Wednesday, December 30, 2015

No Way to Treat An Economy

Decades earlier, I occasionally heard in casual conversation, how recent wars had been a tremendous boost to the economy. After all, war "got us out" of the Great Depression, didn't it? But I had my doubts. Granted, WWII generated quite an uptick of economic activity in the U.S. But how - exactly - did that represent a net gain? War is another good example of reaction (destroy and rebuild) when it proves too difficult to envision economic growth which does not have to destroy something still valuable, in order to take place.

Real gains occur when economic activity augments our time value (through innovation), in relation to other forms of resource capacity. These per capita gains occur when a given market expands through voluntary (i.e. not mandated) consumption patterns. Consider healthcare. Even though healthcare markets previously were not mandated, knowledge limits already prevented them from expanding through organizational innovation. This is why healthcare obligations are a contributor to ongoing losses in aggregate time use potential.

All too often, non tradable sector consumption settings are presented so as to further impact our remaining time use options. For similar reasons, interest on loans can't contribute to actual wealth gains, because they draw from a pool of time availability that is relatively fixed. This process of consumption subtraction (or substitution) occurs across the entire spectrum of consumption potential, for those who take out mortgages. Small wonder that government subsidies for loan formation, have been a major component of tax policy in the U.S.

Non tradable sectors have become notorious, for taking a sledgehammer to the markets most capable of generating prosperous economic conditions. Even though they have generated mass wealth for governments and special interests alike, non tradable sectors have done so through means which have subtracted time value from everyone involved in economic processes. Both asset and services formation represent an ongoing negative shock, in that they now require additional time and monetary support, at all levels of society. This has left tradable sectors little choice - especially with ongoing monetary tightening - but to accept smaller roles in today's economic environments. When tradable sectors lose their footing, nations can also lose their primary rationale, for maintaining positive economic and political relations.

Sometimes, the language of shocks scarcely touches the surface of positive or negative effects which ripple through supply side circumstance. Positive shocks tend to be of a technological nature, but they come in other forms as well. These shocks provide gains in time value, as contrast with other forms of resource capacity. This is in contrast to negative shocks, which also include earthquakes or terror attacks which also require repairs and rebuilding. Lars Christensen describes shocks in a recent post as a component of forecasting:
...a shock by definition is exactly that something you didn't see coming.
Shocks of all kinds can affect growth trajectories, but some do so in more obvious ways than others. Whenever a given growth level is reduced from a recent trajectory - such as occurred with the onset of the Great Recession, shocks take on additional importance. How does one discern possible effects on a given growth level? It depends on how supply shocks interact with with other resource capacity, in its current configurations.

Generally, when the price of oil declines, this appears as a positive shock. However, the most recent drop in oil prices did not encourage consumption as before, given the fact that a larger percentage of the population had already fallen away, from the production capacity they held prior to the Great Recession. Governments have yet to come to terms with the fact that in order to consume, individuals need the ability to produce something of value for the economy as well. For time based services, aggregate demand also requires additional aggregate supply. The present lack of labor force participation, partly explains why some were unable to fully participate in the transportation gains of lower oil prices.

Oil as commodity, is just one example how non tradable sectors have become long running negative shocks, which now impact consumption potential for tradable sectors. When individuals do not participate in major expenses, chances are they minimize their minor expenses as well. Again, the broken window fallacy shows that seeming positives, are not always positives. All the more true, when wealth consists of wealth capture. According to Bastiat:
It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another.
When governments and special interests impose harsh restrictions in terms of production capacity and innovation, economic malaise and frustration is the result. That's no way to treat an economy. Let's hope that recent rumblings regarding a third world war will subside, and nations will once again embrace growth and prosperity while there is still time to do so.