Wrap Up for July 2019

Some have forgotten the extent to which the previous growth trajectory was lost and never fully recovered after the Great Recession. "median household wealth is one third lower than it was in 2007, before the crisis."

Reuters refers to the present expansion as the "new Gilded Age".

Before promising to pay off all student debt, it's a good idea to first observe who is actually holding it.

The "libra" historically was a medieval monetary unit.

"77% of Americans fear rising healthcare costs will damage the U.S. economy, and 45% fear a major health event will lead to bankruptcy"

In contrast with other countries, the U.S. has experienced an almost monotonic decline in the size of infrastructure as a percentage of GDP, since 1970.

When it comes to a higher federal minimum wage, geography matters.

Multiple factors have reduced labour force participation for teens.

Perhaps artificial intelligence is really just recycled intelligence.

In 2005, the labour of convicts actually accounted for 4.2% of total manufacturing employment.
This article includes some surprising statistics.

Paradoxically, life expectancy is decreasing in a way that makes aging in the U.S. even more apparent.
"On one level or another, life is simply not working out for many American adults."

"By 2030, the majority of job growth may be concentrated in just 25 megacities and their peripheries, while large swaths of the country see slower job creation and even lose jobs, the researchers found."

Even if the temptation is over-reach,
"it seems far safer to attack Iranian interests through stern letters to a messaging service in Brussels than with a carrier strike group."

More interesting statistics, these are impressions regarding the importance of manufacture.

"Four of the five largest banks in the world by assets are Chinese."

In the U.S. driving is practically a legal requirement:
"A key player in the story of automobile supremacy is single-family-only zoning, a shadow segregation regime that is now justifiably on the defensive for outlawing duplexes and apartments in huge swaths of the country. Through these and other land-use restrictions - laws that separate residential and commercial areas or require needlessly large yards - zoning rules scatter Americans across distances and highway-like roads that are impractical or dangerous to traverse on foot. The resulting densities are also too low to sustain high-frequency public transit."

Health care system failures have reduced real wages for millions of Americans.

Enrico Moretti has paid close attention to the costs of productive agglomeration.

"Why a positive aggregate demand shock should make the stock market go down if the Fed is doing its job right."

A timeless essay on creativity.

Where is the constituency for sensible economic reforms?

Coffee is actually one of the smallest contributors, to the cost of a cup of coffee!

A most inspiring discussion between Arthur Brooks and Russ Roberts.

Raj Chetty hopes to retrieve the American dream.

From "Human Capitalists": Equity-based compensation is almost "45% of total compensation to high-skilled labor."

"Another way to think about pro-growth policies is to think of them as pro-connection policies that help humans more easily acquire and communicate knowledge over large networks."

David Andolfatto explains why he is sympathetic to Roger Farmer, re the Phillips Curve.

Does price stickiness contribute to the flattening of the Phillips Curve?

Perhaps those World Bank lending standards were sensible after all.

A take from The New Yorker on "The Invention of Money"

Plastics could gain considerable value once consumers seek markets which reject the single use mindset.

Patrick Collison and Tyler Cowen suggest a dedicated field of study for progress.

Arnold Kling: " A family or tribe will readily share resources and take turns doing tasks. In a super-Dunbar setting, we need hierarchies and markets to provide for organization and cooperation."
In response to Kling, I would add that hierarchies tend to be more important when final product (of necessity) results from a wide variety of input from many individuals. Many time based services between individuals don't actually fit this requirement very well. When time based services hierarchy is imposed regardless, people may act out, rebel, or at the very least disconnect emotionally from the process. Nevertheless, hierarchies can sometimes be a useful organizational factor when final time based service product will only function as intended, due to specific sets of steps which are precisely followed.

Ricardo Hausmann stresses the importance of complementary workplace relationships.

Can central bankers remain independent?

What are institutions? Bradley Hansen has plenty of examples.

Can Economics "Raise Its Game"?

Tim Harford wonders whether economics could become more broadly relevant for populations in general, so poses some questions:

How can economics become a more insightful discipline? Should it aim to be more like physics, with its precision and predictive power? Or should economists emulate anthropologists or historians, immersing themselves in the details of the particular and unquantifiable?

