Wrap Up for June 2019

Greg Mankiw offers six guidelines for teaching intermediate macroeconomics.

Samuel Bowles and Wendy Carlin:
"What Students Learn in Economics 101: Time For a Change"
More text book discussions here. Again, Mankiw's text is included.

Some highlights of the lead up to the trade war between China and the U.S.

Changes in employment share for non college educated, since 1970.

Norms for building space requirements have been an all too convenient way to keep out the poor.

Japan is in a pioneering position for the issues other high income economies face in the near future.

"Think of the 20th century as a high real interest rate century and the 21st century as a low real interest rate century."

Texas stood to lose the most from another round of tariffs on Mexico.

"It may also be difficult to discern a connection between markups and inflation if the Fed is pursuing monetary policy that offsets inflationary pressure from markups."

Daron Acemoglu weighs in on the UBI.

Alas, the do it yourself culture hasn't taken off as I'd hoped!

There's a movement afoot to regain more open access.

When it comes to offerings in housing, what has replaced the company town?

"...the number of caregivers needed to keep the current prevalence of unpaid caregiving constant would have to almost double."

Jonathan Portes: "The Economics of Migration"

Fixing today's Social Security shortfall will require more extensive adjustments than were negotiated in 1983.

A growing "brain drain", across states.

Could governments finance welfare programs without imposing higher burdens on taxpayers?

"Artificial Intelligence: The Ambiguous Labor Market Impact of Automating Prediction"
also,
"The Wrong Kind of AI? Artificial Intelligence and the Future of Labor Demand"

John Mauldin for Forbes:
"We are being forced into difficult choices, both political and economic, and the longer we kick the proverbial can down the road, not dealing with the real fundamental issues, the more difficult and starker those choices will be...That said, we need to make sure our choices don't exacerbate the problems."

"The changing structure of American innovation: some cautionary remarks for economic growth"

Joshua Henderson argues that nominal income targeting advocates have not gone far enough in their analogy with free banking possibilities.

Free market advocates no longer have a political "home".

It's sad to see the sharing of knowledge between the U.S. and China breaking down.
Nevertheless, How will the U.S. government approach AI in the near future?

Lael Brainard has become a moderating influence on the Fed.

"At a time when President Trump speaks of rebuilding American manufacturing, footwear is a telling example of how hard it is to turn back time." The good news is that with greater automation, shoemaking may begin to return to where the markets are, instead of where the labour is. As to jobs, these aren't jobs that young people want, which is increasingly true in emerging economies as well.

So long as there is support for GDP from all corners of the globe, for me the world will feel a little less fragile.

A reminder from Gregory Mankiw that national debt is still being swept under the rug.

"As investors snap up more properties, they're helping drive up prices in many cities nationwide."

"The Surreal End of an American College"

Tariffs add many additional costs for all concerned, when they involve global value chains.

Might the Phillips curve be "alive and well"?

One thing "The Economist" liked about Eric Helland and Alex Tabarrok's new book, is its suggestion that the rising cost of education and healthcare is less troubling than believed. Tabarrok was understandably happy with the review! Nevertheless, are we to believe the rising cost of education and healthcare are not troubling? Indeed, William Baumol could have believed this result a benign one for similar reasons. However, one problem lies in the fact the Baumol effect is an incomplete equilibrium in terms of time value potential which cannot be amended by governmental redistribution.

The seventies in particular were a turning point for zoning in the U.S.
"If you're a big city, you don't want people to have to drive for 15 miles for every errand. You want to keep car trips short, allow walking trips and be built in such a way that you can sort of all live together in peace. And that's not what the southern cities are doing."

Russ Roberts talks with Eric Topol about his new book Deep Medicine.

Given the fact interest spending could rise to 20 percent of all federal spending by 2049 if nothing is essentially changed, is this really the time to be adding extensive new spending programs?

