When Coordination Becomes "Too" Efficient

Two posts from earlier today were otherwise different in nature, but I noticed an interesting connection between them in regard to this post title. One could say today's institutions are doing such a good job sorting for preferred characteristics, they pose further externalities which are gradually becoming more difficult for societies to manage, over time. Specifically, when those externalities are people.

First, Timothy Taylor in "How Between-Firm Inequality Drives Economic and Social Inequality", highlights quotes from an essay by Nicholas Bloom:

The real engine fueling rising income inequality is 'firm inequality'...the best educated and most skilled employees cluster inside the most successful companies, their incomes rising dramatically compared with those of outsiders. This corporate segregation is accelerated by the relentless outsourcing and automation of noncore activities and by growing investment in technology.

However, firms aren't alone, in their contributions to inequality through closer coordination for similarly aligned resource use. As it turns out, municipalities sometimes benefit from similar strategies. In "Restrict Supply, Subsidize Demand", Arnold Kling quotes the Los Angeles Times:

Home builders are not keeping up with demand for homes in California. 

Hence the proposed supply side "solution": subsidized demand. Again, from the Los Angeles Times:

a lot of local municipalities have first-time home buyer-assistance programs and people should look at those programs in their area. You also may be able to qualify for additional assistance as a first-time home buyer based on your occupation, for folks like teachers, firefighters and law enforcement. 

What's interesting is that the listed occupations are necessary components of any thriving community. Yet while private firms increasingly sort for high or low income levels, public sector incomes tend to be a moderate income range - one which ends up competing with lower income levels for an already limited market in "affordable" housing. So if local home prices are mostly well above a given national average, municipalities need to find ways to "make room" for important service functions. The subsidy mostly works as a sorting mechanism. Hence locals "solve" for the services coordination problem, but the result doesn't look like a free market solution.

Yet consider what local public and private interests are attempting to accomplish. Much local real estate becomes closely associated with the core elements (or "core" employee ownership) of today's prosperous firms. Nevertheless, many firms now outsource for non core employees. And the lower levels of compensation these employees receive, mean they'll be searching for affordable housing as well.

While between-firm inequality may not be "fair", or public employee housing preferences on the part of municipalities "free market", these dynamics are different from earlier forms of rent control. Public and private institutions likely resort to these methods because they find them necessary to fulfill their own societal obligations. If public and private interests find it simpler to maintain coordination structures within a similar income range of income, why not strive to broaden this approach so as to make more such clusters possible along a wide range of income potential. Without such efforts, too much knowledge would instead end up clustering along a higher income range, where it becomes increasingly difficult to reach a wide range of markets.

In many respects, a services based economy is different from the spontaneous mobility of an earlier period when it was simpler for a wide range of income groups to live and work in close proximity to one another. Much of this was due to the greater flexibility of tradable sector activity, in which both output and marketplace definition was often subject to continual change in definition. The earlier prominence of tradable sector activity was not only more conducive for physical mobility across regions, but also the mobility of differing income levels among local groups.

That mobility is particularly missed now, as society slowly adjusts to different patterns of wealth creation. It is no longer a simple matter of redistributing wealth or knowledge based skill, from tradable sector output. However, with a little luck, redistribution can take place via time value, and its associated potential for knowledge dispersal. Greater mobility might once again become a possibility. Even better, coordination would no longer be "too efficient". After all, time value could once again pick up the thread that was dropped, when employment in relation to an ever expanding output, finally completed its logical course.