Clearly, while more attention of late has been given to precise measure, both matter. Harford noted that the economist George Akerlof believes too little attention is being given to "soft" questions which aren't easy to answer on mathematical terms. That said, I respect the "hard" approach, and likely would have utilized it, had life circumstance been different. Unfortunately my interest in economic issues didn't gain traction until middle age, which proved too late to learn the (now) necessary math. Not only does math has its own intriguing qualities, it sets up Twitter economist conversational patterns which are generally beyond my comprehension. For one thing (among many), I would like to have understood in concrete terms, how dependent service sector markets (in a dominant revenue position) influence the natural interest rate.

Hence I was surprised that the late Gary Becker, as a college student (according to Harford's post), found sociology "too difficult" and consequently remained with economics studies, where he provided useful mathematical framing for specific sociological issues! Indeed, some perennial economic problems haven't responded well to a hard approach. Some examples from Harford:

What are the obstacles to social mobility? Where does innovation come from? Can we strengthen the institutions that matter for prosperity?

What also prompted today's post, was a recent Politico article which seems to speak to these concerns. Diego Zuluaga emphasized how loans supposedly meant for those with low income levels, have instead been given to higher income customers. In the process, neighborhoods gentrify as older homes in desirable areas are renovated - a process which gradually pushes out lower income levels altogether. Yet some of this isn't the fault of the banks, given their incentives. How has the Community Reinvestment Act fallen short of its intentions?

Banks are supposed to lend in low-income areas without incurring additional risk. Absent this safeguard, public policy would cause banks to make ill-advised loans, leaving taxpayers to pick up the eventual tab. Even with the statutory language, some evidence has accumulated over the years showing that the CRA does sometimes encourage risky lending. But by directing credit to higher-income "gentrifiers" in CRA-eligible areas, banks can meet the letter of the CRA without increasing the amount of likely losses on their balance sheets. 

This practice may, however, unwittingly end up accelerating the displacement of poorer residents. Consider, for example that in five tracts in D.C.'s Park View and Petworth neighborhoods, more than 80 percent of mortgage loan volume in 2017 went to borrowers earning more than the CRA threshold, even though all of these tracts have median incomes well below that threshold.

It's bad enough that so many among the marginalized end up displaced. But even worse is the fact they have so few reasonable options afterward. Where might they go, that is safe and offers reasonable hope for a good life? In particular, how can they contribute to wealth building via institutional tools for incremental ownership, instead of loans? The lack of dynamic options where those with limited resources could successfully engage with their world, is a problem crying out for a productive response. All the more so, since low income levels will be part and parcel of our economic realities for the foreseeable future. As long as improvement is framed in a "living wage" mindset, we're essentially stuck. Real wage gains depend on real economy innovations which take local consumption potential into account for community design.

Even more important: In order for economic dynamism to further evolve, the marginalized will need to work with ownership potential on terms that are well within their reach. By way of example, old housing in need of extensive remodeling is not always optimal for those with limited resource capacity, even though it is less expensive than new traditional housing. The fact gentrification has already continued apace for decades, informs us that conversations re simpler ownership options are long overdue. Further, outside investors aren't necessarily well situated to create environments where the marginalized might gain new purpose. Yet all too often, outside investors have been expected to perform this miraculous feat, even if it supports a status quo not necessarily amenable to social mobility and innovation. When ownership is deemed the social responsibility of high income levels, further economic evolution can become difficult indeed.

So how might economics raise its game? I believe it would greatly benefit from a more practical and applied approach - one that could also redress the sectoral imbalances which now impede long term growth. Both human capital and physical capital need simpler formats for ownership potential, so that wealth creation remains viable at all levels of skill and income.

And despite the relevance of math for economics as a discipline, it is still a conceptual tool which responds to broader conversations of social meaning. Said another way: Math illustrates concepts, it is not the actual concept. If economic thought is guilty of suppressing its own important conversations due to a preference for math, chances are that vital conversations are being suppressed in other areas of life as well. Likewise, some citizens now shun the value of knowledge in a society where "losers" supposedly don't even need to work with knowledge. Economics may in fact need to broaden its purpose, if for no other reason than citizens now question the hard won economic logic that has contributed to centuries of prosperity.

