Wrap Up for February 2019

How would the great economists respond to the economic problems of our time? James Pethokoukis has a Q & A with Linda Yueh.

Some forms of multitasking are actually quite beneficial. And perhaps we've gotten too worked up over fake news. (Tim Harford)

Why don't people believe in tech as a potential housing solution?

Millennial migration patterns are different from senior migration patterns.

"...it matters a lot that US productivity growth slowed down back around 2005 even before the start of the Great Recession, and that we don't really understand why."

Information which is already in the process of expiring, is what is most often marketed to us. "This is why it's commonly telling you what happened, not why it happened or under what conditions it might happen again."

Remembering Harold Demsetz
"...the definition of property rights will tend to create situations where individuals internalise the effects of their actions, and to minimise the extent to which individuals' actions create externalities. An implication of this is that changes in the economic environment are likely to lead to changes in the definition of property rights; however it is likely to take time for individuals to figure out exactly how the latter should change."
Plus, "Toward a Theory of Property Rights"

Which industries have had manufacturing gains? also, "Where are manufacturing jobs coming back?"

2018 was a good year for YIMBY movements.

How have incomes around the world changed over time?

Dani Rodrik is concerned about the "good jobs" challenge. But ultimately, we may need to transform excessive hopes for "good jobs" into better systems of mutual support for meaningful work, alongside local settings more responsive to a broad range of income diversity.

Homeless children were invited to take part in the design of a school created especially for them.

Once again, Dietrich Vollrath takes a closer look at institutions.

Noah Smith has concerns regarding the Green New Deal. And wage stagnation as well.

This is no time for the European elite to continue contractionary monetary policy.

"If Not Now, When? New Estimates of the Federal Budget Outlook"

"...the increasing share of prime loans has partially offset the deteriorating performance of the subprime sector."

Alas, the medieval guilds of the past still have economic relevance.

Low skill workers face the biggest challenges.

Finland tries a new approach to homelessness.

"Two hundred years of health and medical care"

It turns out that small groups of researchers do more innovative work than large groups.

"...spending cuts have much smaller costs in terms of output losses than tax increases."

Tyler Cowen blegs for ideas and examples re writing incentives for third and fourth graders.

Is Neo-Fisherism "nuts", or does it make sense?

Even though the quantity theory of money holds in the long run, "it's dangerous to engage in money supply targeting".

"...there's actually a negative correlation between changes in bank reserves and any other kind of macro number like credit or GDP."

Good news of the month: Supreme Court strikes a blow against excessive use of state forfeitures.

Not everyone in the Democratic party has shifted further to the left.

Taxing the rich more is not going to solve the debt problem.

Diane Coyle reviews Sorting Things Out, and also highlights one of her recent lectures which emphasizes how we see and take seriously what we are actually able to count.

The treatment of net exports in economics texts tends to be confusing.

Some historical perspective "on the evolution of the U.S. federal debt over time".

This job mismatch chart between cities and job seekers, speaks volumes re income segregation.
Another possible reason for increasing separation among income groups, is that cities now provide fewer mid level skill jobs for individuals without college degrees.

The Fed would also benefit, if they provided better explanations for the public re what they wish to accomplish.

Why did the classics dominate formal education? And why was the teaching of writing ultimately assigned to English professors?

"Instead of producer-interest capitalism, we need a consumer-interest alternative."

"...baby boomers are aging alone more than any other generation in US history."

How does the country of Bhutan actually measure Gross National Happiness?

Raghuram Rajan for Project Syndicate: Important aspects of market structure in the U.S. and European countries are starting to break down. Instead of populism extremes, governments could instead make it easier for people to devise their own solutions.
Also, a video of his recent Brookings public event discussing his new book, and an excerpt for ProMarket.

What Really Preserves the Labour Theory of Value?

Who still believes in the labour theory of value, rather than the more recent subjective version? Or, perhaps there's actually a more relevant consideration: How much personal belief in a labour theory of value manifests unconsciously, instead of at an ideological level? Chances are, unconscious attributions for labour value are a stronger contributor to economic outcomes than what is often debated. One might envision the general equilibrium result as power relationships in skills arbitrage, for that matter.

