Thursday, June 13, 2019

Baumol Effect Recognition is a Good Starting Point

A recent back and forth regarding the Baumol effect among various bloggers (and their commenters) is quite encouraging. For instance, Arnold Kling (here, here and here) and Bryan Caplan also responded to Alex Tabarrok's posts, Scott Alexander reviewed the book, and Scott Sumner adds some thoughts re healthcare. Just the fact an important structural feature such as this is getting some attention - when distraction tends to be the norm in times of political and cultural turmoil - is cause for celebration.

For that matter, services which contain substantial time centered components, haven't really benefited from serious consideration. Yet this is somewhat understandable, since service sector dominance only came to the fore (at least in recent historical memory) in the latter part of the 20th century. For the most part, only a decade earlier, it seemed time centered services were little more than an afterthought in most online discussions. I recalled some discussion for instance about low skill service providers such as restaurant and retail work. In recent years the dialogue is turning towards high skills services capacity. And time centered knowledge or high skill services as final product, may include economic ramifications we've only begun to discern.

Fortunately it's not necessary to solve the major mysteries of the Baumol effect in short order! For that matter, it appears to play a partial role in a larger foundation of how aggregate time value has come to be conceptualized. When William Baumol explored this phenomenon decades earlier, he may have been more interested in how it affected wage relationships at local levels, in what could be considered an income smoothing effect for skills coordination among divergent groups in cities or regions. Interestingly enough, he didn't seem concerned it would later prove problematic for the nature of general equilibrium monetary flows.

Part of the mystery is how service sector activity tends to mostly level off at around 80 percent of GDP before stabilizing in a mature economy. Why such a high portion of GDP, if one considers the extent to which (for instance) manufacturing levels also impact service sector levels? Perhaps the wealth of housing assets is a factor, especially since much of this is reflected in the financial sector. How to think about the supply side limits of housing wealth, in terms of productive agglomeration? Might the high skill wage limits of the Baumol effect also contribute to the relative scarcity of productive agglomeration?

The relatively recent dominance of service sector activity is an apt reminder, how young economics as a science really is. In some respects a new process of theoretical adjustment could just be getting started, should we be fortunate enough in the years ahead to maintain today's degree of relative economic normalcy! Meanwhile, the wealth of recent high skill services dominance is a major contributing factor, to the increasingly blurred line between public and private activity. It's incredible to realize how different things were, only a century earlier. By way of example, Paul Samuelson, in Economics, noted the earlier clarity of government roles:
Prior to World War I, local government was by far the most important of the three. The federal government did little more than pay for national defense, meet pensions and interest on past wars, finance a few public works, and pay salaries of judges, congressmen, and other government officials. Most of its tax collection came from liquor and tobacco excises and tariff duties levied on imports. Life was simple. Local governments performed most functions and depended primarily on property taxes for their finance.
It's been a long time since life felt that simple. Still, something interesting about Why are the Prices so D*mn High? was the authors' confidence that the Baumol effect was more of a positive than a negative. Will this prove to be the case? It depends. Can society come to terms with the fact real wage gains will need a different approach in the foreseeable future, given the recent limits suggested by this phenomenon? Hopefully, yes.

Monday, June 10, 2019

The Visceral Nature of Economic Freedom

What is economic freedom? How is it different, from the political freedoms which have long been more widely discussed? For one, economic freedom is closely linked with psychological health and well being. Yet this connection has often been misunderstood, despite the millions who risk everything to build a meaningful life through self employment and entrepreneurship. Are the potential economic patterns which might help preserve freedom at its most basic level, simply too boring to discuss? Or are they actually misconstrued as a form of undesirable economic planning?

Unlike the intellectual arenas of political freedom, much about economic freedom is instinctive and personal in nature, hence not always as easy to put into words. Yet much that comprises the foundations of economic dynamism, results from countless individual struggles to preserve one's dignity and self respect in society.

Economic freedoms are also about the circumstance and resources which people have to work with in the here and now. Since freedom is generally discussed at an abstract level, more mundane aspects of economic freedom can easily get lost in translation. Consequently we are more often reminded what freedom is not, than given clear scenarios what personal freedoms might actually consist of. I recall a similar lack of understanding nearly a decade earlier, after reading Hayek's The Road to Serfdom. As it turns out I wasn't the only one. In their recent conversation for Medium, Tyler Cowen asks Russ Roberts which Hayek book influenced him the most:
That would be Fatal Conceit. It's certainly not The Road to Serfdom, which is the book everyone tells me they've read or that they plan to read. I say, "Don't read it. It's really slow going...The style is even more turgid than some of Hayek's other work."
For those who are fortunate, economic freedom helps to preserve social connections later in life when it otherwise might not be possible  to do so. Paul Samuelson detailed some of the incentives and difficulties of the self employed in the 11th edition of Economics, noting how many small scale efforts are doomed from the start, "When the owners' initial capital is used up, they are finished":
Who, on a Sunday jaunt to the shore or mountains, has not pitied some self-employed drudge, whose own efforts and those of the entire family hardly suffice to let them break even? 
Still, people will always want to start out on their own. Theirs may be the successful venture. Even if they never do succeed in earning more than $15,000 a year, there is something attractive about being able to make your own plans and do the variety of tasks that a small enterprise or franchise operation calls for. 
In the almost four decades which have passed since those words were written, how many still recall, just how basic is our desire for social inclusion in a viable economic context. Especially those of us who strongly relied on such framing, to help make up for our own social inadequacies! Recently I came across a study suggesting small business ownership could contribute to happiness and well being, and found myself wondering, isn't that already obvious?

Perhaps these differences between the mundane reality of personal freedoms, versus society's more lofty versions, is part of what stands in the way of a small government approach on the part of today's political parties. If so, it might help explain why those who have been left behind, remain neglected. It's easy to assume the poor consist of people who either haven't tried, or aren't willing to. But among these, are also plenty who have tried, and also started anew, many times. Millions of us embraced and thrilled to those fleeting moments of business success for all they were worth. There's many a fading photograph and local news story of once dynamic Main Streets to tell those stories, and some of them are our own. Have the earlier personal benefits of economic freedom simply become too mundane for a 21st century economy? Once again, Russ Roberts:
But most people who are poor are poor because they do not have the tools, the skills to contribute to the modern economy. They have circumstances that keep them from rising. I've been deeply saddened by the failure of people on so-called our side - the people who believe in smaller government - to think at all about that, to think at all about human flourishing by the people who are struggling. I think that has been a terrible mistake.
At the same time, we've failed to make the case for freedom, and to the extent that even saying that seems foolish...It's not literally true, but the last prominent politician, I think, who made the case for liberty and freedom in and of itself was Maggie Thatcher. Reagan, to some extent, also, but Maggie Thatcher did it relentlessly. That's so out of fashion in our times. We've become so consequentialist. The idea that liberty is a principle worth defending in and of itself is really, really difficult. 
I find it strange that people tie small government to the Republican party. The Republican party doesn't make the case for liberty...We don't have a political home for our ideas and I think the intellectual home has failed badly for our inability to make the case, either for liberty in and of itself, and to understand how and why people who are being left behind by our economy, and what policies might help them. I think that's an utter failure of our side, and it's a tragedy. 

Saturday, June 8, 2019

The Paradox of "Too Much" Productivity

Is it possible for some firms to be "too" productive? Considering how productivity gains have stalled in developed nations, or what such losses imply for future living standards and long term growth, why the recent focus on making successful endeavour a little less productive? Should enterprises learn to scale up too well, does it become necessary to draw the line?

