Tuesday, March 21, 2017

Symmetric Compensation as an Economic Option

In other words: I don't suggest symmetric compensation as a repudiation of the status quo, but as a counterpart to equilibrium conditions which are more tightly defined than generally realized. Symmetric compensation would allow individuals within specific groups, to coordinate time value in ways that allow an additional level of economic access. Best: the process for doing so, would take place as new wealth generation.

Symmetric compensation includes room enough for meaningful coordination of multiple skills levels. This could prove particularly helpful, if the asymmetric compensation which individuals seek on merit based terms is in short supply, for whatever reason. The equilibrium constraints of asymmetric compensation are a major concern for me. Yet I'm still trying to develop a simpler language, for those who aren't economically inclined, why I believe purposeful economic responses are so vitally important in the first place.

It's imperative that I learn to do so, for this project might eventually fizzle out if I don't gain sufficient clarity for the average layperson who comes across my work. Books such as "Thinking Like Your Editor" (2002) by Susan Rabiner and Alred Fortunato, are apt reminders of what is at stake. The authors stress the importance, of knowing who your audience consists of. And just because something is compelling to authors, is not necessarily enough to make it compelling to others.

Some may recall that last year I began organizing material more closely, for a series which will eventually be located on the sidebar of the blog. Since the beginning of this blog I've worked on material that is actually intended for several audiences. Hopefully, the divisions for (eventual) book material will help with those designations.

One conversation last year in regard to audience considerations, essentially came down to this: why did I believe it was so difficult to access important services? After all, if I was willing to take the effort, plenty of marketplace options were already available. Those same options for time based services were also available to others, as well. Why was I making economic access, appear to be such a difficult process?

To the extent services can be available (at least in some areas), my challengers were right. If I wanted or needed something enough to go the extra mile, chances were I could find a way to make it happen. Indeed, a similar rationale applies for one's personal efforts in securing work. If one wants employment "badly" enough, the determination to do so, can be apparent to others. Hence the different economic approach I've suggested, sometimes appears as though an affront to systems already in place.

Yet it is not my intent at all, to deride or dismiss what exists now. When I envision existing work and service options as a constrained equilibrium, my framing doesn't quite make sense, to those who live and work in these demanding environments on a daily basis. One mostly finds the clues of constrained equilibrium, in governments whose citizens are becoming less inclined to share either jobs or services with anyone they perceive to be "outsiders" in some important respect. Consequently, the political framing often becomes construed as politicians who "don't have enough humanity", to maintain even the basic sets of knowledge use one expects to find in a civil society.

I don't disparage the fact that gaining success and "the good things in life" takes tremendous effort. Personal diligence and stamina are most deserving of societal reward, and we celebrate those who are successful for good reason. Nevertheless, people can be quick to assume that those who fall behind, just didn't want success enough to really try. Sometimes that's true. But how often does this assumption arbitrarily condemn those who don't make the cut?

After all, the result may not be one of isolation for a day or a year, but possibly a lifetime. Basic income, even if it should one day prove feasible for large nations, would be a lousy consolation prize for those who would have preferred real connections to life challenges. Indeed, basic income would come to symbolize a door permanently closed, because it became too difficult to envision economic opportunity for a full range of aptitude and skill potential..

Just the same, no one should be expected to rely solely on symmetric compensation, if such methods prove inadequate for personal aspiration. Everyone deserves the chance at a merit based asymmetric income, wherever such an approach is possible. Rather: the bigger concern is one of a lack of economic choice outside the constraints of a too narrowly defined equilibrium. A lack of economic options, could become associated with permanent societal divergence in intellect and ability. That's one "natural experiment" we can only hope will not play out, for much longer.

And it could, if tomorrow's automation taps mostly the highest skilled individuals, while abandoning others to low skill "leftover" jobs. There's no reason for such a dystopian reality, if knowledge can remain integrated across all levels of skill and ability. This is what symmetric compensation could make possible, so that patterns in knowledge use do not diverge any wider than necessary, in the long run.

Saturday, March 18, 2017

Notes on Productivity Considerations

In a recent Brookings article re productivity, the authors wrote:
Improving workers' productivity increases their value in the labor market. It is the main mechanism by which they are able to command higher wages and improve their well being...it will be very hard for incomes to rise without increases in productivity.
Alas, we've been trying to improve worker productivity for a long time, as the costs of human capital investment now attest. Yet human capital investment costs fly in the face of sluggish wage realities. What is the real underlying issue?

Since wages have scarcely risen for decades, it helps to remember why wages were able to rise for so long. Wages rose because output was steadily rising, in relation to other production factors. It's difficult to stress this enough, especially given the level of today's ongoing human capital investment.

