Productivity Musings, and Wrap Up for December 2016

Often, over the course of 2016, I found myself mulling over declines in productivity. Is is possible to rethink what productivity consists of, given the need to take total factor productivity for time value, into account?

In particular, the internal time use patterns (or time use continuum) that many institutions rely on - especially for product quality - don't always translate into greater output or other obvious aggregate gains. Yet at the same time, we are experiencing other forms of societal gains which don't include economic equivalents for reliable coordination over time, or mutually supportive time use patterns. While our institutions continue to make an appearance in GDP figures, that doesn't hold true for many important aspects of what we provide to the world as individuals - both for ourselves and for others on a daily basis.

And no one can afford to be fooled by suggestions we "shouldn't" need money for what we do with our scarce time, given the reality of living costs. Granted, some lost monetary aspects of technological gain appear as though consumer "freebies". But does that mean tech perks are good deflation in disguise? Not quite. For one, this recent result doesn't contain the requisite components of good deflation, especially as it normally translates into more productive organizational patterns. Too many tech consumers - while they are indeed fortunate in their way - still lack either economic connections or reliable reciprocity with others. Technological gains won't translate into societal gain, until other resources can be brought together, to reinforce what is still a missing level of aggregate monetary support.

Given this circumstance: how could productivity gains be redefined to present reasonable options, especially during periods of economic stagnation?  While innovation still features prominently in many settings, non tradable sector activity can be compromised (whether profit or non profit) should these institions attempt to provide more employment and output, in their present organizational configuration. Why so? Non tradable sector product is largely represented by the product of specific time or place. In other words, it has a strong, built in natural scarcity of production limits, which tradable sector activity often does not face. When time or location linked product is offered for a lower price, the result may be either less available budget revenue or profit.

This helps to explain why non tradable sector institutions have tremendous incentive to capture innovation gains internally. What innovation they are inclined to allow, tends to result in less overhead expense instead of lower product costs. After all, the built in scarcity of non tradable sector product which is attached to time and place, means any price cuts for time/location dependent product can disadvantage these institutions in relation to their for profit and not for profit competitors.

However, production losses in terms of output and employment cannot continue indefinitely, without negative economic effects. Organizational capacity needs new patterns which includes both producers and consumers in the loop of gains from innovation and participation. When such gains remain impossible for too long, system wide networks eventually fall out of balance.

Fortunately, there are ways that these structural pressures can be reduced. New institutions could eventually achieve total factor productivity gains for producers and consumers alike. Even though new non tradable sector institutions would need to operate via internal coordination of resource capacity as well, they would do so across a wide range of economic activity. This would allow them to contribute greater total factor productivity at the margins, where normal productivity often becomes constrained by the general equilibrium limits of secondary market formation.

In the meantion, non tradable sector innovation - unlike tradable sector innovation - can't really be designed to increase general equilibrium output. That's why the innovation which has occurred in these areas, tends to accrue in terms of capital gains, instead of the gains of employment, wage increases and total output. These gains are "static" in the sense they don't readily translate into the earlier gains of jobs, output and increased wages.

Tradable sector activity is a more reliable provider of increased wages, than non tradable sector activity, because of the secondary market position of the latter. However, the present lack of market dominance for tradable sector activity (in relation to non tradable sector activity), means relatively less high income potential for tradable sector activity as well.

Dietrich Vollrath takes a closer look at the fact that employment is going south. Literally.

David Beckworth asks, "Can the global economy survive a stronger dollar?"

Many of these youth are witnessing firsthand, a world that has become increasingly difficult for them to take part in, via a standard expectations outcome: https://conversableeconomist.blogspot.com/2016/12/youth-and-future-of-arab-states.html

One of the more notable posts early this month was "Desperately searching for a new strategy". Here's Tim Duy:

Whether or not Trump can or should attempt to reverse the decline in manufacturing jobs is not the big story here. He can't. The real story is that he continues to tap into the anger of his voters about being left behind. That will give him much more power than our criticisms will take away.

Politicians, aided by economists, have long ignored the negative impacts of trade-induced structural change. Indeed, they have even cheered it on. After all the process "releases resources" for use in other, more productive parts of the economy. Those workers are just "low skilled" workers. The US needs more "high skilled" workers anyway.