Scott Sumner muses on how the next three years will play out for the Fed, and also highlights a new working paper from Robert Hetzel, Rules vs. Discretion Revisited: A Proposal to Make the Strategy of Monetary Policy Transparent

Once too many end up left behind, democratic capitalism comes under threat. (Angus Deaton)

JP Koning notes that not only is Facecbook's Libra a new way to pay, it is also a new means of monetary measurement. However, it (presently) has an "interval of certainty" problem. Nick Rowe also highlights the position Libra would (likely) hold in an alpha beta relationship.

"Place Based Drivers of Mortality: Evidence from Migration": "We estimate that equalizing health capital across places would reduce the cross-sectional variation in life expectancy by three-quarters."

Hardening political positions and no desire to compromise, are like sclerotic arteries which could lead to a heart attack for Western democracies. (Tim Harford)

Time as Economic Unit: Intervals of Certainty

The recently proposed Libra currency also provides a useful way of conceptualizing time value as an economic unit. Like Libra currency, a formal means of time arbitrage would function both as a unit of exchange and of account. As a unit or medium of exchange, one unit of time purchases another, and the process is additionally backed with monetary representation for time value as a standardized commodity. As a unit of account, the economic time of each participating group would be fully accounted for, in a recorded continuum of coordinated services exchange.

However, the adoption of Libra as a new form of international currency, is by no means certain. In particular, as JP Koning emphasized, its unit of account is structured so that owing one's friend five Libras isn't the same as owing five dollars.

The most interesting thing to me about Facebook's move into payments is that rather than indexing Libras to an existing unit of account, the system will be based on an entirely new unit of account...Libra will be not just a new way to pay, but also a new monetary measurement.

Since Libra would be created from a basket of international currencies, not only is a Libra approximation of five units different from five dollars, it would fluctuate in ways which the user can't readily determine. Alas, as Koning explained, this could be a weakness for the new currency, since users would lose "intervals of certainty" in their spending patterns. Otherwise, the money in our wallets is fortuitously indexed to how store owners set prices. Incidentally, store prices are somewhat sticky, in part since price stickiness is reassuring to consumers. As to how intervals of certainty benefit retail in general:

It's a helpful fusion. Monetary economists call this a wedding of the medium-of-exchange and unit-of-account functions of money.

Facebook has an ambitious goal to create a monetary unit which could function globally. But will it prove feasible? What would it add to existing payment systems which they presently lack? And more specifically to the purpose of this post: Since I've also suggested time value as an economic unit in its own right, what issue would it address in terms of intervals of certainty?

Indeed, there could actually be a greater need for time as a unit of account, than what Facebook seeks. At issue is that while many time based service prices are also sticky, there's a different rationale for sticky markets which correlate with the income of high skill time based product, as opposed to the retail price stickiness which allows consumers to better manage (some) spending patterns.

Hence intervals of certainty aren't the same for time based product as for other goods and commodities. Yet time as an economic unit, could prove useful in the sense of bringing greater intervals of certainty to consumer management of high skill time based product. While it would be a slow process to build reliable local equilibrium for mutually desired spending patterns, the process could eventually pay off in the long run. Through the sharing of information re current aspirations and responsibilities with all members, participating groups would gradually create intervals of certainty for time based services, allowing each individual to manage their own time scarcities accordingly.

Why do today's high skill service offerings suffer from intervals of certainty problems? Many service providers need pricing flexibility because it is difficult to determine revenue sources in specific periods. Much of the resource capacity which compensates aggregate time value for high level skill, relies on skills arbitrage in secondary markets. Consequently the potential for full monetary compensation of high skill become saturated before all providers are represented. Just as this is a problem in specific time periods, it presents issues for supply side market capacity as well.

Small wonder it is difficult to rely on transparent services pricing, since secondary markets fluctuate according to the revenue creation of primary markets in current periods. Nevertheless, the overall lack of certainty for spending management is more of a problem for lower income levels, than for higher income levels. Hopefully, time arbitrage could eventually help to address this problem.