There's further rationale for sluggish wages besides a diminished long term growth trajectory. The dominance of today's non tradable sectors are nonetheless dependent on other revenue streams. This is why - instead of being an active contributor to additional growth - these areas maintain a relatively stationary level of output.

Whereas formerly, when tradable sector activity was dominant in developed nations, increased output meant new growth, increased profits and rising wages for a larger percentage of the workforce. In recent centuries, this form of organizational capacity proved a reliable route to rising wages. As time based service sectors gradually expanded in relation to the earlier structure, productivity in terms of potential output, fell at the same time.

What is important, however, is not that high skill (or other) time based services are "unproductive". Rather, they are productive in ways which - while still valuable wealth contributors - don't readily translate into higher wages for more than a limited segment of any population. Consequently, time based services generation would greatly benefit from a new understanding of productivity. Labour abundance and its associated lower wages is something to be reckoned with for the foreseeable future. Hence it's time for a new institution: one capable of turning this unforeseen event towards a broader societal gain.

How might such an institution respond? Imagine a local and decentralized equilibrium, in which the initial product on offer is time based services. These services would generate new wealth, as each individual purchases time units on offer from others. Each matched set of time value would serve as paid "mini loans", to generate active use of knowledge, skill and other focused endeavour. Each set would be backed by asset value and a "safety net" framework of mutually desired activity.

In this setting, the nominal representation of wealth is relative, as contrast with the output that is sought. Even though one's time value might be compared to a small wage, an entire basket of services provides matching possibilities for one's own skills capacity. This time based output could prove quantifiable and easier to account for, than the asymmetrically compensated skills sets which are often buried deep within other institutional functions. And since technology is integral to the process, previous worries about wide variations in skills, would be easier to address.

For tradable sector activity, productivity is a result of output gains from the gradual reduction of labour hours. Even though the time arbitrage described above is a stationary level of time (or labour) output, the gains accrue in terms of time quality and group costs for services which otherwise require the additional factor of extensive human capital investment. In time arbitrage, the investment process accrues gradually, with each individual an active part of skills building and knowledge utilization.

Best: more service product would eventually become available for less cost, than what is presently necessary to achieve a productive outcome. What's different is how the organizational capacity arrives at this result. Lower costs for time based service formation, allow an altogether unique level of nominal income and asset formation, from what is often expected in general equilibrium conditions.

To sum up: output for time based product is a fixed quantity, which makes it different from the often capital intensive structures which so contributed to productivity in the past. Human capital of all kinds exists at an internal level, which has yet to be fully acknowledged in the marketplace. Today's changing output structure need not be a threat, if this new pattern can be harnessed so as to eventually bring the costs of knowledge use within the reach of entire populations. Just as tradable sectors continue to bring a wide variety of goods within the reach of small incomes, the same could also be accomplished for services. A new way to envision service productivity, could more than compensate for a future which includes the lower wages of abundant labour.

Thursday, March 16, 2017

Musings on Healthcare Circumstance

Healthcare in the U.S. has a long way to go, before policy makers find acceptable solutions for all concerned. But how long has it been since a sufficient level of choice existed? Clearly, today's healthcare cannot be considered a free market in the same sense as goods or other commodities. In the event today's existing supply side requirements were left to chance, the result would be a far cry, from anything resembling free market conditions.

How did healthcare become so impervious to improvements which citizens could feel comfortable "getting behind"? An apt quote from Josh Barro recently made the rounds:
All healthcare is unpopular because healthcare is 1/6 of our economy, but nobody wants to spend 1/6 of their income on it.
Even though it may appear that overuse of healthcare is the pertinent issue, many of us know individuals who try to avoid a doctor's office unless absolutely necessary. Indeed, not all these individuals are necessarily limited by wages in doing so. Nevertheless, healthcare continues to crowd other economic activity in the marketplace - in part because of how its incentive structures are aligned.

In a broader sense, the inefficient organizational capacity of healthcare could also be negatively impacting international monetary flows. How so? First, consider that even as the Fed attempts to maintain economic stability in the U.S., it also bears a degree of responsibility for a worldwide level of resource capacity. That's how important the Fed's influence became, for monetary flows in the twentieth century. But consider the juggling act the Fed seeks at home, as it attempts to counter any potential internal inflation, regardless of the source, via a 2% inflation cap.