The Cost of the Conduits is Too High!

One might easily imagine the dispersal of knowledge through society as freely flowing through conduits - much as pipes for electrical wiring or channels for water. But how effective are flows of knowledge today, since knowledge protection via rival use means diverting channels to pay the bills? What happens, if conduits for knowledge dispersal in society become so limited, that citizen participation essentially dries up like a river which no longer meets the ocean? Already, we observe where limits to productive agglomeration in prosperous regions are cutting off other avenues for getting things done - not just in the U.S. but across the globe.

That said, by no means are today's knowledge conduits the only ones faced with excessively high costs. Main Streets in general have similar requirements for getting things done. Unfortunately, when the sought after "show horse" versions of retail landscapes don't function as planned, full scale working horse versions aren't often permitted in their stead. Johnny of the blog Granola Shotgun, describes the "working horse" model and how simple it could be to implement, if only it were feasible to do so. He recently visited a flea market which was

composed of an old asphalt parking lot, tents, and portable shipping containers. There isn't anything about the place that costs much to build or maintain yet it functions like a traditional human scaled Main Street with mom and pop shops. 

This was no "fashionable" flea market, either. Rather, it contained essentials and much more:

Quite a few vendors were selling tools suitable for small scale businesses. Landscaping equipment, carpentry implements, compressors, and restaurant supplies could be purchased by people looking to start their own micro enterprise on a tight budget - possibly right there at the same flea market. The whole place was one giant interactive incubator. 

There were plenty of tasty meals to choose from and even inflatable slides for the children. He continues:

This place is a work horse. It grows small businesses from scratch without recourse to bank loans or government subsidies. It provides products and experiences that are genuinely needed in the community. And it costs almost nothing to create compared to the usual economic development model meant to induce artificial prosperity through tax holidays and subsidies for mega projects. Notice how any parking lot is instantly ADA compliant for people in wheelchairs who require a barrier free environment. This is amazingly good urbanism built in the absence of complex bureaucratic proceedings. 

So why don't local governments embrace more of this sort of pop up grass roots mom and pop enterprise? Officials are in a trap that requires them to boost the tax revenue to pay for all the attenuated infrastructure and municipal overhead that's accumulated for decades.  

Alas, municipalities are caught in the same show horse mindset for time based high skill services. Granted, there are vast troves of information and retail possibilities in the digital realm for individuals to access, especially when Main Streets are missing in action. But these economic options don't even come close to replacing the economic dynamism and person to person interaction that were once taken for granted at local levels. Apparently these timeless versions of free market activity could only be recreated by citizens who inexplicably now need exclusive permission, not only to take part in simple physical retail, but also today's knowledge centered economy.

To be sure, some overhead costs have evolved as ways to minimize "riff raff" and security risks. But the perceived need to keep up appearances has completely backfired for countless communities and millions of individuals who wish to take part in local business and service opportunities. More flexible building and infrastructure components, and permissions for knowledge use are needed. Chances are the new landscapes for retail and services wouldn't often resemble the flea markets of yesterday, but they still need to be equally simple to assemble.

Affordable components and permissions for living and working, would mean millions more can get back up and start over, even after they've assumed risks which proved too extensive. Who doesn't want to appear successful, especially since appearances have been legally required in most environs? Hence it's somewhat understandable that business people take excessive risks for the success signal, up to a point. Yet just the same, many individuals with successful flea market operations ended up making the leap to brick and mortar locations, then had no thriving flea market to return to, afterward.

What is not understandable, is the lack of economic options with safety valves that cushion the hard landing of individuals who unsuccessfully assume risk. Without those safety valves, individuals exit only reluctantly after many attempts to stay connected, and their lives can be irretrievably lost to solitude in the process. We need a new version of opportunity zone, one which makes far fewer exits necessary. Opportunity zones could create flexible permissions and incremental ownership options for those who are directly invested, not just outside investors who are expected to maintain the high cost status quo. It should not always have to cost so much to participate in economic life. People should not have to give up on vital connections years or decades ahead of schedule. All the more so, since demographics have shifted in ways which include needing to remain employed as long as possible.

