Saturday, April 19, 2014

Which Matters More - The Flow or the Result?

While there are some of course who disagree, I believe the flow matters most. Admittedly, I'm astonished at the vast numbers who are now willing to believe it is the results of previous flows, which are paramount. In and of themselves, results are inert, thus not capable of creating further economic dynamism on their own. All valuations on preexisting capital and assets, depend on the economic inclusion that keeps flows possible.

If people don't have sufficient infrastructure to generate economic motion, they cannot make full use of existing results - i.e. assets and other forms of capital. What's more, not just any (politically won) infrastructure is capable of generating further motion for multiple income levels. Often, infrastructure involves different sets of economic and pragmatic values, and can be specially designed to meet those needs.

Infrastructures need to be designed and implemented, with full knowledge of existing income "handicaps" in social and economic movement, so that those handicaps can be overcome. What's more, some of the most important infrastructure is social, rather than monetary. Domestic summits would be a good way to start such processes. In these environments, infrastructure options can be discussed not by "experts", but the actual participants who would seek to align infrastructure with their own economic potential.

Economic flows matter not just for measurement or for considerations as to inequalities, but for the maintenance of productive and innovative activity over time. Even though economics might not have much in common with physics, basic ideas as to ongoing movement - or lack of it - certainly apply. The fact that present day results have left us "stuck" with less vitality, really hurts: no question about it. But we have the option of moving past the results of (crony) public private wealth gridlock, to create a better future. Unfortunately, the focus on moral "redistribution" of previous results, is no way to get there. If only it were!

Indeed, history shows that whenever society gets caught up in results over flows, the whole process tends to unwind. Many on both the left and the right are far too nonchalant about the possibly of economic breakdown - as if economic apocalypse could somehow make society "clean". In his book "Capital", Piketty noted that war broke down capital formations, but he seemed oddly okay with that, given the greater "equality" which followed. Why does society prefer war, over the work of creating economic inclusion? Is it really better to break things just because we don't believe they can be fixed? Recently at Cafe Hayek, Don Boudreaux also noted Piketty's use of language, which emphasizes economic results over flow, throughout the book.

One of the ways it's easy to tell that economic flows are breaking down, is the degree of focus on society's results, in any number of respects. Some of today's NIMBYs are a good example of this. For instance, the evening news highlighted an industrial area which - even though it had limited housing - was raising an uproar because it was about to get an influx of people with a criminal record. Pray tell, if someone with a criminal background is not allowed to live in an industrial area after getting out of prison, where might they live? It's becoming harder for people to imagine others being able to improve their lot, and with good reason. Whether good or bad, results matter more than ever: hence have become more of a challenge to overcome.

Scott Sumner provided an apt example of results focused reasoning, in a recent post that touched on regional effects. Supposedly, people felt richer because the value of their house "rose". Just the same, I have to believe the reality was different. Prior to the Great Recession, more aggregate demand existed and along with that demand, greater expectations overall. Hence the level of aggregate spending also meant that there were more simultaneous flows occurring at the same time, among different income levels. In other words, people were especially encouraged by the activity that was in motion - rather than arbitrary valuations on their home which were a result of additional monetary flows. Those additional flows - which were quite obvious - gave individuals more confidence for their own consumption and investment patterns.

Local economies can adapt for greater economic sustainability, by working with present flows of the moment and recognizing their changing nature in resource based terms. To be sure, it is up to monetary policy to maintain economic flows in a macroeconomic sense, and back societal efforts with a nominal level target. However, there are multiple aspects of microeconomic activity which need to be understood and actively worked with, in order to make sure that flows are not broken down unnecessarily.

Fortunately, there's a simple way to think about this process. Imagine both existing infrastructures and potential infrastructures which local areas or regions might elect to utilize. How much economic flow is lost, when some portions of the public don't have the resources to use existing infrastructures? If one envisions this as a mobility handicap, only think of the recent adaptations to handicaps which have become possible in a physical sense. In many instances, people have been able to regenerate movement where before, movement seemed impossible. These same possibilities exist for newly envisioned and interrelated infrastructures. This is an exciting challenge which could make economic mobility possible, once again.