More specifically, it looks like we've got problems in today's digital marketplace. There are players in this arena who have mastered something that many companies have only dreamed of: the ability to scale to such a level, that a majority of possible gains are in fact being captured. Hence the digital realm oddly appears "too" productive, in an economy which otherwise continues to suffer from a general lack of productivity. In a post for Project Syndicate, Diane Coyle explains the dilemma:
Digital markets often become highly concentrated with one dominant firm, because larger players enjoy significant returns to scale. For example, digital platforms incur large upfront development costs, but benefit from low marginal costs once the software is written. They gain from network effects, whereby the more users a platform has the more all users benefit. And data generation plays a self-reinforcing role: more data improves the service, which brings in more users, which generates more data. To put it bluntly, a digital platform is either large or dead.
Perhaps it would be a good idea to think twice before moving in for "the kill". Why not focus instead on responding to - and improving - markets which not only lack the ability to scale via the same means, but remain short on economic access. After all, today's most prosperous digital firms have created an array of product which provides benefits for millions of users, not just high income consumers. Much of this marketplace is of a discretionary nature, for that matter. If one doesn't care for some forms of digital products, generally it's no loss to simply not use them. Whereas the markets which pose real problems, also suffer from both lack of innovation and marketplace access - even though they tend to be non discretionary in nature. By far the most prominent examples are housing and an array of time based services.

In all of this, there's no such thing as "too much" productivity, just as productivity gains need not mean the ultimate loss of meaningful employment. However, in order to preserve economic dynamism, a different approach to scale may become necessary, than what companies have capitalized on in recent centuries. To some degree, traditional forms of scale may have even reached a temporary zenith, given their present lack of new market possibilities at local levels. How, then, might society proceed further from this vantage point, in ways which also continue to improve standards of living?

Let's renew our focus on the economic activities which are closely linked to place and time. Not only do these include our more personal aspirations, they also don't scale up in the same traditional sense that came to be associated with technology and the Solow growth model. Presently, what's most important in this regard, is that alongside use of the Solow model, vast quantities of productivity gains are simultaneously being lost to requirements for human capital inputs. The reason this matters, is that extensive losses are occurring in what is organized as dependent forms of economic activity. Human capital with an intangible veneer, can reduce total factor productivity to such an extent that standards of living end up reduced as well. There is danger in assuming that "intangibles" need not be measured, especially if no other viable options exist for services generation.

Human capital has the potential to function as a direct source of wealth creation, via the time use standardization of symmetric alignment. Where this process differs from traditional scale, is that human capital becomes central to economic processes, and no longer functions as a production residual. Gains in scale in these instances, come from measurable population gains in applied skills and abilities. Time arbitrage as a formal economic unit, makes possible a continuum in which knowledge and skill accumulate over time, thereby creating new means for the measure of productivity gains.

The good news of course, is that time value in the form of human capital, has actually provided similar productivity gains in the past. Successful societies have formed a continuum many times over, for the shared experience of applied knowledge and skill. Even though many recent aspects of knowledge and skill have inadvertently become rival in nature, it's possible to return the use and preservation of knowledge to all citizens.

Fortunately, productivity is about much more, than just the form of scaling up which requires gradually reducing labour to generate final product. When human capital is integral to final product, everything changes. And time value in a wealth creation context, gives the ability as well, to put long term productivity gains back on a steady course.

Sunday, June 2, 2019

Does the Baumol Effect Impact Long Term Growth?

What might the Baumol effect suggest for continued future prosperity? Kudos to Eric Helland and Alex Tabarrok for exploring this issue in "Why Are the Prices So D*mn High?". Tabarrok has been following up with a series of explanatory Marginal Revolution posts as well. For instance, in "The Baumol Effect" he notes the growing cost differential between education and cars:
Yet the rising costs in the education sector are simply a reflection of increased productivity in the car sector. Thus, another deep lesson of the Baumol effect is that to understand why costs in the stagnant sector are rising, we must look away from the stagnating sector and toward the progressive sector.
Regular readers may recall that even though the correlation isn't perfect, I generally refer to "stagnating" sectors as non tradable, and "progressive" sectors as tradable. Tradable sectors benefit from a degree of mobility which often allows them to escape cost constraints imposed by various forms of NIMBYism and many other factors which inhibit innovation. Whereas non tradable sectors haven't been as fortunate, due in part due to the fixed nature of their connections to time and space. Thus far, it's been difficult to try radically new approaches for building components in municipal settings which have long relied on centuries old physical infrastructure. Likewise, professional services remain burdened with societal expectations regarding the inputs supposedly necessary for quality product.

Helland and Tabarrok particularly focus on services generation. Healthcare, along with professional services such as legal, accounting and other business services, " increased in price by a factor of more than three since 1950." Their findings are apt illustrations as well, how stagnant sectors reflect the aggregate wealth generating capacity of general equilibrium. By way of example, statistics for long run trends showed that
The growth rate of healthcare expenditures per capita has declined because the growth rate of GDP per capita has declined.
Should we be concerned? They claim that "The Baumol effect explains a slowing rate of productivity growth and the reason the Baumol effect will decline", and continue:
The price of services relative to goods has been rising because productivity in services has increased more slowly than productivity in goods. At the same time, the services sector has been growing as a share of the economy. In 1950, for example, services accounted for approximately 60 percent of the economy, measured as a share of either GDP or employment. In 2018, services accounted for approximately 80 percent of the economy...Because society is moving more resources into lower-productivity sectors, the inevitable result is slowing net productivity growth. 
However, what if this is actually a positive outcome?
Even though shifting resources to services is slowing down the rate of productivity growth, the shift itself is not a bad thing. Over the past 60 years, consumers have used their higher incomes to buy relatively more services than goods. It is unfortunate that productivity is not increasing faster in services, but faster productivity growth is good only if it increases consumer satisfaction. Shifting resources to the service sector increases consumer satisfaction even if it reduces productivity growth. There is nothing wrong with a future world in which consumers spend most of their income on live musical performances. 
Dietrich Vollrath is another economist who isn't alarmed by these developments, and he refers to the recent slowdown in productivity as "optimal stagnation". As it turns out, he's in the process of publishing a book entitled Optimal Stagnation: Why Slower Economic Growth is a Sign of Success. Given the extent to which tradable sector activity has cut costs for centuries already, perhaps one might reasonably ask, how much do standards of living really need to improve?

Nevertheless, it doesn't hurt to question whether this is a stable reality since - unlike tradable sector markets which create something for everyone - non tradable sector options are now mostly geared for middle to higher income levels. Plus, the lack of options for those with low wages isn't just about consumption opportunities, but in particular those of personal production. Areas lacking in economic complexity, especially illustrate this reality. Not only are they hard pressed for the revenue required to build new traditional housing, but also that of traditional services generation. And since economic activity in general has assumed a lower gear, there are relatively fewer city jobs for rural residents, who in the not so distant past, tended to spend their most productive employment years in prosperous cities and regions.

Indeed, more communities in the near future might start to find themselves in similar circumstance. After all, since the Baumol effect only extends so far in a low growth economy, more citizens will need to accept lower wage employment than the revenue sources many municipalities and governments actually need, to maintain today's services and traditional infrastructure patterns.

Granted, a reduced Baumol effect might prove mostly benign. That said, many real economy adjustments are needed which have not yet even begun to take place. Of course, as Helland and Tabarrok stressed, quality product is a good thing. Who wouldn't want the luxury of experiential goods and services that are well within reach of one's income?

Even so, no one should expect an economy which remains essentially incomplete at low income levels, to be enough. In recent centuries, societies have standardized many product specifications which have improved standards of living across the board. Now it is feasible to also standardize time units, so that quality services might ultimately be generated for all income levels. It is feasible to standardize basic flexible building components, so that settings for life and work might easily be arranged and rearranged as needed. With a little luck, services professionals and municipalities won't stand in the way of the low wage millions who now need to create their own organizational patterns for services generation - not to mention entirely new industries in physical building components and infrastructure.

Thursday, May 30, 2019

Wrap Up for May 2019

What happens when money is really fiat bling?

"The Fed's inflation-targeting framework has forced monetary policy to be too tight for the better part of a decade."

The Spring issue is out for the JEP. (Timothy Taylor)

A standing repo facility would benefit from a corridor system.

It's still slightly more difficult to find a job now, than it was at the peak of the last business cycle peak in 2006. And job finding probabilities are still lower than in 2000.

"Five Myths about Federal Debt"

"Slow productivity growth is hugely consequential."

