illustrate the relationship between primary and secondary market capacity, in terms of long term growth potential. Here's Avent:
Where increased education alleviates fundamental growth bottlenecks - by increasing the numbers of knowledge-frontier-expanding engineers and scientists, for instance - it can increase growth and the size of the economic pie to be distributed. If other economic factors are the bottleneck, however, then education mostly boosts the fortunes of some groups by reducing the relative scarcity of others: nurses who train to become doctors earn more, but they also reduce the bargaining power of the existing pool of doctors by increasing their numbers. And if increased education raises effective available labour by enough - if it mostly adds to the abundance of effective labour available in the world economy - then it might simply reduce the bargaining power of labour as a whole relative to other factors in the economy, such as land or social capital.
Regular readers may realize that I would attribute the bargaining power of labour per Avent's "other factors", to existing growth capacity in the form of first mover or primary market formation. While the knowledge and time based product of secondary market means can be most essential, the problem is that - as secondary markets - they are not positioned to move the marketplace forward on real growth terms.

Consequently, the resources that time based services require just as a steady state, can keep the dimensions of the existing (general equilibrium) pie mostly in place. One reason the physician's pay is also subject to these constraints - much as any teacher or day care worker - is the fact it depends either on existing redistribution or discretionary income through the same economic mechanism that other secondary markets face, in relation to the existing scope of primary market formation.

Knowledge use systems could increase the trajectory for long term growth, because the matched time for knowledge use would serve as a new point of wealth formation. In other words, since this organizational capacity would move growth ahead (or outward) with no additional debt structure, it also expands the pie, via newly generated and accounted for product at the outset. Time based healthcare services as primary market capacity, wouldn't face the same constraints which impact today's existing healthcare supply - given its dependence on the growth level of already existing equilibrium.

Ryan Avent further elaborates regarding healthcare's dependent status on other growth factors:
Doubling the number of doctors working in America - either by increasing the educational attainment of native workers or by accepting immigrant workers - would not generate an appreciable increase in American economic growth. It would make doctors more abundant relative to the labour force as a whole: doctor bargaining power would fall, and doctor incomes would rise more slowly - or perhaps would fall a bit. The doctor doubling would therefore be good for the new doctors (whose salaries would rise), for American consumers (who would enjoy a one-off rise in real incomes thanks to the drop in the cost of medical services) and for the managers and owners of healthcare firms (who would be able to reduce their labour bill and boost profits). Those benefits would derive, for the most part, from the reduction in bargaining power and pay of the original doctors.
When I think about Avent's framing, it actually becomes a bit easier to understand today's supply side restrictions in healthcare, even though I have often railed against them. Whereas many forms of product contribute to overall growth, time based healthcare product - as currently structured - instead acts as a drag on growth via further debt formation. Any increased supply on secondary market terms would further exacerbate this process, by diluting the available amount of redistribution and discretionary income from today's existing equilibrium. Perhaps physicians could have more incentive to prepare future students for healthcare as a primary market structure, than I'd previously realized.

Sunday, October 9, 2016

Of Food Banks and Equilibrium Patterns

Some of my readers may have noted a "feel good" story about food bank efficiency gains, after some organizational adjustments which led to greater free market choice. These adjustments - in turn - made better use of available resources at a national level. But when is coordination such as this more difficult to carry out, in a general equilibrium setting? From a recent NYT Upshot article:
In a free housing market, for example, big houses generally do not go to those who need them most but to those willing and able to pay the most...but it turns out that when you analyze objections to free markets on those terms, they contain two basic issues. First, goods go to the highest bidder; second, bidders possess different amounts of wealth. Disentangling these two factors is important. When markets produce outcomes that seem unfair, it is usually the second factor - the wealth disparity - that is to blame.
Place bidders on an equal footing and the superior efficiency of the market becomes evident. When two similarly well-off families vie for a large house, for example, the family that places the greater value on the property will outbid the other one.
In all of this, housing valuations face thornier general equilibrium issues, than the much simpler tradable commodity coordination which proved amenable to all concerned. The non profit group Feeding America was able to enact a bidding process, which in turn put food banks on equal footing. This allowed food banks to bid in ways that reflected regional variations in supply and demand. The pricing features that were noted, led to surprising discoveries about variance in value assigned to goods - indeed, it turned out that some donations were not actually wanted.