Thursday, April 17, 2014

Time to Think Inside the Box

Wait, what? I say this, because too much thinking "outside the box" has become a bit tiresome. The decision making processes which pass for solutions at the margins - more often than not - contain few positives for the overall economy. Indeed, much of today's vaunted "progress" becomes an actual burden for populations, because of additional costs incurred from closely held knowledge use formations.

The end result of these limitations on our direct involvement, are governments which make it harder - rather than easier - for citizens to coordinate their lives with one another. Too many actions and policy prescriptions in the past few years, have felt like shuffling deck chairs on the Titanic. What really matters is that so far, no approach has changed the fundamental structure of present day economic realities towards a more positive direction.

Today's excuse for an "inclusive" economy, depends mostly on our abilities to consume and to be taxed - or not. Even our housing comprises a far greater component of overall measured wealth, than makes any sense. We pay the bills for our housing and its upkeep. Consequently: how is housing - as wealth - supposed to tend to our daily needs? Does government imagine it can do so, because our housing tends to so many of government's needs? How does anyone imagine more taxation out of an already lopsided definition of wealth?

Too often, it matters not how hard one works, because even the basics of life sometimes have to be set aside just to pay the tax bill. And yet, everyone knows that our governments aren't setting anything aside, in terms of their own lifestyle options. Even as policymakers continue to express concern for the middle classes, our governments have resorted to harassing many amongst the poor for what money they have - and in some cases - money they don't have. After all, it's become too easy to do so, and simply get away with it.

Recently our monetary policies have followed a similar principle, in terms of obsessing over asset margins instead of the core representation of the participants involved. For instance, plenty of tinkering around the edges has already occurred to make the monetary numbers "add up". As a result, policy makers are refusing to address the underlying issues which greatly contributed to the Great Recession. For instance, inflation targeting on the part of the Fed, is little more than a chance to "play hero" and create unnecessary drama. Meanwhile, aggregate spending capacity continues to be shorted, as governments lose the ability to envision their own citizens as a part of vital economic activity in the near future. When knowledge use is severely limited, what is the point in more education and training?

Hence while there's been quite a bit of action at the margins (coloring "outside the lines" if you will), the center holds firm, in its insistence to maintain life as it appears now. That matters at a fundamental level. Indeed, wouldn't it would be great if everything inside the boxes of our lives could stay the same! (NIMBYs unite!) Except there's only one problem with this wish which so many hold. In the near future, on this present trajectory of production exclusion in knowledge use, approximately 20 percent would be expected to set the stage for all economic activity, leaving 80 percent to beg for a few crumbs. What kind of world is that? Not one that makes any rational sense, at all. It would be like people being told they can't own land, even though they still need to eat.

In fact, a dramatic shift could be coming sooner than Tyler Cowen predicted, according to Colin Lewis at RobotEnomics in this post "Study Indicates Robots Could Replace 80% of Jobs". What's more, of the recent jobs which have been created, 73 percent of "new" jobs are at the lower end of the scale - which includes temporary positions. If we don't start thinking inside the boxes of our lives, a lot of us aren't going to have much to do in the near future that matters economically. And when our activities don't matter economically...

That's not exactly what many of today's municipalities - let alone numerous regions - are prepared for. Many of them prefer to signal (zoning, etc.) in much the same way as the regional "winners". Except, the winners in these scenarios depend on international monetary flows which don't always exist locally - even though abundant local resources can make it appear otherwise. Some municipalities have already discovered that just trying to look "rich", doesn't necessarily make it so - a lesson that more cities and towns should heed.

What's more, if they faced reality in that regard so as to create good second options, one would not see so many defaults and tawdry results, when the expensive signals fail. Unfortunately, the same building and construction issues which created tremendous marketplace rigidities, still exist. So far, the real lessons from the Great Recession have yet to be learned. In some instances, the boxes which most of us are still expected to live in, are the prime factor which holds back real progress.

Of course, some members among the elite are now insisting that governments "do something". But most of the "do something" so far, isn't connected to what citizens actually need. Indeed, the marketplace has become too rigged for the important work of economic rebalancing to even begin, for long term growth. In the meantime, many who once were such avid supporters of "free market" growth potential, have grown strangely silent.This has considerable bearing, as to why so much thinking "outside the box" was mostly wasted on finding ways to maintain the status quo, on the backs of consumers and taxpayers.

