Sunday, January 17, 2016

Income Representation is Central to Economic Stability

Without accurate monetary representation for nominal income, economic stability would suffer - in part because production structures remain dependent on continued income capacity in all time periods. For instance, asset formation - despite the Fed's attempts to maintain economic stability in this regard - is nonetheless an end result of ongoing income capacity.

Income representation is not the automatic mirror of aggregate spending capacity, that it may initially appear. Labor compensation and other income structure, serve as a point of origination for what become broad variations in monetary flows. While these different sources of income flow strongly affect one another, their sector activity does not directly correlate with one another. As a result, this creates system wide non linearity, so that products don't automatically or necessarily provide ready substitutions in the marketplace.

The income capacity which is representative of general equilibrium, occurs in what are already non linear paths of private and public endeavor, alongside further variation in tradable and non tradable organizational structure. While I have spoken often of the services capacity of non tradable sectors, the services capacity of tradable sector income follows a somewhat simpler growth path. How so? Tradable services formation (think sales or restaurant work) is more directly reimbursed, hence closer to the (primary) wealth origination of traditional production. One could think of growth capacity for tradable services income as akin to income in finance and assets, in that it directly relies on (non redistributed) income from all sectors for additional growth.

Non tradable sector income, i.e. that which thus far seeks broad redistribution outside of specific institutions, is also part of the secondary marketplace which is nested within existing wealth. When these forms of non tradable services income experience growth capacity, this reflects gains from the primary markets of traditional production. Secondary markets are largely dependent on primary markets. However, should growth decline in the latter - as has presently occurred - non tradable services income can be especially dependent on accurate income representation from monetary policy, in order to maintain nominal stability.

Not everyone is convinced, that monetary representation is important for economic stability. For instance, in a recent post, Dietz Vollrath asks, "Do you need more money for growth to occur?" First I'll address his question in an immediate sense. Monetary growth may not necessarily need to accompany real market growth conditions in the short term, should the supply side provide broad and innovative means to expand markets through good deflation. However, this has scarcely been the circumstance, given the forms of economic activity which the Fed now take excessive efforts to restrain. The monetary needs of non tradable sectors have led to arbitrary caps for production in multiple capacities.

Towards the end of the above linked post, I unfortunately have some serious issues with his reasoning. Again, Vollrath:
...The level of nominal spending is irrelevant. The stock of money is irrelevant...For any modern economy, it is effectively impossible for there to be "not enough" money to let growth occur.
The stock of money is not at all irrelevant, for that stock needs to closely maintain balance in income and resource capacity. This is what a nominal target can specifically provide. While supply side circumstance might not provide sufficient (wealth) balance between services formation and other forms of production, monetary policy has an easier job in this regard than central bankers have been willing to let on.

Maintaining nominal income levels is important not just in the sense of asset formation and loan responsibilities, but also the stability of income flows which regularly contribute to general equilibrium. No one should dismiss the importance of income aggregates and the ways they affect long term growth outcomes. For instance, Paul Krugman notes the non-linearity of present day oil markets, and the fact that expected product substitution in this regard, did not proceed smoothly as expected. Oil price declines do not provide income or product substitution, when individuals do not have income or transportation strategies to begin with.

As it turns out, specific quantities of money are not the ultimate arbiter of economic measure, because the organizational capacity of supply side factors determine ultimate pricing factors in relation to income capacity. However, the mistake is to ignore the important relationship that exists between income potential, and the marketplace capacity which is actually being honored for total resource potential. This is the relationship which a level nominal target would seek to uphold.

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