Wrap Up for September 2016

Long term growth relies on the progress which is embedded in primary markets. These markets serve as an important scaffolding for international wealth, yet tradable sectors continue to suffer. Much of this is due to the interminable lack of support for aggregate spending capacity on the part of central bankers, which also means continued declines in commodity value. Were it not for a recent post from Bonnie Carr, in which she  highlighted a Bloomberg article, I wouldn't have realized that food prices have continuously declined for nine months. Yet how many have noticed? From Bloomberg:

In a startling development, almost unheard of outside a recession, food prices have fallen for nine straight months in the U.S...."The severity of what we're seeing is completely unprecedented", said Scott Muskin, an analyst at Wolfe Research, who has studied grocery prices around the country for more than ten years. "We've never seen deflation this sharp."

And when central bankers allow commodity prices to fall for extended periods, services are sure to follow.

What is classical economics? I came across a blog post recently, which provides some quick yet helpful answers: http://econ488.umwblogs.org/course-outline/topic-2/what-is-classical-economics/

Monetary easing is not a beggar-thy-neighbor policy (Lars Christensen)

Will Wilkinson, "The Great Enrichment and Social Justice"

"There are far more data points on millions of uses than there are on thousands." http://www.hoover.org/research/fdas-power-grab

Derek Thompson interviews Ryan Avent: http://www.theatlantic.com/business/archive/2016/09/the-next-industrial-revolution/498779/

Also from the Atlantic: "The problem with inequality, according to Adam Smith"

Ryan Avent has good questions for Scott Sumner

David Glasner takes a closer look at some historical aspects of monetary rules.

Sandy Ikeda notes some contrasts between Henry George and Jane Jacobs

A paper from Paul Romer, "The Trouble With Macroeconomics", was the subject of considerable discussion this month.

"Are the long term unemployed on the margins of the labor market?"

What makes the cities of Africa different? (The Economist)

Asset sharing was temporary...http://www.digitopoly.org/2016/09/20/neither-uber-nor-lyft-believe-sharing-is-the-future/

Part 7 of George Selgin's Monetary Policy Primer, on monetary control.

Hernando de Soto has not given up on globalization.

It shouldn't be long before more students become aware of the loan forgiveness that is already available...
https://www.brookings.edu/research/the-coming-public-service-loan-forgiveness-bonanza/

The risk is substituting one ideology for another:
http://oecdinsights.org/2016/09/26/complexity-theory-and-evolutionary-economics/

James Pethokoukis points out the extreme nature of Trump's "doom and gloom" approach:
http://www.vox.com/the-big-idea/2016/9/28/13081298/conservative-trump-apocalyptic-america-optimism

"Trade did not cause the breakdown in economic growth. Indeed, trade has helped generate what growth remains. But the pervasive stagnation has left little cover for those set back by globalization."
http://www.nytimes.com/2016/09/29/business/economy/more-wealth-more-jobs-but-not-for-everyone-what-fuels-the-backlash-on-trade.html?partner=rss&emc=rss

Not really sure why ever more (sprawling) suburbia needs strong advocacy, since it has already continued apace for decades. That said, greater population densities and viable walkable options for working and living, are more important than today's special interests are willing to concede. http://marketurbanism.com/2016/09/29/joel-kotkins-new-book-lays-out-his-sprawling-vision-for-america/

What Happens When All Labour Becomes a "Special Allocation"?

While such a designation may seem impossible (one hears "We'll always have jobs"), enough of this form of hiring could eventually occur that - without an active societal response - many more of us could find ourselves unemployed in the decades to come. And should this unfortunate circumstance occur, one's ability to work in a normal (or formal) context, would increasingly become the exception rather than the rule, as traditionally defined labor is replaced by automation wherever possible.

In other words, the ability to work and provide for oneself and others on personally meaningful terms, would become a special privilege! Only consider how relative formal work circumstance has already become, given the fact many of us have lived in places (yes, in the U.S.) where those who are fortunate enough to gain paid work, are consequently deemed "special" human beings and treated accordingly.

Hence ultimately, we all need to become more cognizant of work which is defined on exceedingly "special" terms. Only remember these often amount to arbitrary limits, in which one's level of skills capacity means efficiency gains strictly for organizations, rather than personal efficiency which occurs through active negotiation, to gain comparative advantage for ourselves and others. It is not beyond our means to create institutions which would honor (on formal economic terms) the comparative advantage we seek among ourselves for time based product.

After all, comparative advantage for personally determined time value, would exist as a broader economic landscape which represents a wide spectrum of time value and skills capacity. Only think how carefully "special" is presently defined. For instance, is what we personally deem "special", even on offer in graduate level university economics courses? I compared dozens of offerings more than a decade earlier, before realizing that economic exploration (beyond the core) was quickly capped, towards the end of one's formal studies.

Should we continue to allow "special" to mostly exist as exclusive and determined outside of our own personal input, then perhaps economics is not even about people at all. Indeed. If so, what point is there in blaming capitalism, if the real culprit is ourselves, for forgetting our basic worth? Whatever one may think of Tim Worstall's approach in the above link, he has a valid point:

The destruction of jobs isn't something which defines capitalism. It's something which defines economics. 

Our basic starting point is that human desires and wants are unlimited. We also note that we have scarce resources with which to sate those desires and wants. Economics is about the allocation of those resources to meet them. 

Sometimes, it makes sense for certain job functions and categorizations to be destroyed when resource capacity outside of ourselves is an integral part of the process. Automated job designations do not destroy the potential of our time value. Rather, they reduce production functions which in some instance are no longer the best means by which to derive product.

What many have forgotten is that time value is both product and production means. Even more important, is the fact our time is the most scarce resource of all. Our focused attention (in the form of personally designated time) is central to specific skills settings and knowledge based services capacity. Yet we still lack the formal economic space to use it as a basic commodity. As such, one's time would gain value in use qualities which make elements of personal choice, a valid component of normal economic exchange.

By making room for the scarce allocation of our time, individuals would once again become integral to economic life, via markets for our own time value in relation to that of others. Time value as a basic commodity or good, would become a valid economic component of the very efficiencies we seek.

When I watched the presidential debate between Trump and Clinton, two words especially came to mind, within a matter of minutes of the discussion: broaden trade. In other words, the definition of what trade actually consists of in the marketplace, so as to move away from today's national "beggar thy neighbor" inclinations. Perhaps Miles Kimball was thinking along similar lines, for he has a quote from Henry George today which serves as a suitable way to end this post:

When we consider that [labor] is the producer of all wealth, is it not evident that the impoverishment and dependence of [labor] are abnormal conditions resulting from restrictions and usurpations, and that instead of accepting protection, what [labor] should demand is freedom? That those who advocate any extension of freedom choose to go no further than suits their own special purpose is no reason why freedom itself should be distrusted. For years it was held that the assertion of our Declaration of Independence that all men are created equal and endowed by their creator with unalienable rights, applied only to white men. But this in nowise vitiated the principle. Nor does it vitiate the principle that is still held to apply only to political rights. And so, that freedom of trade has been advocated by those who have no sympathy with [labor] should not prejudice us against it. Can the road to the industrial emancipation of the masses be any other than that of freedom?

Skills Fluency and the Marketplace for Time Value

In "How I Rewired My Brain to Become Fluent in Math", Barbara Oakley stresses the importance of repetition and memorization as building blocks for learning. This is all the more important for math, since one must also rely on what has previously been learned, in order to further progress. Fortunately for Oakley, she was only in her twenties when she decided to make up for the "lost time" of her high school years.

For anyone who waits until later in life to return to math studies (as I discovered the hard way), it can be even more important to make room for memorization and repetition of class assignments, if lessons are to be retained beyond class semesters and become part of one's long term memory. Fortunately, some of today's digital formats assist in this repetition, via presenting the problem till it's properly done.

However, no one should have to be limited to digital means (or other forms of media for that matter), in order to become fluent in any subject. All knowledge and skill takes on additional meaning, when we maintain personal associations with others, in both its acquisition and use. Or - as some have wondered - if robots and automation are (eventually) expected to outperform humans, then what's the point in learning and doing in a high skill knowledge context? The experiential component of knowledge use in relation to time use, is at the heart of this issue. Fortunately, the time value that takes place in equally matched context, need not be threatened by technology, as is the "burden" of compensated high skills value in secondary markets.