All of this is why I suggest throwing out the idea of thinking outside the box. At least for now at any rate, until a better equilibrium is established inside the box for multiple income levels. Sure, people are scared out of their wits at the idea of real change. But it's coming whether we want it or not, and we're going to be living in a very divided world if we don't examine the very core of how we live. Expectations for the future are based on what our realities are, inside the boxes of our lives. And no society can ever afford to forget what it wants to achieve now, if it is to maintain hope in keeping what it has already achieved.

Wednesday, April 16, 2014

Midweek Market Monetarist Links and Summaries - 4/16/14

Too many students in the last 30 years have been encouraged to "ignore money" (Marcus Nunes)
A formal inflation target has not succeeded in coordinating expectations:
One recession is not like the other...
"The United States economy had an unemployment rate of 4.5 percent..." (Benjamin Cole)
Like Mark Sadowski, I prefer a more holistic and gentler approach: Re-breaking bones is the opposite of what should be done
Time to break out the bubbly, already?
The trend charts are most helpful: 
If the job is really done...maybe Gavin Davies can retire!
Until mid 2010 they were following in Australia's footprints:

Even the press is starting to highlight this (Scott Sumner): 20% of Americans are in the top 2%
What might a third option have been? Paul Krugman on monetary policy options
Labor income as a share of NGDP did better in Germany, than in the U.S. - The British Jobs Recovery
Marcus Nunes responds to Scott - Germany remained close to the nominal trend line:
Abenomics is a reminder that growth is still possible even in a declining population: Doing more with less

Some Econlog posts from Scott:
The focus should be on "jobs, jobs, jobs", not compensation for labor:
"The highest-paid 2 percent of doctors received almost one-fourth of Medicare payments: Inequality Among Doctors

"More generally, the problem is interest rate smoothing." (Bill Woolsey) - Interest Rate Targeting and Financial Instability

Why are the long term unemployed being stigmatized? (Bonnie Carr)

There's a world of opportunity under all that bias...(Ravi Varghese)

Why have wealth effects become smaller? (James Pethokoukis)
The Fed, NGDP targeting, and the incredible shrinking wealth effect
Questions for Scott Sumner and John Makin: How to think about inflation and deflation

"What is it with you townies?" (Nick Rowe)

Even Soltas notes that interest payments are set to grow faster in the next decade, than either mandatory or discretionary spending: 

Also of (Piketty) interest:

A post by Karl Smith back in February, which some of my readers may find a useful point of reference now: Piketty and the case for land capital  I only got through this FT paywall once, and I really miss reading Karl Smith, since he went to Alphaville.

Diane Coyle also provides a link to the lecture notes which Karl Smith used:

Speaking of reference points, Brad Delong breaks down the four r's.

Piketty isn't measuring physical volumes, which presents a problem...(James K. Galbraith)

Tuesday, April 15, 2014

Is Obligation "Economic"?

Three words by Emile Chartier particularly intrigued me when I came across them, recently. "Obligation spoils everything." Wow, the stories that just three words can tell, especially about our economic realities! In particular, there are negative psychological components to obligation in economic activity, which deserve to be more widely recognized. Political animals sometimes die painful deaths in these rationale sinkholes.

Consider for instance, how family obligations aren't economic, and for good reason. Thankfully, housework is not a part of GDP. If it had been, how much work in familial "duty" would have been insisted upon as "necessary"? What if someone was negligent in their duties? I might have never heard the end of it on days I wanted to just enjoy myself. Or...might a house be too "hard" to keep clean for some reason? When do one's time choices and decisions simply become moral statements of preference?

Even though housework was left out of the GDP equation in the 20th century, other obligatory aspects of production and consumption have crept in to take its place. Earlier forms of economic activity tended not be so obligatory as the present, unless special interests (defined differently back then!) captured vital processes early on. Clearly, some forms of obligations also have their positive qualities. But anyone knows that when all of life starts to feel like one big obligation, some days aren't much fun anymore. Economies are no different in this regard, and public obligations aren't much more significant than some of the private ones which continue to emerge in the marketplace. One can rationalize private toll roads all they want, but I still don't like them - despite some obvious reasons they seem to have become necessary.

