What, exactly, is an income consumption ratio? It refers to the consumption capacity of various income levels, given the regulatory definitions for economic access. How much elasticity (for production and consumption) exists for income streams, and how are some markets compromised or even lost in an aggregate sense? How do different local or regional settings compare, and how much flexibility do participants actually have? All of these ultimately add up to actual, or aggregate spending capacity. This matters, for an income capacity approach is far more amenable to monetary and supply side adjustments than income changes. When national dictates do not adequately take these factors into account, monetary policy failures and distortions in redistribution, tend to result.
Even though I've written from this perspective since the first post, perhaps I've been remiss in not providing a better explanation, as to what the ratio represents (at least in my mind). After all the recent discussion regarding Piketty's capital income ratio, I suspect some clarification is in order. My approach is the opposite of what Piketty takes, regarding economic inequality. Indeed, the first 100 or so pages of "Capital" induced some wincing, along with a inexplicable desire to delete my own income consumption ratio (and income consumption standard) post tags. Instead, I decided to think about them more carefully.
While Piketty sees some income levels as held hostage to what the world "dishes out", I see income as only one resource among many, which could assist participants in contributing to stable economic equilibrium. Think of income as a given crop in a season, which in turn allows other possibilities for one's property. What's presently missing is the idea of our time with the coordinated time of others, as contextual property for income transformation. While the twentieth century encouraged resource options and innovation in a financial sense, the actual physical resources in our environments remain amenable to innovation - at all levels of income. The same holds true, for the social resources of our knowledge use and services capacity.
Consumers need to be able to maintain control of production means, so that no one need be hampered by a "small" income. That is, in a 21st century society, designations need to exist for both knowledge use rights and production creation rights. These property rights (in time use terms) would allow individuals to make the most of educational investment, along with locally and globally available resources - digital and otherwise. Otherwise, income levels can become problematic, if the consumer continues to have little say in the ways his world is designed. An overly regulated world is like a garden in which we are told we can only grow only certain kinds of food, which are not enough to sustain us.
When excessive economic restrictions occur, governments competely lose the capacity to assist low income levels. When local environments are flexible in terms of product definition, small income streams can go a long way towards meeting one's needs. While this was still true in terms of land ownership even 50 years earlier (memories of a resourceful great uncle contributed to this post), it is true now in terms of knowledge use potential, the digital realm and new means of decentralized production. Our economic spaces could once again respond, to the recognition of a year's seasons.
Our most important resource is time, not just on the part of the individual but in group coordination for economic activity. Otherwise everyone's time can easily become wrecked by everyone else's priorities, as has happened in the present. All too often, unnecessary living requirements on the part of business and government, prevent a more level playing field in production and consumption possibilities.
The inevitable rise of the minimum wage in such scenarios is a poorly thought out response, somewhat like a bandaid on a gaping wound. Even those opposed to raising income levels tend to grudgingly give in, in part because of their refusals of more substantial means of economic access. Why take a chance on one's survival by allowing more competition? But these half baked adjustments along the margin for internal imbalances, mean everyone runs harder just to remain in place.
Why do income consumption ratios matter in inflationary terms? It helps to know the extent of a marketplace which is being denied at aggregate levels, because inflation defined product tends to flood the open spaces where true participation and access have been disallowed. By capping at the aggregate spending level which has already occurred, the recent preexisting growth trajectory in per capita terms has been negatively altered. The problem? Aggregate demand still has not been met on the part of lower to middle incomes, but this great potential remains hidden by a marketplace full of signals. In other words, the most productive component of the marketplace has been obscured, by the positions which special interests have carved for themselves in the middle to upper income domains.
What's more, those signalling terms are also tied to societal expectations in housing, which makes this asset group especially brittle in recessionary periods. Without a marketplace which accurately reflects income potential for lower to middle income levels, inflation targeting has been used as a way to obfuscate the spending capacity which has been disallowed. Incremental ownership options in building components would provide a means for new marketplace generation. Just as importantly, they would provide new evidence that it is a mistake to tie monetary conditions to finance driven outcomes.
To be sure, I don't particularly like Piketty's forecast or prescription. Nonetheless, I accepted parts of his forecast as given possibilities, much as I (grudgingly) accepted those of Tyler Cowen's in his recent book, "Average is Over". Neither forecast is a desirable set of circumstances, of course. In that spirit, both books should be indicators as to what we could all agree, are not the outcomes we would want. It should not have to be so complicated, just to be able to put food on the table and keep a roof over one's head. How can economic inequalities be addressed without resorting to the "usual suspects"? That perhaps, is the question.