Global Scale Adds to Local Diversity Potential

Might societies remain able to support local and global trade in a new community framework? Hopefully yes, because future prosperity may well depend on doing so. Globalization arguments on the part of progressives and conservatives alike, often don't take into consideration what is actually at stake. For one thing, too many discussions miss how vital it is for anyone with limited income to access affordable global product, even as free traders also tend to miss the importance of recreating local dynamism.

With a little luck, future communities which create local services diversity via time arbitrage, will also continue to advocate for the preservation of global trade. Otherwise, it could prove difficult to keep consumer options as open and diverse as possible. While time based services could be central to local production, by no means is augmentation of basic time scarcity the sole option. For instance, besides more traditional economic opportunities, citizens may also actively take part in 3D manufacture, even if only for their own flexibly constructed dwellings. With 3D innovations, especially in recyclable plastics, one of the most promising avenues for more affordable ownership in community investment, would be the local manufacture of building components and infrastructure.

Likewise, traditional transportation hubs at the periphery of walkable community core, will hopefully continue to bring mass manufactured product to most local communities in the foreseeable future. Nevertheless, daily economic strategies would focus on creating services diversity which to some degree would reflect what is now found in the most prosperous regions of nations. In all this, one imagines how future populations will be able to recreate new local diversity, while preserving the movable feast of global diversity to the greatest extent possible.

It's unfortunate that forms of capitalism which function reasonably well, are inexplicably catching much of the heat for other aspects of modern day economies which have functioned poorly for some time. Even more discouraging, is that the inability to face economic issues where they are most pressing, is leading to a cultural backlash. Everyone needs to take a deep breath, regain perspective in terms of resource scale possibilities and system potential, and put these disabling cultural wars to rest. Also: If product responds to scale with fully supplied markets, breaking up its representative firms may leave more negative than positive effects. On the other hand, if product is vastly limited because it does not scale to full markets due to monopoly, regulation, or knowledge use limits, try different economic approaches to create full market scale, but again, set the cultural wars aside.

Now it is time to address head on, the mixed economy additions of the twentieth century which never quite functioned properly to begin with. By way of example, many aspects of healthcare have essentially proven impervious to reform in recent decades. If we don't create new avenues for economic diversity in non tradable sectors, too many political constituents might end up even more determined to destroy wealth which holds considerable value. Why? Often for no better reason than when everyone gets mad, surely some relief can be had by breaking something!

If we can disregard the impulse to destroy wealth due to anger, it would also help to conceptualize two separate spheres in our minds at the same time - the local and the global. By tackling the present problems of insufficient scale in time based services and flexible housing ownership options, there's a good chance we could move beyond the growing political divisions of the present.

Implicit Land Rent as Potential Real Wage Gain

Why would land rent value be important, in terms of defined equilibrium settings which could contribute to the spending power of real wages? Today, productive agglomeration is in short supply, because much of it is limited to high income locales. What, then, could help implicit rent become a more affordable fixed component of the production function for knowledge based endeavour? Both questions matter for communities which seek to generate productive agglomeration for a wide range of ability and income. How would one define "affordable" specific land value which doesn't run counter to the wealth of local income realities, for instance?

Since the two most important factors for those with small wages are generally housing and services needs, it helps to consider how these two could also be interconnected, via implicit land rents. In a defined equilibrium for example, time based services would provide much of the initial aggregate economic value of a start up community. Nevertheless, in general equilibrium, the services to land rental value link is merely a starting point - given the many aspects of production which also contribute to local aggregate income. The more productive complexity that exists in any given setting, the more it is represented in local income and real estate values. However, not only has this process raised the costs of economic access for local landowners (and renters), by necessity it excludes many more who wish to participate on similar terms. Again, the Baumol effect has its natural equilibrium limits.

