Saturday, August 8, 2015

Notes on Services and Long Term Growth Potential

Why does growth remain subdued, particularly given the fact monetary policy has been able to substitute for fiscal policy to some degree? Job prospects have been stronger in sectors which have to rely on other production as a direct point of wealth origination. Even though some aspects of knowledge based services translate into primary wealth, local multiplier effects are mostly real, insofar as actual skills compensation is due to gains from economies of scale.

As a result, highly compensated knowledge based skills sets in both the private and public sectors, are facing some built in limitations. Consider how government transfers are taking precedence over other forms of government spending, and the fact this is due in part to growing Medicare obligations. Even though healthcare is slated for future growth (especially in contrast to other sectors), the fact that much of it remains reliant on other forms of wealth, restricts healthcare from contributing to the growth patterns experienced by the U.S. until the Great Recession. This could explain - in part - why the Fed has not been willing to forecast growth capable of reaching 2 percent in the foreseeable future.

Isn't it possible to generate more than 2 percent growth in a year? For one thing, policy makers and economists alike are remiss, when they forget that growth is not just a matter of adding more to prosperous cities, but also learning to do more in the places where so many are actually able to live out their lives. While many are willing to relocate to thriving regions whenever possible, the fact that many counties in the U.S. have higher unemployment than is recognized by national statistics, speaks volumes.

Those who live, work and breathe the life of cities, don't realize the degree of knowledge that others witness via digital media, but too often do not experience at work or home. In some respects it's a different world, especially in rural settings. While some aspects of life may be experienced as "better", far too much is missing in terms of both economic and social options. Those missing elements are also responsible for the vast cultural - and monetary disconnect - which society now experiences in government legislatures.

Services do exist in rural areas, but they tend to be woefully incomplete, in terms of knowledge use. K-12 education, rather than being intended for knowledge access in one's immediate environment, was structured for access to city environments which already exist in relatively full equilibrium patterns (i.e. "for their own"). Likewise for healthcare offerings. When any emergency arises, the first response is generally to dash to the nearest major city, which can tend to the emergency at hand. Also, of local services, Alexandria Lopez-Cermeno writes:
Today, around 70% of the U.S. force is devoted to local service production. Essential as they are, these services are nothing but a consequence of prosperity, while the engine of growth lies within the tradable services sector.
Consider how vital these time based ("distributional and personal the same time and place of production") services are. For developed nations, these services workhorses became the base of economic activity, in areas which lie adjacent to more prosperous areas. Yet these are the very services - yes this 70% - which remain most vulnerable to any changes to monetary flows of more prosperous regions. This is the situation which the local corporations of knowledge use systems would seek to address, by making time based services a direct source of wealth. She continues:
In other words, big cities are specialising in knowledge-intensive service sectors - becoming larger and attracting skilled and unskilled workers from smaller cities. As a result, workers from small cities are abandoning their hometowns in fear of becoming part of the rural U.S. County inequality is increasing, although big metropolitan areas in the upper tail of the distribution are becoming more equal among themselves. 
While Alexandria Lopez-Cermeno has an understandable take on this situation, the goals she would seek are not actually possible to achieve on the terms she puts forward. Why so? First, she notes that high skills are where the wealth creation actually lies, as the tradable "engine of growth" of knowledge intensive business activity which provides local multiplier effects. She suggests that more cities make a stronger effort to attract high skill levels, and that lower skill levels be monetarily reinforced.

However, this approach does not adequately consider the dynamic which is already in play - one that also reflects today's low growth environment. Look where job creation exists, and note that the high skills being sought are mostly to reinforce the already existing equilibrium which only generates partial economic access in the present. Note that she does not distinguish (re highly compensated skills) whether the multiple job effect they create is due to positions which benefit from economies of scale, or from artificially limited knowledge use factors. It would be difficult to achieve wage growth on the terms she envisions, because of the position of human capital in the marketplace which has already been constructed.

That's not to say that nominal income has little capacity for growth, but that it needs to occur on different terms, i.e. the places which actually need growth. One reason why today's political battles are so confusing is that even though policy makers know some people are still struggling, it has been difficult to frame this struggle in terms of economic access.

New growth can be generated. But it needs to be achieved by reaching across business sectors for inter-sector coordination at local levels. This growth would be possible in that services can be directly created, a process which would gradually allow labor force participation to return to sustainable levels. To some, the time value that exists in relation to other time value seems as though insignificant, but it is actually the most promising venue of wealth creation that is possible in the present. Further, time value - in relation to other time value - also provides a new frontier, by which local economies of scale become possible.

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