Meanwhile, without a marketplace for time value, compensated skills value is often deemed too important, to be "squandered" on the above mentioned reinforcing mechanisms for knowledge acquisition. Consequently, public K-12 education tends to focus on a basic or core understanding, whereas reinforcement in this regard is likely to take place on informal, mostly non economic terms. Often, this is simply additional support one may receive from family, peers, and possibly tutors, especially for higher income levels. The monetarily expected time/skill limits of the teacher in the workplace, may inadvertently become the skill limits of the student as well.

Even though public school teachers are increasingly held accountable for student aptitude, there's little room in the monetarily compensated skills of most teachers, to provide the additional reinforcement of repetition and memorization. This especially presents a problem for low income students, in committing material to long term memory.

The knowledge use systems of an equilibrium corporate structure, would approach learning as an incremental process: one which also provides monetary compensation for peer based mutual efforts in providing assistance. In particular, a marketplace for time value could also increase skills fluency, by creating room for memorization and repetition as an economic part of the learning process. Equally important, is the fact that compensation for mutual assistance, would increase the range of subject study and possibility, beyond core subject elements. Skills fluency would begin younger in life, as students pursue the subjects which present the greatest challenge for them.

Through equally coordinated time value, even the education of young students would become part of a newly generated primary marketplace, with its associated cumulative gains over time. When students become responsible for their own roles in learning, education takes on more personal meaning via connections with others in one's environment, instead of marketplace abstracts. And these additional student roles would remove much of the burden from both parents and older individuals who assume teaching roles, who consequently are freed to assist young students where it matters most.

Primary Service Formation and the Coasean Approach

Could service formation benefit from an internalized Coasean approach? Just as firms continue to organize for production gains in terms of tradable goods, a similar approach is possible for time based services capacity, only within a combined supply and demand framework. Also, groups would coordinate time based product in relation to its actual dimension within existing group structure, instead of generating service product for open markets. However, this directly managed approach makes it possible for time based services to exist as new wealth formation, in a primary marketplace capacity.

Wikipedia explains Coase, in the Theory of the Firm:

According to Ronald Coase, people began to organise their production in firms when the transaction cost of coordinating production through the market exchange, given imperfect information, is greater than within the firm.

Few examples of "imperfect information" are as extensive, as government fiscal transmission capacity for time based services product. Fortunately, time based services markets can realign where it is possible to do so, while generating greater product clarity in the process. Local underperforming economies could finally address service issues which continue to undermine long term growth, and the effectiveness of fiscal policy. Indeed, until now, economists may have been reluctant to take a proactive approach in support of more extensive entrepreneurial activity, because of the political barriers to positive market adjustments and streamlined transaction costs.

Just the same, a wide array of service product is now mostly being coordinated for middle to upper income levels in general equilibrium conditions. If economies are to regain the growth trajectory which existed prior to the Great Recession, time based services product needs to be brought within reach of the lower portion of the income spectrum, on primary market terms that generate new wealth. Lower income levels would greatly benefit from an alternative equilibrium approach, to generate time based services via more efficient means.

Even discounting the social and political problems of the present, the fact that too many governments are contending with near zero bound monetary conditions for the foreseeable future, is a good indication that the economy would benefit from a more proactive stance on the part of economists. Granted, no one would want to "engineer solutions" for societal ills. Nevertheless: if the open pathways of economic freedom are not continuously encouraged and maintained, economic circumstance which are distinctly not free, will only continue to fill the void.

Without the preservation of economic freedom, more secondary markets become necessary - many of which rely on the wealth of the limited marketplace which remains free, in order to take place. While a substantial degree of secondary market activity is associated with government involvement in the economy, plenty of private market activity is structured along similar lines. One reason there's too little investment in the present, is that not enough primary marketplace formation exists, in relationship to the secondary marketplace formation which relies on primary wealth. Meanwhile, economists and entrepreneurs alike have tremendous stake in making certain that marketplace conditions remain strong for a full range of local asset formation and time based services. Otherwise, governments remain compelled to fill in the missing gaps, even when it's not possible for them to do so.

Historically, when primary marketplace formation exists in a greater capacity than secondary marketplace formation, economists can perhaps afford to be a bit passive in their approach to marketplace conditions. But when economic stagnation sets in with political gridlock and a lack of productive initiative, economists have far more to offer the marketplace than political positioning and policy recommendations. Today, economists have the ability to assist entrepreneurs, by providing an economic framing for the rationale of better defined organizational patterns. Fortunately, no one needs to assume that economists are powerless to respond to economic stagnation in the decades to come.

Economics: It's Personal

I know, economic thought can seem anything but personal. Mention economic rationale to others as an appropriate strategy for social problems, and the average person quickly loses interest, if they had any interest to begin with. That's often been my experience as a layperson, over the last thirteen years. Somehow along the way, economic thinking became disassociated from the circumstance of our daily lives, and it's not easy to get it back. Yet - at the risk of seeming pedantic - get it back we must, if only because identity politics and social justice diatribes are hardly going to get us to a better, more constructive place.

Part of a lack of productive dialogue is due to the fact that - as Narayana Kocherlakota noted - economic professors have been "doing well" for decades. Why fix what does not appear to be broken - at least from where one is standing? And since economists are the ones expected to address economic concerns, it's easy to assume that society as a whole is in little need of substantial adjustment, or the experts would already be on the case.

Indeed, economists are "on the case", but mostly in terms of the always popular identity politics, instead of where municipalities are increasingly overwhelmed - both socially and economically (and everyone imaginable is getting the blame for failed cities, as a result). Otherwise, economists are more inclined to closely examine local conditions, in parts of the world where local politics are less likely to interfere with one's own attempt to provide an objective view.

Only consider, the brief mention (if at all) in the news, when local citizens in struggling U.S. cities initiate discussions re lack of jobs and local economic opportunity. Why doesn't anyone take these earnest requests seriously? Why doesn't this initial hopeful economic framing on the part of local citizens, remain in the consequent discussion and  public response?

Instead, it all gets reduced to yet another round of identity politics reaction. Sometimes the riots, property damage and social destruction don't start in earnest until these valid economic points are roundly dismissed. Yet the economic foundation is a problem which few individuals respond to, at a gut level. Is real economic response (instead of reaction) not "interesting" or challenging enough, even for economists? What the heck is going on?

Even though it is rational to hope for greater social tolerance, populations can hardly expect to achieve social justice, when there are few economic means to make it so. Without such means, economists mostly become reduced to extended discussions and studies which suggest government should help the marginalized, or government should not help. Perhaps it is off limits to suggest that the marginalized could help themselves. Nevertheless, that's a lot of lost effort, not to mention the loss of any meaningful vote in Washington this silly season.

So the challenge is to once again make economics personal. Today, despite the danger of oversimplification and potential immediate counter response to the contrary, I'll leave it at a few suggestions that might at least make sense - particularly for the lay reader - at a gut level.

Where there is a very real and persistent lack of economic complexity:

1) Become willing to monetarily reimburse one another for the simple act of helping one another.

2) Do so by means of a long term commitment, so that instead of local education being about some ridiculous abstract preparation for the "world of work", it becomes part of the world of work, and also about helping one another.

3) Prepare a yearly calendar for planned time in which everyone can both help one another and spend time with one another, and leave room not just for the necessary, but also for spontaneous efforts as well.

Time Use Options as Intentional Paradox

How so? Many of us hope to make something positive and meaningful of our time value, only to discover that existing marketplace hurdles don't make our participation a simple proposition. Too many claims on 21st century marketplace context were already staked out, long before anyone realized how valuable some portions of our knowledge based territory, would eventually become.

Meanwhile, Derek Thompson of the Atlantic assumes that full time work isn't necessarily desirable in any instance, as he makes a poor assumption about today's rich, versus the current statistical reality:

The rich were meant to have the most leisure time. The working poor were meant to have the least. The opposite is happening. Why?

First, why should anyone care whether the rich or poor end up with more leisure time, than the other group? To me, that was a misleading way to frame the discussion. Nevertheless, let's briefly unpack the historical context, which is also associated with the very different times in which Keynes lived, in terms of wealth generation.

Granted, the rich of earlier centuries frequently had plenty of "desirable" leisure time, and many of those individuals would scarcely have understood the cultural context which we associate with the rich of the present. Much of today's wealth consists of compensation for high value skills capacity, rather than one's ability to manage broad swathes of resource capacity. In some respects, knowledge wealth is more closely held, especially in terms of equilibrium outcome.

