Saturday, April 26, 2014

Taxation Can Fail in a Merit Based Equilibrium

Why might this be the case? Merit in the economic sense of knowledge based work, is not widely distributed enough for taxation to smooth (almost) empty valuation points. What's more, holders of knowledge use also do not have the ability to provide market density to the degree their salaries imply, unless they do so through association with product separate from time. However, overall equilibrium adjusts in valuation, as if those with exclusive knowledge use rights are able to provide full market density just the same.

This has bearing as to why redistribution ends up benefiting special interests, and further exacerbating inequalities. Too little balance exists, in terms of what vital forms of time use are now able to accomplish at aggregate levels. As a result, recent knowledge use investments remain caught in uncertain holding patterns. Unfortunately, the marketplace for knowledge use which should have evolved, is simply not there.

Given this scenario, further taxation cannot accomplish what is needed to repair economic inequalities and generate new growth. Calls for further taxation would mostly burden the existing consumer based scaffolding, which supports today's limited wealth formations. What's more, the scaffolding which supports a delicate merit equilibrium, represents consumer limits in several contexts. Indeed, housing faces lower valuations than rent, in part because it already carries an extra burden as a primary wealth designation (or supporting wall). While I have written about problems associated with merit, a recent post by Nick Rowe gives me a chance to put these thoughts into a more focused perspective.

Even prior to Nick's post, I had already planned a related response this morning, as to Piketty's assertion (page 244 of "Capital") that capital is always more unequally distributed than labor. In monetary terms, capital and related assets are nevertheless random supply side elements, in spite of the wealth they represent. To be sure, resources of all kinds contribute to sustainability. However, the capacity in which we are able to use our time effectively, is the finite and central component.

What matters is not where certain resources happen to exist or even what we may do with them in consumption terms, but the degree to which we can utilize our time to make resources matter in an overall capacity. However, when our time gets "cancelled out" by merit compensation which is far greater than our own, no amount of random resource compensation - or government redistribution - can make the difference at lower to middle income levels. Indeed, the attempt to do so within the confines of sticky markets, is like trying to fill a leaky bucket.

Merit "failures" (in compensation terms) mean losing more of our already finite time quantity. One could compare this to starting out with forty acres to farm (average workweek), only to end up utilizing one or two acres of land with something left for the marketplace. That leaves anyone with less "merit" or supposed intelligence, unable to contribute to the infrastructures and environments everyone relies upon. When everyone waits in line for the person or institution which dispenses the "appropriate" knowledge, too much of vital importance cannot happen at all. This is why high valuations inadvertently become time theft, especially given the fact monetary systems depend on aggregate time use to maintain equilibrium settings.

However, if our income is insufficient for expected consumption patterns, one way to compensate is by working and living in an arbitraged time use equilibrium. Coordination of resources with time use can not only smooth time value variations, but consumption preferences as well. Of course this is a long term solution, which requires focused learning and coordination patterns. However, comprehensive remedies are needed, because merit compensation distorts aggregate economic equilibrium so thoroughly, that taxation to remedy the differences in time use valuation, doesn't get at the underlying problems of aggregate time use.

These distortions would not pose such problems for societies if more participants were actually compensated for merit and knowledge use in relative terms. Instead, knowledge which applies for given situations, is too frequently applied for circumstance which deserve more thought and time than is generally provided. Even so, some income smoothing in aggregate remains possible for those who have relatively high valuations in merit based terms. Therefore, these groups might still gain compensation from the redistribution which is a result of taxation systems.

But as it presently stands, the higher valuations of the few, continues to subtract time use value for many into negative territory. Even the lower valuations of the many would be far more manageable in redistribution terms, if the sticky market equilibrium of upper incomes had not being imposed on all populations, regardless of merit valuations or compensation. As it is, sticky markets accurately reflect the consumption capacity of the upper levels, and expect the lower levels to adjust.

Increasingly, the missing component of the marketplace has been parked (by the Fed) in the interest on reserves. This policy decision was enacted, in lieu of maintaining the former growth trajectory which had been in place for well over a century. These reserves have their purpose in maintaining the delicate valuations which high merit created: I get that. What I don't get is that anyone imagines this to be a long term solution. The fact these severe structural problems have yet to be addressed, is why I have such problems with rationale for further taxation. It is also why I try to do an end run around present day taxation for lower income levels, in that redistribution for this group is massively inefficient for all concerned.

Fortunately, merit based time use problems can be approached head on, through time coordination and arbitrage for services of all kinds - including those of the highest nature. After all, many an individual needs to seek lifesaving measures in the course of a lifetime, even though few are presently authorized to provide them. What's more, local education for full services provisioning, would prevent intelligence from becoming even further fragmented among populations than it already is.

Part of why production has been so successful in recent centuries, is the fact that resources have been utilized as interchangeable components as needed. This allowed populations to adapt whenever some resources became limited, and it allowed society to accomplish more with less - time and again. If we gain the capacity to arbitrage our time use as an interchangeable component within social systems, the progress which seems to have fallen away, would have a chance to continue. It is primarily because of the limitations of merit, that no one imagined skills sets as a master key which could unlock the door of a brighter destiny.

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