Friday, January 22, 2016

When The Political Chickens Come Home to Roost

Perhaps - crazy as it seems - today's unsettled political climate has been a long time coming, given the amount of discord and refusal to cooperate in high places that has already occurred. Now, as governments are increasingly forced to spend less, Jim Geraghty of the National Review asks, "What if the American people don't want smaller government that spends less?"

Scott Sumner responds:
It's meaningless to talk about public opinion on "big government". The public doesn't even know what the term means...And since their views on taxes and spending are impossible to meet, in a very real sense they have no opinion.
No one really seems to know how to "connect the dots", for positive action which is actually feasible. Take just one issue of the (earlier) small government agenda: entitlement reform (since audits of Defense weren't likely...). Even though such reforms are needed, they pose real threats to those who maintain solid access to general equilibrium conditions. Democrats and Republicans alike, strive to uphold the promise that these more prominent forms of access will not be lost. Territorial grabs wouldn't be so problematic, were it not for the fact their revenue conditions are increasingly built on economic exclusion.

For those who are concerned about the economic access which has already has been lost: should nothing be done, today's reduced labor force participation is but a sample of what could occur in the near future, without a marketplace for time value. But where to begin? At what point in a given equilibrium, can one begin to make the structural adjustments which would also mean dramatic improvements in monetary policy?

It's complicated. For one, no broad based structural changes should be imposed on any entire public, given the different circumstance with which so many live out their lives. This helps to explain why "one size fits all" government attempts in recent years have gone nowhere. Only consider earlier discussions re phasing out social security, and how difficult it was to agree upon cutoff points or potential replacements.  And, the fact that the U.S debt situation is looking about as good as will be the case for the foreseeable future (according to James Pethokoukis) is another indicator that the chickens are coming home to roost. There's still time to act. But these issues need to be addressed now.

Smaller governments are needed. But they are needed on terms which can gradually fold services capacity - and people - back into the marketplace, as direct contributors to wealth formation and economic activity. Until this occurs, everyone will remain uncertain how governments can reasonably apportion services capacity to the "deserving", and voters will be asked at the polls to make increasingly harsh judgments in this regard.

Why haven't economists been able to address these circumstance, already? Twelve years earlier when I started this project, I was still in awe of economists, in that I believed they were capable of rising above the social and political fray. Consequently, I believed (and still do) that potential solutions for world issues can be found in economic ideas.

Since then, I've slowly had to learn that economists don't particularly relish the role of system wide confrontation, which in retrospect makes sense. Why would economists want to jeopardize their standing with the special interests which also have considerable bearing on their livelihood? To what extent does ideology stand in the way of broader growth potential? However, it isn't so necessary for economists to be able to forecast every recession, as to do a better job of indicating when economies become too fragile because of access issues. These issues also lie at the heart of nominal income representation.

In fairness to economists - perhaps - it has not been easy to suggest solutions in general equilibrium, because doing so means pointing out supply side circumstance that occasionally run counter to a need to maintain flexible wages and overall access. Hence it's often easier for economists to suggest partial adaptations (specific to individual circumstance), instead of taking overlapping effects into consideration.

Minimum wage discussions are an example. It makes good sense to argue against minimum wages and I've done so plenty of times. Why, then, has the public (and increasingly more economists) moved instead towards support of a "living wage"? This is not the solution it seems, because wages need to be considered in equilibrium context. However, the focus tends to swing back towards "living wages" when general equilibrium has too little means to adjust for income potential.

Instead of forever "chasing" small wages with government subsidies or mandated employer dictates, income potential needs environments which are conducive to the actual sources of revenue that they represent. In order to make this possible, individuals need more say, in defining the primary non tradable consumption components of their lives. Everyone needs valid roles in the production of their own environments. But who has really been able to suggest equilibrium level strategies?

Otherwise, even though the great majority of tradable goods can be had by low wages, much of the non tradable sectors are not accessible to lower income levels. It is the lack of inclusive reforms in these areas, which now makes it difficult to find logic or reasoning in the political sphere. I believe that political solutions could be sought at the margin, through alternative equilibrium where it is possible for people to create more accessible services and asset structures.

Even though this post touches (once again) on long term growth issues, the U.S. growth trajectory is still in doubt, due to the seeming insistence on the part of the FOMC of undercutting nominal stability. In a post entitled "The Sky Is Not Falling...Yet", David Glasner notes:
The 2008 financial crisis ensured the election of Barak Obama as President. I shudder to think of who might be elected if we have another crisis this year.
Indeed. Will the Fed continue to overreact to - hence magnify existing problems in structural issues? Let's hope not.

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