Keynes did not know, the degree to which institutions would eventually sort for skills capacity in order to meet their goals. Consequently, should one's skills value be perceived as somewhat mediocre, according to institutional need, one may only receive compensation for labor on a part time basis, so as not to require additional institutional benefits. Whereas if one's time is perceived as more valuable because of skill levels, these individuals are pressured to "give their all" for the most efficient outcome.

While this reasoning makes sense in traditional production terms, it's an approach which leaves too many negative externalities. Not only are too many individuals left out of the economic equation, they can scarcely plan a life for themselves which includes either meaning or personal responsibility. When institutions select primarily for specific forms of skills value over extended periods, the concept of time value - so vital to interpersonal relationships and social cohesion - may be lost.

A new institutional structure is needed, which honors personal time value alongside skills value, so no one need settle for the leisure options that presently appear "best suited" according to income - such as fewer time based services for lower income levels. By allowing individuals to take part in the valuation process for both time and skills availability, a broader interpretation of knowledge use potential would eventually become possible. This approach would eventually lead to broader societal participation, as well.

In Voltaire's time, it was possible to persuade with words, especially given the new publishing environment. However, in the present, it seems we have come full circle, since far more than words are needed to generate good political and economic outcomes. People would greatly benefit from a formal economic structure, which makes it possible to negotiate for individual needs on more comprehensive terms.

Only when individuals gain the ability to do so, is it reasonable to expect the citizen roles we once took for granted, to come back within our reach. Much of the growing chasm between different segments of society is about meaningful knowledge use, rather than differences in income. Even though I've enjoyed writing this blog, the practical part of me will not be satisfied until it is possible to turn words into action. Fortunately, there are more practical means by which knowledge can be applied in efficient contexts, than what is occurring in the present.

Musings on Markets and Models

Recently I indicated to my readers that I was attempting to "delay" some mental challenges re primary and secondary markets, to better organize previous material more closely related to unemployment issues. However, my mind has a "will" of its own, and now a growing backlog of notes needs to be dealt with. Hence a recent post from Arnold Kling, provides a good excuse to clear my desk somewhat. After attending a discussion about Ryan Avent's new book "The Wealth of Humans" (am awaiting my copy in the mail), Kling noted:

As the conversation jumped around, I found myself frequently thinking, "Show me the model". That is out of character for me, because I have spent a lot of the last few years criticizing economists' use of formal models. But as people tried to speculate about capital accumulation, wealth distribution, and productivity differentials, I found that I could not follow what was being said. I needed to think in terms of supply and demand curves crossing, income adding up to output, and output equal to labor input times output-per-worker.

For me, a fully functioning and dynamic model, would be one which has sufficient primary market formation, that additional secondary market formation also makes sufficient sense to all concerned. Alas, that is not the case right now, as central bankers attempt to dampen the secondary marketplaces of the present through arbitrary means.

There's also a recurring thought about models which continues to stump me, because simple though it seems, I'm still missing something. Coordination is valued according to equilibrium. Single price structures for time based services in particular, refuse to work the same way in (invariably unique) local non tradable settings, as for the price coordination of tradable sector commodities and goods at international levels. Equilibrium definition makes all the difference for supply, demand, output and growth, because of the ways in which its tradable and non tradable sectors interact and also, respond to already existing factors. How to think about this?

Growth and output depend on the relationships between full equilibrium settings versus partial equilibrium settings. Full (international) equilibrium and its corresponding coordination/pricing mechanisms are best represented by tradable sectors and their related primary markets, which serve as a scaffolding for world wealth. Each secondary market necessarily operates as a partial equilibrium, which due to its construction can only take limited resource sets into account.

Fiat monetary formation also served as a formal recognition (by policy makers) of secondary marketplace importance, in the 20th century. Nevertheless, the underlying reasons for this more flexible monetary policy structure, were never fully resolved or understood. For instance: If central bankers were conscientious to maintain nominal income or aggregate spending capacity, they would be doing a better job of stabilizing the relationships between primary and secondary markets, than is presently the case.

Primary markets are most closely related to the exogenous measured wealth of nations, as opposed to the endogenous formation of (secondary market) credit and other facets of non tradable sector activity. Government backed economic activity and financial markets exist as the most substantial secondary markets, in part because of the extensive economic access and liquidity they make possible. The measured wealth of a nation also depends on its exposure to exogenous or worldwide wealth, which is reasonably captured by the measure of nominal income. For each central banker which accurately measures nominal income, it becomes easier for a nation to more closely reflect their own participation in exogenous wealth creation, alongside endogenous wealth.

While all of government subsidized activity can be considered as secondary markets (due to the partial equilibrium of revenue redistribution), many forms of financial product nonetheless fulfill roles as a point of market origination. Time and knowledge based services presently exist only in secondary marketplace roles, though they have the potential to function as (local tradable) primary markets as well. In the meantime, secondary market roles are not only quite important, they serve as what is sometimes the only means to coordinate time value, which otherwise doesn't readily correspond to general equilibrium market circumstance. Secondary financial markets are all the more important, since not enough of today's knowledge based activity exists in primary marketplace roles.

Perhaps most important for this post, is that secondary markets exist as partial equilibrium valuations which tend to quickly react to negative aggregate demand shocks, that particularly affect the broad valuation of tradable sectors. For instance, when excessive market tightening occurs, the commitments and investments of local high skill service providers can be threatened by slow - but nonetheless steady - disinflation strategy. Too few individuals realize that turning back the clock on globalization, could threaten the worldwide primary market scaffolding that supports today's general equilibrium revenue structure. Most - if not all - investment terms for high skill general equilibrium knowledge use, extensively rely on this framework.

Ultimately, more secondary markets need to be transformed into primary markets, so that the present backlash against globalization will ease. And given the present lack of (local) primary market roles for time value, it is all the more important for all concerned to understand how extensive investment commitments remain threatened by the "cold feet" of central bankers. These forms of knowledge preservation are all we presently have on formal economic terms, because time value does not yet clear (coordinate by price) in a complete marketplace context. Neither time value or knowledge preservation are understood in a complete framework, as a requisite necessary aggregate for human capital.

Given this reality, the fact credit does not recognize but a fraction of personal wealth potential, should make it obvious that credit only exists as a secondary market. Alas, many are fooled by the idea of interest as the price of money instead of credit, even though credit does not exist in a way which allows it to price or coordinate the general equilibrium broad wealth context it purports to represent. The fact credit markets are secondary, also accounts for the fact that inflation targeting is an inappropriate means to capture equilibrium wide dynamics for economic stability.

Consider more closely as well, why credit serves neither as a point of either monetary or economic origination. Credit is a claim on what is already existing economic time value, from previous wealth formation. Credit is an endogenous response, to wealth which is both exogenous and endogenous in nature. And it is only as tradable sector wealth leads to greater economic complexity, that credit can become part of the process.

When central bankers choose to protect asset and credit formation over a continuous level of aggregate spending capacity, they cannot provide a stable lever for the delicate balance that exists between the additional coordination roles which primary and secondary markets of necessity provide for one another. This balance and coordination between the two matters all the more, given the level of dependence which non tradable sectors will continue to have on the exogenous wealth of international tradable sectors, well into the future.

Knowledge Use Limits in a "Predictable Outcomes" Context

Among the more difficult aspects of economic stagnation, is that centralized structure can mean unexpected limits for knowledge use. So, too, the ability of societies to provide asymmetric compensation for a wide range of (massively investment backed) skills capacity. Asymmetric compensation in this context is either that of private institutional discretionary revenue, or government redistribution, to monetarily reward skills capacity.

Yet in today's world, for many individuals it no longer appears rational, to perform research or take on intellectual challenges, if no public or private rewards appear to be in the offing. In particular, more than just a dearth of monetary opportunity for specific skills sets is involved, because social connections also tend to be missing - if and when one is not (already) gainfully employed.

Consequently, many individuals are unable to (productively) engage in ongoing societal concerns, if a series of degrees is not a part of one's background (clearly this problem has not stopped a lot of unproductive engagement). One almost has to wonder, in spite of plenty of historical evidence to the contrary: how was it ever possible, for individuals to pursue intellectual challenges alongside others, through means other than higher education?

This is an important issue, since the present framework of institutional structure now places real limits, on the personal challenges that can be met by society on well compensated economic terms. While degrees are needed to participate in important aspects of present day realities, there will only be so much economic room - in spite of the extensive investment required - to assure inclusion on these terms.

