So long as missing time aggregates are not taken into consideration (reduced labor force participation), many of the main questions which stemmed from the Great Recession have been "settled". Consequently, as U.S. unemployment figures continue downward, policy makers are anxious to move forward. In all of this, some central bankers and economists believe that interest rates should reflect an economy which has long since moved out of recession. How does one define future growth potential, if interest rates are sending the "wrong signals" for the marketplace?
There's only one problem for central bankers and policy makers: the new normal is a far cry, from the old. As a result, some have resorted to Neo-Fisherian logic, in order for the desired equilibrium to have a more understandable context. Within this agreed upon economic environment, "better" minimum wage floors are becoming a feature, as a starting point for economic access. Once again, however, less prosperous regions and rural areas are forgotten, for they will also need to comply with these same wage floors. Plus, many policy makers agree with the population, that inflation needs to be kept as "low as possible". If only this dogmatic approach could provide the imaginary stability it seeks to promise!
Policy makers are resorting to a Neo-Fisherian scenario, in hopes that rising interest rates will "normalize" economic activity through signals that "all is well". The big unknown thus far, is whether normalization can occur from a changed economic reality, rather than the output which existed prior to the Great Recession. Whether rising interest rates will cooperate with these hopes is yet to be seen. If central bankers are able to do so without undue harm, some policy makers will doubtless reason they are finally "home free".
I don't have a problem with anyone's wish for a general equilibrium pattern which makes sense to all concerned - nor do I take issue with anyone's desire for the economy to return to a normal status in spite of who (and what) has been left behind. A more robust long term growth trajectory is still possible, but I suspect it would need to take place through more negotiation than is likely, in primary equilibrium. Even though such flexible terms are difficult to come by in broad sets of circumstance, there is still hope that experimental strategies can occur at local levels. Over time, a return to a better long term growth trajectory is still possible.
In a recent post I highlighted some fundamentals about economic balance which remain my primary concerns. One reason growth has been scaled back in the present, is that it has become difficult for traditional production to maintain adequate provision for the services marketplace. One of the easiest ways to think about where - and how - equilibrium begins to break down, is in the rural areas - which of course never gained adequate attention after the Great Depression. Instead, they became reliant on government redistribution and subsidies - a pattern which continues to this day. Now, their circumstance is only becoming more problematic. Recently, Arnold Kling touched on this subject with colleagues at lunch:
3) There was a lot of talk about how things are not really as bad for the middle class as the left makes them out to be. I asked, if things are not so bad, then imagine giving a talk to people in a small town in Ohio or rural Oklahoma. What sorts of advice about future jobs would you give? Some of the answers were glib ("Move to the city") Others suggested that the jobs would be in fields like nursing. But not everyone is cut out to be a nurse.There's another important thing to consider re the "move to the city" response. More and more, one finds online references to the fact that many sought after cities are uncomfortable with newcomers. New arrivals want to take part in a dynamic which locals suspect to be fragile, in spite of appearances. Hence those online "population full" signs for popular cities, can be considered equivalent to the "full" equilibrium, which central bankers now treat as a knife's edge between "overheating" and deflation.
Even though the idea of "overheating" seems odd in a near deflationary environment, it applies to any groups which reach for the expected "beyond the means" ladder because it's (often) the only one available. While sticky wages are still debated, it's the sticky marketplace which particularly makes problems for those still seeking economic access. Available options for both living and working, are often regulated so they are not amenable to one's actual circumstance and resource capacity. Further, should more individuals opt to become a nurse (for instance), healthcare practitioners also have the same watchful eye as city locals, as to new graduates who are waiting in the wings for their own jobs. Again, "full cities", and a full primary equilibrium need to be accounted for.
Hence the focus on the part of policy makers is one of maintaining the current equilibrium that exists, not attempting to expand it. Even though there are still open doors for future careers, there simply isn't as much room for entry, as what existed prior to the Great Recession. None of this means that dynamic long term growth is no longer a possibility - simply that it needs to occur on new terms. It is doubtful that anyone can achieve 4 percent growth for instance, by "nibbling around the edges" of regulations which prevent individuals from plying some of the simpler services trades.
Fortunately, it is possible to generate new long term growth, without having to rely on the transmission from production to services primary equilibrium. However, more direct forms of services wealth creation need to happen in ways which won't present problems for current primary equilibrium patterns. Ultimately, this will mean new cities, new means to "make a living", and new settings for infrastructure innovation to take place. The best part, is that real alternatives to primary equilibrium are possible. What's more, those options will not be dependent on other sources of wealth. Instead, they can provide additional means for greater productivity and new wealth creation.