Musings on The Growth That Matters

It's been quite a rough week for the stock market. Even so, despite the recent mistakes of the Great Recession and a still evident output gap, central bankers will probably not respond to the realities on the ground. James Alexander outlines the unfolding scenario, in Taper Tantrum 2.

What we are seeing now is the very long and slow recovery from the Great Recession being threatened...What Market Monetarists and markets cannot grasp is why this should lead to active monetary tightening. All monetary theory says that you should tighten when nominal growth is too rapid, too far above trend. There is no conceivable data in the US or UK to show that we are above trend growth. Yet the very same central banks who messed up in 2007-08 are on the verge of doing it again. Markets can see this and are reacting badly, correctly.

One reason the Fed could be so anxious to "normalize" - misguided though the term truly has become: hardly anyone in a position of power can imagine economic growth, beyond the boundaries of what the elite expect to continue. Think NIMBYism, only at a grand scale. As a result the Fed is also willing to short rational expectations, which includes contractual agreements already in progress. Indeed, the growth which is needed most - for those with insufficient economic access - isn't even on the radar of the Fed right now. Today, Scott Sumner titled a post "Fed Policy is Bankrupt". The resignation of that title surprised me, especially given the years he has had such patience with Fed actions.

Many who remain on the sidelines in the U.S., do not necessarily have the (earlier) consumption capacity one normally associates with these groups. How many without work, no longer drive - for instance? With little provision for infrastructural considerations, output potential becomes somewhat of a moving target. Thus far, commodity producers are attempting to maintain their own output levels, even as monetary stability remains uncertain. From The Economist:

The real curse for producers is over-supply in almost all raw materials, yet they continue to act as if they are blithely unaware of it. Capital is still pouring into holes in the ground, creating a hangover that may last at least a decade. Jeff Currie of Goldman Sachs...says past cycles suggest it can take up to 15 years to work through the over-investment. "The world has just flip-flopped", he says.

And those demographic explanations re older individuals, which supposedly contribute to reduced labor force participation? Josh Zumbrun reminds us in this WSJ article:

Employment rates among those 55 and over actually are rising. As recently as the mid 1990s, less than 30% in this age group worked. That's since risen to 40%.

Another source of confusion regarding growth potential, is political. Even though Keynesian thought has seen better days in the political arena, many ascendant Republicans - and the internet Austrians they tend to espouse - have not adequately considered the importance of services formation in the marketplace. Populations may indeed suspect this, given extreme reactions in the media, to immigrants and other "unworthies" who "steal" needed services. Not until services formation is generated through broader and more direct means, will these kinds of reactions finally get a chance to calm down.

Even though privatization of many government functions is needed, today's version of services formation would cut back growth capacity even further than what has already occurred. The privatization which is needed is that which can grow economies, instead of holding them back. For market monetarists such as myself, the fact that much of the country scarcely notices monetarist contributions to the political debate, is also worrisome.

Services are an important component, of the kinds of potential growth which matter most. Further, the recording of services activity should provide means to recognize knowledge dispersal, as noted by Dietz Vollrath in a recent post. Much service formation is hidden within organizational structures which don't measure time based product in recognizable ways. Part of the problem of course is that many services are an undefined contributor to product formation, as Arnold Kling discussed in a series of posts in June. I wrote two posts on time based defined product, in part as a response to Kling's posts, here and here.

Local corporations could help solve recording problems for services functions in a number of ways. Any time based product which occurs between two individuals could have specific recorded designations. For one, there is the nature of the activity between participants, but also the larger context (either group or individual goal) in which the services take place. Even though recording in a sense would involve two separate designations, it should not be difficult to combine them for ongoing records.

Fortunately, local corporations would not involve extensive reform challenges on the part of governments, because they would exist in a context which does not change the nature of knowledge use as it is currently practiced in prosperous regions. Making room for the growth of local corporate knowledge use systems is not so much about policy change or reform, but simply a growth safety valve for those who do not have sufficient economic access through normal means.

Safety valves such as this are urgently needed. As citizens fear for their own services access, they become more skeptical of immigration from other countries, because they know that more immigrants means more competition for a still limited services marketplace. With a truly free marketplace for services formation, such fears would no longer be necessary.