Thursday, March 29, 2018

Is a Different Form of "Middle Class" Possible?

Much about life has changed, due to a transitioning middle class which has also migrated toward higher income levels in recent decades. In a recent Project Syndicate article, Mohamed El-Erian notes the consequences of income polarization:
From the anchoring role in society of the middle class to the agility and resilience of mid-size firms, the middle has long been regarded as consistent with both individual and collective wellbeing. Yet, in recent years, the middle has become less stable, less predictable, and more elusive.
One can't help but notice how tradable sectors sometimes respond to income polarization, given this state of affairs. Consumers are increasingly frustrated when they can't locate goods of medium range quality. In recent years, I've purchased plenty of household products which functioned so poorly they promptly went in the trash. With a little luck, perhaps local 3D manufacture will eventually recover some basic design features that permit everyday household items to work properly.

Nevertheless, tradable sector quality issues remain a minor quibble, compared to non tradable sector production issues - issues which affect the life of anyone with a small income, at a more fundamental level. What of Mohamed El-Erian's hope that a strong middle could "be reclaimed if policies adapt quickly enough"?

Alas, it's not so simple. A strong middle has been possible for centuries in advanced nations, due to tradable sector dominance. Tradable sectors ensured reliable, measurable growth in output which also translated into gains in aggregate income. However, long periods of tradable sector dominance encourage societies to devote more resources to human capital investment, which can result in excess debt formation and input requirements that detract from aggregate output. Once non tradable sector dominance comes to the fore over extended periods - such as has recently been the case - there's less aggregate output to provide sufficient revenue for a full range of income levels. At this point, excess human capital requirements (knowledge production input) in relation to actual output, becomes a drain on national debt levels and aggregate productivity.

If this weren't problematic enough, both tradable and non tradable sectors have come to rely on core and peripheral employment. While core employment is all but necessary for many to fulfill life's essential obligations, chances are that future core employment on present day terms, may not extend beyond 25 percent of workplace requirements. This would leave approximately 75 percent of a given population, poorly equipped to meet the production and consumption demands of today's non tradable sectors.

Therefore a different kind of "middle class" response might become necessary, if citizens are to remain in anything resembling a normal life - at least in advanced nations. Instead of hoping that lower income levels might somehow be amended, a more productive response would be to target good deflation in a broad range of non tradable sector activity, so that small wages can go much further than is now possible. Hence a simple question: How might the benefits of good deflation, become associated with non tradable sector production?

One way to think about good deflation for time based product in particular, is the creation of a steady state for time based services, so as to maintain input and output for knowledge based production at the same, measurable level. Even though time arbitrage wouldn't actually create good deflation, neither does it generate internal inflation. This steady state process for inputs and outputs, would eventually reset service sector output levels at a higher level. Gradually, aggregate output would become easier to measure, and general equilibrium conditions could return to a normalcy capable of restoring a wide range of tradable sector options in the marketplace. One reason this approach could prove so beneficial, is due to the fact that costs for non tradable sector production have outweighed the societal benefits of tradable sector good deflation, particularly since the Great Recession.

Targeted good deflation strategies for non tradable sector activity, would help those who can't always meet the expansive expectations of present day middle class status. What's more, a decentralized steady state services sector, could help to restore the full monetary representation which has been compromised by human capital valuations in today's non tradable sector activity.

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