Aggregate Output and Expectations of Reciprocity

Why did tax reform prove so difficult recently, in instances where existing subsidies for high income levels weren't necessary? Much of this comes down to who in society is able to fully reciprocate with government. Present day taxable income, largely accrues from individuals who use high levels of skill in a professional capacity. Given the degree of economic prosperity these groups make possible for today's governments, many policy makers are understandably compelled to respond in kind.

As non tradable sector activity burgeoned in the 20th century, high levels of mutual reciprocity developed between governments and high skill knowledge workers. However, this process has partially displaced the extensive output of tradable sector activity, along with its positive redistributive effects. Aggregate output gains slowed, as price taking coordination in tradable sector activity gave way to the price making structural shifts of skills arbitrage. What has become a growing reciprocity between governments and professionals (particularly via income taxes), leaves less redistribution for lower income levels - especially during historical periods of non tradable sector dominance.

This process is concerning for many reasons, and reciprocity imbalances affect long term budgetary obligations as well. For instance, even though U.S. taxpayers can presently claim mortgage interest tax deductions on homes up to $750,000 in value, lower income levels are now less able to even access traditional home loans, than they were prior to the Great Recession. Another example is government subsidies for graduate student loans, even as fewer subsidies remain for students from lower income level backgrounds.

Decades earlier, even though high income citizens were more likely to benefit from government largesse, fiscal policy could still respond to the shifting economic realities of lower income levels. Some argue that plenty of government revenue remains to assist lower income levels (if necessary), who don't realize how much general equilibrium resource capacity has already been claimed. It's one thing to imagine "living wage" revenue from automation that increases tradable sector output, and altogether another to envision "extra" revenue potential, where automation mostly augments professional income instead of output.

These problems have yet to be meaningfully addressed, and they are further exacerbated by the fact government provisions for Social Security and Medicare in the U.S. are being depleted. Growing divisions between societal expectations and arbitrary limits on resource reciprocity, are important reasons why I've advocated time arbitrage as a platform to create new social contracts for economic reciprocity. Many people are in need of such a platform, as it becomes more difficult for governments to include a full range of income levels in the social contracts they currently honour. It's important to begin reducing future budgetary obligations before they get out of control, and new forms of economic reciprocity would provide a suitable starting point.