Iowa remains a testing ground for presidential hopefuls. Yet they are stymied as to what can be done.

This may turn out to be the best news of the year...
"Scientists from Berkeley Lab have made a next-generation plastic that can be recycled again and again into new materials of any color, shape, or form."

Democrats are increasingly the party of the young.

Ricardo Hausmann exposes the danger of merit and the prestige equilibrium.

Diane Coyle provides some highlights of a flourishing discipline.

Just finished reading A Godly Hero: the Life of William Jennings Bryan by Michael Kazin (2006) and found it unexpectedly fascinating, both as a biography and history of his times. For one, my knowledge of the early Progressive movement has been somewhat limited. Hence I was surprised how much of its origins weren't necessarily secular and urban, but also rural and religious in nature. My previous knowledge of William Jennings Bryan was mostly limited to his advocacy for silver, at a time when the gold standard had quite a negative impact on farmers. Many a monetarist for instance, recalls Bryan's Cross of Gold speech from his younger days.

Remembering Alice Rivlin:
from Brookings
        Timothy Taylor
        Arnold Kling
       David Henderson also highlighted an oral history.

Increasing non discretionary demands on income have made rising wages less "freeing" than was previously the case. Even without wage stagnation, births are still at a 32 year low as of 2018.

Speaking of birth rates...
"Even after three decades under the ban, Romania's birth rate had not increased."

In the U.S., "17 percent of all 18 to 24 year-olds" are out of work.

Sebastian Edwards notes mistakes Latin Americans have already made with MMT. "In each case, the central bank was controlled by politicians, with predictable results."

"Nine ways to prevent future recessions."

"Big business is not running the show. If big business was running the show, President Trump never would have been elected."

Trade hawks are not doing the U.S. and China any favours.

It's no simple matter to give up what is known, for the unknown.

"...our visions of past collapses are typically seen through the eyes of its most privileged victims."
And, "Modern civilizations might be less capable of recovering from deep collapse than their predecessors."

Even though doctors may not be statistically in short supply, their skills are still needed in rural areas.

"If a house was designed by machine, how would it look?"

"Monetary policy ten years after the crisis"

It's time for Harriet Tubman to replace Andrew Jackson on the $20 bill.

A thirteenth consecutive year of decline in world freedom.

Why do holidays provide more memories?

Neighborhood amenities can make a positive difference.

"Why are the prices so d*mn high?"
"It is great when we can substitute a good from the progressive sector for one from the stagnating sector, but we should not confuse statements about substitution with statements about productivity growth." (page 41)

In contrast with other developed nations, "US home prices declined sharply after 2007."

I too was dismayed at the recent outrage over currency manipulation.

David Beckworth "goes back in time" with Robert Samuelson to discuss the great inflation.
Even though Robert Samuelson isn't related to Paul Samuelson, they both had long writing stints at Newsweek. Incidentally, I recently read the latter's "Economics From the Heart: A Samuelson Sampler", which reprints nearly half the articles Paul Samuelson wrote for Newsweek between 1969 and 1981. There was plenty of discussion about the constant inflation problem during those years, which made Beckworth's recent talk with Robert Samuelson all the more interesting for me. Robert Samuelson worries that should high inflation once again become a problem, people might adjust to the point of rationalizing it. Indeed I noted some of that tendency in Paul Samuelson's later articles for Newsweek.

As it turns out, that old Paul Samuelson paperback gives me added perspective for his 11th edition of "Economics" (1980), which is one of my summer reads. I'm only 45 pages in, and already surprised how many text examples have been "revisited" of late. For example, Eric Helland and Alex Tabarrok explain the production-possibilities frontier (guns and butter) in the above linked PDF, "Why are the prices so d*mn high?"

Federal debt is not a popular subject right now!
"...more immediately, higher interest costs would force a political budget squeeze."

"Three-fourths of the decrease in labor share in the United States since 1947 has come since 2000."

What is meant by a precise inflation indicator?

"Aggregate implications of changing sectoral trends"

"Understanding weak capital investment: the role of market concentration and intangibles"

Summer is already upon us, and thankfully I haven't fallen too far behind with my writing schedule. Just 20 more subheadings to review in the last chapter, before starting the final edit. With a little luck, I'll have this first book ready to publish, sometime in early fall.

Friday, May 24, 2019

Supply and Demand Still Determine Equilibrium

Supply and demand are conceptual basics not only in microeconomics, but also for economic activity at the macroeconomic level. However, Raj Chetty recently returned to Harvard with a different introductory approach in mind, than what Greg Mankiw has taught. Mankiw's basic emphasis and textbook contributions have likewise been utilized by other universities for some time. Interestingly enough, Chetty also aims to make his course a model for other schools. An article for Vox by Dylan Matthews, explains:
The courses could hardly be more different. Chetty has made his name as an empirical economist, working with a small army of colleagues and research assistants to try to get real-world findings with relevance to major political questions. And he's focused on the roots and consequences of economic and racial inequality...
There's little discussion of supply and demand curves, of producer or consumer surplus, or other elementary concepts introduced in classes like Econ 10. There is no textbook, only a set of empirical papers. The material is relatively cutting-edge. Of the 12 papers students are required to read, 11 were released in 2010 or after. Half of the assigned papers were released in 2017 or 2018. Chetty co-authored a third of them.
Is econ 101 broken across the university system, as some now believe? Granted, students aren't being well prepared for a world in which markets do frequently fail. But what if markets function poorly because they have gradually become less complete, not "broken"? If so, it would seem that supply and demand remain as relevant as ever.

If introductory economics students aren't acquainted with the basics of supply and demand in the near future, it may only become more difficult for the average individual to envision the less than optimal trade offs between sectors which are presently occurring at system wide levels. Lack of understanding in this regard, further inhibits the potential of public policy responses as well. Given this reality, a stronger emphasis on supply and demand is needed, not less. Already, non tradable sector dominance has considerably altered how many aspects of supply and demand play out in the marketplace as a whole.

What also encouraged me to write this post was a recent conversation between Tyler Cowen and Ezekiel Emanuel. Their discussion provides an apt example of supply and demand dynamics in general equilibrium, for high quality services which are dependent on other sources of wealth origination. When Tyler Cowen pressed him on physician shortages, Ezekiel Emanuel noted the existing human capital investment burden, and why it's better to task shift going forward instead of adding more doctors:
once you train a doctor, it's basically a million dollars or more.
That's quite a societal burden! And since today's healthcare is organized as a market which is dependent on general equilibrium dynamics, adding more doctors would only drive up the cost for all concerned, in ways which subtract other aspects of general equilibrium potential. Yet even though the supply side would appear relatively more adequate, this general equilibrium dependence on a limited revenue pie, dilutes salary potential. In other words, a lose lose scenario. Hence Emanuel adds:
Medicine is a classic case of supply-induced demand. Doctors write orders, and they have a certain income in mind, and they will do things to get to a certain income, and especially on the margins, where what's called unnecessary care, or low value care.
He would like to see more tasks assigned to other health professionals, even as physicians remain in control of the outcomes. That said, hierarchy is vitally important for how healthcare is currently structured. Which means the desire of physicians as a group to maintain control over both income and the processes of patient diagnosis and response, could make task shifting somewhat difficult. This poses a problem, given recent changes in demographics and also healthcare losses in regions without sufficient economic activity.

In the meantime, worsening budgetary realities for healthcare compensation, suggest a different approach is needed for applied knowledge in general. In recent years I've suggested the horizontal patterns of time arbitrage, which would make it feasible for services to more directly align as wealth creation, rather than budgetary burden. Symmetric organization of time as an economic unit, could also make it feasible to integrate healthcare with other high skill services activities via deep learning AI.

Even though we don't yet know, whether more physician supply might be deemed "necessary", the real issue for many physicians is to be able to preserve human capital investment in its current form. Indeed, a horizontally aligned knowledge use system would likely pose less of a threat from without, than the internal reforms of traditional healthcare that could make it difficult to preserve the integrity of human capital value for physicians today. When services markets such as healthcare are dependent on other sources of wealth, societies can only generate supply side high quality human capital, up to a point. I remain convinced that since this point has basically been reached, given today's low growth economy, it's time to pursue more direct means, for the continuation and preservation of high skill knowledge in the 21st century.