Unfortunately, these hard limits on aggregate spending capacity - even as pressing real economy factors continue to be neglected - are leading to further sectoral imbalance. Consequently, healthcare's internal inflation contributes to the current Fed tightening cycle, which gradually diminishes total resource capacity even as other developed nations are attempting to maintain sufficient aggregate spending capacity. In all of this, Washington attempts to cut long term healthcare expenses by trimming the provision of healthcare, altogether. Of this current tightening cycle, Charlie Billello of Pension Partners writes:
In stark contrast, the Bank of Japan (BOJ), Bank of England (BOE), and European Central Bank (ECB) have all cut rates since December 2015. 
Clearly, there are many contributing factors to the Baumol effect other than healthcare. Even so, this sector is a major component of today's open-ended equilibrium approach to the redistribution and nominal compensation of time value and human capital. And yet even though U.S. healthcare costs are high in relation to other developed nations, that's not to say single payer markets don't face their own sets of problems in terms of marketplace choice.

At a basic level, the problem which exists for healthcare, is like that for many other forms of time based product: inadequate representation of overall time value in the marketplace. One reason it is so difficult for healthcare to provide sufficient price signals in the U.S., is the fact price signals first need to coordinate resource capacity which is fully represented. Unlike a wide range of resource utilization in the marketplace, overall time value is woefully underrepresented in terms of system potential.

Since time aggregates are a fixed scarcity in relation to the random scarcities of other resource capacity, the option of time value in relation to itself, would finally make free markets in time value a reasonable option. Further, time value as a price signalling process, would particularly help democracies which now face tremendous struggles in their attempts to coordinate welfare states. In order for healthcare to gain free market options in terms of choice and preference, more participants need to be brought into the process.

Tuesday, March 14, 2017

Technology and the Second Law of Thermodynamics

How might one think about economics as a system which is subject to the second law of thermodynamics? Specifically, are the input and wealth gains of present day technology, sufficient to maintain positive growth and the avoidance of entropy?

After all, economic activity is like other organic systems in this regard. Should economic activities be subjected to a certain amount of isolation (or insufficient energy input), ultimately the larger system may be in an increasing entropic state. Or, one might say economic dynamism refuses to "stand still" while yielding a "guaranteed" set of benefits, even if various NIMBY or protectionist factions wholeheartedly wish to make it so.

Can technology overcome such impulses? John Tamny is among those who remain convinced technology assures a positive economic outcome. In a recent Forbes article, "Notwithstanding the Warnings of the New York Times, Economic Growth is Limitless", he writes:
What the Times is revealing, either on purpose or unwittingly, is that ever there was some truth to the popular notion among economists about "limits to growth" all of it goes out the window with the ongoing rise of robots.  
And of a recent piece by NYT economist reporter Neil Irwin:
If Irwin is to be believed...too much economic growth has an inflationary downside.
John Tamny responds, "But it doesn't." What's at issue here? Considering the fact that today's aggregate output continues to take place via relatively less aggregate input, how do fewer inputs affect the system overall? Particularly if less energy may in fact be entering the system, even as technology makes the system more efficient. Which suggests more entropy could actually exist than is readily apparent. I was reminded of the second law of thermodynamics by a recent post from Shawn Parrish which highlighted both Steven Pinker's recent musings on the subject and Eric Beinkocker's "The Origin of Wealth", an excellent book which also takes the problems of isolated systems into account.

What economic components are particularly important for system energy? Money could be considered the nominal component of "system energy", since it is a direct expression of the real economy components of aggregate output and time value. However: an important consideration, is whether money as a nominal expression, maintains an anchor for both aggregate time value and output in the relevant system.

As I've noted in recent posts, sometimes technology is used not so much to contribute to additional output, but instead to reduce the costs of an already given level of output - particularly for important forms of product which involve time value. Ultimately, if a substantial amount of economic activity utilizes this process, it could result in a nonexistent to slight increase in output, as technology contributes to a still diminishing level of (nominally represented) time based input. Given this reality, the second law of thermodynamics may suggest problems for system stability.

To sum up, it's easy to imagine that technology contributes dynamic input in a reliable and constant relation to ever increasing economic output, yet this is not necessarily the case. If a growing percentage of output is not reliably recorded for GDP, there's little point in pretending that otherwise subjective gains are going to somehow make up the difference for system balance. Indeed: for centuries, technology has proven capable of expanding system boundaries via additional output. Now, system boundaries are becoming murky as they are increasingly defined in terms of exclusive outcomes.

Sunday, March 12, 2017

It's Time to Counter The Baumol Effect

Indeed, I've provided numerous accounts and rational to do so for some time, even if I've been slow to come out and voice this sentiment directly. But first: what, exactly, does it mean to "counter" the Baumol effect?

After all, the Baumol effect provides a vital time/asset value coordinating mechanism for citizens with a similar degree of related resource capacity. Among the growing problems with this coordination approach, however, is (thus far) it only takes place via a single set of general equilibrium conditions. Global factors can contribute to time use imbalance as well. Generating more nominal "space" through such a setting only becomes more difficult over time, once economies are less dominated by resources and commodities, and more dominated by human capital factors.