Defined equilibrium would approach land values in ways that allow applied knowledge to function as an accessible starting point for economic community. To this end, local land value would particularly reflect the maturity, or lack thereof, of local services generation. Management of implicit land rents as a local consumption standard, could provide an institutional response to the present day lack of productive agglomeration. Presently, productive agglomeration mostly exists where both salaries and implicit land rent are already high.

The core of such an equilibrium would consist of flexible infrastructure and building components, and an applied knowledge continuum for a full range of services generation. In order for a defined equilibrium to maintain access to lower income levels, much of what otherwise would be represented by monetary value, becomes correlated with aggregate time value as measured by gains in local skill and and economic diversity in services. Not only would this value in use process help preserve services complexity in the event of severe economic downturn, it makes possible a free market approach for time value in general.

However, in conceptualizing these possibilities, it helps to reflect on what is normally the starting point for monetary economic value in local settings. How does rent factor into the costs of production? What does implicit rent mean for one's opportunity costs as a landlord, especially given what has been necessary for home ownership in a knowledge based economy? How does local aggregate income level correspond with local production (what local property generates), or the real estate which also reflects local aggregate income value? Indeed, which comes first? Paul Samuelson offers ways to think about this in Economics (page 527 and 528):

Since rent is the return to an inelastically supplied factor that would still be supplied to the community even at much lower prices, the direction of causation is as follows: The prices of goods really determine land rent - rather than having land rent determine the prices of goods.

Okay, for us this would mean the aggregate value of services helps to determine land rent, right?

But at this point we must avoid our old enemy "the fallacy of composition". What appears as a cost of production to each and every small firm using a particular kind of land may, as we have seen, be to the whole community merely a derived, price-determined rent expense rather than a price-determining one. More than that, suppose the land is specialized and can be used only for the production of one industry. If a grade of land is inelastically supplied to one industry and has no place else to go, it will always work for whatever it can earn there; then its return will appear to every small firm as a cost like any other.

It turns out that relativity of viewpoint matters as well, because even though land is inelastic, to any one firm or industry the supply is elastic:

To conclude: Whether rent is or is not a price-determining cost depends on the viewpoint: that of a small firm, small industry, large and even exclusive-user industry, or whole economy. What is a price-determined rent return to a factor which is inelastic in supply to the whole community or dominant industry may, to each firm and to any small industry that is only one of many potential users, appear as a price-determining cost.

In normal circumstance land values accrue gradually, especially as communities build up permanent forms of infrastructure. Much of their success depends on the degree to which infrastructure of all kinds can be maintained. The better they become at the process, the more limited their access may in fact become, especially if the land contains special natural attributes.

Cost "containment" or management in defined equilibrium, would depend on many things. Even though land can be kept "affordable" by generating similarly accessible services, each part of the process depends on the other. And while such communities would generate economic activity which goes well beyond time based services, flexible infrastructure makes it reasonable to pursue short term economic strategies which need not require extensive monetary investment.

Since - in a defined equilibrium - much of the local economic value would reside in the time continuum, the best way to reflect this is to ensure that local ownership remains flexible and incremental. This way, local system infrastructure would not bear such high access costs that lower income levels become barred from participating in a knowledge based economy. Recently it has been difficult for those who struggle to invest in human capital or access highly productive regions, to contribute to productive agglomeration. Fortunately, this could be changed with a defined equilibrium which aligns implicit land rents with real wage potential.

Wealth Can't Be Built On Merit Alone

What makes meritocracy such a long term problem for societal organization? If merit remains the primary workplace option, skills differences among citizens will eventually be magnified in ways which make democracies more fragile than is already the case. I've promoted time arbitrage in part because it could contribute to workplace participation without the present political impulse to sort groups differently, based on prior privilege or the lack thereof.

Granted: To a certain extent, merit based organizational patterns - despite their exclusivity - are logical for getting things done. If institutions can fully compensate employees for their expertise, problem solving on these terms can be quite efficient. When national wealth benefits from extensive use of scale, public and private interests will abundantly reward specialists who - in turn - pay dearly for their human capital investment requirements.