Even more problematic, is that a higher degree of asymmetric compensation is being usurped by a wide array of crisis circumstance which crowd out ongoing maintenance functions. While this may simply present another cost factor for private enterprise, more is at stake for governmental budgets. What is not already committed to entitlement requirements, is increasingly expected to respond to systemic breakdown along the margins.

In light of this, governmental budgetary management includes a factor equally important to GDP correlation: how much revenue potential exists on discretionary terms? What purpose in demanding more taxation, if and when taxation can no longer respond to present economic circumstance? It is certainly difficult to assume the potential of fiscal measures for recessionary times, when discretionary revenue is overcome by both existing obligations and emergency funding needs.

Here, it helps to note how authoritarian regimes gain a certain degree of economic origin for their rationale. Should budgets lose room to provide funding for daily economic needs (that aren't entitlement or crisis driven), ironclad rules and automated procedures begin to substitute for knowledge use discretion and asymmetric compensation. While rules and greater automation are sometimes appropriate (depending on the purpose of discretion), there are also times when they substitute for better suited responses which include both compassion and human logic. It always helps to define: what is the lever, and to who does it apply, that discretion may serve.

"Predictable outcomes" via rules and regulations are - in part - a response to both public and private budget demands. But when do "predictable outcomes" also reduce our economic freedom? This is important not just in terms of authoritarian tendencies and more laws, but also automation as a response to every budget problem. Only remember that governments are not necessarily alone in their inclinations to reduce economic freedom, especially if private interests attempt to dismantle government processes without sufficient consideration of the knowledge use which could be lost.

Important though asymmetric compensation has been, and the knowledge use associated with what has been a useful economic tool, remember: monetary compensation and knowledge use mostly exist in a "permission only" format. What is sometimes missed by hard liners and inflation nutters, is that even the first mover position of tradable sectors is affected by this reality. Today, the permission of government to effectively operate on a wide societal scale is being challenged, as much of its existing revenue becomes bogged down in prior obligations.

Among the many reasons I suggest organizational capacity in the form of symmetric compensation: people would not have to constantly "ask permission" of authority figures, so as to get things done and respond to life's challenges. The "burden" of equally compensated time value for daily, useful knowledge application, seems small indeed, if it means regaining the ability to steer the ship of humanity.

Decentralization as a Contributor to Time Value

The broader the context for economic time value, the more that any society can bring to the table, for all of their wants and needs. Decentralized settings for economic activity would particularly make it easier to apply knowledge, in time and location specific context. The unique characteristics of specific circumstance are sometimes discounted, especially when centralized organizational patterns require strict adherence to specific knowledge sets. Excessive centralized patterns of knowledge use, can be likened to a centrifugal force which isolates both social interaction and different fields of endeavor. When decentralized knowledge use options are missing, knowledge loses much of its integrative and dynamic qualities.

In recent decades, populations have lost much of their ability to negotiate time value with others on general terms, at an economic level. As a result, time value in aggregate is also becoming compromised. Even though we often value the time of others more than specific sets of knowledge or skill, we have too few remaining means to compensate one another, on time based terms.

Centralized knowledge use structures continue to atomize (previous) time based services product into automated and specific patterns, which increasingly adhere to patented information. The lower one's income level, the more one may be (consequently) expected to accomplish service tasks, without personal assistance from others - regardless of their ability to help. While highly specialized knowledge use is at least somewhat suited for the population densities of large cities, a high volume of knowledge use specificity is difficult to sustain, elsewhere. As a result, those who don't live in close proximity to large cities, are becoming more isolated from the centers and societal expectations of today's knowledge based wealth.

Fortunately, this problem could be addressed, by tapping new forms of organizational capacity via formal and effective decentralized means. Consider for instance, what tradable sectors have accomplished in recent centuries, through well coordinated divisions of labor which regularly change skill sets according to evolving tasks. These changes require time and circumstance specificity, not knowledge use rigidity. The ability of traditional manufacture to closely coordinate a broad array of time based functions, also made it possible for tradable sectors to thrive for centuries as a self starting component - one which often contributed to further economic complexity.

Services production could potentially self replicate as well, through internally generated coordination of what are normally multiple institutional patterns. These general frameworks for knowledge use, would also mean more flexible divisions of labor. Granted, this level of coordination would have previously been difficult. However, technology has advanced to such an extent, that digital processes would augment group formation so as to compensate for any lack of knowledge based investment, at broader levels. Ultimately, this would allow knowledge use to spread to areas which are in great need of economic complexity. Best, new sources of wealth generation would once again have a chance to thrive, through decentralized means.

"Bootleggers and Baptists" at the Gate

We live in strange times. Even though people still look to Washington in hopes of getting sometime done, it's hard to feel good about the majority of people who are elected for that purpose. In many instances, I'm compelled by the trends behind the individuals involved. Perhaps that helps to explain, why I've become less inclined over the years, to delve into the particulars of political personalities.

Both Democrats and Republicans have ignored supply side fundamentals, especially those regarding practical aspects of knowledge use in today's marketplace. This inclination to dismiss deep structural issues out of hand, undermines both political platforms - a trend which Trump's ascendance exemplifies all too well. Consequently, the fact he is noncommittal about many policy preferences, could oddly work in his favor. Whereas the fact Clinton accepts more of those "back room" mutual agreements among progressives and conservatives alike, may work against her. Meanwhile the "old guard" remains nervous about Trump, in part because he can't be counted on to "guard the gate".

Perhaps a good way to describe this seeming oddity, is in terms of "bootleggers and baptists". Consider the gate as economic access - particularly in terms of knowledge use. My dad still has vivid memories from his youth of the real thing, in Depression era East Texas. He even put some of those stories to paper - decades earlier - when he first retired. Meanwhile, a national version of this phenomenon is proving somewhat more difficult to eradicate. From Wikipedia:

Bootleggers and Baptists is a catch-phrase invented by regulatory economist Bruce Yandle, for the observation that regulations are supported by both groups that want the ostensible purpose of the regulation, and by groups that profit from undermining that purpose.

For much of the 20th century, Baptists and other evangelical Christians were prominent in political activism for Sunday closing laws restricting the sale of alcohol. Bootleggers sold alcohol illegally, and got more business if legal sales were restricted. Such a coalition makes it easier for politicians to favor both groups. The Baptists lower the costs of favor seeking for the bootleggers, because politicians can pose as being motivated purely by the public interests of well-funded business. Baptists take the moral high ground, while the bootleggers persuade the politicians quietly, behind closed doors. 

Even though both progressives and conservatives have their own "high moral grounds", it is the progressives which have inadvertently proven most public with theirs, as to "needed" regulations which can also impact the most basic elements of economic access. For instance, Bernie Sanders, in his recent push for "free education", provided an apt reminder, how progressives increased educational costs in their ongoing efforts to expand university access. One could say progressives have taken the "high moral ground" or Baptist role in this instance, via their reaction to a lack of economic access.

Alas, then things become more complicated. The (more) public nature of a progressive high ground dialogue, means it's easy for Republicans to blame Democrats, as responsible for driving service product price levels ever higher, even as they remain quiet about their own restrictive supply side role. One is reminded of the old rich who don't wish to advertise their good fortune, lest attention be drawn to its "unseemly" political source.

A good example of "knowing too much" in this regard, was Milton Friedman, who broke what was mostly a code of silence, regarding physicians and licensing restrictions. In recent years some have asked, "Why do tight money conservatives reject Milton Friedman's monetary wisdom - especially since he was such a staunch supporter of free markets?"

While differences abound between pro business and pro market perspectives, some rejections likely exist since Friedman committed the "unpardonable" sin, of highlighting a (mostly otherwise) hidden supply side problem. I say mostly hidden, because while the layperson speaks about it, policy makers steer clear wherever possible. Even though many of Friedman's targets involved progressive policies, he had few qualms about pointing out what was particularly a conservative role, given the supply side limits of healthcare. Today, advocates of tight money, are often "closet" advocates for tight restraints, in knowledge based supply side production.

Hence a lot of bootlegger and baptist action continues to take place behind the scenes, while media debates for ever more healthcare regulation, have been a constant feature of daily television news for decades. The progressive (Baptist), in promoting government "protection", still does the heavy lifting on the conservative's (bootlegger's) behalf, for supposedly "rational" supply side measures. While progressives contribute to higher knowledge use prices in the mistaken belief that product demand is the most important issue, many conservatives also understand that limits to supply are responsible for their own prosperity.

