Sunday, April 9, 2017

Confronting the Private Incentives of Fiscal Illusions

Sometimes when I consider the intricacies of public and private debt formation, I am reminded of a game we used to play in the street as children. Each of us assumed our positions at the end of the block, where the goal was to move ahead step by step and be the first to cross a chalked line. Of course sometimes we'd gain a step, only to have to move two steps back.

Oddly, those lost steps are not unlike today's public and private debt burdens, given a growing imbalance between secondary market formation to primary market formation. The commitments of our debt fueled personal investments can easily end up as "two steps back", for these high costs reflect what is a limited knowledge use platform, to begin with. Sadly, some are willing to accept the losses of growth potential, to maintain control over forms of property which are now closely held.

Yet governments cannot always afford to take two steps back. It is not possible to indefinitely seek debt fueled revenue for fiscal policy support, instead of encouraging the greater use of existing resource capacity. While the high costs of today's economic access creates profit for public and private institutions alike, those debt fueled expenses don't necessarily translate into greater output or total factor productivity. How can the costs of access contribute to growth and output, if knowledge based output is artificially constricted?

Fortunately, economic access for today's developed nations has not always been so uncertain. As Hernando de Soto wrote in "The Mystery of Capital" (2000),
The genius of the West was to have created a system that allowed people to grasp with the mind values that human eyes could never see and to manipulate things that hands could never touch.
In particular, de Soto praised what had become a well integrated legal property system. Where once the poor had been excluded, policy makers gradually developed legal means to include them in the formal economy. Only recently, has that earlier inclusion been tested, as a growing lack of access to the properties of knowledge use translates into mortgage exclusion for lower income levels.

Even though lower income levels have greatly benefited from the use of credit, this tool is far more useful when it can be applied to further wealth creation. Yet all too often it is now applied to the extensive commitments required for economic access, instead of broader property frameworks for knowledge use. Unfortunately, governments and special interests alike have gained from their extensive requirements. Yet these costs stand in the way of what governments are now able to provide for their citizens, which only means further fiscal pressures as well. Of property, de Soto writes:
Property, then, is not mere paper but a mediating device that captures and stores most of the stuff required to make a market economy run. Property seeds the system by making people accountable and assets fungible, by tracking transactions, and so providing all the mechanisms required for the monetary and banking system to function. The connection between capital and modern money runs through property.
Alas, the accountability of our real estate is not yet reflected in the recording of our knowledge and time based product. Small wonder that the normal activity of money is distorted, when time based product lacks transparency and clarity. Also remember that the wealth of physical property is a result of our own active engagement in the economy. As technology assumes more of the production responsibilities for our physical goods (meaning less labour force participation in traditional areas), citizens will need greater responsibility for knowledge use across the spectrum, just to maintain the earlier connection with physical property. Already, this connection is being threatened, as central bankers retreat from mortgage access to lower income levels - even while reducing existing mortgage responsibility on their balance sheets.

One step forward, two steps back. Again, consider Adam Smith's warnings from centuries earlier, how nations experience setbacks in progress if excess revenue is allocated for "unproductive" endeavour. Even though some recognize this problem; what is not widely recognized, is how the high skill sets Adam Smith labeled unproductive, need organization on terms by which time based product becomes productive. Otherwise, goods production alone will hardly be enough, to sustain the growth capacity of nations in the years ahead.

Still: for fiscal policy, a certain degree of non productive funding is always possible. After all, it is reasonable to expect government revenue for skill sets which further the purposes of government. The problem in the present, is that subsidies for time value have been carried well beyond the skills sets which contribute directly to government functions. Nevertheless, the normal "maker" and "taker" arguments only distort what is actually at stake. These arguments become meaningless, as important "takers" (i.e. not building product output) receive subsidies which completely distort any assistance which governments might otherwise provide for citizens in need.

Even in the best of circumstance, governments cannot cross the "finish line" first via fiscal measures. As technology continues its substitutes for labour force participation across the economy, much of that participation can be turned towards the building of knowledge use capacity for entire populations. But in order to do so, knowledge properties will need the same legal care and attention, that physical properties received, centuries earlier. It's time to make debt formation less about wealth capture, and more about wealth creation, once again.

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