Fact: Workers hate being referred to as "low skilled". 

How we respond to Trump is important. If we simply fall back on our standard numbers, we lose. If we confidently predict that TPP is a big win because it will add 0.5% to GDP by 2030, we lose. If we just use this as an opportunity to reiterate the importance of a college degree, we lose. We have been doing this for decades, and it helped deliver Trump to office. 

Part of the problem is whether one is actually in a position to even be able to innovate, or otherwise meaningfully reciprocate with others in terms of shared knowledge, when they do not have the requisite degrees. Fortunately, in tradable sector activity, degrees aren't necessarily part of the equation in terms of one's ability to interact with others. These individuals can contribute to what are already internal processes, which benefit from resource use patterns amenable to local adjustments. However, in non tradable sector activity, even those with the requisite degrees find it difficult to innovate. The knowledge based processes involved, mean being too close to the very structures that are threatened by new organizational patterns.

In the knowledge based work that is non tradable sector activity, it's not easy to establish resource pattern changes (innovate) to reduce costs. By way of example, the vertical integration that consolidates resource use for productivity gains in tradable sector activity, can't be replicated in the knowledge use (of general equilibrium) for non tradable sector activity. Yet the fact vertical integration isn't possible in today's non tradable sector knowledge use processes, also means it is becoming difficult for lower to middle income levels to take part in important time based services product. The result of course is lost human capital, and lost economic output.

The supply of medical practitioners in the U.S. has two problems which particularly stand out: heavy distribution of physicians in prosperous regions instead of rural areas. Also, too many healthcare providers aren't currently able to fill in for physicians, in a wide range of areas where the latter choose not to live. (HT Miles Kimball) http://www.nytimes.com/2016/11/08/upshot/a-doctor-shortage-lets-take-a-closer-look.html

Where are rates of unemployment for men, below average? https://www.brookings.edu/research/americas-male-employment-crisis-is-both-urban-and-rural/

A Q&A with Nobel Laureate Oliver Hart

The most common job in each state has changed considerably, in recent decades. Automation in transportation, would reduce the now common truck driver designation, much as the secretary role was reduced decades earlier.

This is actually a general equilibrium approach which has potential. But would the groups slated for such moves, actually tolerate leaving the places which mean so much to them? The government activity being addressed is still centralized activity after all, even if it does not appear so, geographically. http://www.vox.com/new-money/2016/12/9/13881712/move-government-to-midwest

James Pethokoukis makes an excellent point in this post, especially since the statistics back it: the U.S. economy is far more closed to global trade than many realize. https://www.aei.org/publication/just-how-open-is-the-us-economy/

The U.S. has a "disability belt", and Arkansas is at the center. https://www.aei.org/publication/here-is-americas-disability-belt/

Common ownership can cause some unexpected problems when incentives are poorly aligned.

Well said, William Easterly:

One of the greatest insights of economics is that individual incentives work while group rewards and punishment don't. Collective guilt doesn't work to change anyone's behavior. In the end, collective guilt, fashioned from bogus analysis and delight in stereotypes, is mere slander. It's a formula for constant antagonism and it's poisoning American politics.

It's much easier to innovate, when the reference points for ongoing divisions of labor are internally coordinated. http://voxeu.org/article/how-engineers-innovate-automotive-supply-chain

Seattle opens its first convenience store without a cashier.

The importance of place for a college education. Some would question "education deserts" for the same reasons they questioned food deserts a few years earlier, but I remember well how distance played a substantial role in the difficulty of completing a college degree.

From Real Clear Markets: "Don't Expect the Jobs Gains of 2016 to Continue"

Are there NIMBY tendencies hidden beneath Trump's growth stance?

Ashok Rao asks, "What are real assets?"
Also, is it still possible for individuals to make a real difference for those in need, when this responsibility has already been designated to governments?

Education also has productivity issues because much it does not fit well in any time continuum, which could explore a full range of aggregate time use potential https://www.brookings.edu/blog/social-mobility-memos/2016/12/23/the-declining-productivity-of-education/

Basil Halperin on "Monetary misperceptions, food banks and NGDP targeting"

Like so many of my readers, I can't help but hope that 2017 will turn out to be a more pleasant, less stressful year, than 2016 has been. Here's wishing everyone a Happy New Year!