It's important for me to be specific re the post title, because I do not mean "counter" in the sense of opposition or reaction. For instance, I've tried to confront what is gradually becoming a stronger resistance, to knowledge application across broad marketplace settings. Just the same, far too much knowledge use is presently murky and open ended, which means it is capable of detracting from the stability of fiat monetary wealth formation over the long term.

Knowledge use patterns of the present don't mean knowledge redistribution via fiscal means is "wrong", or that the resulting negative budgetary circumstance is specifically anyone's "fault". Rather, knowledge use via taxation and income redistribution has been a traditional societal response to wealth creation, as long as anyone can remember. In many respects, it's a process which has contributed to further wealth creation, as well.

Nevertheless, populations can only tap knowledge dispersal via fiscal measures (during productive cycles of growth) for so long, before the mechanism falters. I have basically argued at times that the Baumol effect could be countered by organizing knowledge use via decentralized paths or settings, capable of creating knowledge/skill wealth via internal means. Most important, doing so would make it possible to utilize a much broader range of knowledge and skill capacity, instead of being forced to rely primarily on those who "make the cut" of general equilibrium requirements for knowledge use.

Due to present day over reliance on the skills coordination of general (national) equilibrium, the Baumol effect creates a single level of societal expectation. In this setting, skills variance of every variety conceivable is placed in harsh contrast with other options for general equilibrium access. This problem goes well beyond the obvious societal or cultural framing, for it also contains distinct monetary challenges. There's an expected nominal aggregate level of value for important forms of time based product, which poses problems for the economic entry of every potential skill set, which might otherwise contribute to new wealth.

This murky nature of today's knowledge use, also generates an open ended claim on nominal income aggregates - a process which encourages central bankers to arbitrary close the loop of economic entry, too soon. While the Baumol effect is stressful in a time of growing middle class polarization, it is quickly becoming precarious for the poor, as evidenced by recent events in Washington.

If only the present dilemma were really a simple story about "makers" and "takers" in an economic pie which stubbornly "refuses" to expand, and the political actors which represent all concerned. Instead, this tale is greatly complicated by the interactions between primary and secondary markets: particularly since the wealth of the latter actually exists in a dependent (i.e. "taker") position not directly observable by populations as a whole.

Hence part of the story is about "grandfathered in" special interests which generate Baumol effects that now pose limits on a previously dynamic economy. Further, much of this income moves into a passive "holding position" in the form of limited velocity real estate, once it is generated. Since the real estate of productive regions is closely tied to Baumol effects, this reduces economic access across multiple areas of the economy.

What if the Baumol effect is not somehow effectively countered? William Baumol called this problem a disease for good reason, because it involved sectoral crowding and imbalancing which could eventually destabilize both the values and conditions of general equilibrium. In other words, this force is likely a component - albeit in today's unique circumstance - of potential civilizational decline. What specifically needs to be considered?

1) The wrong economic factors still get the bulk of attention and blame, for uncertainty regarding long term economic stability. Consequently, reform effects in these areas are not as helpful as they might appear, with finance in general as a prime example.

2) Important time based services are losing their potential for broad applications, as indicated by the recent struggles over healthcare in the U.S. The skills and knowledge coordination emblematic of upper middle income levels, can no longer be expected to readily diffuse to broader populations. Which is why these groups need to assist the groups which will increasingly need to organize on more decentralized means in the near future.

3) Until this occurs, monetary policy will likely continue to tighten, even if only via passive processes that rely on the wrong statistical indicators. What is not recognized is the degree to which supply side structural shifts presently contain their own real economy tightening factors, which in turn monetary policy inadvertently follows. Perhaps due in part to the Baumol effect, the Fed has relied on the ineffective tool of inflation targeting. However, over time this worsens the already low level of economic participation. Equally problematic is a gradually increasing tendency to ignore both supply side and monetary factors as central to monetary policy discussion.

Possibly, the end of the twentieth century may have been a turning point in terms of balance between tradable and non tradable sector activity. Indeed, a number of studies from several years earlier captured this dynamic and was briefly discussed, only to be summarily dismissed as a point of purposeful discussion. It was a defining moment, when some began to realize education was no longer was no longer a guarantee of productive economic engagement. For instance, in 2014, Nick Bunker at the Washington Center for Equitable Growth mused that policy makers may need to rethink "the conventional wisdom" and he continued:
Education would have to recede in importance when we consider long term policy...Instead, policies that boost demand for workers of all education levels would need to be fleshed out. It's a sobering thought but one we all need to examine more thoroughly.
If only discussions such as this had continued! What is all the more striking, is a recognition of the underlying problem at a most basic level. Nevertheless, the same educational lottery ticket options continue to play out as the defining factor for economic access. High skill application is of course needed as a broad percentage of today's available work. Yet the need for further high skill investment in aggregate decreases, as college graduates end up in jobs with fewer skills requirements, which further displaces lower skilled job applicants at the same time. The present equilibrium settings only have so much room for human capital investment capacity, yet these settings could be changed.