Friday, May 17, 2019

GDP and the Reciprocal Volunteerism Factor

Volunteer activities are important for any community. Yet many take forms which make them impractical to designate as formal transactions that include monetary compensation as a part of GDP.

That said, there are important exceptions which might gain validation in the near future. From a wealth creation perspective, the greatest economic significance of social interchange is due to specific voluntary transactions between individuals which can be directly reciprocated. After all, these activities may contribute to the personal welfare of both participants, since both are included in the identity enhancement process of voluntary provision.

The most beneficial social exchange for economic purposes, consists of two participating sides in specific and timely transactions. By way of example: While the positive nature of "pay it forward" processes could be loosely considered a two sided voluntary exchange, its tendency in groups is infrequent in nature, while providers and recipients are not directly reciprocal. This helps explain as well another name for paying it forward: "random acts of kindness". Consequently, paying it forward may not occur frequently enough to strengthen trust or group cohesion. What's needed are regular and ongoing patterns of reciprocal volunteerism, for mutual assistance to become a replicative and spontaneous process.

Many who have felt powerless at some point in their lives, instinctively understand the value of mutually agreed upon negotiation for the supply and demand of time based services. Well designed platforms for services supply and demand, could help individuals go beyond efforts they might normally expend for their own families and friends. People especially need such patterns when they lack employment which encourages negotiation and social interchange in the workplace. Yet too much of this activity has been assigned to rigidly formal patterns in present day institutions. When specialists and professionals do most of the negotiating on behalf of the average individual, there are few remaining possibilities for voluntary reciprocity, or the identity reinforcing nature of mutual assistance which keeps us civil and humane.

What about forms of volunteerism which continue to function best informally - especially insofar as GDP is concerned? When we volunteer to help someone without a request on their part, we also (generally) don't expect them to reciprocate. While our assistance may still have positive results, random services supply without expectations on the part of recipients, can make it difficult to discern whether group social circumstance are positively evolving over time.

Also, domestic responsibilities in the home tend not to be the best candidates for the measure of GDP. Indeed, much of this activity revolves around personal preferences for spending time in one's own home environment. In other words, while work is certainly involved, it is generally of a much freer nature than most workplace norms, even to the extent of functioning as a form of positive experiential product. Fortunately, home for most individuals, at least during many stages of life, continues to be the main place where people actually have the most freedom to do as one wishes. The better part of home obligations today are choices, rather than absolute necessities.

Nevertheless: As more aspects of production continue to shift towards automation and technological support, societies will need to reconsider the relatively informal terms by which neighbors might provide voluntary services for one another. For that matter, the more that mutual assistance is spread among as many participants as possible, the less likely that anyone ends up taken for granted in such exchanges. It's easier for everyone concerned, when maintaining one's self respect is feasible in services exchange. Only recall that when individuals lack social norms re reciprocating for assistance, many will refuse to ask or accept - sometimes even if they are in dire need.

Another factor in terms of potential reciprocity, involves economic options such as guaranteed jobs or a basic income. Guaranteed jobs present problems in terms of external decision making as to what "needs" to be done, or what is "worthy" of being done. Without adequate input and negotiation on the part of all participants, guaranteed jobs miss the point. For instance, when external decision making determines the jobs provided, few are going to be willing to give up their own meaningful work, just so that others might have employment.

Likewise, some assume that a basic income could allow recipients to "do their own thing". Alas, while this approach could help in the short term for unexpected emergencies, long term it would be little more than an existential path to despair. Being expected to "do "one's own thing" indefinitely, is still social isolation, with little hope of returning to meaningful interaction with others. Indeed, the basic income approach would mean the least amount of group alignment among all possible economic options, in terms of local supply and demand for mutual assistance.

Granted, it would take considerable effort to decipher the supply and demand possibilities which individuals might seek to voluntarily provide one another. But once such processes are set into motion, the rewards could eventually prove worth the effort, for it would give individuals the chance to rediscover their natural inclinations for mutual exchange.

Tuesday, May 14, 2019

Is Targeting Productivity a Good Idea?

Would it be reasonable for the Bank of England to have a productivity target alongside its inflation target? Probably not. In response to a recent report which suggests a productivity growth target of 3% per annum, Frances Coppola offers explanations why attempting to target productivity in this matter could present problems:
This target is extremely challenging. A footnote in the report notes that labour productivity growth since 1950 has averaged 2.4%, and describes the proposed uplift of .06% above this average as a "small increase". Forgive me, but an increase of 25% in the rate of change is not by any stretch of the imagination "small". It's an absolute whopping hike, particularly when you take into account the fact that in the 1950s and 60s the labour force was much smaller due to lower immigration and female participation, and the UK was rebuilding after WWII. In a mature economy which is 80% services and which has nearly full employment of both men and women, that 3% target looks well-nigh impossible. 
There was also lack of clarity in the report, what aspects of productivity might actually be targeted, hence Coppola noted labour, capital, and multi-factor productivity as possibilities. What about capital, for instance?
The fact that the rate of return of capital has been falling for the best part of forty years could suggest that capital is not being deployed efficiently. 
However: Recall that as returns on capital have fallen, the services component of the economy has been rising, and has only recently stabilized at present levels in mature economies. Chances are the decades long shift in dominance between tradable and non tradable sector activity, holds considerable meaning for how capital potential translates into marketplace realities. After all, time based services in particular face not only natural scarcities but also artificially imposed scarcities, which further limits aggregate output for applied knowledge. Since much of today's capital investment is closely linked with human capital investment, non tradable sector output includes higher levels of professional income, rather than tradable sector profits which tend to be more widely dispersed among key staff, employees and shareholders.

There's probably little that central bankers can do directly, to encourage productivity gains. It's up to participants in the real economy to make this happen, and differences in organizational capacity will also be needed before significant productivity changes are likely for some non tradable sectors. In any event, central bankers aren't well positioned to positively impact present levels via productivity targets.

Alas, mature economies do need productivity gains in the near future, if living standards are to continue improving for future generations. But what can be done? Presently, a non linear approach might be necessary, which is another way of saying much of the low hanging fruit for productivity potential has already been picked, via more obvious linear means.

Any non linear approach would also benefit from a broader framing re general equilibrium dynamics. Toward this end, aggregate output potential can be considered through a total factor (or multi-factor) productivity lens. For instance, how much of today's time based product in non tradable sectors could be likened to a knowledge production factory?

Once we envision inputs and outputs on these terms, one problem quickly comes into focus. Unlike the direct alignments of tradable sector supply chains, many non tradable sector inputs which could translate into applied knowledge settings, are mostly haphazard and partial. Processes of learning in this regard, presently extend across a wide range of diverse institutions which are only indirectly linked to other institutions, if at all. Plus, it's difficult to discern what supply and demand for time based product might actually consist of, since much of the alignment is from individuals to multiple institutions, instead of individuals to individuals in group settings with a knowledge continuum.

Consequently, inputs which hold potential for use at most skill levels, greatly outnumber the outputs which are actually gleaned from the time based product of these supply chains. Imagine the problems this would create for the supply side chains of tradable sector activity, if only a mere fraction of their intermediate processes were useful to other parts of the supply chain!

Just as tradable sector activity has often combined many separate activities into long term knowledge continuum, an institution is needed which can perform a similar function for diverse high skill services in the present. Fortunately, it's possible to turn many aspects of formal education and human capital investment into input which could simultaneously function as output. Instead of attempting to target productivity in an effort to achieve long term growth gains, why not turn time value into an economic measure which provides greater focus for input, even as output is simultaneously increased. Time value as resource reciprocity could ultimately mean more productivity gains, than has been possible thus far with the input/output imbalance of today's high skill non tradable sectors.

Thursday, May 9, 2019

Does Price Making Lead to a Zero Sum Economy?