Indeed, underlying assumptions regarding labour value, greatly affect how high skill human capital has been conceptualized, especially since the workplace transitions of the twentieth century. Professional groups often rely on a non tradable sector structural framework which allows human capital inputs to take precedence over the aggregate outputs of time based product.

In this instance, it turns out that subjectivity cuts both ways. Consider how a subjective theory of value in terms of product, previously benefited from direct correlation with good deflation and recognizable gains in standards of living. It made sense to emphasize the subjective reality of product value regardless of labour contribution, when progress could be largely attributed to tradable sector productivity gains. But more recently, subjectivity has become associated with societal expectations as to what quality product represents. The consequent emphasis away from baseline utility, has muddied the waters for product subjectivity, especially for potential labour value contributions. Alas, quality time based product often includes excessive inputs at multiple institutional stages, before the product output intended for consumers actually takes place.

While my impressions re subjectivity dovetail somewhat with those of the Austrian school, many such discussions feel more relevant for historical periods of tradable sector dominace. Madson Pirie reflects on Carl Menger's many contributions to subjective value, and notes:

He founded what is now called the Austrian school. His crucial insight was to recognize that price is not based on what it costs to produce goods, as traditional economists had supposed, giving rise to the labour theory of value on which the edifice of Marxism is built, but on what the demand is for them.

He adds:

...value does not reside in the object, deriving from its input, but resides instead in the mind of the observer, representing his or her estimation of its worth. 

Even if arbitrary definitions for quality standards reduced the impact of good deflation for tradable product, at the very least many forms of tradable sector product provide standard utility which can be readily discerned. Alas this hasn't proven the case in non tradable sectors, where a reasonable baseline for product utility has long been abandoned in favor of requirements which - among other things - have muddied the waters of true productivity gains.

Given the subjectivity of economic outcomes, a better utility baseline is needed for non tradable sector product in general. A better definition of basic non tradable sector utility - especially for housing and time based product options - could clear some of the present fog as to how aggregate productivity, hence potential economic gains, might once again be measured with confidence.

Artificial Intelligence as a "Road to Serfdom"?

Even if so, AI would only be one of many factors which could exacerbate further losses of freedom in the years ahead. In particular, AI should not be scapegoated for the kinds of equilibrium defining actions which humans have been responsible for, all along. What's really at stake, is how individual actors and associations choose to implement artificial intelligence in markets and workplaces. Might its use become mostly limited to the augmentation of professional functions, for instance? Why haven't we thought more about the right to actively participate in applied knowledge, as a valid component of economic and personal freedom?

With complex issues such as these, it helps to recall how supply side considerations also impact economic outcomes - especially for the high skill time based product of service sectors. Given the fact non tradable sector activity has become largely responsible for the dynamism of advanced economies, how might existing opportunities for scale be encouraged? When basic aspects of domestic aggregate output are purposely limited, demand deficiency results. And unfortunately, these general equilibrium conditions don't readily respond to either fiscal or monetary stimulus, when basic supply side factors create most of the existing imbalance.

Today's best opportunities for scale, lie in the greater inclusion of all individuals in economic participation. How so? Our dominant sectors are heavily linked to time and place. Once assets or services are specifically time and place related, the greatest potential for gains in scale is in terms of aggregate participation. This reality is radically different from centuries of tradable sector dominance, in which gains in scale (and progress) were determined by a growing output trajectory which gradually required fewer labour inputs over time.

Plus, no society can remain free, should too many citizens find themselves excluded from the most basic forms of domestic economic activity with connections to time and place. In an article for Project Syndicate, Robert Skidelsky wonders whether AI might contribute to a "road to serfdom", in part because of the slowdown in wage growth:

Studies around the world show that people want secure jobs. At the same time, they have always dreamed of a life free of toil. The rise of the robots has made the tension between these impulses palpable.

Skidelsky also emphasized the fact that technology has in fact been able to bolster wage capacity for a long time. What I believe has not been highlighted enough, is the fact that non tradable sector dominance has proven responsible for much of the present wage conundrum. Yet while technology has already provided millions with workplaces essentially free of physical toil, AI is beginning to enter territory which is increasingly unappealing to professionals. After all, deep learning processes enable AI to supplant some aspects of work which are part of intellectual challenge. Most high skill work has always been free of toil in a "beast of burden" sense.