Some of the first economic gains, which encouraged individuals to explore life beyond one's personal circles, emerged for no better reason than they were interesting. Only think - for instance - how everyone needs time with others outside of family and "tribe", because that time doesn't require the same structure and demands of home. When economies are healthy and active, they take on a similar rejuvenating aspect. Just getting out and about in a vibrant marketplace, often goes hand in hand with the "getting out for a good time" that anyone enjoys with their friends.

But once certain forms of public and private obligations come into marketplace environments, the gains of spontaneity - let alone more positive elements of surprise and delight - can be lost. The reason this matters is that an increasing amount of production and consumption has become regimented and categorized. In other words, there is less about the marketplace of the present which is fun to participate in, than the marketplace of earlier decades. It may be tempting to shrug it off, when we hear others respond, "why even bother?" But when ever greater numbers opt out and stay  home, that eventually translates into fewer economic options as well - hence fewer social and lifestyle possibilities - in every aspect of life.

What's more, problems in this regard tend to build up slowly. Anytime a public or private interest captures a set amount of the marketplace, that cancels out other production and consumption possibilities. Economic choices eventually feel like little more than drudgery, with mere survival the prime incentive. Faced with obligations at home and in the marketplace, what is any sane person eventually going to develop a preference for? Which would be fine, perhaps, if it were possible to maintain a full economic life in a familial context. But by the most natural of economic definitions, it is not. Unfortunately, it is the choices, options and much needed innovations beyond one's personal life, which create a stronger base to return to, in one's own home and "tribe". Every NIMBY wannabee needs to take note of this reality.

Hence, some like myself miss a marketplace which once held plenty of room for all, regardless of income or social status. When I hear policymakers speak of future stagnation, I have a strong suspicion they would just as soon keep today's limited and obligatory marketplace for themselves. Even though far too much obligation was built into service environments in the 20th century, it has also slowly become a part of other product offerings as well. In particular, clothing once held vast variety. That finally disappeared and was replaced by "bargain" clothing or status signalling options -  neither of which seemed practical or interesting in the least. Indeed, this is why some with the income to do otherwise, seek out thrift stores for interesting clothing. After all, how much "thrill" is really involved, in the boring purchase of a status signal?

Once obligation comes into the picture, there is little remaining incentive to innovate or improve the overall context of the environment in positive ways. True innovative technology in our environments never had a chance, because obligations had already been targeted and defined by realtors, developers, local financiers, construction unions and finally the governments that shared the largesse. Does anyone really wonder why a full income is required to pay bills, in a business environment which now mostly prefers to offer part time work? How many special interests painted themselves into this ridiculous corner?

Obligations do have their place in life, but that place certainly is not in the heart of the marketplace. Long term growth could indeed be lost, if governments remain obliged to allow the present holders of power to define the marketplace on their terms. The question is why anyone would willingly allow that to happen.

Sunday, April 13, 2014

Land in a Whole Economy

Nick Rowe grapples with a question: how can a negative interest rate be possible in models which should include land? This provides an opportunity to explain how - at least to me - the issue of forgotten land capacity, contributes to economic problems in a number of ways. How so? For one thing, regions which are less than dynamic, tend to also correlate with individuals who often have no representation in the formal economy.

Or at the very least, such individuals are inadequately represented. These people - and this land - is part of a whole system. Therefore, both need to be accounted for in the total equation, through far more than just consumer definition or the limited resource definition of the area. While less than dynamic regions are often areas (in the U.S.) which are more "affordable" for retirees and those with disabilities, many who live here are over reliant on passive wealth holding in the form of housing and land, as the primary source of wealth.

Property holdings alone are not enough to create additional flows for the services, which these areas especially need to be able to access internally. What's more, neither are the local resource definitions which these areas rely upon. Hence, people here tend to be dependent on the service formations of more dynamic areas and handouts from national government, much as underdeveloped nations were once more dependent on developed nations. Also, youth from these areas have fewer options in the present, for moving to areas where jobs can be more readily found.

In a time frame when knowledge use is a primary economic activity, any location which remains limited to utilizing knowledge mostly for K-12 education, is going to have problems in terms of economic sustainability. Presently, these communities are forced to rely on taxation for what services they may be able to provide for one another, thus they are not able to take advantage of knowledge use for local wealth creation in a larger sense.

