Wednesday, May 11, 2016

"No Growth Needed": The General Equilibrium Response

Depression was only narrowly averted, in the last decade. One way that it's easy to tell, is the fact present day stagnation talk resembles dialogue from the Great Depression - albeit with a few twists this time, given important changes in the makeup of economic activity in recent decades. The "traditional" stagnation view also comes across in a recent post from Timothy Lee, who looks at the maturation of scale and consumption fatigue (of physical goods or "things") as contributors to slow growth. He echoes the thoughts of many, that supply side growth is supposedly not even necessary. Only consider that fiscal infrastructure arguments aren't exactly compelling, either. Who wants to invest in human capital, for a job in bridge and road maintenance?

Regular readers know I find talk of economic stagnation, concerning. "No growth necessary" arguments ignore the reality of those who still invest heavily to access a general equilibrium setting not structured for full high income access. New institutions are needed for broader inclusion, and economic stability could also be sought on terms which don't require sticky wages. However, many remaining problems regarding economic access aren't widely recognized. The fact they are not, comes across in reasoning from a commenter in Lee's post who opined, "we need new strategies for excess money to support our economies".

None of this is about a need for "excess" money! The circumstance of a rapidly evolving economic environment is still being missed. And what about the fact nominal income still needs stronger support from central bankers just to maintain present economic stability, let alone the issues of long term growth and inclusion? Okay, I'll take a deep breath and back up a bit. First, think about what is happening politically. "Too many" consumer goods or no, there's heavy irony in "spent out" reasoning, given the fact that so many want tradable sectors to "come home" so a baseline of fiscally provided service structure can be maintained. The threat of protectionism has returned, and it has been roundly discussed of late.

But another problem looms on the horizon. Economists - whose reasoning is in many ways based on quantification - appeared to be arguing in high places recently for what amounts to less quantification. Granted, there are aspects of economics which do need to be expressed on less quantitative terms. Only consider how we continue to rely on centuries of economic reasoning, prior to today's statistical approach.

Just the same: there's reason for concern, when Davos movers and shakers muse about happiness and the supposed inadequacies of GDP, instead of the vital 21st century services economy which desperately needs greater clarification in GDP terms. Let's don't use "faulty or outdated GDP" to obscure the fact that making sense of time/knowledge based service product is hard work. When services are not well understood in terms of wealth contribution or long term growth potential, accurate monetary representation for citizens is also lost.

In fairness to all concerned, the measure and understanding of services formation (in total resource aggregate context) is not a straightforward process, because what is asymmetrically compensated does not exist in the same linear dimension as product which directly generates new wealth. However, without careful quantification for time based product, it becomes more difficult over time to coordinate the time based services product that people wish to produce and consume. The fact that many time based services remain ensconced in government activity, obscures the marketplace coordination factors which could contribute to more productive organizational capacity.

How to think about the time based product that has proven difficult to quantify? These services are asymmetrically compensated in general equilibrium. In other words, time based product which includes knowledge use, has not yet been generated as a direct source of wealth, but is funded either through either privately or publicly held wealth. This is why time/knowledge based product hasn't (yet) been able to "grow" the market for knowledge use diversity, at an aggregate level.

Consequently, too much knowledge (in time based product) is compelled to prove "superiority" over other forms of knowledge which are competing for the same pool of public or private wealth. Since this form of knowledge competition is in a beta position (to the alpha position of existing wealth/revenue), knowledge use competition has been expected (thus far) to drive out other knowledge use options, instead of growing a knowledge use market in aggregate. And with the loss of knowledge use, goes the loss of employment potential - especially given the fact government pays twice for each product unit of time based knowledge, whereas private industry only pays once.

The latter should mean greater efficiency for time/knowledge based product, right? However, organizational cost efficiency was lost, due to the fact private knowledge use compensation in aggregate was limited by design. Hence government provision of knowledge based product was mistaken at the startEven though the government beta limits on knowledge use growth are involuntary, the alpha limits on a broader knowledge use marketplace are intentional. The sought after production and consumption of the 21st century can't gain traction in terms of marketplace growth. Fiscal policy has no choice but to pay two dollars, for employment that could have been had for a dollar on monetary terms, had the supply side been willing. Indeed, if governments could "magically" pay once, knowledge based work may have been viewed as the best fiscal option for the recessions of the 21st century.

What about growing the knowledge use marketplace on private terms? Unfortunately, for presently existing private institutions, that would mean diluting the salaries that already exist. This is one reason I suggest creating an alternative equilibrium, to make it possible to grow knowledge use without damaging the wage structure of general equilibrium. It is difficult for all concerned, to directly address the reality of time based services as the most important GDP component of the present. Small wonder it's too easy to bash GDP and talk about happiness instead! At the very least, service provision can be quantified through compensation for mutual cooperation and assistance, so that general equilibrium can better meet the obligations for knowledge production it already holds.

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