Megan McArdle argued in an article earlier this year, "Cut health costs or help workers. You can't do both." Perhaps the bootlegger versus baptist story helps to explain why her insightful argument mostly fell on deaf ears. Fortunately, the process of production reform for healthcare could begin along the margins. But too many wealth capture gains exist, to expect real change in the circumstance of general equilibrium, anytime soon.

Debt Considerations, and the Missing Role of Productivity

When someone seriously addresses the debt to GDP ratio, I am inclined to listen, and Alice Rivlin's recent testimony to the Joint Economic Committee is worth the reader's time. The title is also appropriate: "Rising debt - not a crisis, but a serious problem to be managed."

Consider the parallels, between a growing urgency to address rising debt via sustained measures, and the urgency of addressing the hidden unemployment of a gradually declining labor force participation rate. Until now, neither have been directly confronted, in part because of the underlying complexities involved. Granted, Washington may not yet have reason to believe that important links exist between the two, but over time, perhaps those links could be established.

Government budget problems which originated in the 20th century are somewhat different from earlier budgets, given the substantial portion which exists as a response to insufficient production of knowledge based product in the marketplace. All too often, government budgets now attempt to make amends for what were arbitrary production limits - limits which not only negatively affect countless bottom lines, but also the ability of individuals to freely interact in the marketplace.

For important aspects of knowledge based services production, this particularly holds true in rural areas. Compared to the rest of the population, rural residents are especially dependent on government, and the knowledge product of prosperous regions. Even though they often fund public education locally via taxation, they don't get local or direct services results, for their own expected responsibilities in this regard.

Productivity is missing in our rural areas. Were it possible for rural residents to engage more directly in the production of knowledge endeavor, their participation could eventually help ease the burden of government debt, as well. Even though tradable sectors generate production gains when less personal interaction is required, time based services - via mutual employment coordination - would generate greater productivity by make more personal interaction part of the process. As Alice Rivlin stressed:

We need policies that help grow the GDP faster and slow the growth of debt simultaneously.

Absolutely. Of course, getting there is not quite a straightforward process, in spite of this assertion on her part:

To grow faster we need a substantial sustained increase in public and private investment aimed at accelerating the growth of productivity and incomes in ways that benefit average workers and provide opportunities for those stuck in low wage jobs.

But how does one avoid confusion, concerning the factors which may - or may not - contribute to productivity gains and output over time? The physical infrastructure of the twentieth century contributed to productivity, because it provided more means for all citizens to generate a broader degree of economic activity. Today, however, the highway infrastructure which still contributes to areas that are economically complex, doesn't provide the same benefits for rural areas. Edward Glaeser also notes the diminishing returns which particularly apply to traditional rural infrastructure, in a recent article:

A well-known 1988 Congressional Budget Office survey found that spending to maintain current highways in good shape produces returns of 30 percent to 40 percent - but that new highway construction in rural areas showed a much lower return.

Likewise, the wage gains of 2015 - while good for rich and poor alike, did not reach the residents of rural areas. According to Jim Tankersley:

Median incomes did not budge significantly in rural areas, while in cities they grew by 7.3 percent.

The kinds of infrastructure which could contribute to greater economic complexity where it is most lacking, have yet to be considered. Unfortunately, productivity gains aren't just a matter of ever more contributions for systems which are already strong, even if this is the approach which makes the most sense to governments and private interests alike. For example, in her testimony, Alice Rivlin stated:

We need aggressive economic policies to grow the economy faster and create more and better paying jobs.

Interestingly enough, more jobs on offer in the near future, are likely to be higher skill offerings. The catch is that there's a relative trade off between more jobs versus "better jobs" in a general equilibrium context. It's that trade off which also reflects what existing services capacity actually represents. More services capacity needs to be generated directly. Even though it is likely not possible to lower services costs for today's prosperous regions anytime soon, new services generation for rural areas could take place via more cost effective means. Not only would this ultimately lead to greater productivity for services production, it would mean a long term strategy for debt reduction, as well. 

One Thousand Posts: The Unemployment Dialogue

One thousand posts represents a summit of sorts, yet it is hardly the last mountain I'll need to climb in the years ahead! Now, I'll need to "give myself permission" to better organize the contents of this blog, and spend more time in the near future making it "user friendly" as well.

Granted, it's tempting in some ways to move on with intriguing concepts, such as the ways in which primary markets (tradable sectors) and secondary markets (non tradable sectors) affect growth and output. But I've not yet finished the task at hand. It's simply not the moment to chase new challenges, because I've yet to put the work of recent years in an understandable context for my readers. Again, I should have a glossary ready in a couple of months - albeit one which will receive plenty of editing in 2017 while I revisit earlier posts.

Why are these thoughts so much on my mind? Recently, I was asked a question which was also posed to me about a decade earlier. "Who, exactly, are you writing for?" Even though I responded (again) "for the unemployed", I acknowledge this is somewhat of an elusive and frustrating answer. Elusive, in the sense that the unemployed aren't always in a position to enter dialogue which addresses a practical long term approach. Further, others aren't in a position to give the unemployed more "room" in the existing economy. Consequently, like so much of life, unemployment tends to be an either/or proposition. Either people are actively seeking employment and utilizing familiar channels to do so, or the search has generally ended, to an extent one becomes anxious to "get on" with life by other means.

For a time however, this familiar either/or pattern was interrupted, as the Great Recession encouraged large numbers of the recently unemployed, to take part in dialogue on economics blogs. While these blogs benefited from an additional audience for a number of years, many sites have gradually reverted back to a previous norm, since it became apparent most economists didn't believe any "drastic" changes were needed, particularly in terms of the real economy. While one occasionally heard of "structural solutions", many of these references were in regard to already existing positions on public policy initiatives. As a result, the vitally important concern of unemployment - in a context of future employment potential for all concerned - again became mostly relegated to talking points, for the agendas of various interests.

What was missed in the earlier dialogue, is that unemployment is a conceptual real economy problem. A gradually declining labor force participation rate, should be a strong signal that people need to think long and hard, about the kind of future economy which would be possible. What is meant by employment as a conceptual reality? When a wide range of products have become possible via automation, what do people still want to be responsible for? How do they desire to assist one another? What social realities do individuals wish to experience with one another? If these economic concerns are not directly addressed while we still have the monetary value of present day wealth, we could lose the opportunity to do so in a recognizable economic context.

Unemployment isn't just a matter of being unemployed. It's a condition which also indicates how people desire to be employed - especially given the fact people invest on a massive scale to achieve meaningful employment. Unfortunately, it's not easy to find how to books or sheets at the ready, which address unemployment as a conceptual issue. Plus, it's not easy to write publishable how to books for the concerns of unemployment. If it were, the unemployed would already be purchasing them. But that doesn't mean we don't need to begin putting sheets together just the same, so as to begin experimenting with future employment potential.

On those days when I feel somewhat like an alien, attempting to "call" earth yet not getting an answer, the enormity of the task at hand, serves as a reminder that what we attempt to provide at this point is still a drop in the bucket. For instance, of the coming changes in the near future, Ryan Avent mused in a recent interview:

I think this transformative revolution will create enormous growth in [the supply of workers and machines], automating a lot of industries and boosting productivity. When you have this glut of workers, it plays havoc with existing institutions.

I think we are headed for a really important era in economic history. The Industrial Revolution is a pretty good guide of what that will look like. There will have to be a societal negotiation for how to share the gains from growth. That process will be long and drawn out. It will involve intense ideological conflict and history suggests that a lot will go wrong.

Those who are young, don't realize how much these coming changes have been discussed all along, even in the early nineties. Yet what is so striking, is that much of the early discussion was highly positive. People looked forward to automation freeing people, for what they wanted most to be able to do with their lives. Many of those early forecasters were so hopeful, and they believed that technology would relive millions from "mind numbing" work.

But no one stopped long enough in the past decades, to frame employment potential as a "how to" scenario. Consequently, most individuals are no longer as hopeful as those early forecasters. Even though it would have been difficult to determine how to make the transition to more meaningful work, the resulting political uncertainty of the present, is far more difficult, by comparison.

Hence I need to proceed in the years ahead, with the memories of the high hopes which so many gentle souls have held for our economic future, to make sure those hopes remain alive. Some may think it is too late to hope for the best, but as a civilization we still hold enough potential that our lives need not be undone by the political and economic uncertainties of the present.