This is why the high skill work of the present, needs to be recognized for the intellectual challenge rewards it can actually provide, for anyone fortunate enough to take part. Most important, is that much of this is work people would actually be willing to perform even without pay, if the circumstances of their lives allowed them to do so. Just the same, the costs of living in our most prosperous regions not only require one to do desirable work for pay, it needs to be substantial pay to live in these settings as well. Consequently, we still have high hopes which - alas - won't be met, to somehow gain higher incomes and stable jobs for everyone who tries hard enough to obtain them.

Fortunately, good economic options are on the horizon. However, there's still plenty of social turmoil to get through before those options start to become more obvious. And the biggest hurdle which has led to so many dashed hopes, is the myriad of ways society has defined what success supposedly looks like. Presently, we are being ground under by a massive accumulation of societal expectations - even though many of them are little more than lifestyle illusions.

Once we recognize the possibilities of innovating the domestic parts of our economy - that is, the ones which so often manage to make our incomes appear too small, we can begin to redefine the non tradable sector equilibrium conditions which have made the maintenance of our present lifestyles so fragile. AI can help us in this challenge, by radically reducing today's human capital investment costs. Instead of struggling to bring income capacity closer to supposed general equilibrium "necessities", it makes more sense to allow non tradable sector equilibrium dynamics to reflect a wide range of local wage capacity. Eventually, variations on defined local equilibrium, could also give citizens the ability to ensure that AI improves the prospects of all human capital.

Has GDP Measure Lost Its Practicality?

While no one knows whether GDP will remain the primary economic measure for the long term, there's nothing yet on the horizon which could reasonably be expected to take its place. In a recent Project Syndicate article, Diane Coyle notes "the widespread consensus that GDP is no longer a useful measure of economic progress". However Coyle is refreshingly realistic as to what this actually means:

Official statistics are similar to a technical standard. It's hard for anyone to move from one framework to another without a lot of other people doing so at the same time.

She continues:

Dissatisfaction with the prevailing GDP approach is therefore insufficient: a sufficiently large coalition has to agree on an alternative framework. Any successor to GDP also must be easily implementable because statisticians will have to set out detailed definitions and methods, and collect the data.

Even if GDP is discontinued or at least discounted as a primary measure of progress, much of the data and statistics it provides remain a valid and vital component of economic measure. After all, these figures bear the responsibility of capturing the most current economic activity taking place - regardless of what occurs which ends up defined as non economic. While today's methodology is far from perfect, it's still the best approximation we have to determine the amount of monetary representation a nation needs in any given year.

One issue in all this, is the fact monetary representation is only a partial approximation of economic progress. And while output is determined by supply side activity in the real economy, the rise in intangible factors has created problems for output measure as well. Might that mean we need to create separate tangible and intangible measures - all the while tracking how wealth creation potential is affected since intangibles can impact aggregate demand? Perhaps.

As to other approaches, multiple perspectives are presently being debated. Nevertheless, practicality and utility are important to the outcome. Both are not only important for productivity considerations, but also to provide clarity regarding disagreements over what recent growth capacity actually consists of. Scott Sumner in a recent Econlog post highlights what I believe to be important considerations in this regard, especially insofar as how progress, productivity and long term growth potential, tend to be perceived.

To most people, actual economic growth is something tangible and positional, like a better house and car. New products like iPhones and HDTVs are just "how we live today". If boomer's kids have to downsize from their parent's 5 bedroom 3000 sq. foot home to a small three bedroom ranch that's perceived as going backwards even if the smaller home is full of gadgets that they could only dream of back in the 1960s. And I'd say the same is true of lots of other changes.

How much is progress, and how much is simply a hedonic treadmill?

Growth is getting increasingly hard to measure as we move from an economy of stuff (commodities) to an economy of intangibles. If we can no longer measure growth in terms of quantity of "widgets" being produced, we need some measure of the value provided by economic output. You could use money, but the value of money itself changes over time, so that won't work.

Economists typically speak in terms of "utility". But as far as I know there is not a shred of evidence that we have more utility than we had 60 years ago.