Baumol Effect Recognition is a Good Starting Point

A recent back and forth regarding the Baumol effect among various bloggers (and their commenters) is quite encouraging. For instance, Arnold Kling (here, here and here) and Bryan Caplan also responded to Alex Tabarrok's posts, Scott Alexander reviewed the book, and Scott Sumner adds some thoughts re healthcare. Just the fact an important structural feature such as this is getting some attention - when distraction tends to be the norm in times of political and cultural turmoil - is cause for celebration.

For that matter, services which contain substantial time centered components, haven't really benefited from serious consideration. Yet this is somewhat understandable, since service sector dominance only came to the fore (at least in recent historical memory) in the latter part of the 20th century. For the most part, only a decade earlier, it seemed time centered services were little more than an afterthought in most online discussions. I recalled some discussion for instance about low skill service providers such as restaurant and retail work. In recent years the dialogue is turning towards high skills services capacity. And time centered knowledge or high skill services as final product, may include economic ramifications we've only begun to discern.

Fortunately it's not necessary to solve the major mysteries of the Baumol effect in short order! For that matter, it appears to play a partial role in a larger foundation of how aggregate time value has come to be conceptualized. When William Baumol explored this phenomenon decades earlier, he may have been more interested in how it affected wage relationships at local levels, in what could be considered an income smoothing effect for skills coordination among divergent groups in cities or regions. Interestingly enough, he didn't seem concerned it would later prove problematic for the nature of general equilibrium monetary flows.

Part of the mystery is how service sector activity tends to mostly level off at around 80 percent of GDP before stabilizing in a mature economy. Why such a high portion of GDP, if one considers the extent to which (for instance) manufacturing levels also impact service sector levels? Perhaps the wealth of housing assets is a factor, especially since much of this is reflected in the financial sector. How to think about the supply side limits of housing wealth, in terms of productive agglomeration? Might the high skill wage limits of the Baumol effect also contribute to the relative scarcity of productive agglomeration?

The relatively recent dominance of service sector activity is an apt reminder, how young economics as a science really is. In some respects a new process of theoretical adjustment could just be getting started, should we be fortunate enough in the years ahead to maintain today's degree of relative economic normalcy! Meanwhile, the wealth of recent high skill services dominance is a major contributing factor, to the increasingly blurred line between public and private activity. It's incredible to realize how different things were, only a century earlier. By way of example, Paul Samuelson, in Economics, noted the earlier clarity of government roles:

Prior to World War I, local government was by far the most important of the three. The federal government did little more than pay for national defense, meet pensions and interest on past wars, finance a few public works, and pay salaries of judges, congressmen, and other government officials. Most of its tax collection came from liquor and tobacco excises and tariff duties levied on imports. Life was simple. Local governments performed most functions and depended primarily on property taxes for their finance.

It's been a long time since life felt that simple. Still, something interesting about Why are the Prices so D*mn High? was the authors' confidence that the Baumol effect was more of a positive than a negative. Will this prove to be the case? It depends. Can society come to terms with the fact real wage gains will need a different approach in the foreseeable future, given the recent limits suggested by this phenomenon? Hopefully, yes.

The Visceral Nature of Economic Freedom

What is economic freedom? How is it different, from the political freedoms which have long been more widely discussed? For one, economic freedom is closely linked with psychological health and well being. Yet this connection has often been misunderstood, despite the millions who risk everything to build a meaningful life through self employment and entrepreneurship. Are the potential economic patterns which might help preserve freedom at its most basic level, simply too boring to discuss? Or are they actually misconstrued as a form of undesirable economic planning?

Unlike the intellectual arenas of political freedom, much about economic freedom is instinctive and personal in nature, hence not always as easy to put into words. Yet much that comprises the foundations of economic dynamism, results from countless individual struggles to preserve one's dignity and self respect in society.

