Part of the problem is due to a lack of understanding, regarding important correlations between time use wealth aggregates, versus the wealth of product which exists separate from time. Instead of organizing so as to capture international productivity gains, local economies have often viewed the good deflation of innovation and productivity as a threat. Knowledge use is needed for both traditional production and services formation. Even so, knowledge use is often approached on terms which mean unnecessary inflation, less labor force participation, or both. Traditional production and knowledge use need to exist in balance with one another, and that balance is slowly being lost.
Thus a growing asymmetry between knowledge use and other forms of resource use, contribute to constant budget constraints. Consequently, governments find themselves forced to cut back on their support of human capital. The somewhat unexpected lack of ability to support knowledge use, also means a gradually declining labor force participation rate. As a result, governments have come to rely on relatively passive wealth formations to generate redistribution, instead of the active wealth component of human capital.
Worse, this development was already ongoing, as developed nations gradually become more dependent on the non tradable sector. Because knowledge based product is often time and (local) context dependent, human capital tends to be non tradable. However, instead of tackling a growing workforce participation problem head on, the U.S. opted for increased homeownership as a last ditch means to "park" wealth. Sadly, this strategy could have actually proven somewhat reasonable for the American public, had innovation and easing of regulatory burdens been allowed into the mix. Instead, gains in the non tradable sector mostly accrued to special interests and governments in general.
Also, consider the timing, for a further shift from tradable to non tradable formation in the U.S. In particular, effects of important policy changes run counter, to arguments about monetary policy being "too loose" in 2003. In a post from 2011, Marcus Nunes explains:
Whilst in Asia and emerging markets resources were being diverted from the non tradable to the tradable sector, in the U.S. the opposite movement had to occur. In 1997, in addition to all the "incentives to homeownership" the U.S. government abolished capital gains taxes on homes sold after two years. Given the need to transfer resources to the non tradable sector, this opportunity was too good to be ignored so not surprisingly a "housing boom" ensued.The timing of this dynamic is also important, in terms of its contribution to housing considerations on the part of those who lost investments in the dot com bust. Some individuals took advantage of housing gains, but much of this occurred well before 2003. Even market monetarists are somewhat divided as to whether monetary policy should have tightened in 2003. Even though I can't technically "defend" loose monetary policy in this time frame, personal circumstance suggested that people in these years needed all the monetary assistance they could get.
Why so? The early 2000s were a continuing series of quickly changing events in the lives of many baby boomers. This group had basically been faced with changing employment strategies since the technology gains of the 1990s. And in the early 2000s, many baby boomers such as myself, made what turned out to be last attempts at small businesses and other self employment. This was frightening beyond belief, given the fact that many of us had more or less been steadily employed at least since the mid seventies.
Some individuals also borrowed against the equity in their homes, as means to prop up personal business efforts. Part of what bothered me about this (frequently) losing strategy, was the degree to which home equity loans contributed to new bank growth, at the precise moment other forms of small business were actually in decline. Anyone who remembers how many small businesses had to close their doors in these years, also remembers the odd circumstance of new banks - some of them quite luxurious - opening in these locations while many small businesses were saying goodbye to Main Streets for the last time. Many baby boomers went through a flurry of efforts in subsequent years to remain employed. After countless unanswered resumes were sent out, some finally made the decision to apply for disability...
Regarding human capital: some months ago, Dean Baker argued that wage stickiness at the higher end, was not exposed to the same globalizing income levelers which lower wages tend to experience. Initially, it almost seemed as though he was making an argument for greater wage flexibility among higher wage levels. Alas, this is not actually possible in primary equilibrium, for a number of reasons. To some degree, protectionism is reasoning from wage level changes. Now, economists who had been supportive of free trade, appear to be having second thoughts.
Perhaps wage rigidity at upper income levels, contributes to rigidity at lower income levels as well. Both sides of the political aisle are coming forward to reinforce or raise the wages of low income levels. But this is a losing strategy, compared to what would be possible through production reform. If broad scale innovation were given a chance, countless products and services would move closer in affordability, to the actual capacity of lower income levels.
Today's non tradable sectors pose a substantial challenge, to the ability of nations to sustain the economic gains of recent decades. The marketplace has become so rigid, that many policy makers refuse to consider either logic or reason. Artificial limitations and restrictions in the housing sector, continue to closely reflect the artificial limitations which still exist for knowledge use. As a result, many onlookers assume that there is little capacity to support further aggregate demand potential for the U.S., even as further recessions occur in the near term.
However, aggregate demand is only repressed, to the degree that knowledge use is repressed on the part of whole populations. People everywhere still need to be helped, and people everywhere still need to be compensated for helping them. What's more, processes of helping and being helped are vital components of both aggregate supply and aggregate demand. There is no "great" stagnation. There is only a refusal to make the most, of incredible quantities of both human capital and resource capacity.
Update: Greg Mankiw has a recent article in favor of free trade, much of which I agree with. I would add - as I had originally intended to do in this post - that tradable goods imports which are most amenable to good deflation, are also capable of increasing the value of time aggregates. The lower costs and economic functions of imports give individuals greater choices as to what they prefer to do with their time. However, the reason those gains for time value are not yet obvious to all, are due to the fact there is no marketplace for time value, yet.
I do have one problem with his article. Mankiw says, "People tend to underestimate the benefit from conserving on labor, and thus worry that imports will destroy jobs in import-competing industries." No, we have a torn society because institutions have been conserving on labor for a sufficient period of time that the labor force participation rate continues to drop. Services need to be directly created, so as not to generate either budget uncertainties or public responsibility beyond the reach of said services. Every society needs services for all their citizens. With a better understanding regarding time use aggregates in relation to resource aggregates, nations would not have to worry about other nations "stealing" their traditional manufacture jobs, which are limited in the first place.
That earlier fetishism about gold? It is also replaced with a "services for me but not for thee" mentality. Knowledge use systems are needed to take care of this problem.