Like Scott Sumner I have my own utilitarian tendencies. That said, I can't help but believe that growing income variance is making it increasingly difficult for citizens of large nations to create government policies capable of benefiting clear majorities. In particular, attempting to do so is burdensome because time aggregates have partially uncoupled from other forms of resource capacity. Consequently, time based services decentralization (along with local infrastructure definition), may be better suited for small limited income groups to promote the success and prosperity of their own "largest number". Indeed: Small houses are still "tangible and positional" for individuals who otherwise may not own a house at all. These groups would also need to generate statistics and data (for time based activity) in a new framework - such as Diane Coyle stressed - so their ongoing personal efforts are recorded and can be preserved for society as a whole.

What's particularly important for GDP, is that money remains a well suited measure for all the economic activity which occurs in a given year. Even though GDP is far from perfect, it's the closest proximate we have which (hopefully) ensures sufficient monetary representation for public demand. Perhaps since GDP measures the good and the bad (regardless of its societal "value"), a more definitive name may be in order. In all of this, activity and output are represented, as are total wages and income. Add to this any inflation (or deflation), which then provides the nominal representation which is a reasonably accurate estimate of monetary demand. As it turns out, monetary demand is not always the same as other forms of demand.

Just because GDP may be eventually demoted in importance, doesn't mean we no longer need a monetary gauge for economic activity. How might our perception of this measure change? Should it be framed as a nominal economic activity index? Meanwhile, intangibles will make it difficult to measure output, plus both need to contribute to a stronger utility base if progress is to continue. Should we know how many intangible forms of economic activity exist in contrast with those which are tangible, and track their measurement accordingly?

Another statistic utilitarians may find useful, is what percentage of a nation's citizens have sufficient economic connections to routinely take part in their own environments. For instance: How have the costs of individuals with too few connections been shifted onto taxpayers? Measures of poverty don't really get at these issues, in that costs are blurred with multiple layers of state and national assistance for select groups. Nevertheless: One of the most important ways to determine base level utility, is whether individual and family units actually have a reliable roof over their heads.

GDP measure still has practical features, even if its emphasis becomes changed in certain respects. Meanwhile, I continue to believe that time units would be one of the most useful new measures. Time units as a formal economic measure, would not only have potential to capture aspects of well being, but also ongoing gains in knowledge and skill utilization over time. It's not hard to imagine how per capita applied knowledge gains per time unit, could provide what would in some respects become non monetary representation for ongoing production gains, as well.

Some Notes and Thoughts on Community

While reviewing potential reference links for the February wrap up, I noticed a common theme regarding community which suggested a post of its own. Formal economic activity has been associated with global markets and nations for so long, that many possibilities for renewed economic dynamism in local communities have been neglected. Perhaps this lack of local economic definition, contributes to the fact that men in the U.S. who are out of work, also experience more difficulty in life than would otherwise be the case.

And in an interesting article for the Adam Smith Institute, Ananya Chowdhury highlighted the once stateless nation that was Medieval Iceland. Customary laws may have been part of what encouraged this decentralized society to combine cooperation and competition in their mutual efforts to get things done. Indeed, it could be said the only "King" in their society was the consumer! Among the references listed in "Vikings or Vagabonds?" for ASI, some readers may be particularly interested in Elinor Ostrom's "Governing the Commons."

Raghuram Rajan also has a much anticipated book about community coming out this spring ("The Third Pillar"), and Diane Coyle highlights his arguments for more power at local levels:

Rajan advocates devolution of power "from the international sphere to nations, and within nations to the regional to the community level." The Third Pillar needs to be reinvigorated. There needs to be more scope for people to fill gaps left by formal economic structures, to experiment with structures of political and economic governance, to create meaningful, non market work.

Nevertheless, I would stress that increasing levels of time scarcity have made it difficult for high skill providers to also pursue work which could be productively defined in non market ways. Why should it be "necessary" to task high skill individuals with this responsibility? Fortunately, in most respects, it isn't. But sadly, many imagine those who are not already gainfully employed (or lack college degrees), to lack skills or other abilities which could prove useful for others. Thus far, we lack the structural mechanisms which could meaningfully challenge this perception. Consequently, many unemployed or underemployed individuals end up with "excess" time on their hands, since too few actually welcome them to participate in ongoing voluntary forms of non market activity or workplace activity.