Crucially, the millennial moment and turning point of the year 2000, further highlighted a sectoral shift which had begun decades earlier. Over time, it becomes more difficult for the wealth of primary market activity to reliably supply crucial forms of non tradable sector activity with additional growth. And yet the ever present educational expectations also keep the Baumol effect alive and well.

Again, it's best not to ignore what is happening, so that destruction of knowledge based wealth does not eventually occur by default. Equilibrium stability could be restored, by focusing on skills capacity across the entire spectrum of life. However, until greater equilibrium stability is actively considered, some who rise to power in the years ahead may become more insistent on destroying the Baumol effect, through far more direct means than the ones which I've advocated for.

Friday, March 10, 2017

Time Sequencing and Economic Complexity

Given the partial nature of general equilibrium in terms of growth potential, how to encourage a broader range of economic complexity? After all, some possibilities under consideration, are not so much about labour as gradually being replaced by robots and automation, but rather the kinds of economic time interaction which could prove capable of preserving social identity and purpose.

Even though some of this interaction would doubtless remain "low skill", anyone can respect the fact this skills flexibility is what individuals often prefer in time based service interactions. When skill level isn't paramount for either one's time compensation or product outcome, individuals find it easier to contribute to the nature of time based product, via the mutual participation it suggests. Hence preserving group identity would particularly depend on the integration of a wide range of skill sets, among all who take part in knowledge use systems.

One way to think about this thorny issue, is to consider where a broad array of overlapping time sequencing already exists in populations, and where it does not. Wherever the overlapping of designated economic activity remains thin, individuals and groups alike suffer, because social isolation tends to be the result when there is little reason to join other groups other than a need to overcome loneliness. Indeed, one's attempts to access a very limited range of economic or cultural options due to personal loneliness rather than common interests, tends to be self defeating.

Nevertheless: before individuals or groups could be comfortable embracing the time sequencing of new economic complexity, formal recognition and validation would be needed, given the level of personal commitments involved. Yet once these permissions are in place, group participants would eventually gain more economic options, and more courage, to take a chance on finding purposeful time with others, once again.

Among the benefits of new templates for economic complexity, is that after a period of experimentation and development, this organizational capacity would also become capable of self regeneration and sustainability. In other words, the ability to create new wealth via one's own efforts, also means that local revenue and organizational structure would exist which is not at the mercy of external monies or redistribution, just to maintain its social cohesiveness.

Only consider the fragility of so many rural environments of the present in the U.S. Many of these exist in their current form mostly because of the extensive redistribution which takes place in the form of retirement and disability payments. Often, if retirement pensions do not also contribute to this mix, such communities have insufficient local structure for formal time sequencing, other than local schools, possibly a non profit office or two, religious affiliations and a smattering of local retail. Even families in these places tend to travel elsewhere, for much of their time based production and consumption. That's not a lot of potential for time sequencing for local citizens, where individuals might go to freely mingle with others on terms that are mutually understandable and agreeable.

Over time, the internal wealth creation of knowledge use systems could generate economic complexity which allows not just the additional time sequencing of time based product, but also other forms of output as well. If anyone needs any reminder why it is so important for average citizens to contribute to new forms of 21st century wealth creation, one only need remember earlier government reactions to the Great Depression, and how those reactions "contributed" to "wealth formation". The all too recent Great Recession - in many ways - was a contained depression which still has not been confronted on the crucial supply side terms which matter most. And somehow, I don't think many of us really want more worldwide war as a response to insufficient economic complexity.