Normally, price making in aggregate should not lead to this result. However, price making may imply not just a lack of resource coordination among private firms, but also economic activity which benefits from taxpayer support. Ultimately, much depends on the relevant sectors.

Likewise, economic dynamism may be reversed when societies overreact to perceptions of "ill gotten" gains. Venezuela provides one of the strongest warnings of our time, as to what might occur when citizens and governments overreact to existing prosperity by breaking up firms. All too often, such intentional destruction does little to preserve markets, for the products supplied up to this point. There is danger in placing excessive blame on the dominant tech firms of our time. Should these firms be broken up, it could lead to the loss of valuable product, especially for those who lack sufficient access to other platforms for knowledge and information dispersal. Whatever weariness or disillusion society may have with social media, it would be far better to create new economic patterns and systems for face to face interaction, instead of holding social media accountable for problems which in many instances it only bears partial responsibility.

Why do so many believe we are living with a zero sum economy? For one, non tradable sector dominance tends to lack the level of output that occurs during periods of tradable sector dominance. Unfortunately, price making as a way to reimburse extensive overhead costs (in lieu of limited output), can negatively impact aggregate output if practiced to excess over long periods.

Of course, economists and others regularly remind us there is no such thing as a zero sum economy in the long term, in aggregate. One observer put it this way:
In a capitalistic economy, in aggregate, there will always be more winners than losers. This is because the economy is growing in the long run and both parties benefit from an exchange.
Let's keep the faith in long run positives as best we can, since the short run has plenty of uncertainty. Even small examples of protectionism and zero sum thinking can cause further problems. Recently, zero sum thinking on President Trump's part, prompted him to impose a 17.5% tariff on tomatoes from Mexico. Many of us in Texas have already faced rising prices on fresh tomatoes for months, as it has gradually become more difficult for deliveries to cross the border in timely fashion. And given the lengthy wait those truck drivers face, by no means are tomatoes the only fresh produce being affected.

Is the supposed "product dumping" on Mexico's part a form of price making? Even if it was, low prices for commodities such as these, lead to a positive sum circumstance. There's more fresh food consumption than would otherwise be the case for lower income levels, more income for growers and workers and also retailers. Affordable produce for all income levels means more economic dynamism, not to mention health benefits. Seriously, is anyone really being hurt by tomatoes from across the border? After all, many tomatoes grown commercially in the U.S. are already slated for canning and other processing, instead of grocery store produce sections.

The price making that causes a structural possibility of zero sum circumstance, is when price making occurs in ways which pose clear limits for supply side potential. All the more so, when the production processes correlate with product linked to space and time, which only sets up additional negative ripple effects. However, the best way to ensure as much economic dynamism as possible, is to respond to price making by ensuring that price taking is also possible in the same markets that already contain natural scarcities. In other words, continue to provide real economic options, instead of destroying what continues to function in the here and now.

After all, creative destruction is not due to purposeful destruction. It's about the potential for societies to make new choices, not just in terms of both consumption, but also production.The best way to make certain we don't end up with zero sum outcomes, is to always leave room for the full coordination and market enhancement of price taking. All the more so, when product and services are already subject to the natural scarcities of space and time.

Thursday, May 2, 2019

Build New Realities That Reflect Where We Are

And by extension, what society already has, not to mention previous accomplishments on the part of individuals and groups alike. Continued economic prosperity need not be as difficult as some are inclined to make it out to be.

Ultimately, our economic settings are about much more than participation and contributions at the cutting edge of applied knowledge. For that matter, the biggest part of our working lives is composed of what we've already learned and done - albeit in new contexts. How might we ensure that the profits from the the cutting edge don't always have to be redirected for the ongoing maintenance of utilitarian knowledge and skill? If shared workplace activities are to be sustained wherever people choose to live, those activities need to contribute more directly to wealth creation. New organizational methods which combine workplaces in more accessible settings, could help ensure we remain able to pursue our life objectives and intellectual challenges well into the future.

Alongside the new knowledge of cutting edge endeavour, we also all have the good fortune to be "standing on the shoulders of giants". It's this wealth of preexisting knowledge and skill, which could revitalize so many communities that lack the ability to contribute at the level our most prosperous regions now experience. The earlier efforts of untold millions who came before us, hold plenty of relevance for what we continue to pursue in the here and now.

What's more, much of what we've already accomplished as individuals, could often be useful to others as they pursue their own paths in life. How might we make our own self improvement efforts more relevant to others on economic terms? Economic inclusion is not about forcing everyone to certain forms of skill and ability which present institutions may not even need, it's about exploring the possibilities of what we already have. Further investments in human capital for what we assume workplaces might need, aren't necessarily the human capital others would seek from us in a better aligned economic framework.

Formal aspects of human capital investment in particular are being questioned, as the bar for social and economic inclusion continues to be pushed ever upward. Today's definitions of quality product tend to come with assumptions that our already existing attributes are somehow "never enough" to take part in society as we are now. Still, when our time value is only allowed as exclusive quality product, even the most routine of services based activities are expected to transpire on these terms. In the process, societies end up budgeting for these forms of quality product in ways that further exclude those who don't meet the qualifications as they presently exist.

For these reasons and more, I sometimes find myself overwhelmed by posts and articles which call for higher wages as supposedly the most important guarantor of continued prosperity. Granted, substantial wage increases have been with us for a long time. But how much of these wage increases were actually derived from the output gains which resulted from centuries of tradable sector dominance? Is it not time to design environments which more accurately reflect the forms of resource capacity we presently hold? Because much of that capacity is now more closely aligned with the experiential nature of scarce time based product, instead of the output gains associated with tradable sector activity.

What prompted this post was an article from Daron Acemoglu for Project Syndicate, which left me somewhat deflated. In "Where Do Good Jobs Come From?", he writes:
Historically, no known human society has created shared prosperity purely through redistribution. Prosperity comes from creating jobs that pay decent wages. And it is good jobs, not redistribution, that provide people with purpose and meaning. 
Articles such as this seem to come with underlying assumptions. One would expect that wages "must" go ever higher for all concerned, so that we as taxpayers might continue covering the ever increasing costs of our governments and maintenance of our environments. It won't be easy to dissuade these high cost expectations for the sum total of our living and working environments, even though ever higher wages are only feasible up to a point, especially now. Plus, these expectations stemmed from centuries of tradable sector dominance which made extensive and costly forms of building capacity/infrastructure possible in the first place.

How can we build more flexible environments which are more responsive and better suited to changes in output scale, during times of non tradable sector dominance? Today, continued progress depends on a better alignment of overhead costs and gains from scale in applied time, alongside what money can contribute in terms of ongoing output. Much of this process means creating physical infrastructure and building components on more lightweight and flexible terms. By way of example, walkable communities will definitely need to include building elements for living and working needs which are transportable by means other than automobiles and trucks.

Fortunately, it is also within our ability to create good work with meaning, even when such work does not come with well compensated salaries. Importantly, however, meaning is subjective. What is fulfilling to one person might just be an aggravation to the next, and selection processes need to be more closely aligned with individual preferences. Time arbitrage in particular, should always be a voluntary process for flexible forms of work association.

In his article, Daron Acemoglu noted that "no known human society has created shared prosperity purely through redistribution". I would add that redistribution isn't just about money, because we can't redistribute applied knowledge from those whose time based product is among our most scarce resources. The only way that knowledge can be increased in society is through active dispersal via time increments - not just via education but in terms of actual use and economic validity. As to the latter, increased participation is necessary, if it is to happen.

Economic inclusion means less judgement as to what is "supposed" to take place in time based experiential product. Indeed, if we can come to terms with this possibility, there could consequently be less emphasis on lifetime education as means to survive a demanding society, and more emphasis on lifetime learning as one of many ways to meaningfully live in a society. With a little luck, this approach could lead to communities which accept widely diverse levels of knowledge and skill as valid paths to economic participation. Let's build stronger economic realities based on what we have already become.

