Perhaps the fact I recently wrote a post defending neoliberalism, accounts for a scolding I received from a commenter in that post - one seldom knows for certain. When I looked up John L. Davidson, I found a Miles Kimball post from 2013 which highlighted an article from this attorney. Never mind any discrepancies he may hold in terms of economic viewpoints, as contrast with market monetarists such as myself. That's not what's important in this context. What I am concerned with, is clearing up some misconceptions he apparently held of me - indeed one could say misconceptions as to my entire purpose for blogging. From Davidson's comment:
You seem to think deflation has a place in economics. Not when 85% of your economy are services for which deflation is not a choice or option. Medicine, law, and haircuts have too large a labor component to get cheaper w/o reducing the incomes of those providing the services.First, if I have come across in my blogging as a deflationist, then I have done a poor job of communicating to my readers. So first, for the record, I am most certainly not in favor of deflation, especially given today's structural circumstance and the need to further include many who still lack economic access. All the more true, when the good deflationary potential of tradable sectors remains swamped by the bad deflationary potential of non tradable sectors (and tradable sectors by extension). Even bloggers such as George Selgin who have highlighted good deflation over the years, would acknowledge this unfortunate fact. Regardless, central bankers need to maintain present day income levels in aggregate - both to make it possible for individuals to maintain their financial obligations to one another, and to protect central components of asset value in general equilibrium conditions.
Also, it may have my neoliberal arguments in the above linked post, which led Davidson to assume I don't believe in progressive taxation. In terms of the fiat monetary structure of governments and nations, taxation has been and will always will be important, for the kinds of activity which are difficult to carry out otherwise. That said, taxation needs to be implemented far more effectively than is now the case. Taxation has been abused in entirely too many instances, to support forms of activity which otherwise could be more directly and broadly generated. However, devolving economic activity to state or local control with no intent to build a broader marketplace for time value, would be an unmitigated disaster. Still, much of today's taxation is not effective for its intended purpose. Among other problems in this regard, much of the economy is structured on terms which don't allow growth to overcome debt based fiscal requirements, at aggregate levels of output.
How to think about this problem? Anything that is fiscally backed, has to be paid for again, with already existing revenue. Further, fiscal multipliers often don't apply, for what is little more than ongoing fiscal obligations. Once developed economies evolved towards fiscally supported services as relatively more important than monetarily driven tradable sectors, governments initially had means to make up revenue shortfalls. In particular, government held direct involvement in the wealth creation of asset formation, through the international monetary flows of fiat monetary formation. So long as worldwide economic growth remained strong, this connection served as a substantial government multiplier, which tended to "cancel" the debt issues of ongoing economic obligation such as subsidies and (certain aspects of) entitlements.
Indeed, worldwide growth made government asset management a fallback position, for more than half a century. However, with the recent pause in worldwide tradable sector activity, more than asset management is needed for long term budget considerations. A broader marketplace is now necessary, for continued worldwide growth. Plus, the adoption of more direct forms of wealth creation would offset growing burdens in fiscal obligations and requirements.
One approach to this long term growth dilemma is a marketplace for time value. A marketplace for time value would provide means to stabilize general equilibrium, by restoring internal trade at local levels. By opening trade options to the potential of time value, nations would not need to worry, what their unique mix of tradable and non tradable sector activity actually consists of.
Fiscal policy, like monetary policy, is not "out of ammo". However, fiscal obligations have not been closely considered, as to where they could provide the most support to populations as a whole. As a result, present day fiscal restraints represent problems for aggregate growth potential. And without full employment, adherence to an inflation target (instead of NGDPLT) could lead to gradual deflationary effects. Fiscal policy cannot provide an indefinite stand in for aggregate time value. Today's time value in aggregate has to "wait in line", for time which is deemed to have value. The effect is low economic velocity, both in terms of time coordination and monetary flows. This pattern impedes both monetary and fiscal efforts for stimulation.
Plus, today's high fiscal levels of economic activity are largely responsible for the "full" equilibrium conditions which now limit economic access to a minimum. The structural change that is particularly needed for lower income levels, is economic activity which need not be backed by debt - either at the level of individuals or nations. Why? Today's debt requirements are immediate barriers to both economic access and growth, at microeconomic and macroeconomic levels. By integrating time value into the fabric of non tradable sector activity, alternative equilibrium conditions can be built which don't rely on government or private sector debt, to take place.
Doing so, would also make it obvious that trade need not be a zero sum game. Indeed, the fact that service sectors are a major economic component, makes it mind boggling to expect so much non tradable sector activity to occur on fiscal terms. Likewise, for tradable sector wealth to be supposedly somehow responsible for backing the vast majority of knowledge and time based product! And yet this is the reasoning that policy makers have inexplicably made, instead of looking closer to home to reformulate 21st century time and services based product.
Granted, the asymmetric compensation that progressive taxation and government redistribution provides, is still vital for the forms of knowledge use that have important applications beyond local spheres of economic activity. Eventually, with closer attention given to non tradable and tradable sector flows, one can hope that government budgets ultimately do a better job of moving budgetary obligations towards the forms of knowledge use that matter most in this capacity.
Sometimes I am called to task for what I appear to say, instead of what I've tried to express. Those are the times when I wish my early education included a better grasp of mathematical concepts. If only my mind worked so that I knew how to provide visual representation of the economic concerns which worry me most! Suffice to say that much of what appears as austerity, really is not. Instead, it is indiscriminate political handouts with little rationale for the economic ends they serve. If budgets are not carefully addressed in the years ahead, much of the very good could be lost with the needlessly included. Governments have maintained such a large stake in economic outcomes, that fiscal policy as handouts for all comers is finally getting in the way of growth.
In order for future governments to thrive, they need to discover what government budgets best serve, and then leave ample room to respond in changing economic times. Government provided asymmetric compensation should tend to knowledge based functions which are truly state and nation centered by nature. Instead, governments have compensated local knowledge sets in ways that resulted in the extreme loss of aggregate time value. As a result, too many individuals found their level of skill capacity deemed insufficient, to contribute to the greater whole.
Economic activity that is backed by mutual time value, would give fiscal policy a chance to stabilize general equilibrium conditions and the role of fiat monetary formation. General equilibrium conditions cannot always provide full integration, during periods of low worldwide growth. This is the time when knowledge use systems are most needed, to make certain that entire generations are not lost, and valuable knowledge preserved, as well. Trade does not have to be a zero sum game. Don't let that happen.