Wednesday, March 8, 2017

Some Thoughts on Labour: Then and Now

Why has labour been considered integral to all economic activity - at least until recently? If labour matters because of the consumption it makes possible, one's time input matters, in part because of what it allows us to experience. Even more than labour, time provides a human component which is also expressed in nominal terms. Adam Smith notes that labour is "the real measure of the exchangeable value of all commodities". From book one of "The Wealth of Nations":
The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it...What is bought with money or with goods is purchased by labour, as much as what we acquire by the toil of our own body...Labour was the first price, the original purchase-money that was paid for all things.
But though labour be the real measure of the exchangeable value of all commodities, it is not by that which their value is commonly estimated. It is often difficult to ascertain the proportion between two different quantities of labour. The time spent in two different sorts of work will not always alone determine this proportion. The different degrees of hardship endured, and of ingenuity exercised must likewise be taken into account. There may be more labour in an hours hard work than in two hours easy business; or in an hours application to a trade which it cost ten years labour to learn, than in a month's industry at an ordinary and obvious employment. But it is not easy to find any accurate measure either of hardship or ingenuity. In exchanging indeed the different productions of different sorts of labour for one another, some allowance is commonly made for both.
Every commodity besides, is more frequently exchanged for, and thereby compared with, other commodities than with labour. It is more natural therefore, to estimate its exchangeable value by the quantity of some other commodity than by the labour which it can purchase. The greater part of people too understand better what is meant by a quantity of a particular commodity, than by a quantity of labour. The one is a plain palpable object, the other an abstract notion, which though it can be made sufficiently intelligible, is not altogether so natural and obvious...Hence it comes to pass, that the exchangeable value of every commodity is more frequently estimated by the quantity of money, than by the quantity either of labour or of any other commodity which can be had in exchange of it.
Smith stressed that while equal quantities of labour are always the same to the worker (one's time is fixed), potential employees will value our work somewhat differently or randomly. Nevertheless: what's important for the individual, is the real or marketplace component of one's production/consumption transactions. The real component of our time engagement, buys a certain amount of life's necessities and conveniences. Whereas the nominal component of a labour/time transaction is the money involved, which does not designate a certain amount of purchasing opportunity.

Consider the nominal aspect of labour (or time) value in general equilibrium terms. Even more than in Adam Smith's time, labour value is difficult to discern in relation to other resource capacity; particularly as the gap between aggregate output in relation to actual labour output, only continues to grow. Still, nominal labour value needs a constant monetary relationship with total resource capacity, despite the fact these vital components are at variance across the spectrum of resource potential.

As Smith noted, it is what labour can purchase that is important, not the money that is involved. Unfortunately, it appears the labour theory of value could have been partly responsible, for a diminished focus on wealth as accruing from reductions in product costs. Little doubt, rationale re time investment as "necessary nominal value" for labour's contribution to product, carried over to educational requirements for a wide range of professional time based services. Consequently, many time based services have yet to benefit, from the real economy factor which makes mutual wealth gains possible.

One danger of perceiving consumption in mostly aggregate demand terms, is forgetting that consumption gains re real economy factors are crucial to wealth. As Adam Smith stressed, "The labourer is rich or poor, is well or ill rewarded, in proportion to the real, not the nominal price of his labour." In closing, this quote from Smith reminds me of present day arguments for nominal stability via a level target:
Labour, therefore, it appears evidently is the only universal, as well as the only accurate measure of value, or the only standard by which we can compare the values of different commodities at all times and at all places.

Monday, March 6, 2017

Have Libertarians Abandoned Economic Freedom?

Granted, this post is not about libertarians who give the identification a bad name by promoting free markets for some individuals. Indeed it has become all too apparent where some of those sympathies actually lie, as "fair" trade gains a new and unexpected meaning. Rather, my concern is libertarians who are quite moderate in outlook by comparison, and generally support a wide range of viewpoints.

The problem? A passive approach to advocacy of economic dynamism is no longer enough, as the hopes of many who support free markets are now being dashed. That's a shame. Moderate libertarians could have better aligned with the public in recent decades, to preserve the freedoms that are so vital for economic stability.

How could anyone forget, that economic participation is part and parcel of economic freedom? How could anyone not see that - as populations gradually lose their economic and social connections, political unrest would be the result? Yet some have yet to be convinced, re decreased labour force participation as important for political, social and economic outcomes. For instance, in a recent post, Arnold Kling called labour's share a "macro-Marxist concept", and likened "organizational capital" to what a company such as Google might capture in the future - irrespective of the actual employment involved.

What is organizational capital, if not human capital at the core, as noted by Ryan Avent and others? Indeed, organizational capital is crucial to the 21st century version of wealth. Organizational capital provides means for people to better their lives and assist one another in the process. Yet what's being missed, is that too much organizational capital remains aligned so as to be utterly dependent on preexisting wealth.

This shrinks the potential of organizational capital, and leaves it dependent on the definitions of special interests and governments. A lack of organizational capital in aggregate, also accounts for the fact prosperous regions are becoming off limits for the average citizen. Even the single category of construction, points to a sector which has not been allowed to experience innovation or growth. The consequent severe lack of productivity in a crucial area of life, hurts every citizen, and contributes yet another category in which the U.S. lags other nations.