Tuesday, April 30, 2019

Wrap Up for April 2019

Why was European colonialism in Africa held up as a successful example of a "tax-driven currency"?

Jeffrey Hummel provides an interpretation of MMT.

Recent trends in 3D printing.

Arnold Kling reviews The Third Pillar.

Isabel Sawhill: "Forget collusion, the problem is corruption and complacency."

Miles Kimball explains how the Fed has changed its operations since 2008.

Taking on the two party monopoly.

"The first challenge is rising government debt."

Tracking regional variations in economic opportunity.

The good news is that sometimes, sovereign debt can be solved when it appears to have already gotten out of hand.

Could skilled immigrants revive the heartland?

"Beyond 2020, world growth is expected to stabilize at around 3.5%,"
Also, Highlights from a synchronized slowdown.

He won his case, but will he get his Land Rover back?

What role should commodities play in Fed targeting?

"17 percent of young adults ages 18 to 24 are out of work in mid to large cities in the U.S."

The Tories have stopped trying to tell an economic story.

The loss of continuity can compound more quickly than is often realized.

"...non-manufacturing employment in the US appears to have been increased by Chinese trade."
The problem however is that new high skill services generation hasn't been created in areas which lost manufacturing employment, but - instead - areas which were already prosperous.

Econtwitter helped Diane Coyle put together a great list of books in which economics and philosophy intersect.

"...every dollar of government health care spending represents both care for a patient, and income for a provider, and both groups will fight hard against cutbacks."

It turns out the implicit inflation target was approximately 1.5%.

Nolan Gray provides a useful list of books which can help readers gain a better understanding of zoning issues.

"What Happened to U.S. Business Dynamism?"

"There is no straight line from agricultural productivity to high GDP per capita."

Taking value chains into account.

"work in futures is about patterns, not predictions."

It's difficult to get "mini estates" and urbanism at the same time. "Without density, there is no walkability."

The price of dryers went up by approximately the same amount.

The Medicare hospital trust fund will be the first to go.

Might "greater transparency and openness" actually be counterproductive?

"Economic geography bites back."

What are the roles of "public interest" versus "public choice" in occupational licensing?

Applications for disability have dropped dramatically.

Perhaps civic engagement would benefit from new marketing strategies.

How important is speed as a factor in production?

"Does federal debt hurt the economy more than we thought?"

While I've been aware of time as (too often) a luxury amenity, it turns out shade is in short supply as well.

"This is not exactly how a market for lifesaving medical devices is supposed to work."

Thursday, April 25, 2019

Centralization, Economic Freedom, and the Skills Divide

To what extent could individuals still govern themselves, in contrast with how nations tend to be envisioned as "governing ourselves"? This question has become increasingly complex and important, as societies rely more than ever on knowledge to get things done.

Self governance was a simpler option for example, when property owners could still eke out a living from a productive plot of land. Whereas much of today's production involves high levels of knowledge and skill, not to mention levels of social coordination which go well beyond familial responsibilities. In a world economy increasingly dominated by knowledge and skill, does that mean it is no longer realistic to conceive of economic freedom as meaningful choice in interaction among individuals?

Too many time based services have been unnecessarily subjected to losses of economic freedom, via forms of external organizational control which reduce the possibility of meaningful interaction. But unlike many forms of final product, time based services tend to be experiential in nature, which often suggests they could be effectively managed and negotiated by the individuals who voluntarily choose to take part. Time based product is different from the specifications of tradable sector product, in that it often assumes snowflake forms. Indeed, this particularly holds true when we are young and still actively engaged in educational processes. Without real possibilities for mutual voluntary services association, people can end up experiencing difficulties establishing healthy boundaries, mutual respect, and trust as they go through their lives.

Over time, divisions of labour for time based services have become restricted in ways which not only inhibit total factor productivity, but also limit the nature of how providers and recipients could otherwise experience the personal exchange. Put simply, externally defined divisions of labour make more sense for the precise qualities needed in tradable product, than for the experiential nature of time based services. What's more, the non tradable sector divide in skills use potential, has been perpetuated by liberals and conservatives alike.

Perhaps these implicit agreements among professionals affect economic conditions in ways not always considered. Pierre Lemieux provides some interesting context in "Lessons and Challenges in The Limits to Liberty" where he takes a closer look at James Buchanan's Limits to Liberty (1975). For instance, Lemieux noted Buchanan's support of individualism in the latter's quote "each man counts for one, and that is that", and then continues:
It follows that individual liberty is a value and that the social system should be based on unanimous consent. Any limit to liberty must thus be consented to by each and every individual.
Alas, where do we observe this presumed liberty in action, given the lack of freedom so many now experience in the use of their own time, especially in relation to the time of others? If we do not believe that a diverse range of services could be freely chosen and provided, how can we really believe in free markets in the 21st century? How much of the present fiscal budgetary dilemma is due to our governments ensuring services markets remain as unfree as possible, on behalf of the interests they protect?

Not surprisingly, it turns out there are limits to the freedoms which James Buchanan believed to be possible. For one, Lemieux emphasized how Buchanan argued in favour of government provision for public goods as a social or constitutional contract. Yet what's different in this instance, is Buchanan's reasoning for doing so. As it turns out, his beliefs regarding personal aptitude and ability also factor into his proposed economic outcomes.

In contrast to other contractarian theorists, Buchanan does not assume equality in terms of resource utilization or personal capabilities. From this it follows that some minimum of welfare state may therefore be necessary. Private and public goods both depend in part on the rules of the economic game, whereby freedom is mostly agreeing to take part in what is already proposed, or refusing to do so. It's easy to imagine that sometimes the state needs to intervene when people refuse. Doing so costs money. Hence this quote from Buchanan:
The dividing line between private and public goods depends, in part, on how the property rights of persons are defined.
The twentieth century gave rise to many domestic forms of applied knowledge protectionism, long before the tradable sector protectionism which arose more recently. Essentially, knowledge and skill has also been made rival in non tradable sector circumstance, in part because protected knowledge has to do the heavy lifting of meeting the organizational costs of quality product and costly real estate. And with the giving to special interests of these exclusive production rights, comes the rationale for a welfare state as well. Hence conservatives and progressive alike, would tend to view welfare as means to reduce public rebellion or even revolution. Indeed, I recall an instance among friends in a local welfare office decades earlier, where local progressives expressed the rationale of public assistance exactly in these terms.

Again, Buchanan is hardly alone in assuming relatively permanent differences in aptitude and human potential at the outset. After all, many progressive arguments for government job guarantees or some form of "living" wage, contain the same underlying assumptions regarding how workplace conditions and skills requirements "should" consequently be defined. Nevertheless these assumptions blatantly disregard the potential for mutual reciprocity and well being, when societies allow as many as possible to pursue full engagement and meaningful interaction.

A limited welfare state is desirable for societies to protect the old and the weak. That said, there are millions who actively resist remaining weak. Some of the latter I might either respect or fear. But I don't find welfare states acceptable on the rationale of keeping out those who could potentially thrive but presumed too dumb or weak for society to allow to take part. Social and economic exclusion is not going to work in a knowledge based economy, especially when many forms of production and former employment are tended to by technology and automation. Let's don't create permanent skills divides between groups. That's a recipe for disaster. Doing so would not only prevent millions from assisting one another, but also incline some among these groups to rebel in a thousand ways that no government can prevent.

Wednesday, April 17, 2019

"Keeping the Faith" in Services Generation

Much of today's high skill services generation and knowledge preservation are closely linked to government budgets, even though financial obligations toward this end are being rolled over and delayed as long as possible. One is compelled to wonder: How much GDP is even made possible through current resource capacity and reciprocity, instead of expectations for future claims on wealth? The fact so many rely on presently provided services which won't be repaid anytime soon, is creating problems for long term growth and output. This is already being reflected in the negative political scenarios many nations now face.

