Friday, December 2, 2016

Getting Beyond General Equilibrium Restraints

Grassroots reform, such as I have touched on in numerous posts, could allow those who often appear to need help, a chance to eventually learn how to help themselves in meaningful ways. Such an approach would also make it possible to recreate economic complexity, in many forgotten regions of the country.

Most important, grassroots reform would create much needed growth and output for the economy. How might one think about greater economic vitality at a grassroots level, versus the "preservation" of existing jobs? According to Justin Wolfers in a recent NYT article ("Trump and Carrier: How a Modern Economy is Like a Parking Garage"):
A parking garage stays full, and an economy stays healthy only if it is constantly refreshed.
Part of the problem for mature general equilibrium conditions, is the fact too many special interests are now at work, to prevent the "refreshing" that normally takes place for further economic inclusion. For instance, our most prosperous regions now have a "closed" sign, in the form of high real estate costs. When economies become dominated by secondary market formation, it becomes increasingly difficult for individuals with middle range skills to work among others with high skill levels.

Hence further growth and output now depends on extending the range of economic complexity, instead of "forcing" more economic inclusion into places where productive complexity already exists, as Adam Ozimek (HT Steve Randy Waldman) noted in recent posts. Again, Justin Wolfers, utilizing the parking garage example in which Trump sought to make certain parked cars "stay longer":
Rather the long-term strategy of such business is to try to attract a larger clintele by offering a more convenient experience. They understand that there are many more potential customers outside than inside the garage. In this analogy, the government's best hope for creating jobs is to create a positive business climate.
However, something needs to be considered about his otherwise apt explanation. He's right that when tradable sector formation exists in a competitive state, it benefits from the fact there are "many more potential customers outside than inside the garage". The problem in this regard is non tradable sector activity. Today's prosperous regions - because of their dependence on existing revenue via secondary market formation - serve as a prime example of not wanting additional producers and consumers from elsewhere, due to how their resource utilization is already structured.

This results in a form of non tradable sector wealth capture which crowds the very primary marketplace it relies on, instead of contributing to (further) growth and output. Since tradable sector activity obviously contributes to growth and output, not to mention the revenue that sustains today's secondary market formation, it appears more and more as though the goose which lays the golden egg.

Here's the problem. Many assume that presently existing tradable sector activity can produce both greater employment and output as desired, wherever such activity may happen to be. However, the internal organizational capacity of tradable sectors now requires fewer employees, relative to output in general. This results in a lower labor force participation level, which in turn limits the amount of tradable sector output that is needed, due to the smaller customer base which results from low labor force participation. Since today's non tradable sector activity remains in a dependent secondary market formation, it too is forced to limit labor force participation. This further limits the potential customer base which is able to engage in primary market activity.

Yet it is completely possible for non tradable sector activity to organize in a non dependent primary market formation, by recognizing time value as a product in its own right. This form of institutional structure would eventually restore labor force participation and consumer base levels, which in turn would allow tradable sector activity to increase output levels along with the relative level of employment capacity they remain able to offer, given present day automation. In the meantime however, the dependence of non tradable sector activity on tradable sector wealth, means less ability to contribute to the employment that nations increasingly seek for their citizens.

In other words: one could say that today's extensive (secondary market) non tradable sector organizational capacity, is not yet positioned to "attract a larger clientele by offering a more convenient experience", either in terms of time based services product or building component asset formation. Yet these are precisely the areas which could generate new economic vitality, beyond the present day "parking garage" of general equilibrium.

Best, the alternative equilibrium of local services production, could function as a primary marketplace which - because it is not dependent on the revenue or employment of tradable sector activity, can actually contribute to both, by generating new growth and marketplace output. Even though deregulation always disrupts the sticky markets of a mature general equilibrium, there can be new zones for minimal sets of regulation which not only make sense for all involved, but are less of a threat to established interests. This would be a critical step, for the inclusion of population that is now needed to contribute to a broader level of employment, than what is now capable of supporting the economic activity of the present.

Before wrapping up this post, there's something else that deserves to be said about Trump's efforts, whatever one may think of either the individual, or what he now seeks to make happen. It's too easy to point out the fact anything he attempts, likely won't work. Oddly, that is the same response most everyone else has received as well in recent decades, regardless of their level of skill, intelligence or job description. The blogosphere could have been a place - after the Great Recession - where productive structural adaptations had a recognizable beginning point, especially in those initial years of online engagement. Unfortunately, little changed, and the political retreat back into tribal positions is most unhelpful. We still have a long way to go, before we gain secure means to hope for a better economic future.

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