Total Factor Productivity as a Growth Component

What might be done, when existing patterns of organizational arbitrage don't generate sufficient economic access across the income spectrum? The good news, is not all organized resource capacity has to operate solely from a supply side axis. In other words, institutions could contribute to the growth of aggregate demand on real economy terms, by expanding the definition of aggregate supply. One might say that the guidelines of a single institution could make Say's Law possible, for time value. In order to do so, local resource factors can be reconsidered, which previously haven't been taken into account for institutional definition and organization.

Digital platforms are already making it possible, to coordinate a broader array of resource sets than have sometimes been utilized in the marketplace. Ultimately, these processes could also generate new productivity, through redefining the reach of total factor productivity at local levels. Of course, total factor productivity exists in a relative sense, given the fact it's neither possible or desirable to internally align all resources in any given environment, as an aspect of local resource outcome.

Until recently, corporations have mostly influenced resource outcomes, through resource alignments along a supply side axis. This pattern is only just beginning to change, as digital platforms begin their experimentation with supply and demand sets - some of which also include time based product.

However: thus far, digital platforms of this nature are open ended and mostly dependent (at least from what I've observed) on already existing economic complexity. What is presently needed, are digital platforms which can contribute to new patterns of productive economic complexity, which provide a complete internal decentralized structure. While some existing digital platforms presently contribute to output, the real potential in this regard, is to coordinate for local supply and demand of time based product. By aligning local land use patterns with these efforts, relatively small groups would be able to generate wealth agglomeration benefits which are normally associated with a population of millions.

By considering total factor productivity via local combined supply and demand efforts, non tradable sectors would finally have means to capture good deflation, much as tradable sectors have been able to do by organizing (mostly) on the supply axis. Consider why this matters. Tradable sectors have generated good deflation even as they created more overall output, which also meant higher profits even with lower product costs. Non tradable sectors need to take more demand factors into account along the entire production axis, in order to achieve greater output. Likewise, there is greater potential for good deflation - particularly in terms of a local group perspective.

How so? In part by folding personal time management factors, into better integrated workplace and marketplace settings. One negotiates time preferences according to personal schedule considerations, instead of assigning this negotiation responsibility to others. Also, local government provision as a part of time based coordination, would mean participating communities would no longer need to raise taxes for government services. Total factor productivity considerations are simply an additional step, in what have already been standard organizational processes for centuries.

Yet note that the above description is only a partial definition of productivity coordination, as it describes potential productivity gains. A parallel alignment in terms of local land use, would particularly make high density knowledge use agglomeration possible for lower income levels. This form of agglomeration would greatly benefit from land use which utilizes walkable core settings, for those who are currently engaged in daily routines for time based services.

Why is it important to broaden productivity potential? For one, there is less certainty regarding components of specific factor productivity. For instance, consider some central elements of growth economic theory, which are utilized for theoretical constructs. In a recent post Dietrich Vollrath writes:

Perhaps the main organizing principle in growth economics over the last sixty years has been the "balanced growth path" or BGP. BGP is really just a name for a set of conditions related to several major pieces of economic data:

1) The growth rate of output per worker is constant over time.
2) The rate of return on capital is constant over time.
3) The share of output paid to capital is constant over time. 

If only these precepts could still be taken for granted! Vollrath was also concerned, whether their present day validity might be changing. That's not to say these concepts haven't been quite useful. After all, these conditions were able to maintain reasonable constants to an extent, that production and consumption roles could be safely guided by governments and private interests, without substantial input from citizens for the production processes involved.

Today, however, the tasks of aligning supply and demand are becoming too important, to be left completely in the care of nations, states and established interests, without broad input from citizens as well. With a little luck, local economies will finally get their turn, to contribute to the organizational processes which could reclaim future long term growth.

Protectionism, vs the Protection of an Economic Contract

Is it possible, for any form of protection to be considered "pro market", rather than pro business? Context matters. Where it is possible to provide protection for total market support, overall output of time based services product could also become better aligned with actual participation.

While the international dimension of protectionism gets the most attention, there's plenty of domestic versions as well. In the latter, certain businesses - and by extension, individuals - may be protected at the expense of others. Unfortunately, it's not easy to maintain a pro market framework in every circumstance. This is one reason I've suggested an equilibrium corporate structure which - while small - could encourage pro market settings which are also capable of decentralized duplication.

Instead of protecting specific markets or special interests on pro business terms, we could organize to protect time value as the scarce resource it actually represents in the marketplace. Even though skills capacity is important, allowing time value to hold equal importance to skills capacity, would make it simpler to fully integrate automation without further disrupting marketplace participation. Aggregate time value in these settings can be thought of as an apple harvest, in which the fruits with blemishes are also traded alongside other apples on a regular basis.

A marketplace for time value would exist as an economic social contract. Each participant would have the economic right to take part in both local consumption and production, by means of an understandable local framework. While human rights have been internationally stressed since the 20th century, what is missing in a 21st century context, is a right to produce goods and services which does not interfere with the right of others to do the same.

Many individual production rights declined in the 20th century, especially as governments came to define the terms of time based product. Unfortunately, institutions are are not well positioned to provide time based product via centralized means, since this process limits the supply of time based product in aggregate so as to meet budget expectations. In turn, "exclusive" supply invariably means revenue limits as well, for all concerned. Yet when governments attempt to tax information technology to make up for revenue limits, the process can be likened to burning down one's own house, just to stay warm. Human capital - unlike tradable sector product - becomes viable for time based production, consumption, wealth creation and redistribution, when it is mutually accounted for in actual terms of exchange.

The Universal Declaration of Human Rights was conceived in an era, when some believed that broad prosperity would eventually make it unnecessary for populations to maintain full employment and individual economic participation. Otherwise, the importance of the right to produce might not have been lost to the degree that has actually occurred. Few things are more important than one's personal ability to remain economically viable through the course of a lifetime. If we are to overcome the dangers of today's renewed protectionism, one means is to protect the value of time, as a primary point of economic stability.

Capping Inflation Means Never Having to Say You're Sorry

Never admitting one's faults, also means not having to make amends for one's past mistakes. In particular, without a level target rule, central bankers don't need to explain to anyone why they may choose (via discretion) to withdraw aggregate spending capacity for any reason. Yet due to the way the Fed frames its communications processes, the public hardly understands what is at stake in their deliberations - nor is it easy to decipher what has actually been lost, since the Great Recession. On Milton Friedman's 90th birthday, Ben Bernanke made a surprising admission:

Regarding the Great Depression, you're right, we did it. We're very sorry. But thanks to you, we won't do it again.

Scott Sumner must have remembered this astonishing moment of honesty on Bernanke's part, in a recent monetary conference, when he mused: why, if apologies were in order for that earlier calamity, is admitting fault for the Great Recession still off the table? Granted, Bernanke and company did what they believed was necessary to rescue the financial system, and even congratulated themselves in the process. Ah well, when it comes to expecting inflation targeting to guide monetary policy, perhaps an arbitrary cap is simply Fed "toughlove" which means never having to say you're sorry.

Or perhaps the moral hazards of inflation targeting have yet to be publicly emphasized, because so much of economic debate remains "above the fray" in this regard. Yet without this perspective, it can be a bit of a struggle to explain the importance of a level nominal target to others, so as to reinforce one's points at an emotional level. Greg Ip's incisive questions for the last panel (well after an extended lunch!) at the "Monetary Rules for a Post-Crisis World" conference, was a case in point. Hence I agree with Bonnie Carr, that emphasizing the moral hazards of inflation targeting, may be a good tactic, especially now. In a recent post, she asks:

Why is it imperative, above all else to keep inflation low and stable rather than being allowed to reasonably drift with supply side conditions?...If headline inflation is nearly always a supply side phenomenon, what effect does it have to effectively cap pricing pressures as a matter of policy?...Don't those pressures have to go somewhere?

Indeed they do. Given that services (of non tradable sectors) are a larger component of developed economies than tradable sectors, inflation targeting has reached a point where it could be distorting the production potential of marketplace structure.

After all, remember what resides below a hard inflation cap. The relative inflation of non tradable sectors leaves less room for tradable sector formation. Think of this as expensive necessities versus "cheap" everything else. Yet the consequent lack of growth in tradable sectors, means less redistributed revenue remains available for service sector formation. As secondary markets, service sectors must rely on the very tradable sector wealth which their relative inflation continues to suppress. This state of affairs likely contributes to what has now become the slowest services growth in six years.