It's understandable that libertarians have yet to carve out sanctuaries for economic freedom, since institutional evolution is part of the process. But it's not as easy to understand, how so much ground has been lost in other areas of economic freedom which were once taken for granted. As moderates of many persuasions have faltered in their support of free markets; like libertarians in general, they are becoming an endangered political species .

Fortunately it hasn't always been this way. For centuries, citizens had good reason to believe free markets would remain capable of contributing to long term growth in the foreseeable future. In this context, requests not to destroy inefficient markets "too quickly", made good sense as well. There's no need for production reform to endanger existing wealth or otherwise distort equilibrium value - which is why I've suggested a slow approach for the introduction of time arbitrage as a direct form of wealth creation. In an introduction to Adam Smith's "Wealth of Nations", Richard Teichgraeber, (1985), provides an apt reminder of the usefulness of a "take it slow" approach:
Smith thus concluded Chapter II, Book IV, with a cautious program of practical advice for statesmen and legislators who might happen to embrace his views. In the first place, he remarked that any thoughts of suddenly laying open the domestic market to freer competition were dangerous as well as utopian. While free competition would destroy the "great manufactures" of Britain, Smith saw no cause also to squander the capital they had invested in paying workmen and maintaining the material instruments of their trades. So the choice he posed was not regulations versus no regulations, but finding reasonable ways of eliminating or counterbalancing the worst regulations. An "equitable regard" to the interests of monopolies and corporations, as well as the more "extensive view of the general good," required that changes be made piecemeal - or, in Smith's words, "slowly, gradually, and after a very long warning." The task for government here was not simply one of restraint. The marketplace for Smith was a world of preexisting adversary relationships where government often must play the role of disinterested yet pragmatic judge. On the question of monopolies, what he hoped for was not the utopian world of pure laissez-faire, but instead a more pragmatic concern "neither to establish new monopolies of this kind, nor to extend further those which are already established. And the same spirit of pragmatism would later govern his remedies for the "mental mutilation" that was threatened by the division of labor...
Why is this passage so relevant now? Today's greater threat to wealth creation and long term prosperity comes not from swift destruction of what is shown to be inefficient and impractical, but the abandonment of the effort to do so. When moderates disappear, it becomes increasingly difficult to focus on the worst regulatory atrocities. In other words, the "very long warning" has been forgotten and replaced with entrenched interests to such a degree, that long term growth and prosperity are now threatened. Indeed, no one need worry about lost wealth from dismantling monopolies "too soon", when the real concern is whether the long term growth trajectory can be restored.

Saturday, March 4, 2017

Level Target Hopes vs Open Ended Claims

Perhaps encouraged by positive signs of late, Scott Sumner makes a prediction:
I am going to go out on a limb and predict that we are now entering a new Great Moderation, even more stable than the 1985-2007 period. Let's start with what we know.
We are only a few months away from being eight years into the expansion. This 8-year period will likely be the second most stable in all of American history, outdone only by the ten years of stability from 1991 to early 2001...the recent stability of NGDP growth is about the same as during the 1990's albeit averaging somewhat below 5%, rather than somewhat above 5%. 
He goes on to give seven reasons why he believes this could be the case, some of which are reasonably persuasive. Nevertheless, monetary stability is normally linked to political stability. If central bankers are within range of this goal, why so much political instability in the present? Plus: as market monetarist James Alexander wanted to know, has Scott given up on level targeting?

Granted, returning to the 2008 trend line is no longer a practical matter. Even so, I've plenty of sympathy for market monetarists who question whether nothing can be done re the present lackluster NGDP growth level. Even now, nominal income loss is an important factor in economic difficulties which continue unabated.

Which brings me to the post title: are hopes for a level target being dashed by open ended claims on nominal income? For one, open ended claims are indicative of firms which lack sufficient competition in the marketplace. According to Cyril Morong in a recent post "What Industries Have the Highest Profit Rates?""
For example, we expect firms in perfect competition to earn an average profit rate or rate of return because, if they are above average, more firms enter driving prices and the profit rate back down. When there is not enough competition, firms can stay above average.
Morong then highlights a Forbes article re the most lucrative industries of 2016, which explains in part why these firms don't face normal profit margin constraints. What are the most lucrative? From the article: "The answer depends on how it's measured, but based on pre-tax net profit margin, the top money-makers include specialty service providers in accounting, law, health care and real estate."

Only remember the open ended claims on nominal income these activities consequently pose, and the level of relative inflation they generate in relation to the good deflation and productivity of many traditional firms in more normal competitive settings. Do the open ended claims of these competition constrained firms, keep the Fed (through crowding out) from printing sufficient nominal income for all concerned?