And yet those who live in these "forgotten" places, still have consumer roles in the areas which surround them. As retail operations now tend to cluster in more dynamic regions and automobile use continues to slow, so have these consumer roles - which consequently are also in dire need of new pathways and provisioning. If we think of land components as a complete whole, dynamic regions are but a small part, of what need to be more fully represented in wealth based terms. While aspects of healing are often portrayed holistically, this is also true of unmet capacity in a less than healthy economy. Wholeness refers both to the larger equilibrium, and the potential vitality which smaller, decentralized wholes could add, to equilibrium.

Thus,the negative equilibrium real interest rate is - in one sense - an unhealthy result of lower density land use, in which the primary optimization has become that of the most obvious local resources. Late in the 20th century, people who lived in these areas become excessively reliant on more dynamic regions for both service and retail needs. What's more, the kinds of self sufficiency these areas need to create in the present, is quite different from the more materially focused self sufficiency of an earlier era .

Indeed, much of the earlier era - if regenerated on those terms - runs counter to productivity gains. Yet lack of access to recent gains in organizational capacity, pushes people back into these lower productivity roles. Even as these underrepresented areas need better access to existing retail, they need to generate their own services, and also generate material needs with resources which exist beyond local borders. While Dani Rodrik discusses this lack of integration in terms of developing economies, the same dynamic exists between more and less developed regions in the developed world. There's just not a lot of difference sometimes, between rural tourist destinations in the U.S. and those of a developing country, in economic terms.

Once productivity came to agriculture in particular, city migration occurred. And for decades afterward a partial migration ensued as well, in that some residents eventually returned to (relatively) rural areas for their retirement years. But city migration at all stages of life has recently slowed in developed nations, as surely as migration to developed economies has also slowed. All of this plays a role in the slowing of overall growth, which some have - in my view - prematurely called an inevitable stagnation.

Still, this is an aspect of twentieth century economic life which was never effectively resolved. Rural residents fully compensated for their lack of economic access, as long as they were able. Some of today's lower numbers in labor participation, reflect an increasing lack of ability to live where work has already been generated.

Therefore, it is long past time to assist less dynamic regions in wealth creation, so that these individuals can contribute to their own stability and that of the global economy as well. What's more, this needs to happen in fluid knowledge use terms throughout populations, not just more buildings and structures to be maintained. Not only will doing so make many regions more fully engaged, the negative wealth equilibrium of the present can be resolved. It is tempting to look at land and say, look at what it is capable of producing! Indeed, this is often the case, particularly when fossil fuel production is involved. In fact, some aspects of rural production can rival what is produced in the cities.

But the fact remains: these material aspects of production, now occur with a small degree of human involvement. This is why people moved to the cities, as long as they could reasonably do so with minimum risks. Many such as myself, were once able to do so with little more than a full tank of gas and lots of motivation, because that's were the action was. Now, in a world which seems to become more NIMBY by the day, all of us need to do a better job of creating our work, where we can gain the options of living out our lives. That also means wresting the false limitations of knowledge use, from the cities where it has especially flourished.

The fact that it is not economically feasible for everyone to live in what have become extremely desirable locations, has to be resolved so that the negative interest rates of the present can also be resolved. The knowledge diffusion which Piketty spoke of, needs to also occur in low population density areas: something which has not even begun yet. Until this happens, the value of (the most desired) urban areas will only continue to rise against rural areas, as indicated by this example from New Geography. Indeed, the creation of smaller lots cannot resolve the lack of city access, because knowledge use limitation has created artificial limitations in overall land access as well.

Populations in low density areas need to become part of the organizational capacity of resource use at multiple levels, just as they were, early in the 20th century. One reason that recent focus on the growth path has become a false assurance (look, it's the return of the Great Moderation! Where's the "bubbly"?) is that the disconnect between low density and high density economic environments has yet to be addressed. Without a reconciliation of economic activity between those densities, policy makers will only continue to discount the value of economic time which - of absolute necessity - lives in all these realms in a per capita sense.

In an odd sense, static economies with a growing dependence on inherited wealth (such as Piketty imagines) could's just that this is not a desirable "dead end" for any economy. I thought about this in regard to Krugman's review of Piketty's "Capital". Krugman pointed out the fact that inequality appears to have more to do with compensation of incomes, than capital accumulation. An apt point, indeed. However, where one lives cannot help but play into one's personal perceptions in this regard. To what degree is Paris, where Piketty has spent the best part of his life, dynamic in the same income based sense as either the D.C. area or New York, which are more familiar territory for Krugman?