David Beckworth also pointed out in the above mentioned Mercatus conference that with a level target rule, the Fed would be formally committed to take care of past mistakes. Even though the Fed has become fairly consistent in representing aggregate spending capacity since the Great Recession, no one can really discern how those earlier monetary and production losses impacted output and growth potential. And because of inflation targeting framing, many still do not recognize how or why, so many of these losses took place.

According to Scott Sumner:

It is NGDP growth shocks that destabilize labor markets and financial markets, not inflation shocks...

He also responded to a recent claim from Michael Hatcher, that NGDP targeting is "confusing":

The public would actually find it much easier to understand NGDP targeting whereas the public is completely mystified by inflation targeting...When the public thinks about "inflation" they tend to implicitly hold their nominal income constant. Thus they wrongly think that inflation lowers their living standard...But of course the Fed has no impact on supply side inflation, it can only influence demand-side inflation.

What I find especially significant about Scott's remarks, is what the public mistakenly believes as to income already being held constant. Without the appropriate framing of nominal income or aggregate spending capacity for this discussion, it is only more difficult to deal with the fact that policy makers remain uncertain as to human contribution to economic activity in the near future. Because of the language of inflation targeting, people have few means by which to engage in the most important economic debate of our time: keeping citizens front and center, in both monetary representation and economic reality.

Arbitrage: The Good Fortune of Creating Value

How to think about arbitrage potential? Those who have owned businesses, experienced self employment or engaged in financial activity, already understand the broad scope of arbitrage potential on a conscious level. Arbitrage - like innovation - can serve as a beginning point, for new organizational patterns which contribute to greater resource utilization. This post is particularly for those who may not closely follow economic discourse. Recently, it came to my attention that inquiring minds want to know: what specifically do I mean, by arbitrage?

First, a few standard interpretations. Investopedia focuses on some financial aspects:

Arbitrage...is a trade that profits by exploiting the price differences of identical or similar financial instruments on different markets or in different forms. Arbitrage exists as a result of market inefficiencies.

However, "market inefficiencies" may be considered relative, since arbitrage can also be a more open ended process in which "inefficiencies" are hardly obvious to the average observer. Wikipedia further broadens the idea of arbitrage, via an explanation of markets:

A market is one of many varieties of systems, institutions, procedures, social relations, and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services (including labor) in exchange for money from buyers.

This latter description could be helpful for readers who are uncertain about my framing, regarding the need for greater personal freedom of choice, via a marketplace for time value. Many workplaces are in a process of social transition - one which is less about labor, and more about time based social options. However, this change is so recent, that society has yet to develop meaningful and relevant context, by which time based services could more closely match personal challenges and inclinations. Time arbitrage would allow individuals to discover time value in relation to that of others, so that our institutions would not have to constantly do all the negotiating in our stead.

Some time based services are practical, while others are experiential. Yet both need to occur so as to feel freely chosen by the participants. In many respects, the idea of product is in the eye of the beholder, which is why formal structure for services formation at an individual level could prove so useful. Whether or not one finds value in the sets of resources that individuals offer, depends on the broader context of those resources. How has this context been represented by the entrepreneur, business person or professional who brings the product environment to our attention?

Arbitrage can prove successful enough, to bring new social patterns and economic activities into play. However, it helps to remember that arbitrage can't be forced. No arbitrage process is as simple as anyone might imagine. By way of example, only consider the wide range of skills and talents that individuals gain over the course of a lifetime, and the time investment involved. Often, too few of these investments and challenges have proven viable in the marketplace. The challenge is to make more of the things we enjoy, a dynamic and vital part of our economic lives.

Even though society more often thinks of entrepreneurship in terms of national or global opportunities for creating value, the fact remains that far too little economic value has been created of late in our own environments. Yet local entrepreneurs are in the best position to contribute to our life experiences in an immediate sense. The arbitrage which is possible in our immediate environments, is just as important as the arbitrage of nations. Both hold equal value.

The Case Against Insufficient Economic Complexity

In "The Case Against Cash", Kenneth Rogoff writes:

I am not advocating a cashless society, which will be neither feasible or desirable anytime soon. But a less-cash society would be a fairer and safer place.

Note that despite the disclaimer, it appears that Rogoff "agitates" for a cashless society just the same. Yet what would such a measure actually provide, in terms of more positive circumstance? There's a chance this reasoning on his part ("a fairer and safer place"), is wishful thinking, in terms of the proposed "solution". I've argued against a cashless society in earlier posts for a number of reasons - not the least of which include the inconvenience factor, for anyone such as myself with limited income.

What I wish to emphasize here, however, is that efforts to massively reduce cash holdings are a backward approach, to the informal economies beyond government's domain. Unfortunately, these conditions thrive, due to a lack of formal economic options for individuals. Plus it's a problem which is only getting worse. Hence instead of a case against cash, why not address the lack of productive economic complexity, in places where it is most needed? How does anyone expect a massive reduction in cash to cripple a vast underground economy - one which primarily exists because too many people have too few options to make a good life for themselves?

And without more positive economic choices, people in the underground economy would quickly find means to circumvent a lack of cash, should governments take this route.The best way to provide incentive for people to participate in formal economies, is to formalize more means of generating economic activity for all concerned. When policy makers spend far too much time going in the opposite direction, the economic underground will remain strong as ever, regardless of restraints on cash formation.

Positive formal economies which provide sufficient economic complexity, are - first and foremost - a result of individual empowerment. David Henderson encourages us to honor the laborer as an individual, in this essay for Labor Day:

To honor laborers, you would have to respect their right to make choices for themselves.

Presently, people lack sufficient economic context by which to do so, and much of the earlier reliance on cultural norms for economic coordination has been outmoded. When individuals and groups alike lack context for mutual organizational patterns, unions and underground economies can be counted on to fill the void. However, in spite of pro/con arguments regarding unions, Timothy Taylor reminds us that unions do not have the presence in today's society which existed only decades earlier:

About 30% of the workforce belonged to a union back in the early 1950s, compared to barely more than 10% today. Union workers do earn more, but at least in part, this is because their employers know how to compete with a mixture of higher-priced labor, fewer jobs, and more capital investment. Are there alternative institutions that might represent the modern needs of US workers?

His concluding question could be considered as a challenge. Indeed, in an earlier post on unions, Taylor noted that when workers don't have a voice in the workplace, they turn to politicians instead. How might institutions respect the right of individuals to make choices for themselves, without giving in to excessive demands?

One possibility for 21st century workers, is an institution which allows individuals to take (economic) credit for the abilities they already have, so that they can continue making progress acquiring new skills, without undue risk. Via mutual employment, individuals would likely not be so inclined to take advantage of one another, because mutual employment would also mean an ability to learn stronger means of negotiation.

Also, mutual employment would more often mean "being okay" with "good enough". How so? Consider what has already occurred, as society has become ever more insistent on creating the best standard which everyone is "supposed" to follow. When societies insist each time on going for the best, the most efficient results, non human algorithms are going to beat us at our own game. Indeed, this is already happening.

Why not respond to encroaching automation, by embracing local "closed loop" services capacity, via the local creation of time based product. This form of hive mind hardly needs to provide the "ultimate" or the "latest and greatest" in knowledge use. Instead, it's a process which would make it possible for individuals who don't live in prosperous regions, to also have a good life. Otherwise, automation and the economic underworld may continue to encroach on the employment of our less prosperous regions, in spite of the cashless society which economists such as Kenneth Rogoff are keen to imagine.

Speed Traps, NIMBYs and other Community "Coping" Mechanisms

Often, when we think of economic imbalance, low income individuals and families come to mind. In the 21st century, many lack economic access in part because knowledge use has become such an important component of economic activity. Without the ability to tap into knowledge use for widespread employment, low income groups suffer, and communities suffer as well. How do communities "cope", when a general lack of economic access also means insufficient resource capacity or economic complexity?

Consider the coping mechanism of "speed traps", as an apt example. If the economic rationale isn't taken into account (lack of local resources for municipal needs), speed traps can seem almost ludicrous. Why would local police park in a not so obvious spot by the side of the road, and wait for unsuspecting motorists to speed by?