As Timothy Taylor noted in a recent post, there was a certain predictability about long run U.S. budget deficits that would eventually come to pass. According to Taylor:
Because two major federal spending programs are focused on older Americans--Social Security and Medicare--it has been utterly predictable for several decades that the long-run budget situation would come under strain at about this time.
When it comes to high skill services generation, healthcare is one of the more pressing concerns. He continues:
But the projected rise in government health care spending of 3.2% of GDP is a challenge that no one seems to know how to fix. It's a combination of the rising share of older people, and in particular the rising share of the very-old who are more likely to face needs for nursing home and Alzheimer's care.
Let's briefly consider some recent historical context. I just finished reading the book I.O.U.S.A. by Addison Wiggin and Kate Incontrera (sorry I couldn't provide an online link), which was published in 2008. Even though this book is all over the map in certain respects, it's an apt reminder that long term debt obligations were still being taken seriously by practically everyone, prior to the Great Recession and shortly thereafter. Perhaps that explains why some who contributed to I.O.U.S.A. expressed optimism: Once the need became obvious, people would step up to the plate and government debt would be addressed before it could spiral out of control.

Alas, the need is quite obvious yet nothing on the horizon suggests this hopeful scenario will occur, after all. Consequently, much of the decades long optimism re budgetary sustainability, is giving way to dismay, blame games, and wishful thinking such as MMT. It feels odd after having read I.O.U.S.A., to realize that expending energy on solutions for government debt is now basically a fool's game for anyone in a position of power. Yet nothing has changed. Once long term debt loads reach a certain point (and no one knows when that is or what it consists of), the genie cannot be put back into the bottle. We would be facing a very different national economic reality.

With such a dramatic shift, the marketplace for high skill time based services as they are currently constructed, would greatly suffer. What has finally become obvious - and none too soon - is that reform from within is proving impossible. No one will tolerate spending cutbacks until governments are no longer able to borrow on the terms they have come to expect. Timothy Taylor highlights the inertia we face in the meantime, for healthcare:
...every dollar of government health care spending represents both care for a patient and income for a provider, and both groups will fight hard against cutbacks.
In a sense, there is an awareness what could happen, just under the surface of today's dialogue. Since nothing has been taken care of in positive terms, however, that subtle awareness is expressing itself in negative ways. Hence demand for healthcare and other vital time based services is cloaked in insistence that existing supply side limits be reserved for natives - in other words leading to "this nation/system is full" talk. Likewise, another sidelong approach to the problem, has been the demand from conservatives and progressives alike for job creation which includes income levels or benefits capable of meeting healthcare expenses as they are now - despite the fact such talk runs counter to economic realities.

Even though interest payment levels are just one facet of long term debt issues, it's an important one. Timothy Taylor also stressed that interest payment obligations for past borrowing stood at 7.9%  in 2018. While that doesn't sound like a big deal, if nothing fundamental changes (which is of course the main concern of this post), interest payment obligations could balloon to 22% of all federal spending by 2048. That's one heck of a difference and a total game changer as well.

How to "keep the faith" that nothing will go wrong? Can we embrace production reform which buttresses the wealth creation of our existing systems, instead of posing threats to them? Can we ask our healthcare providers to join the effort in stepping away from a debt centered existence, to wealth creation which utilizes time based services as sustainable knowledge preservation?

If we can create forms of services generation which build new wealth at the outset, perhaps our governments won't ultimately end up with higher interest rates which force their hand in unwanted austerity, not to mention the havoc that would cause for what has become our services oriented economic existence. In the long run, wealth creation utterly relies on circles of sustainability, which means more use of resources that can be reciprocated in the present. Fortunately, it is feasible to build a new social contract for a wide range of services generation. Let's give it a try, while there's still time. Because time is running short.

Thursday, April 11, 2019

Does Real Estate Contribute to Baumol's Disease?

Is real estate a source of Baumol's disease? Like the chicken and the egg, it's difficult to tease out which comes first - local income averages or local real estate cost averages. And regardless of productivity (or lack thereof) in relation to income, people from all walks of life often need to come together to get things done. Hence income smoothing for social and economic coordination - all the more so at local levels. Still, there are additional burdens from the Baumol effect which dramatically affect overhead costs for a wide range of activity. This in turn can ultimately impact the dynamism of both tradable and non tradable sectors.

Tradable sectors have long employed whatever means they could dream up, to escape the burdensome nature of real estate overhead. Non tradable sectors don't often take this route, and since their product tends to be linked to time and place, they also lack incentive to do so. But why? For one, they tend to conceptualize real estate "exclusivity" as a signal of quality product. Of course this form of quality product carries additional costs for everyone, since much of it is non discretionary. The more impressive and "solid" each building where time based services are provided, the greater the problem for total factor productivity in general.

Real estate expectations such as these can lead to disequilibrium, once non tradable sectors dominate tradable sectors. In this historical instance, non tradable sector dominance is placing too much money in a passive position with limited potential for investment. Plus: Currently, all economic activity is designated solely as money. One issue is that when money represents all formal activity, aggregate revenue ultimately flows to real estate. Alas, non tradable sector dominance can hasten the process. For instance, we currently see it playing out as landlords "capturing the wealth" of prosperous regions. Once a certain amount of real estate becomes associated with services consumption instead of tradable sector production, substantial monetary flows get "parked" on the sidelines.

Nevertheless: The main problem for Baumol's disease in relation to real estate, is that governments won't be able to maintain adequate taxpayer revenue much longer, since the cost signal for quality product is repeated over and over throughout the entire applied knowledge (supply side) chain. Unfortunately, quality signal costs are borne by all individuals and institutions. More than anything, this is precisely what stands in the way of sustainability for applied knowledge in the 21st century.

One way to address the problem is a new approach to ownership - one which not only promotes greater flexibility and incremental options for citizens, but places less emphasis on real estate as a quality signal for time based product. Plus, by making time value a viable economic unit in its own right, less economic value would flow to real estate as a final resting place. Alongside the flows which money creates in real estate, would be a time flow continuum which culminates in greater use of applied knowledge and skill, and greater economic participation by all concerned.

To sum up: Once service sectors begin to dominate, they generate a different macroeconomic reality than what exists during tradable sector dominance. Still, should systems be negatively impacted (making them appear as though "full"), time value could prove a vital economic unit for additional wealth creation, alongside money. Otherwise, too much human potential can end up parked on the sidelines or on the other side of borders. Economic time value could capture knowledge and skills in ways which make them a constant component of economic dynamism. It could help reduce the Baumol effect, and the problem of landlords passively capturing the sum total of wealth value. Indeed: Perhaps Baumol's disease really is linked with what have become unnecessary real estate costs.

Friday, April 5, 2019

Some Broader Considerations re MMT Logic

As the MMT debates continue, James Galbraith recently weighed in as well with a less technical perspective. Even though I cringed a little while reading the article, his "nothing to hide" approach makes it easier for laypeople such as myself, to reflect on what's at stake. From the Boston Globe:
MMT is built on the work of John Maynard Keynes and Hyman Minsky. A core insight is that money in "modern states" - meaning, as Keynes wrote, for the past four thousand years at least" - is defined by government. Money is created (mostly) by public spending and bank loans. Money is not something "out there" that the government must borrow from the public in order to function. It is created as government functions; only afterward, those who take payment may then trade the cash for a bond.  
MMT is about the way the world actually works. It explains why big deficits do not drive up interest rates or "crowd out" private investment, and why big governments in big countries don't go bankrupt. Such countries can support big public debts if they have to. Contrary to mainstream wisdom, there is no "threshold" beyond which public debts produce financial disaster.
Like many who have been influenced by market monetarism, I believe MMT logic puts the cart before the horse, so to speak. It takes for granted what have at times been fortunate sequences of events from market outcomes, but does so without a closer consideration of real economy sources for productive economic complexity. Despite the impressive spectrum of achievements which governments have been able to achieve via fiscal policy; by no means is the present scenario, one that today's successful governments should expect to be able to maintain over the long term. There are simply too many demands on fiscal policy today, for even a portion of those demands to be successfully juggled in the decades to come.

