After all, the Baumol effect provides a vital time/asset value coordinating mechanism for citizens with a similar degree of related resource capacity. Among the growing problems with this coordination approach, however, is (thus far) it only takes place via a single set of general equilibrium conditions. Global factors can contribute to time use imbalance as well. Generating more nominal "space" through such a setting only becomes more difficult over time, once economies are less dominated by resources and commodities, and more dominated by human capital factors.
It's important for me to be specific re the post title, because I do not mean "counter" in the sense of opposition or reaction. For instance, I've tried to confront what is gradually becoming a stronger resistance, to knowledge application across broad marketplace settings. Just the same, far too much knowledge use is presently murky and open ended, which means it is capable of detracting from the stability of fiat monetary wealth formation over the long term.
Knowledge use patterns of the present don't mean knowledge redistribution via fiscal means is "wrong", or that the resulting negative budgetary circumstance is specifically anyone's "fault". Rather, knowledge use via taxation and income redistribution has been a traditional societal response to wealth creation, as long as anyone can remember. In many respects, it's a process which has contributed to further wealth creation, as well.
Nevertheless, populations can only tap knowledge dispersal via fiscal measures (during productive cycles of growth) for so long, before the mechanism falters. I have basically argued at times that the Baumol effect could be countered by organizing knowledge use via decentralized paths or settings, capable of creating knowledge/skill wealth via internal means. Most important, doing so would make it possible to utilize a much broader range of knowledge and skill capacity, instead of being forced to rely primarily on those who "make the cut" of general equilibrium requirements for knowledge use.
Due to present day over reliance on the skills coordination of general (national) equilibrium, the Baumol effect creates a single level of societal expectation. In this setting, skills variance of every variety conceivable is placed in harsh contrast with other options for general equilibrium access. This problem goes well beyond the obvious societal or cultural framing, for it also contains distinct monetary challenges. There's an expected nominal aggregate level of value for important forms of time based product, which poses problems for the economic entry of every potential skill set, which might otherwise contribute to new wealth.
This murky nature of today's knowledge use, also generates an open ended claim on nominal income aggregates - a process which encourages central bankers to arbitrary close the loop of economic entry, too soon. While the Baumol effect is stressful in a time of growing middle class polarization, it is quickly becoming precarious for the poor, as evidenced by recent events in Washington.
If only the present dilemma were really a simple story about "makers" and "takers" in an economic pie which stubbornly "refuses" to expand, and the political actors which represent all concerned. Instead, this tale is greatly complicated by the interactions between primary and secondary markets: particularly since the wealth of the latter actually exists in a dependent (i.e. "taker") position not directly observable by populations as a whole.
Hence part of the story is about "grandfathered in" special interests which generate Baumol effects that now pose limits on a previously dynamic economy. Further, much of this income moves into a passive "holding position" in the form of limited velocity real estate, once it is generated. Since the real estate of productive regions is closely tied to Baumol effects, this reduces economic access across multiple areas of the economy.
What if the Baumol effect is not somehow effectively countered? William Baumol called this problem a disease for good reason, because it involved sectoral crowding and imbalancing which could eventually destabilize both the values and conditions of general equilibrium. In other words, this force is likely a component - albeit in today's unique circumstance - of potential civilizational decline. What specifically needs to be considered?
1) The wrong economic factors still get the bulk of attention and blame, for uncertainty regarding long term economic stability. Consequently, reform effects in these areas are not as helpful as they might appear, with finance in general as a prime example.
2) Important time based services are losing their potential for broad applications, as indicated by the recent struggles over healthcare in the U.S. The skills and knowledge coordination emblematic of upper middle income levels, can no longer be expected to readily diffuse to broader populations. Which is why these groups need to assist the groups which will increasingly need to organize on more decentralized means in the near future.
3) Until this occurs, monetary policy will likely continue to tighten, even if only via passive processes that rely on the wrong statistical indicators. What is not recognized is the degree to which supply side structural shifts presently contain their own real economy tightening factors, which in turn monetary policy inadvertently follows. Perhaps due in part to the Baumol effect, the Fed has relied on the ineffective tool of inflation targeting. However, over time this worsens the already low level of economic participation. Equally problematic is a gradually increasing tendency to ignore both supply side and monetary factors as central to monetary policy discussion.
Possibly, the end of the twentieth century may have been a turning point in terms of balance between tradable and non tradable sector activity. Indeed, a number of studies from several years earlier captured this dynamic and was briefly discussed, only to be summarily dismissed as a point of purposeful discussion. It was a defining moment, when some began to realize education was no longer was no longer a guarantee of productive economic engagement. For instance, in 2014, Nick Bunker at the Washington Center for Equitable Growth mused that policy makers may need to rethink "the conventional wisdom" and he continued:
Education would have to recede in importance when we consider long term policy...Instead, policies that boost demand for workers of all education levels would need to be fleshed out. It's a sobering thought but one we all need to examine more thoroughly.If only discussions such as this had continued! What is all the more striking, is a recognition of the underlying problem at a most basic level. Nevertheless, the same educational lottery ticket options continue to play out as the defining factor for economic access. High skill application is of course needed as a broad percentage of today's available work. Yet the need for further high skill investment in aggregate decreases, as college graduates end up in jobs with fewer skills requirements, which further displaces lower skilled job applicants at the same time. The present equilibrium settings only have so much room for human capital investment capacity, yet these settings could be changed.
Crucially, the millennial moment and turning point of the year 2000, further highlighted a sectoral shift which had begun decades earlier. Over time, it becomes more difficult for the wealth of primary market activity to reliably supply crucial forms of non tradable sector activity with additional growth. And yet the ever present educational expectations also keep the Baumol effect alive and well.
Again, it's best not to ignore what is happening, so that destruction of knowledge based wealth does not eventually occur by default. Equilibrium stability could be restored, by focusing on skills capacity across the entire spectrum of life. However, until greater equilibrium stability is actively considered, some who rise to power in the years ahead may become more insistent on destroying the Baumol effect, through far more direct means than the ones which I've advocated for.
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