Why this matters for the U.S. is that a similar process could still occur in lower density and lower economic access areas of the U.S, as may have happened in France. Should that happen - a greater reliance on familial wealth, could back the assertion Piketty made. If such a reliance seems shocking to anyone who lives in dynamic regions - believe me, it was an extreme shock as well, the first time I encountered family dynamics in this regard.

These dynamics, which have a strong landholding aspect, aim to protect family members at all costs against the "intruders" of marriage formations, even though it may not be obvious to those who marry into the family until it is too late. In general, desirable land in rural areas is also protected against the "intruders" from other areas as well. When all individuals are able to rely on their own skills sets and knowledge use for wealth creation, these kinds of family and land protection, don't have to be so necessary for survival of family and community. Partly as a result of what I have encountered in less dynamic regions of the U.S., I firmly believe that freedom in knowledge use is the only way to keep freedom in economic mobility, for rural and city regions alike. What's more, when entire nations become less economically dynamic, this "protection" process starts to scale up...

For economies to remain whole, healthy and viable, land wherever people actually live, needs to be accessible to the knowledge use which came to define the wealth of the 20th century. Otherwise, desirable locations which appear scarce now in terms of potential comers, become even more scarce, when the most significant knowledge use happens within their borders.

Friday, April 11, 2014

How Fragile are Our Governments?

Since beginning this project eleven years earlier, I have especially been focused on macroeconomic concerns. What's more, the Great Recession made monetary policy a primary part of public debate, where it has remained. And - in spite of the recovery - macroeconomic issues surrounding the onset of the recession, are far from being resolved. Just the same, there are days when an ongoing emphasis on the bigger picture, presents a problem for this blogger.

Numerous times, I have started posts with the intention of detailing more specific local options, only to end up - once again - writing about the broader version of the issues involved! Let alone the fact that these are also the posts which are most interesting to my readers.

Just the same, there are times when I need to delve further into frameworks which suggest ideas for better resource coordination, locally. These frameworks already need to be a part of active and ongoing discussion - hence widely understood - if and whenever larger systems falter. And a couple of posts this morning, made me wonder a bit more than usual, about impending fragility on the part of national government. The fact remains: when governments stumble, people need to figure out better means of social and economic coordination in a hurry. This is one of those moments when the micro and macro definitions people rely on, need to intersect through better application in the marketplace.

Today's most telling example of something gone wrong, comes from the Washington Post. Seriously, did Social Security and the IRS really have to resort to making the younger generations responsible, for decades old debts of their elders? It seems unthinkable that they resorted to this, yet amazing that this odd situation has only now come to light. I used to think it was crazy - how many second hand items had to be sold, before hospital thrift store volunteers could pay for some needed technology for the local hospital. How many low income people have to be bilked for old unpaid Social Security bills, just to pay for one Washington event? Optimization FAIL.

One of the things that was once touted as a major achievement for civilization, was the fact that people were no longer held responsible for debts or deeds of family members. Indeed, I remember well my sense of relief at a young age, that humanity had progressed to that degree. Fast forward to the recent present, and a circumstance which feels oddly related to the above link. Several individuals at Social Security couldn't seem to get the facts quite right, when my mother died last year.

In recent months they have taken further cuts from Dad's Social Security, and upset him needlessly by claiming the problems were his fault - when they were the ones making the mistakes! Until recently, the issue of stopping payments upon someone's death, was readily being tended to through the banks which deposited Social Security checks. Hence, no one at the bank could not understand why they were putting Dad through the ringer, unnecessarily. He's hard of hearing anyway, and has trouble making out conversation on the phone.

Did a Social Security employee decide to bypass the normal bank procedure for reasons I'd rather not have to think about? Were employees at Social Security taking advantage of the fact that elderly customers can't possibly know, if the procedure isn't done properly? It's little things like this that are really making people leery of government... minor aggravations which nonetheless add up over time. And the fact that it took five months to deal with a straightforward and simple matter, made me uneasy. Writ large, what is really going on? I was surprised, to see the Washington Post story also highlighted on the evening news.