Economic freedoms are also about the circumstance and resources which people have to work with in the here and now. Since freedom is generally discussed at an abstract level, more mundane aspects of economic freedom can easily get lost in translation. Consequently we are more often reminded what freedom is not, than given clear scenarios what personal freedoms might actually consist of. I recall a similar lack of understanding nearly a decade earlier, after reading Hayek's The Road to Serfdom. As it turns out I wasn't the only one. In their recent conversation for Medium, Tyler Cowen asks Russ Roberts which Hayek book influenced him the most:

That would be Fatal Conceit. It's certainly not The Road to Serfdom, which is the book everyone tells me they've read or that they plan to read. I say, "Don't read it. It's really slow going...The style is even more turgid than some of Hayek's other work."

For those who are fortunate, economic freedom helps to preserve social connections later in life when it otherwise might not be possible  to do so. Paul Samuelson detailed some of the incentives and difficulties of the self employed in the 11th edition of Economics, noting how many small scale efforts are doomed from the start, "When the owners' initial capital is used up, they are finished":

Who, on a Sunday jaunt to the shore or mountains, has not pitied some self-employed drudge, whose own efforts and those of the entire family hardly suffice to let them break even? 

Still, people will always want to start out on their own. Theirs may be the successful venture. Even if they never do succeed in earning more than $15,000 a year, there is something attractive about being able to make your own plans and do the variety of tasks that a small enterprise or franchise operation calls for. 

In the almost four decades which have passed since those words were written, how many still recall, just how basic is our desire for social inclusion in a viable economic context. Especially those of us who strongly relied on such framing, to help make up for our own social inadequacies! Recently I came across a study suggesting small business ownership could contribute to happiness and well being, and found myself wondering, isn't that already obvious?

Perhaps these differences between the mundane reality of personal freedoms, versus society's more lofty versions, is part of what stands in the way of a small government approach on the part of today's political parties. If so, it might help explain why those who have been left behind, remain neglected. It's easy to assume the poor consist of people who either haven't tried, or aren't willing to. But among these, are also plenty who have tried, and also started anew, many times. Millions of us embraced and thrilled to those fleeting moments of business success for all they were worth. There's many a fading photograph and local news story of once dynamic Main Streets to tell those stories, and some of them are our own. Have the earlier personal benefits of economic freedom simply become too mundane for a 21st century economy? Once again, Russ Roberts:

But most people who are poor are poor because they do not have the tools, the skills to contribute to the modern economy. They have circumstances that keep them from rising. I've been deeply saddened by the failure of people on so-called our side - the people who believe in smaller government - to think at all about that, to think at all about human flourishing by the people who are struggling. I think that has been a terrible mistake.

At the same time, we've failed to make the case for freedom, and to the extent that even saying that seems foolish...It's not literally true, but the last prominent politician, I think, who made the case for liberty and freedom in and of itself was Maggie Thatcher. Reagan, to some extent, also, but Maggie Thatcher did it relentlessly. That's so out of fashion in our times. We've become so consequentialist. The idea that liberty is a principle worth defending in and of itself is really, really difficult. 

I find it strange that people tie small government to the Republican party. The Republican party doesn't make the case for liberty...We don't have a political home for our ideas and I think the intellectual home has failed badly for our inability to make the case, either for liberty in and of itself, and to understand how and why people who are being left behind by our economy, and what policies might help them. I think that's an utter failure of our side, and it's a tragedy. 

The Paradox of "Too Much" Productivity

Is it possible for some firms to be "too" productive? Considering how productivity gains have stalled in developed nations, or what such losses imply for future living standards and long term growth, why the recent focus on making successful endeavour a little less productive? Should enterprises learn to scale up too well, does it become necessary to draw the line?