Government redistribution in the U.S. for instance is quite recent. It's easy to forget that national income taxes were only established a century ago. Before this level of taxation became reasonable for most citizens, they needed sufficient exposure to income which could benefit from gains in scale. What guarantee does anyone have that most individuals will have jobs in the near future, which can tap those gains in scale to a degree that governments have sufficient revenue to redistribute at their desired levels? Only consider for instance that services are approximately 80 percent of the economy, and a substantial amount of service activity does not benefit from traditional scale.

Even though governments were once directly engaged in tradable sector activities which generate output on traditional terms, advanced economies have become closely aligned with time and place based activities that scale in terms of individual participation. Yet citizen participation in these areas has been minimized, so that governments and private interests alike could capture additional gains. Since much of government redistribution has been rerouted to the support of high skill endeavour, nations are becoming ever more dependent on debt to fund applied knowledge, and much of this accumulated debt will be rolled over for future generations. What comprises today's safety nets is structured in ways which create long term problems beyond what already exists. If it had already seemed that no one wanted to address the structural realities which contributed to the Great Recession, MMT is a further extension of the wishful thinking that all is well and nothing needs to be done.

While MMT is currently promoted by Democrats in the United States, by no means is this a single party reference point. Alas, both parties stand to gain in the short run from an MMT approach as it makes their policy preferences appear more reasonable. Much of the earlier concern regarding government budgetary burdens has receded into the background, since the Great Recession. There could be a stronger alignment between conservatives and progressives for an MMT framed fiscal policy than is generally recognized, since both groups maintain strong vested interests in how governmental redistribution takes place.

One difference for conservatives, however, is the fact they have more incentive to preserve non tradable sector strongholds at local and state levels, in contrast with a more national framing favoured by progressives. Perhaps this helps to explain why some conservatives are having a negative reaction to "The Third Pillar" by Raghuram Rajan. After all, Rajan's advocacy of greater local community control for economic outcomes, runs counter to the local control which conservatives have exercised with plenty of reinforcement from Washington. Indeed, my own advocacy for new wealth creation in local communities, would exist as an economic alternative which individual states could either allow or disallow.

MMT is another means to claim control over a pie which - even if not shrinking - is no longer growing as in the recent past. For instance, David Wessel in a recent Brookings email, cited a paper from Robert Gorden and Hassan Sayed, and noted that
long term declines in productivity growth in Europe and United States look very similar in terms of size, industries affected, and source of the decline. The common cause, they say, is a decline in the pace of innovation. The authors show that industry composition and drivers of the productivity slowdown have shifted in the last decade in both places. While the slowdown was concentrated in goods rather than service industries until 2005, since that time it has been observed across both sets of industries. And where lack of innovation used to be the dominant driver of low productivity growth in the U.S. and Europe, they show that since 2005 low investment has played an equally important role. This indicates that common factors across industries and countries are now reducing global productivity gains.
Note particularly that despite the growing prominence of services formation (especially in the last half century), its expansion in relation to tradable sector activity is now essentially at a standstill. For that matter, central bankers are still scrambling to manage the fallout. This, even though millions of citizens do not participate fully in these aspects of the economy at local levels, whether via supply side production or consumer demand. How can anyone reflect on this circumstance and assume there's nothing wrong?

Possibly my biggest concern about MMT, is what appears as an implicit assumption that it's okay to create and maintain permanent divisions of skill levels in populations. Chances are the "guaranteed jobs" of MMT advocates would be little more than workplace leftovers which no one with meaningful work would even accept. If that weren't enough, arbitrary skills divisions would be funded by long term debt which becomes rolled over so extensively, future generations inexplicably bear responsible for the lucky ones and "good life" of the present. This is no way to create a sustainable and hopeful future. Do we really want to close the door on full economic participation, especially for the intellectual challenges of our time? We can do better.

Wednesday, April 3, 2019

When is Technology Relevant in GDP Data?

Even though technology can appear mysterious in terms of GDP measure, there's actually a simple way to consider how tech gains particularly matter for aggregate output and productivity - especially if the product in question has become "free" for consumers. Technology holds an accountable position for productivity gains in GDP data, when tech contributes to reductions in non discretionary costs for both individuals and organizations. When this in fact occurs, individuals and organizations alike experience more economic options and opportunities for commitments than were previously possible.

While prices represent what people are willing to pay for tangible market product, prices can be misleading when they involve the intangible costs of getting things done, particularly when non tradable sector activity is responsible for those costs. In many respects, non discretionary costs lack the voluntary nature of other market decisions, and assuming those costs may lead to other transactions and commitments being (involuntarily) set aside. For any measured time frame in aggregate, many consumers, firms and organizations simultaneously make discretionary or non discretionary decisions which ripple out like waves across a pond. These ripples become cumulative institutional effects which - in the circumstance of excessive non discretionary obligations - can also reduce the clarity of aggregate output as data for GDP.

The most important technological potential of our time, could ultimately reduce the cumulative damage of non discretionary burdens which have settled like layers of sediment across many institutions. Just the same this possibility is not yet on the horizon, despite the fact some optimists believe the problem could actually be with GDP calculations. Hence I respectfully disagree with Tim Worstall's reasoning in "From Facebook to Skype, GDP is not keeping up with technology":
The most obvious answer is that the data has been counted wrong - that has long been my contention. 
Worstall believes we need to make amends in the measure of GDP, to address "low GDP growth in the middle of a technological revolution." But unfortunately, some of the apps he references could actually be making more demands on economic time priorities and overhead costs, than functioning as labour or time savers. Arnold Kling recently noted the problem of overhead costs that apply for labour not associated with traditional production:
Production labor can be incrementally increased or decreased as needed. But overhead labor is not adjusted strictly according to sales volume.
Labour and related personal time priorities function so differently in non tradable sector activity, that these intangible organizational processes have skewed our understanding of productivity. Yet how does any society continue to meaningfully coordinate divisions of labour, or clarify ongoing productivity gains, if aggregate output can no longer be accounted for in relation to overall costs? Due in part to how many professionals derive profit, our non tradable sectors lack the incentive to utilize technology for productivity gains, with the general exception of reducing or occasionally eliminating lower levels of the hierarchy in time based services.

By way of example for the latter instance, technology created productivity gains in the early nineties which could be readily observed. I was just one of many office workers during this time who reluctantly let go of governmental employment, due to the new software programs which made it feasible for attorneys in my workplace to assume activities which previously had been carried out by office assistants. While productivity gains such as these were associated with private enterprise, the fact local and state governments were also able to reduce overhead costs (even if only temporarily), doubtless contributed to Washington's balanced budget during the Clinton administration. Truly, this was a time when digital technology became quite relevant to GDP data.

Why has it proven so difficult to realize similar productivity gains today? One reason is that recent technological innovations actually threaten the organizational structure of today's non tradable sectors. It's one thing to apply automation which increases output in traditional production or services which readily scale, but altogether another to contemplate deep learning which in crucial respects can undermine the logic of extensive human capital investment. Especially when that investment augments the fixed scarcity of professional time value, for time based product.

Not only does AI seem to suggest that some professional human capital costs aren't "necessary", but 3D manufacture could eventually upend the rationale for much of traditional manufacture as well. However, traditional building methods are the bread and butter of countless local developers, in what is still one of the main wealth building activities for any community which continues to have an economic pulse. Yet as long as traditional development holds sway in most quarters, it will determine the nature of local economic activity which is even still feasible, despite what citizens would like to create if they had the chance to do so.

One of the main reasons for economic uncertainty, is that we still have no idea how our existing non tradable sectors will respond to the recent array of cutting edge technological possibilities. Even though the potential for productivity gains is extensive, it nonetheless comes with mind boggling cultural ramifications. Sometimes civilizations are able to coexist with new innovations alongside traditional systems, and sometimes they are not. In the meantime, no one can really pretend the crucial elements have come together for the best optimal economic outcomes, because technology. Again: In order for technology to make substantial contributions to productivity gains, its impact would contribute to overall cost reductions which improve the systems capacity of entire supply chains which coexist with applied knowledge production. Alas, free apps such as Skype and Facebook weren't made for this challenge.