Sunday, May 17, 2015

Notes on The "Hidden" Equilibrium

Was the recent recession a learning experience that we haven't fully absorbed? Tyler Cowen suggests this could be the case in a recent NYT article, "Don't be so sure the economy will return to normal". In particular he stressed ongoing changes in wage structures across sectors, and suggested that rather than fight these ocurrences, it might be better to work with them. From the article:
Institutional rigidities don't permit adjustments to occur all at once, but by studying continuing changes we may be able to peer around a corner and see where a sector is headed. Such processes are scary because we may be watching a slow unfolding of a hand that, in its fundamentals, has already been dealt. There are signs that a comparable story may apply to the American economy more broadly. 
The "slow unfolding" which Cowen spoke of, could be thought of as a broad equilibrium shift - albeit one which remains partially hidden. Some former patterns no longer hold, but it is difficult to understand why they don't. In spite of shifting wage patterns, other elements of the economy remain suspended in what Scott Sumner describes as an "era of unprecedented non-change". Sumner also notes:
Last year, the US saw a 0.73% increase in its population, the slowest since 1937.
Even if economists are not in agreement regarding a long "recovery" which doesn't feel right, the fact that family formation remains subdued, speaks volumes. Structural issues have been difficult to address, and they also involve first mover responses for which there are no "blueprints" to follow. Initiating change is generally viewed as "someone else's responsibility", particularly when governments are not well positioned to guide the process. A recent cartoon sums up the point nicely, in which a speaker addresses the crowd and asks "Who wants change?" Of course the crowd enthusiastically responds, with a show of hands. However, when he adds, "Who wants to change?" no hands are raised, and the audience suddenly appears self conscious.

One of the more immediate concerns which has yet to be addressed, is a lack of response to evolving wage potential in terms of community infrastructure and maintenance needs. It is sad to think that many municipalities may find themselves at the brink of bankruptcy, before they are able to seriously contemplate what changing wage structures among populations could mean for expectations and long term goals.

Shifts in general equilibrium will of course impact some communities more than others. Some may be able to reorganize financially, while retaining the look and feel of the present. But others will need to reconsider ongoing transportation needs and other local infrastructure, at very basic and occasionally simpler levels. The good news in this regard is that when populations approach long term infrastructure issues head on, the results have more integrity than would be the case with a partial and reluctant response.

Perhaps one of the more difficult adjustments will be the fact that wages cannot always be maintained at the levels which seem appropriate. There are too many interconnecting factors affecting wage structures which will need to be closely examined, particularly given the fact that labor force participation needs to be increased in the years ahead. At the very least, production reform in services and building components could make wages go further without decreasing economic access overall. What's more, innovation and experimentation at local levels could provide some "missing links" in the evolving equilibrium, as well.

Update: This letter is one example of the reset:

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