Unfortunately, some general equilibrium components - particularly for national level non tradable sectors - aren't really amenable to coordination on a broad scale. Non tradable sector activity reflects both local labour market factors and local/international wealth holdings, which are quite different from one region to the next. This wide variance would distort many general equilibrium bidding processes that attempt to place participants in an equal framework. In particular, the costs of housing and time based services often correspond to the degree of access for local employment. Housing can be expensive if it reflects real property scarcities, even though employment scarcities may be artificially imposed. In these environments, most attempts to place participants on more equal footing for economic access, run headlong into local efforts to keep economic conditions as they already exist.

Even though general equilibrium conditions include wide income variance for time value, not all labour markets have to exist on these terms. New employment templates would be possible, via alternate equilibrium conditions in which local price coordinates aren't so dependent on externally driven employment factors. In these settings, time value could serve as an equal starting or bidding point, by which equilibrium corporations would create their own internal economic access. Labour market scarcity can be alleviated through knowledge use systems which generate a mutual employment market structure. Eventually, the high rents which now accrue to areas with the most economic complexity, would be offset by growing markets for time value and knowledge based services in new regions.

Part of today's general equilibrium coordination problem, is due to the need for money to bear the entire burden of representation for all resource capacity. In times when money is in high demand, other resources can appear as though too abundant. And yet some of these resources would be capable of assisting the circumstance of individuals and groups which may otherwise lack economic access, were the coordination in place to make this happen. It is possible to link resource capacity and time value to monetary representation, so as to strengthen local economies.  Ultimately, this approach could extend economic access to those who need it most.

Friday, October 7, 2016

Wealth Makes More Sense When It's Quantifiable

Initially, this post began with thoughts I wanted to explore, re the quantification for time value via a complete and measurable loop of activity. However I was pleasantly surprised when Scott Sumner wrote an Econlog post, "Non Materialistic Millennials and the Great Stagnation", which highlighted the truly quantifiable wealth of (seemingly) "missing stuff". All that stuff made quite a difference in the lives of Baby Boomers! And his post PS was intriguing:
This might be a stretch, but is the Trump phenomenon at some deep level a longing for the old stuff-oriented economy? And is Hillary the "services" candidate?
Why do services register so differently in our minds, as a form of product? Even though we occasionally value experiential components as a part of the package, those qualities don't necessarily hold substantial monetary value or "worldly" worth. Nonetheless, both services production and consumption are closely related to supposed levels of intelligence or skill - not to mention the level of economic access which skills can also impart.

While economic access is more necessary than ever, all those earlier associations with physical stuff not only felt more natural, they were a lot more fun. While I scoffed along with other Baby Boomers when Madonna sang "Material Girl" years earlier, many of us lived some version of that materialistic reality just the same. Even now, a few vestiges of that earlier materialism are part of my environment. There's thousands of books stashed alongside the shelves filled with thrift store collectibles, which my mother happily discovered in the "thrill of the hunt".

Also noted in Scott Sumner's post, was the fact that eating out at a young age was somewhat of a rarity for some Baby Boomers. Apparently Houston must have been an outlier for restaurants and eating out, compared to other parts of the country. Indeed, the biggest part of my restaurant consumption took place when I was young, and Houston had no shortage of great food options - even in the sixties and seventies.

Consider how restaurants have proven an interesting way to bridge the gap between "stuff" and services, in a number of ways. Even though many restaurants include a strong time based service component, these services tend to be quantifiable as simple measures, in part because of a reliance on internal coordination for well defined product sets. For the most part, it's also easy to tell whether this form of organization serves practical or experiential roles, and time considerations are planned accordingly.

If only more time based services capacity could be organized internally on self replicating (hence primary market) terms, instead of having to rely on other forms of redistribution, to take place. Knowing what to expect in terms of competition and market formation, would make it a lot easier to appreciate time based services as a valuable form of product.

 Ryan Avent also noted the shift from "stuff", to what is increasingly a services based economy:
Indeed, it is true of our consumption in general; we once devoted most of our household budgets to physical things: food and drink, clothing and furniture. Now we spend vast amounts on things like education and healthcare, or on housing, the value of which is mostly dependent on the access it provides to social capital rather than the wood in the walls and the plastic in the pipes.
In short, services could benefit from more time based quantification, and less judgement all around as to the levels of skill that are necessary or desirable in every instance. Part of what made free markets so easy to defend in earlier decades is the fact they tended to be a lot more fun, when there was less insistence as to how they were "supposed" to take place.