Sunday, December 17, 2017

Wealth Creation and Capture Have Macro Effects

Why don't our current economic models take the general equilibrium effects of wealth creation, versus wealth claims, into account? Especially since factors such as consumer debt, government subsidies and other forms of redistribution all diminish the natural Wicksellian interest rate? While some advanced economy debt still contributes to wealth origination, our prevalent consumer debt patterns (for instance) are mostly claims on what today's existing wealth and income can provide in the future. Even though aggregate spending capacity greatly depends on what is monetarily allowed in the immediate present.

Had I not allowed myself to be sidelined from math in high school (and then waited too many years to try again), I would have sought to build a model which could highlight the general equilibrium effects of wealth origination alongside claims on future wealth. Such claims could be discerned, through the identification of primary wealth origination and today's revenue dependent secondary markets, such as today's healthcare.

The macroeconomic effects of wealth creation and capture are important for many reasons, not the least of which public and private designations are not the identifiers of wealth origination. Even though governments routinely engage in wealth capture instead of wealth creation, private industry does the same, particularly during periods of non tradable sector dominance. Only consider how today's government associated multipliers work poorly, since a large percentage of fiscal activity is ultimately earmarked for wealth capture. Yet it's easy to forget that government multipliers hold some positive relevance during periods of tradable sector dominance, when governments are more likely to contribute to new tradable sector formation. On the other hand, government subsidies for existing tradable sector activity, are more often another example of cronyism in the form of shared wealth capture.

Fortunately, not all wealth capture is negative in nature. When non tradable sectors aren't subjected to extensive artificial constraints, secondary market activity can often contribute to economic dynamism and monetary velocity. In emerging economies, secondary market financial activity and redistribution for high skill knowledge use, can sometimes lend stability and dynamism for new points of wealth origin. What's important, however, is recognizing when the tipping point of secondary market dominance over primary market formation, begins to affect macroeconomic outcomes. By no means is this danger limited to economies that successfully mature. By paying closer attention to the aggregates of tradable sector and non tradable sector activity, societies would also find it easier to understand when a nation's debt accumulation, begins to present problems for economic stability and dynamism.

Sometimes a critical perspective from others, makes it easier to reconsider the fundamentals. That was certainly the case for me after reading a post (HT Miles Kimball) that not only questioned DSGE models, but today's limited options to DSGE thought as well. Of course it's all too easy to be critical of DSGE models, but what's interesting is that so many are skeptical for entirely different reasons! There's a wide range of viewpoints involved, by no means limited to economists, as to why DSGE models aren't effective in the real world.

Today's general equilibrium perspectives - especially when simplified - don't square well with structural real economy factors. The authors of the above linked post, note that for Freshwater people, "government has no effect". And "Saltwater variants add in the Calvo fairy to make up for the fact not all prices respond to shifts in equilibrium."

It's interesting, that only a few basic concepts of equilibrium are up for broad discussion. Yet consider how a Calvo fairy could matter. Secondary markets, as they they moved towards equilibrium dominance, were also more likely to establish inflexible prices (price making). Walrasian equilibrium at least held more validity, during the earlier dominance of tradable sector activity which relied more on price taking - hence simpler forms of equilibrium coordination.

Too much price and wage stickiness exist now, for a real semblance of the early equilibrium to be reclaimed. After all, the first perceptions of equilibrium evolved in times of tradable sector dominance. By no means does that suggest the DSGE model is more useful. Remember that DSGE evolved as governments were consolidating their share of the wealth gains, from still expanding tradable sector dominance. That economic circumstance is part of our economic past and has been for decades, even though there has been little response to this reality, thus far.

In other words, changing sectoral conditions, and their long term effects on general equilibrium growth potential, have yet to be accounted for. Unfortunately, earlier sectoral patterns which suggested equilibrium structure during their turn, have shifted beyond recognition. Meanwhile, the wealth capture effects of secondary market activity are being hardened with regulations and rules from special interests that remain determined to secure reliable monetary flows. Needless to say, these flows will remain "reliable", until - finally - they no longer are.

What, then, does the increasingly fragile nature of secondary market domination, suggest for future wealth potential? Regular readers know that I am no liquidationist, for I believe extensive use of knowledge can be recreated, on primary market terms in which no debt or redistribution is needed. My main concern is that if present systems break down from secondary market dominance, so too will an extensive portion of today's knowledge use and economic participation. So far as that goes, any economist who suggests that today's political polarization is not linked to macroeconomic outcomes (and some have of late), might want to reconsider. If we don't craft a better understanding of macroeconomics before too much political fallout occurs, there's no guarantee we'll get the chance to preserve prosperity, should we wait too long.

Many continue to believe that the spending of nations can somehow derive from future debt obligations. Still, every nation reaches a point when nominal spending capacity must be maintained from the wealth that is currently being generated, rather than the wealth that is being claimed. True, it's difficult to give up the idea that wealth can somehow derive from what is already claimed, in part because this allows special interests to control the ways in which economic activity takes place. Societies find it desirable to control how wealth generation and capture occur, and so they can - again, up to a point. Once the process goes on too long, and too much wealth creation is stalled, equilibrium expansion through wealth capture is no longer possible. Do we have the collective courage to allow new points of wealth origination and general equilibrium growth, on the part of individuals outside the purview of special interests? Only time will tell.

No comments:

Post a Comment