Sometime ago I wrote about police departments as a "last line of defense", when societies ignore structural economic issues for too long. This last line of defense shows up in multiple ways. At root, there has been a gradual loss of monetary time value (in aggregate), for too many individuals. When people lack sufficient means to make their time count on economic terms, others gradually lose their trust in these folk, and social unrest is just one result. Communities of all sizes respond to this reality, by zoning out the individuals most likely to experience social unrest and related problems. And for communities which are not well positioned to keep the "unwanted" out, sending them to prison often becomes the next option.

Nor does anyone have to be sitting behind bars, to feel imprisoned. Even though we no longer have (literally at least) debtor's prisons, a general lack of local resource capacity in many instances, is nonetheless leading to the same legal traps which poor people experienced centuries earlier, of legal fees for which one had few resources to address. Even though excessive court fees for these folk can appear even more irrational than the aforementioned speed traps, these kinds of problems will only grow until local communities once again have broader means to harness the skills capacity of their own citizens.

However, these issues of economic loss are not easy to discuss at a political level, for their problems are mostly observed among the margins which have little means to resist them. This is Main Street protectionism. One can of course note the winners and the losers, but it has proven more difficult to decipher how - or why - some communities and cities continue to unravel.

In the meantime, there are calls to bring those who have lost out to the places now experiencing success, without adequate understanding as to what communities were trying to protect themselves from in the first place. When David Henderson wrote "The Case For Low-Income Housing" in response to a Strong Towns post,  "Handle" responded (in part) in the comments:

...in an average month, the vast majority of cases of violent crimes involved residents of these complexes...It is a very dramatic and obvious manifestation of the Pareto Principle - "10% of the people cause 90% of the problem," and concomitantly they produce a wildly disproportionate per capita drain on local resources.

"Handle" further explains that there is a race to the bottom competition among localities to avoid these individuals as a result. Again, rural areas which find themselves on the losing end of the race to the bottom, are more likely to resort to longer prison sentences for local safety concerns. Likewise, the War on Drugs continues to serve as a source of local resource capture, for too many communities which have insufficient means to tap knowledge use for local productive wealth formation.

Only recall the earlier debtor's prisons and what finally made it possible for populations to escape them: new horizons in the New World. Today, there is also the possibility of creating new horizons for knowledge use, so that individuals, families and communities alike can escape the coping mechanisms which make so little sense to others. Unfortunately, there were sometimes understandable reasons for communities to put up walls against the individuals who lacked the ability to reciprocate as responsible citizens. The challenge is to make it possible for all people to assist one another with knowledge use, so that coping via exclusion is no longer as necessary, as has proven to be the case in the present.

When are Value in Use Gains Not Enough?

Brad Delong is encouraged by the growth trend for the long run, despite recent political issues that have emerged. In "The Economic Trend Is Our Friend", he wrote:

More people are gaining access to new, productivity enhancing technologies, more people are engaging in mutually beneficial trade, and fewer people are being born, thus allaying any continued fears of a so-called population bomb.

Here's the part that concerned me:

The way we measure real GDP accounts for all the goods and services being produced, but it doesn't properly account for value that exists but can't be measured - such as the immense social benefits that accrue to social media users from services that cost them nothing...More than ever, we are producing commodities that contribute to social welfare through use value rather than market value.

However, this particular form of technological access has yet to provide good deflation where it matters most: our ongoing financial responsibilities for non tradable sectors. These obligations are still in place and we need to make sure GDP measures continue to count them whatever their cost, so that collectively we will all have the money to pay them.

Consumption gains can contribute to well being on monetary terms, but those are gains that free up our time for further production potential, instead of making further demands on the limited time we still have. Why have economists and policy makers alike confused the leisure gains of social media, with the kinds of productivity which in the past have actually reduced the costs of living, working and doing business?

Even though social media can add quality to time value, this gain does not matter at a monetary level. Value in use gains - important though they are - will continue to need other resource reinforcements, in order for individuals to use them effectively in the marketplace at a value in exchange level. Facebook doesn't make it easier to pay our bills. The aggregate spending capacity of mutual monetary obligations is the defining feature of GDP measure, whether or not central bankers and policy makers may wish it to be otherwise.

"JEC" of Mean Squared Errors has a good response to Brad Delong in "'No, social media is not 'undervalued' in GDP":

...let's keep in mind that, when we talk about GDP, we're talking about the market value of goods and services, not their value value...It's no objection to say that the market value of social media differs from its "real" value--that's true of literally everything that composes GDP. It's perfectly valid to argue that GDP is a meaningless construct...But it's an entirely different matter to claim that a particular component is being mismeasured.

Note as well that "value value" could also be attributed to personal time value. Yet consumption or leisure can't be confused with the productive components of time value which make it possible to fulfill one's own monetary or financial obligations. While time aggregate representation would greatly benefit from more compensated personal value, the main difficulty in this regard is a lack of personal production representation, in terms of a value in use structure.

Consumption gains should not be confused with the gains that free up time use potential. Should GDP measure change to reflect "hidden" consumption gains, poor reasoning such as this would likely lead to further monetary tightening by the Fed. And money has been too tight for too long, already.

Regular readers know that I believe value in use settings could be a part of GDP representation, so long as the time value of mutual assistance is in fact monetarily compensated. Indeed, this approach would include time value on more personal or "value value" terms. It would have the additional support of linked asset structure, which would create a local equilibrium that reflects local wage and income capacity. The value gains which matter for GDP are those which are readily measured on monetary terms, and value in use time structure is no different in this regard.

Imagining a Good Life, Sans University?

In the post "Are universities worth it?" which also responds to Bryan Caplan's arguments re education, Tim Harford sums up:

Collectively, we have allowed university admissions and examiners to become gatekeepers for a successful career. Is that really wise?

Clearly not, but alas, the matter is not so simple. Nor could this existing circumstance in terms of work formation, be readily reversed at a general equilibrium level.

Some of higher education's specialization has become vitally important, as practical service goods in the marketplace. In these instances, education's formal structure provides an extensive public service, which makes its associated costs more relevant. Yet there are structural problems for higher education, which are hidden in exactly how knowledge based endeavor continues to replace other forms of employment, on multiple levels. Too many aspects of knowledge use have been lumped together into a university vision of isolated dialogue and activity, leading to extensive loss in other civic environments which once supported a vast array of intellectual life.

These issues are becoming more evident, as automation erodes other skill sets which were once necessary in the workplace. Many baby boomers (such as myself) without college degrees, have observed a wide range of employment dwindle which is deemed no longer necessary. Yet...before younger generations decide against a college degree, there's this seemingly contrary reminder from microeconomic insights:

Over the past three decades, the wage gap between workers with college degrees and those without has nearly doubled. In 1980, college graduates earned 38 percent more than non-college workers. By 2011, the ratio had risen to 73 percent. At the same time, workers have become increasingly spatially segregated by education. Cities which had a large share of college graduates in 1980 increasingly attracted larger shares of college educated workers from 1980 to 2000, while less educated cities in 1980 gained few college grads. The increasingly highly educated cities also experienced higher wage growth for both low- and high-skill workers and substantially larger increases in housing costs.

One could say that the educational patterns of the twentieth century created an exclusive equilibrium, which in turn attracts a majority of the providers for today's time based services product, across an entire spectrum. Indeed, whether practical or experiential knowledge is involved, time based services goods have yet to provide the prosperity, that tradable sectors made possible in the last century. What is particularly unsettling about this fact, is that higher education as presently defined, is not really the way to get to full services representation for populations as a whole.

Should larger percentages of any population gain a college degree, there are not (presently) sufficient primary markets for knowledge use, for these college grads to find gainful employment. Yet today's secondary markets rely on the wealth of primary markets, in order to maintain the employment levels they currently represent. Without a marketplace for time value, the lack of primary markets (for wealth formation) would eventually nudge higher income levels to work directly with others, while lower income levels would be increasingly limited to algorithms and packaged knowledge directives, in lieu of actual human capital.

Consider how local income aggregates reflect local asset wealth. Monetarily derived time value closely coordinates with income patterns in local settings. The challenge for those without the resources to assume the risk of formal education, is to generate productive knowledge use which creates a good life, without the high levels of investment normally associated with the entire process.

Knowledge use need not be solely about economic access. Again, the challenge is not one of changed terms for general equilibrium settings. Instead, knowledge providers could support those who are willing to preserve valuable knowledge sets which lead to viable paths for productive employment on broader terms. What's important is to honor the knowledge based approach that individuals are most comfortable with - whether as economic access or a simpler version of the good life.