Indeed, this situation also poses problems for fiscal revenue availability, as governments are more inclined to seek revenue from firms they are not as closely associated with; firms which also tend to have more tangible forms of output and lower profit margins. For instance: retail has seen more than its share of problems in recent years. This sector would take a hard hit from border tariffs, regardless of how they may be defined.

Consider how the technological gains which augment professional service income, tend to maintain an already existing output level instead of contributing to growth. In aggregate, these dominant service sectors with their low productivity and secondary market position, mean fewer total output gains, but at the same time, reduced aggregate input particularly in the form of nominal income. In all of this, less revenue remains available for the hopes and dreams of further government economic activity, regardless of political party. Does anyone really wonder why immigrants who don't even come close to the definition of "bad hombres", are being chased out of the country?

As a market monetarist, I am grateful for the victories that have been achieved, in terms of the Fed becoming more careful about maintaining nominal stability. Still, I would be most hesitant to claim victory too soon, especially since some of the more important challenges have scarcely begun, in terms of true economic stability. We continue to live in a world which is losing labor force participation - an unfortunate circumstance that doubtless affects both nominal income potential and full economic engagement.

Thursday, March 2, 2017

Capital Strengthening, the Fed's Balance Sheet and More

In a "perfect" world, the Fed would not need a large balance sheet, to begin with. Alas, that's not the circumstance presently, given the lack of economic dynamism and investment opportunity in spite of Wall Street gains. Which is why I agree with those who remain concerned about unwinding the Fed's balance sheet, too soon. A few weeks earlier, David Andolfatto also reasoned there could be fiscal advantages in maintaining the balance, for now. Larry White at Alt-M argued otherwise, and here's Andolfatto's response. Larry White sums up in his post:
The principal cases for normalizing the Fed's balance sheet are (1) the Fed should not distort the allocation of credit by holding trillions in MBS and (2) normalizing the size of the balance sheet would allow the Fed to normalize the conduct of monetary policy by making bank reserves scarce again. There is no fiscal-free-lunch case for holding off on normalization.
While I agree with Larry White that the balance sheet isn't really conducive for fiscal "opportunities", the bigger issue is maintaining economic stability and the overall valuation of general equilibrium conditions. What's concerning is that hawks and doves alike are anxious for normalization (whatever that may be), even though many recent monetary policy responses stemmed from economic problems which have yet to be addressed, according to their structural underpinnings.

Caught up in today's normalization "wishful thinking" is an even bigger issue. Is monetary history"as we know it", in jeopardy? As Nick Rowe writes, "all that remains is the boring technical work of bringing central banks implementation of that policy closer and closer to perfection." He continues:
How will the end of The End of Monetary Policy History affect investment? I think it would cause investment to fall. And that fall in investment (as a percentage of GDP) would cause the long run GDP growth rate to fall. And this fall in the growth rate would happen even if the growth rate of employment were unaffected by the end of The End of Monetary Policy History...We need a regime change. But instead all I see is that the demand for a monetary policy regime change is slowly sliding down the agenda as the world's economies slowly "recover". This is not what "recovery" is supposed to look like. 
Suppose that good fortune eventually prevails, and the monetary policy history that matters, doesn't fall away. In that case, we might also have occasion to ask: What took place (structurally) which made a large balance sheet appear necessary in the first place? Central bankers need a bit more patience. One can only hope that policy makers aren't anxious to unwind because no one believes substantial capital strengthening is possible. After all - if this is the case - deflation could indeed occur, should policy makers act too quickly.

What could be done? One way to think about what's involved, is the continuous interplay of fixed and circulating capital, as described centuries earlier by Adam Smith (he also considered education investment a form of fixed capital). In our time, much of the dynamism and velocity of circulating capital, has gradually been captured as fixed capital. While much of fixed capital over the centuries has been associated with growth and output, today's fixed capital often is expected (instead) to generate specific revenue flows. This is one reason why general equilibrium valuation, now in delicate balance via Fed balance sheets, has become such an important factor.

For instance, too much nominal income is expressed as fixed human capital in the guise of formal education and mortgage activity - in relation to other market activities. Nevertheless, the fact nominal income has become narrowly defined, is all the more reason to protect a large Fed balance sheet until this circumstance has a chance to change. It's important not to destabilize the asset values of general equilibrium in the meantime, in part because governments rely on these valuations for their own circulating capital.

Meanwhile, the process of capital strengthening can begin. Once all individuals play a greater role in circulating (human) capital, more nominal income can be expressed in active terms. Even though this new velocity would take the form of local knowledge use and services participation, it would gradually help restore the kinds of monetary normalcy which really count. Indeed, circulating capital in the form of human capital, would ensure an economic normalcy which I suspect might be an improvement over the "normalization" processes which policy makers want to achieve on our behalf.