Ultimately it could prove helpful to define many aspects of voluntary time on formal economic terms, so as to bring more individuals back into normal settings who otherwise end up socially excluded - especially when others have few other means to gauge their trustworthiness. I remain convinced that more - not less - market definition is needed for time use potential, to begin filling missing gaps in local community organizational capacity.

One way to frame these missing gaps is via the macroeconomic result, of missing general equilibrium demand as a result of today's supply side requirements. Yet it's difficult to determine what time based services demand is actually missing in the economy, when job creation is mostly framed by the skills institutions seek from individuals, rather than what individuals would otherwise freely seek among themselves.

Given this limited demand setting, societies also up with an inability to coordinate time based product at a general equilibrium level. In other words, individuals lack the ability to personally negotiate their overall preferences, which not only reduces happiness (clearly), it negatively impacts the nature of supply and demand in time based services. Today's prosperous region approach to high skill time based services provision, means millions either end up experiencing excessive time scarcity or else insufficient time demand, more keenly than would otherwise be the case. Further, structural imbalances in time based product demand only make redistribution more difficult, because many assume those left behind would be incapable of negotiating on their own behalf. In all likelihood this is not the case.

Symmetric organization of mutual time priorities for time based product, could make it possible for the consumer to become "King" as noted in the Medieval Iceland article. After all, by combining both cooperation and competition at a time participation level, consumers would contribute to the nature of time based product in ways that make it simpler for producers to construct what others actively seek. Yet this process could be productively tempered by group efforts to particularly focus on mutual activity which supports intellectual challenges. The end result would mean broader market formation for time based services, and more participants would in all likelihood be happier with the results. With a little luck, local market based patterns for community dynamism, may become a more substantial part of social discourse in the near future.

Exogenous as Expansionary, Endogenous as Steady State

What patterns of wealth creation can be considered endogenous, and which patterns have strong exogenous tendencies? Tradable sector activity has the exogenous features of global networks and product mobility, even as it contributes to revenue streams for non tradable sector domestic activity - much of which is endogenous to wealth creation. Tradable sector wealth can disperse well beyond income levels tracked in individual nations, hence the nature of global wealth partially obscures revenue dependencies. What's more, some aspects of non tradable sector activity have lately taken on exogenous features as well - in particular, product which is not time or place dependent, hence capable of traditional output scale.

Given the growing prevalence of MMT rationale; as a (market) monetarist I find it increasingly important to note recent general equilibrium shifts in endogenous and exogenous relationships, especially since these changes have begun to negatively impact aggregate output. For that matter, some even find monetarist beliefs to be "folk tales" which central bankers supposedly should be rid of! Does anyone imagine that doing so could actually improve productivity, long term growth and standards of living?

And even though prominent economists have seemingly become less concerned about budgets and national debt levels, the idea that budgetary constraints don't matter, feels to me as though a non tradable sector variant of short termism. Put another way: Let's just maintain high levels of monetary compensation for all critical knowledge use until the revenue dwindles, and then spend the next century debating who to blame for the shortfall! The quantity theory of money is important for similar general equilibrium reasons. If we don't choose to quantify money in relation to output aggregates, how would it be possible to even respond, when the variance between input and output becomes too extreme?

Possibly the best option for new economic growth, would be to quantify sets of time use preferences for participating groups on formal economic terms. Doing so, could ultimately help protect the use of knowledge, as it becomes more difficult to compensate personal skills via high income levels - regardless of one's formal investments in human capital.

Presently, the endogenous wealth which is directly connected to time and place, does not exist in a steady state, due in part to its dependence on other points of wealth origination. This post title is what I would hope that endogenous or (time and place specific) domestic activity might eventually be able to contribute to general equilibrium patterns, via the formal economic quantification of time value. While some non tradable sector activity can be expansionary in that it is capable of scale, much of our most important non tradable sector activity does not scale. Given this reality, non tradable sector activity will ultimately detract from long term growth potential in mature economies, if it remains completely dependent on other sources of wealth origination. Symmetric use of time value might counter the dilemma, by creating a steady state for time based services which could gradually reduce the extent of competing governmental debt obligations.