More specifically, it looks like we've got problems in today's digital marketplace. There are players in this arena who have mastered something that many companies have only dreamed of: the ability to scale to such a level, that a majority of possible gains are in fact being captured. Hence the digital realm oddly appears "too" productive, in an economy which otherwise continues to suffer from a general lack of productivity. In a post for Project Syndicate, Diane Coyle explains the dilemma:

Digital markets often become highly concentrated with one dominant firm, because larger players enjoy significant returns to scale. For example, digital platforms incur large upfront development costs, but benefit from low marginal costs once the software is written. They gain from network effects, whereby the more users a platform has the more all users benefit. And data generation plays a self-reinforcing role: more data improves the service, which brings in more users, which generates more data. To put it bluntly, a digital platform is either large or dead.

Perhaps it would be a good idea to think twice before moving in for "the kill". Why not focus instead on responding to - and improving - markets which not only lack the ability to scale via the same means, but remain short on economic access. After all, today's most prosperous digital firms have created an array of product which provides benefits for millions of users, not just high income consumers. Much of this marketplace is of a discretionary nature, for that matter. If one doesn't care for some forms of digital products, generally it's no loss to simply not use them. Whereas the markets which pose real problems, also suffer from both lack of innovation and marketplace access - even though they tend to be non discretionary in nature. By far the most prominent examples are housing and an array of time based services.

In all of this, there's no such thing as "too much" productivity, just as productivity gains need not mean the ultimate loss of meaningful employment. However, in order to preserve economic dynamism, a different approach to scale may become necessary, than what companies have capitalized on in recent centuries. To some degree, traditional forms of scale may have even reached a temporary zenith, given their present lack of new market possibilities at local levels. How, then, might society proceed further from this vantage point, in ways which also continue to improve standards of living?

Let's renew our focus on the economic activities which are closely linked to place and time. Not only do these include our more personal aspirations, they also don't scale up in the same traditional sense that came to be associated with technology and the Solow growth model. Presently, what's most important in this regard, is that alongside use of the Solow model, vast quantities of productivity gains are simultaneously being lost to requirements for human capital inputs. The reason this matters, is that extensive losses are occurring in what is organized as dependent forms of economic activity. Human capital with an intangible veneer, can reduce total factor productivity to such an extent that standards of living end up reduced as well. There is danger in assuming that "intangibles" need not be measured, especially if no other viable options exist for services generation.

Human capital has the potential to function as a direct source of wealth creation, via the time use standardization of symmetric alignment. Where this process differs from traditional scale, is that human capital becomes central to economic processes, and no longer functions as a production residual. Gains in scale in these instances, come from measurable population gains in applied skills and abilities. Time arbitrage as a formal economic unit, makes possible a continuum in which knowledge and skill accumulate over time, thereby creating new means for the measure of productivity gains.

The good news of course, is that time value in the form of human capital, has actually provided similar productivity gains in the past. Successful societies have formed a continuum many times over, for the shared experience of applied knowledge and skill. Even though many recent aspects of knowledge and skill have inadvertently become rival in nature, it's possible to return the use and preservation of knowledge to all citizens.

Fortunately, productivity is about much more, than just the form of scaling up which requires gradually reducing labour to generate final product. When human capital is integral to final product, everything changes. And time value in a wealth creation context, gives the ability as well, to put long term productivity gains back on a steady course.

Does the Baumol Effect Impact Long Term Growth?

What might the Baumol effect suggest for continued future prosperity? Kudos to Eric Helland and Alex Tabarrok for exploring this issue in "Why Are the Prices So D*mn High?". Tabarrok has been following up with a series of explanatory Marginal Revolution posts as well. For instance, in "The Baumol Effect" he notes the growing cost differential between education and cars:

Yet the rising costs in the education sector are simply a reflection of increased productivity in the car sector. Thus, another deep lesson of the Baumol effect is that to understand why costs in the stagnant sector are rising, we must look away from the stagnating sector and toward the progressive sector.

