Sunday, June 19, 2016

Economies Would Benefit From an Equilibrium Approach

Economic access is not simply a matter of "too much" or "too little" income or taxation. "Too much" or "too little" in relation to what, exactly? The interconnected nature of general equilibrium conditions, means any attempts to remedy specific parts will affect the whole to some degree. Hence general equilibrium problems would benefit from public dialogue which transcends the ongoing battles of relative wages, income and taxation.

When policy makers approach problems from partial equilibrium framing, often the result is greater equilibrium imbalance. An apt example for equilibrium perspective, is the recurring battles over gun control. Instead of imposing yet more rules and laws yet again, why not work together to redress equilibrium imbalance? Doing so, would ultimately mean that people have fewer incentives for using guns on one another in the first place.

General equilibrium settings can be envisioned as shared marketplace capacity, between tradable and non tradable sectors. The complex effects these sectors have on one another in terms of growth capacity, are not yet well understood. This is all the more problematic, given high level government involvement in non tradable sector activity. Even though government "crowds out" private sector activity, too much of this process occurs with the implicit "blessing" of the private sector - in spite of protestations that circumstance are otherwise.

Sometimes, government crowding out almost seems beside the point, as time based product is called into question because it is not generated through viable and sustainable means. Here, knowledge applications are questioned, because of the fact they take place on terms that are simply too open ended, in terms of shared resource capacity. In other instances, the wrong parties are continuously blamed for supply side deficiencies, in what have been deemed crucial areas for applied time based activity. It does not seem plausible, that the marginalized get the blame for seeking access to the forms of time based production which they have not been deemed capable of providing on their own.

How does a lack of equilibrium balance contribute to so many problems? Tradable sectors developed their share of wages and income in relation to actual resource capacity, i.e. that of currently existing revenue and capital. This setting also actively contributed to ongoing product formation and marketplace expansion. A balanced equilibrium would imply that non tradable sectors take a similar approach, but alas this was not the case. Rather, today's non tradable sector activity is a completely open ended structure, which also has not proven capable of gauging aggregate resource capacity in real market terms.

Non tradable sectors estimated the aggregates of wage and income, based largely on whether or not political factions were in their favor. As a result, this open ended structure - which did not lead to direct (i.e. time or resource backed) wealth creation - meant permanent dependence on tradable sector wealth, in aggregate. Had existing resource capacity for national tradable sector activity been taken into account (also in relation to similar international tradable sector activity), non tradable sectors would not face the current wage/income impasse which now contributes to worldwide productivity losses. As a result, hiring is either partially curtailed or continued at lower levels of compensation.

Just the same, non tradable sector formation is likely somewhere beyond the early stages of crowding out tradable sector marketplace capacity. Should this crowding out process be left unchecked with no marketplace alternative, central bankers may incrementally decrease the level of aggregate spending capacity which represents both sectors.

A recent post from Marcus Nunes, shows how this process has already been occurring for some time. There's a way to think about the gradual shift downwards, which puts additional pressure on both nominal and real growth levels. How so? In some time periods, non tradable sectors will claim a relative greater share of total resource capacity than tradable sectors. Their relative inflation, as contrast with the good deflation of tradable sectors, also decreases the tradable sector representation for that period, when a hard inflation cap is in place. Since this adjustment draws down total existing resource capacity from which non tradable sectors derive their revenue, inflation caps gradually draw aggregate spending capacity downward.

Is it possible to set non tradable sectors on more sustainable paths, which do not continue to draw down resource capacity for both tradable sector activity and combined activity overall? One reason for today's political gridlock, is the fact it's difficult to fight the multiple battles of equilibrium imbalance within the structure itself. UBI can be thought of as such an attempt to fight a problem at general equilibrium level, from within. In a recent post, Scott Sumner noted the lack of political feasibility for UBI, because of the political issues involved. How does one willingly "step away" from government promises such as Social Security and Medicare for instance, if there are not viable long term options to reduce risk?

Much as inflation targeting represents an arbitrary cut off point on the part of central bankers, governments also become inclined to throw up their hands and institute arbitrary cut off points such as UBI when general equilibrium issues have gone unaddressed for too long. Rather than everyone having to face arbitrarily cuts for entitlements in the near future, why not provide the choice of an alternative equilibrium approach in the present?

Today's government promises are risky, but the only thing more risky is relying on private enterprise which does not yet have a built in continuum option for previously applied time value. The best way to deal with risk in a manner that approaches a government promise, is to build an internal time continuum which links time based wages to asset and service formation. It's an approach which still leaves the participant free to gamble their resource/income equivalency if they wish, but in which one's time/wage equivalency can maintain the protection of both individuals and the participating group.

Alternative equilibrium is an equilibrium response which need not jeopardize existing equilibrium structure. No one set of economic rules should have to suffice for multiple differences in lifestyle preference and wage/income potential. Democracies only fall into disrepute when opposing tribes attempt to impose their beliefs on one another, as if there were no other choice but to do so.

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