Why is this such an important concern? In recent decades, non tradable sector activity expanded considerably in relation to tradable sector activity. However, that expansion came with some organizational problems: Excessive constraints in both high skill time based services and housing, are making it difficult to maintain normal levels of supply and demand across the income spectrum. These basic marketplace deficiencies consequently reduce the market potential of tradable sector activity, as well. One way to think about this process, is that non tradable sector activity carries non discretionary requirements which crowd discretionary income, in effect reducing aggregate demand.

Even though MMT can seem valid in certain respects, dependent forms of endogenous activity have the greatest capacity to expand, so long as tradable sector activity continues to dominate economies which are still in the process of maturing. However, once revenue dependent forms of non tradable sector activity start to dominate in general equilibrium, they lose the ability to provide adequate economic access to diverse levels of income. Without that access, government programs ultimately face their own limitations as well.

It may be that we now need to create endogenous activity which creates wealth at the outset (no debt required) to bring new growth potential to mature economies. Indeed, a services sector steady state in small communities could also encourage advanced economies to be less dependent on mercantilism as a source of revenue and economic dynamism.

Credit creation, important though it is for some purposes, will always remain a subset of true wealth creation. No one can afford to rely on fiscal policy, credit based activity, or even money printing for that matter, as more important than the ways in which people actually build wealth and long term growth potential in the real economy. In an era when knowledge has become so important to society, the quantification of our time could provide a much needed mutual building block for human capital. We can't expect all non tradable sector activity to be capable of expansion indefinitely. But we can transform vital aspects of knowledge use into a steady economic state.

TFP Potential: Time Reduction, or Synchronization?

Is progress slowly being diminished? One reason it's difficult to know for certain, is that progress has also become more difficult to measure. In a recent Econtalk with Russ Roberts, Patrick Collison says he's agnostic as to whether possibilities for progress have actually been reduced. However, he is quite concerned about a measured productivity rate which is "declining very rapidly on a per-person, per-hour, or a per-dollar basis." Collison adds that "our per-person productivity seems much, much lower."

Roberts and Collison also note how total factor productivity is a useful framing for this problem. I would add that this still evolving circumstance could be a result of increased economic activity which doesn't readily scale. Since there are relatively more inputs for time based product than output, there is also less overall revenue potential. That doesn't mean we should cut back on time based services provision in order to achieve gains in output, but rather, think differently about the organizational factors involved. Thus far, in aggregate, there's too little time based services output, in relation to the input which is often required in high skill services generation.

Total factor productivity provides macroeconomic clues for envisioning aggregate output and long term growth potential. However, we still conceptualize productivity in linear terms, which means assuming it is always necessary to further reduce time and labour in relation to output. Indeed: One of the more pressing questions now, is how far will societies travel this path to productivity gains? After all, it's an approach which means eventually excluding larger percentages of the population from formal workplaces. Despite the productivity gains - even if some form of monetary redistribution were also involved - there would still be losses in terms of both output potential and consumer demand. Might some remain convinced it is better to sacrifice potential productivity gains, so as to keep citizens gainfully employed?

There are further complexities for how we think about present day productivity, as well. Even though some aspects of non tradable sector activity are notorious for their contribution to output losses, other valuable service activity has been generated which does not require time based product. Indeed, services which don't require someone's personal attention (or specific locations where that attention takes place) now contribute to substantial productivity gains. Fortunately, not all aspects of today's non tradable sector activity are problematic for continued progress and long term growth potential.

Nevertheless, if average citizens are to preserve vital economic roles in the near future, many could still benefit from a non linear perspective on wealth creation. Time arbitrage, or symmetric time matching, could synchronize many forms of time based product which people find valuable. Time synchronization could make if feasible for time based services to become recognized as a valid form of economic output, rather than societal obligation.

Yet how to know which services individuals especially value? Exploratory processes would allow people to decipher what forms of (voluntary) time based services are most meaningful, versus activities which are only tolerated. How "necessary" are the latter, for instance? Once the differences become apparent, societies could more readily measure what individuals hope to encourage and maintain. In all of this, the concept of time as a separate distinct product in its own right, helps tease out aspects of economic measure which matter at a broader level. To sum up, while it is possible to increase productivity via further reduction of time hours in relation to aggregate output, doing so would not necessarily increase output and demand. Time synchronicity could ultimately increase both.