Regular readers may recall that even though the correlation isn't perfect, I generally refer to "stagnating" sectors as non tradable, and "progressive" sectors as tradable. Tradable sectors benefit from a degree of mobility which often allows them to escape cost constraints imposed by various forms of NIMBYism and many other factors which inhibit innovation. Whereas non tradable sectors haven't been as fortunate, due in part due to the fixed nature of their connections to time and space. Thus far, it's been difficult to try radically new approaches for building components in municipal settings which have long relied on centuries old physical infrastructure. Likewise, professional services remain burdened with societal expectations regarding the inputs supposedly necessary for quality product.

Helland and Tabarrok particularly focus on services generation. Healthcare, along with professional services such as legal, accounting and other business services, " increased in price by a factor of more than three since 1950." Their findings are apt illustrations as well, how stagnant sectors reflect the aggregate wealth generating capacity of general equilibrium. By way of example, statistics for long run trends showed that

The growth rate of healthcare expenditures per capita has declined because the growth rate of GDP per capita has declined.

Should we be concerned? They claim that "The Baumol effect explains a slowing rate of productivity growth and the reason the Baumol effect will decline", and continue:

The price of services relative to goods has been rising because productivity in services has increased more slowly than productivity in goods. At the same time, the services sector has been growing as a share of the economy. In 1950, for example, services accounted for approximately 60 percent of the economy, measured as a share of either GDP or employment. In 2018, services accounted for approximately 80 percent of the economy...Because society is moving more resources into lower-productivity sectors, the inevitable result is slowing net productivity growth. 

However, what if this is actually a positive outcome?

Even though shifting resources to services is slowing down the rate of productivity growth, the shift itself is not a bad thing. Over the past 60 years, consumers have used their higher incomes to buy relatively more services than goods. It is unfortunate that productivity is not increasing faster in services, but faster productivity growth is good only if it increases consumer satisfaction. Shifting resources to the service sector increases consumer satisfaction even if it reduces productivity growth. There is nothing wrong with a future world in which consumers spend most of their income on live musical performances. 

Dietrich Vollrath is another economist who isn't alarmed by these developments, and he refers to the recent slowdown in productivity as "optimal stagnation". As it turns out, he's in the process of publishing a book entitled Optimal Stagnation: Why Slower Economic Growth is a Sign of Success. Given the extent to which tradable sector activity has cut costs for centuries already, perhaps one might reasonably ask, how much do standards of living really need to improve?

Nevertheless, it doesn't hurt to question whether this is a stable reality since - unlike tradable sector markets which create something for everyone - non tradable sector options are now mostly geared for middle to higher income levels. Plus, the lack of options for those with low wages isn't just about consumption opportunities, but in particular those of personal production. Areas lacking in economic complexity, especially illustrate this reality. Not only are they hard pressed for the revenue required to build new traditional housing, but also that of traditional services generation. And since economic activity in general has assumed a lower gear, there are relatively fewer city jobs for rural residents, who in the not so distant past, tended to spend their most productive employment years in prosperous cities and regions.

Indeed, more communities in the near future might start to find themselves in similar circumstance. After all, since the Baumol effect only extends so far in a low growth economy, more citizens will need to accept lower wage employment than the revenue sources many municipalities and governments actually need, to maintain today's services and traditional infrastructure patterns.

Granted, a reduced Baumol effect might prove mostly benign. That said, many real economy adjustments are needed which have not yet even begun to take place. Of course, as Helland and Tabarrok stressed, quality product is a good thing. Who wouldn't want the luxury of experiential goods and services that are well within reach of one's income?

Even so, no one should expect an economy which remains essentially incomplete at low income levels, to be enough. In recent centuries, societies have standardized many product specifications which have improved standards of living across the board. Now it is feasible to also standardize time units, so that quality services might ultimately be generated for all income levels. It is feasible to standardize basic flexible building components, so that settings for life and work might easily be arranged and rearranged as needed. With a little luck, services professionals and municipalities won't stand in the way of the low wage millions who now need to create their own organizational patterns for services generation - not to mention entirely new industries in physical building components and infrastructure.