The problem? Dependent markets not only get lots of things done via already existing wealth, extensive price making is also part of the equation. For instance, the Baumol effect includes large percentages of non tradable sector activity at high skill levels. However, this largely rival form of knowledge dispersion can only generate economic dynamism up to a point. Indeed, the barriers to modern economy access are already apparent, for the productive agglomeration of today's knowledge based economy is centered in a relative few prosperous regions. Are we really ready as a society, to impose drastic limits to wealth on these terms?

In the past, "special" locations for skill sorting and applied knowledge weren't so problematic, since millions remained actively engaged in activities where extensive amounts of price taking were also important for social cooperation and economic cohesion. In many of these settings, competition tended to be more pure and transparent. Communities and cities didn't need total integration with high skill knowledge in order to generate prosperity. Now they do. All the same, those who were left behind, will need stronger organizational patterns that utilize the skills capacity which is already in their midst. Fortunately, this also means rediscovering the wealth creation potential of price taking, instead of trying for yet another share of the price making pie - given the claims it has already endured.

Productive agglomeration will need to be conceptualized differently, so that more skills potential might be tapped in time arbitrage context. Since considerable revenue potential has already been apportioned to price making, groups will need to start anew, with price taking mechanisms that allow time value to function as wealth, alongside money. Otherwise, the long term dangers of sorting for skill on price making terms, will only become more evident in the near future.

Let's Focus on Means, Not Outcomes

Alas, sometimes the Fourth of July serves as a reminder that freedoms have become less certain than they once appeared. Political ideology has especially been damaging for personal liberties, as it increasingly focuses on outcomes instead of means. If Democrats once appeared as though the party most responsible for struggles over governmental redistribution, that has changed. It is disconcerting that Republicans who once advocated for wealth creation on the part of all citizens, continue to shift toward a deterministic and essentially outcome based stance.

Any time a nation decides to limits means of production to the province of special interests, it may eventually be in danger of losing both economic and political freedoms. Organizational hierarchies for knowledge based means, have led to supply side realities which left little room for reform from within. Yet sharing the means of production is quite a different concept than it once was. Unlike the traditional manufacture of discretionary goods, much of knowledge based production is non discretionary. As a result, individuals have lost much of their freedom to participate in activities which - instead of being largely a matter of choice - are often basic requirements for living a normal life.

Outcomes for knowledge based endeavour, also tend to be couched in terms of access and cost. Is there a difference? Not as much as one might imagine, because they are both about supply side outcomes rather than means. Tim Taylor recently noted the distinction, perhaps in hopes that dealing with healthcare policy in terms of cost rather than access might bear fruit. Nevertheless, cost and access in this instance are inextricably linked, making them all the more difficult to internally resolve.

Again, nothing can really be done without ultimately addressing the limits of today's knowledge centered production. Likewise, the desire to slash public spending for education and healthcare, in hopes that private enterprise will step in to fill the void, misses the fact that the supply side would still be faced with a constrained equilibrium, in terms of the extent to which it can fully compensate human capital investment seeking entry. Production means have long since determined marketplace outcomes for the organizational patterns currently in use. Unfortunately, these patterns have inadvertently led to a devaluing of human capital potential at a global level, even though that would scarcely have seemed possible before the recent era of high skill services dominance.

Since the product of time and place are scarce and don't readily scale, today's time based product providers needed to create revenue for income and overhead costs by limiting supply. Otherwise, it would not have been easy to fully function in the high value equilibrium generated via centuries of tradable sector wealth. Importantly, these earlier hierarchies were an understandable approach, which also worked reasonably well for a long time and for much of the populace. However, as services sector activity has come to dominate the economy, fewer individuals are now monetarily compensated at a level they can still access high skill services as currently constructed.

Consequently, greater means of production potential will need to be restored to those with limited sources of income, so they too will be able to participate in and contribute to a knowledge based economy. By creating new patterns of organizational means, full participation in a modern economy could once again become possible for the vast majority of citizens. For the sake of freedom and liberty, let's focus on restoring means, instead of struggling over restricted outcomes.