Is Social Security the tip of the iceberg? Let's consider another chunk of that iceberg for a moment, which is the 73,954 pages of the tax code for 2013. Growth in this behemoth has slowed in the last couple of years - thank goodness for small favors. The other link which prompted today's post was a question which Timothy Taylor asked: Is the IRS Unraveling? Over time, already complicated tasks on the part of the IRS are becoming even more complex and difficult to carry out at the speed of the modern economy.

Part of what is so difficult is that we are fighting our post recessionary economic battles on two major fronts at the same time - macro and micro. Worse, so is the Fed - which makes little sense. That is, until we remember that there is no other organized dialogue to coordinate micro and supply side issues into what are still major macroeconomic concerns. This is why I have suggested domestic summits, to fill missing gaps for coordinated supply side efforts.

To be sure, a lot of voices need to be heard and considered, before a new consensus emerges for continued prosperity. Just as there are aspects of macroeconomics which look to what can be, microeconomic considerations can be future oriented as well. And both are needed, when governments falter.

Thursday, April 10, 2014

Imagine There's No Finance...What Then?

I know - the title was too much "fun"! So some readers could be surprised that I don't think of debt jubilees as solutions. Why? They don't address the underlying problems which consequently rebuild as before, literally and figuratively, and sometimes sooner than later. Nor do I see whatever the latest batch of finance regulation coughs up, as a solution set either. Rather, the thorny brier patch of financial and political legalese, obscures what could be a relatively simple and headache free world on the other side. So how could anyone imagine ways to live, in which the use of finance doesn't have to be necessary?

Don't be fooled by the morality plays between government and finance. Because it's quite clear: they need one another more than ever for their own attempts to maintain the status quo - especially when mortgage financing is at a 14 year low in the U.S. What's more, mortgage debt has long been more substantial than consumer debt in growth based terms, and would be students are looking to other options as student debt loads become more of a liability than a guaranteed future. Is this why U.S. government was only recently looking to benefit, from loan offerings for preschool childcare?

For these and other reasons, it looks as though our government is already imagining there's no finance - or at least not as much as it would like. If they're not so happy about it, only consider how much they benefit - even if only indirectly. Forgive the snark, but no wonder "inequality" has become the hot new target of discussion! Let's get some more money flowing from the assets we already have! (yeah that's the ticket) Except there's an inconvenient truth involved: those pinnacles of attainment representing the business and services (knowledge use) realms are already relatively equal...hmmm. How do we reduce our own "inequality" by increasing the taxation on our own houses? We "met the enemy" and it was...

At least a few factions appear to be "okay" with the continued possibility of recessions. Some others can readily tolerate the idea of depressions as well and - oh - why not throw war in the mix if it turns out some really good firefighters and related heroes. After all, recessions, depressions and war give governments lots of busy work - plus reasoning for additional monies so as to come "to the rescue". To be sure, governments need something if there's not enough continued finance growth. Especially after other sources of economic growth have become too muddled through gridlock, to materialize. It does seem that talk of growing inequality, stems from wishful thinking that government can continue fulfilling obligations with the taxpayers help. But it would be far better, if governments actually relied on the skills potential of their citizens, instead of more moral arguments for already squeezed tax dollars.

What's more, when depressions and wars ensue, governments don't generally have to live the frugality that becomes a real part of the lives of their citizens (of multiple income classes) - hence they don't understand where value actually exists in frugality. Thus, the whole idea of government to the rescue, mostly backfires without an ongoing commitment to a level target for spending capacity. Let alone the fact that after the Great Depression, the growth path resumed in short order...something that hasn't happened this time around. Is it because some have already given up on human potential? Many are now quick to deem hard assets as more important than even aggregate spending capacity - hence the continued willingness to short nominal targets. Let alone the focus on inflation targeting which also backs assets over the value of our economic time.

Some of us have a great appreciation of frugality, because we see how much it has helped those who relied on it over the course of a lifetime. There are times when turning away from finance can really help, and the Great Depression taught self reliance. By refusing to use credit or mortgage lending, and avoiding insurance of any kind unless absolutely required, my Dad gained a retirement with the least amount of bureaucratic nonsense possible. Structuring life so that finance becomes choice rather than necessity, is not just smart. It also creates a more sustainable reality for lower income levels which need this option. Forget "attacking" payday loans for instance, and give people ways to work, live and pay bills so that payday loans aren't needed.

