Tuesday, August 7, 2018

Monetary Policy for a Dynamic Welfare Economy

Recently, Kai Weiss (for CapX) in "Can you really have free markets and a big welfare state?", asserted:
It is time to tackle the idea that only the state can provide welfare.
Weiss highlights a recent CapX post from Samuel Hammond, who suggested free markets and welfare states can coexist, and doesn't see why they can't be made more dynamic. For instance, Hammond suggests that social insurance could help free market processes "remain a positive sum game".

How to think about these arguments? In many respects, welfare economics largely reimburses time elements which are an integral part of final product. Presently, much of this activity takes place in dependent relationships which I've also described as secondary markets. Two examples include the compensation of government employees, and healthcare, which - in the U.S. - government now reimburses at least half the total costs.

While it's possible to create a more dynamic and less dependent welfare state, we would benefit from a new form of organizational capacity which allows time value to directly serve as an economic unit. A formal measure for time (labour or work preferences), would lend much needed validity to our societal participation. A basic time engagement standard that contributes to personal agency is all the more important, since today's digital automation possibilities could lead to more integrated workplace roles for all concerned.

An organizational realignment such as this, would allow our time value to play a more beneficial role as a form of primary market. Commodification of time use at a basic engagement level, would transform our time preferences and labour priorities into a wealth creation position - one similar to tradable sector commodities which have served as broader wealth representation means over the millennia.

When time value is indirectly tapped via asymmetric means, this process can eventually distort societal coordination for time based product. As these asymmetries grow, people come to expect money to do more heavy lifting than it can reasonably accomplish on its own as the sole economic unit. Excessive deficit spending is a prime example, of the fact we rely so much on the liquid and fungible nature of money, that the time value many of us hold, no longer fulfills our ongoing societal obligations. Consequently, excessive hopes pinned on money as the sole arbiter of economic value, now means that  - for instance - bondholders, taxpayers, and retirees who hope for full pensions, are beginning to discover how money can't always be all things to all people, in this representative exchange.

We also need for time value to play a larger role alongside monetary policy, in order for monetary policy to fully maintain stability for aggregate time value in the near future. Consider why this matters in light of arguments re labour representation for a nominal target. In particular, there's uncertainty about labour as means to full employment, when non tradable sector activity, which comprises such a large extent of economic activity in general, has been dominated by price making rather than price taking. When too many economic actors make prices which place excessive demands on general equilibrium, this also reduces the extent to which full employment is possible.

If a product is new, price making allows corporations to cover the costs of bringing product to market. However: When product is no longer new to the market, price making often leads to reduced market capacity and employment potential. Ultimately, monetary policy could be more effective and fully representative, if fewer corporations relied on excessive price making. If more companies were willing to adhere to an internal production norm of lower or at least constant price levels over time, the monetary policy result would be more accurate representation of time aggregates as well.

Hence the most beneficial new institutions for a dynamic welfare economy, could be those which also support the principle of a production norm, so that gains in standards of living remain possible. How might this be achieved? The equilibrium corporation would have a dual (tradable/non tradable sector) nature that makes a unique (or defined) local equilibrium feasible. Not only would it rely on internal price taking mechanisms for services generation, but also locally defined environments which generate relative price constants for a diverse range of physical infrastructure and building component options.

A tradable sector role would allow the equilibrium corporation to manage a full non tradable sector spectrum, via means that leave plenty of room for discretionary income potential which can make amends for time scarcities. What's more, this dual responsibility could present a possibility for managed convertibility of central bank representation of time arbitrage as a wealth origination role. Scott Sumner's recent post which highlighted Josh Hendrickson's Mercatus paper, encouraged me to think through some possibilities. The problem for direct convertibility is that it can't be directly applied to labour or in this instance, time value. But given the dual role of the equilibrium corporation, equity shares of infrastructure and building components - given their basic commodity representation - could provide means for central bankers to purchase shares on behalf of originating time value as a primary market.

In order for this to be a remotely reasonable proposition, the equilibrium corporation would have to make an important promise to central bankers and governments alike. How so? Unlike other forms of non tradable sector activity, these institutions would need to uphold a production norm for both time based activity, and the costs of community organization as a whole, via the tradable sector production of infrastructure and building components. Such a promise would be vitally important, given the disequilibrium and sticky markets which have resulted from extensive price making on the part of existing non tradable sector institutions. If standards of living are to continue rising for the foreseeable future, we need more dynamic versions, for what has been mostly structured as public goods provision.

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