Inflation on the part of governments is hard to eradicate, because the costs of getting anything done exist deep in the heart of financial and political complexity. It's hard to get excited about slaying a few of the worst regulatory offenders against economic access, when the playing board remains set up so that no one really has clear rules to proceed. Much of the social safety net is hopelessly caught in this tangle, as well. What if one were allowed to adjust the game board, so as to better utilize the innovations and achievements of the recent past and present? And do it all through the incremental ownership of resource use, which doesn't require finance? That would mean imagining no finance - only without fear or anger as the next immediate response.

Presently, people attempt to provide for services needs by crossing fingers and hoping that their political constituency vote in enough options to make them happen. But even when some individuals are fortunate enough to maintain their priorities in this regard, it's an ad hoc way to get there. Much of the resulting inflation impacts regions differently, depending on whether other sources of wealth remain available. Knowledge use limitations presently result in supply shock forms of inflation which affect all classes.That means less economic access and monetary activity for others, and fewer resources available in other areas. Until populations deal with the inequality of knowledge use, further redistribution to address today's mostly all or nothing access, remains a pipe dream.

After long business cycles, populations become torn between printing more money for needed services, adding more taxation, or simply insisting that people can get by without all three. However, none of these options are the right way to look at the matter. Consider for a moment what a level nominal target would be able to accomplish in this context: it would seek to create a balance between inflation and deflation through a focus on nominal spending capacity, which "automatically minimizes the variability of both inflation and output growth" as Marcus Nunes recently noted.

However, there is still a problem. Even though a nominal target provides the best monetary stability possible, some object to the cap it would create because they don't want to be the ones who get shorted from the cap. As a result, people on both the left and the right remain willing to short output, if they can't dictate how the race is run. Even discussions regarding inequality may end up framed in these terms, which is one of the more unsettling aspects of Piketty's new book - whether he intended it so or not.

As mentioned above, limitations on knowledge use represent supply shocks which negatively impact people of all income levels. For me, this has not been adequately considered in the arguments for redistribution which Thomas Piketty puts forward in "Capital". He believes in the importance of knowledge, but in the moral sense that it needs to be "supported" by capitalism - even as capitalism falters in terms of present day growth. As far as I can tell,, Piketty sees no need to define human potential in its own right, because that would imply we can create product directly through knowledge use. The very fact that he raised slavery as an argument against direct economic trade, implies that he has little interest in equal access for knowledge and skills use.

If I am right (I will be reading his book slowly), does Piketty support further taxation because he believes further economic growth is unlikely? If so, what about the still relentless forms of inflation which government have not learned to control? In a recent post, Scott Sumner highlighted a comment made by Morgan Warstler: "Under NGDPLT, it becomes the job of fiscal policy to control inflation." would this ever realistically happen if the turf is mistakenly viewed through the lens of inequalities? Doesn't our government realize the role it plays, in shorting its own economic growth potential? Apparently not.

At least in the intro, Piketty acknowledges that inequalities diminished greatly in times of war, and he noted that they were primarily a feature of limited regions. My point exactly, which is why greater taxation would hurt some regions economically, far more than others. This relates back to the fact that prosperous regions especially rely on international monetary flows, in order to sustain the same higher knowledge use patterns which Piketty (rightly) believes to be so important. How could he forget that in the aftermath of war, the primary beneficiaries of knowledge use also lost out?

In an article for Cato, Arnold Kling recently wrote:
It appears that humans are most inclined to cooperate in small groups, in which everyone knows everyone else and repeated interactions are likely.
This is what governments need to consider for services provisions of the future, even though they have not yet taken steps to do so. After all, the finance and taxation "solutions" - which governments have relied on since manufacturing gave way to a service economy - can only go so far. History should tell us: any time people go through cycles leading first to finance growth and then (relative) finance exhaustion, the appropriate response is not to double down with inflation targeting. This response "pretends" that finance and credit use are still central, when in reality growth needs to be completely redefined. The knowledge diffusion which Piketty spoke of, could give us the chance to approach our economic future in more direct terms. Let's hope that the opportunity to do so, is not squandered and lost.

Update: To what degree might corporate credit make the difference for continued growth? Kevin Erdmann notes this recent trend, with links to posts from Sober Look.