Wrap Up for February 2020

Alain Bertaud: "My problem with planners is that they try to plan what is happening within your lot and they don't plan enough what is in the public realm and what will serve what is being developed within the land."

There are many differences between automation and artificial intelligence.

In a review of Yuval Levin's A Time to Build, Arnold Kling considers institutional roles.

"Whereas most of the economics literature talks about the division of labor in society, Alchian wanted to get fellow economists to think about the division of ownership in society."

When it comes to operating systems, the Bank of Canada manages to make it look easier than does the U.S.

This is a decade when important trust funds in the U.S. start to become insolvent.

The U.S. depends heavily on immigrants in both science and engineering.

When might it be possible to solve pressing issues at local levels? Jayme Lemke highights an Elinor Ostrom article and also notes the importance of local and everyday histories in problem solving.

"The Four Pillars of Economic Understanding"

Banks and big corporations now appear more trustworthy than government.

"Profitability in the Health Care Market Has Never Been Better"

From A Richmond Fed interview with Janice Eberly: "Intangible capital does seem less sensitive to traditional monetary policy."

The economy is (partially) beginning to dematerialise.

An interview with Phillip Lane of the ECB, and the Financial Times

Trumpanomics? Graphs tell the story.

The trade-offs of location: "...moving up 10 spots in the rankings on favors between neighbors is associated with moving down three to four spots on concentration of start-up businesses."

The Huawai dilemma might mean that the U.S. in contrast with smaller countries, wouldn't be able to roll out 5G in rural areas. Only recall this also means smaller communities would be less likely to utilize smart grids for transportation needs.

Is dissatisfaction with globalization a "crisis of capitalism"?

"Solo Self-Employment and Alternative Work Arrangements: A Cross-Country Perspective on the Changing Composition of Jobs"

India's demonetization turned out to be only a temporary disruption.

What distinguishes a not so respectable political rant, from one that is "respectable"?

How has the composition of government spending changed over time?

"Tim Harford on Persuasion and Popular Economics"

"It is precisely because fiscal policy inevitably involves messy, hard-fought compromises - often overturned by future elections anyway - that most countries have turned to central banks for short-term stabilization policy."

Marty Makary notes the government healthcare burden, for Russ Roberts:
"...we just had a study come out at John Hopkins that 48% of all federal spending goes to healthcare in its many forms. It's up to half of all Social Security spending goes to Medicare, copays, deductibles, coinsurance, and out of network costs."

"In ten countries, holding all else equal, a consumer would have to work four extra weeks per year, on average, to consume the same amount of housing, healthcare, and education as he or she did in 2000."

"The aggressive can-do American approach to health care isn't working when it comes to medicine in general and cancer medicine in particular."

"How Secure is Employment at Older Ages?"

"The great value of experimenting outside of the rationalists' comfort zone is that most of your competitors will be too scared to go there."

Trump's approach to power relationships is "getting medieval".

The Fed's implicit guarantees are changing.

"Introductions of papers are worth four times as much effort as they usually receive."

A map of companies with really long histories.

Wikipedia has become "the closest thing there is to an online public square."

How has the American dream changed?

A Mercatus Working Paper from Scott Sumner: "Currency Manipulation, Saving Manipulation, and the Current Account Balance"

It's difficult enough that fiscal policy gets hamstrung by political intentions, hopefully the same will not happen to monetary policy as well.

Lots of little ideas, including the "gotcha" fact-check scarcity principle.

How important is long term growth? Diane Coyle highlights some of the recent arguments.

COVID-19 may become one of the new seasonal viruses we look out for.

India's growth in services certainly helps the well educated, but it does not function as a form of growth which contributes to the population as a whole.

David Beckworth's interview with Paul Schmelzing is incredibly interesting and thought provoking.

Eight centuries of new data show a persistent 500-year decline in global real interest rates, challenging existing theories and raising new questions.

Ryan Avent on a pandemic induced supply side interruption: "...it's one thing to rev up the economy when jobless workers are desperate to get back on the job and quite another when workers aren't sure they want to leave the house."

The main challenge is to make certain a negative supply shock does not become a demand shock.

Some recommendations from Emma Rothschild for books on economic history.

"...there has been no real improvement in productivity in construction in the last 50 years."

Sometimes disagreement has a valid purpose.

Are current unemployment rates low because many people are finding work, or because of low entry rates into unemployment?

"The rush of speculative capital into flower bulbs was fueled by a wave of cash windfalls accruing to the surprised heirs of plague victims."

James Pethokoukis discusses technological change with Erik Brynjolfsson.
"...we need to think carefully about how we want to change the world."

Many healthcare facilities now rely on temporary physicians.

"The Consequences of Treating Electricity as a Right"

Does Internal Inflation Affect Market Outcomes?

How could internal inflation affect aggregate market capacity? When most participants choose price making over price taking in non tradable sectors, crowding out elsewhere becomes more likely. Plus: When price taking is not an option for time based services production, societies gradually lose their ability to fully coordinate activities that require considerable knowledge and skill.

One point of confusion regarding internal inflation, however, is whether it also occurs at the level of an entire economy. For the most part, mature economies have learned to avoid such an outcome. Consequently, even though internal inflation can negatively impact discretionary spending as a market outcome, it doesn't pose direct issues for monetary representation at a general equilibrium level.

Indeed, when it comes to inflation at macroeconomic levels, policy makers are now inclined to go too far in the opposite direction. Since central bankers have little - if any - patience for general equilibrium inflation, healthcare providers, given their dependent market status, are now responding in kind with their own supply side limits. After all, healthcare is such a substantial part of GDP, that there is little remaining political freedom for more healthcare revenue burdens, in spite of the challenges of today's aging demographics.

Perhaps recent efforts by healthcare providers to control aggregate or supply side level cost burdens, could be better appreciated, were it not for their organizational inefficiency, as recently noted by Jerome Powell. For that matter, a post from Tyler Cowen earlier this month, highlights how healthcare doesn't necessarily lead to the market outcomes one might expect. From the abstract of the Health Affairs study:

In the period 2010-17 the number of NPs in the US more than doubled from approximately 91,000 to 190,000. This growth occurred in every US regions and was driven by the rapid expansion of education programs that attracted nurses in the Millennial generation. Employment was concentrated in hospitals, physician offices and outpatient care centers, and inflation-adjusted earnings grew by 5.5 percent over this period. The pronounced growth in the number of NPs has reduced the size of the registered nurse (RN) workforce by up to 80,000 nationwide.

Cowen also questioned the relative losses in nurse capacity:

Given the growth of the health care sector, should not the number of nurses, broadly construed, be rising at a higher rate?

When organizations face revenue constraints due to dependent or secondary market status, a slowing economy can lead to hard choices regarding the most important skills sets for the medium term. Likewise, just as some believe we would benefit from more nurse capacity, others argue that more physicians are needed in rural areas. At the very least, the decision to place more nurse practitioners in rural areas makes sense, since many physicians prefer not to practice in rural regions. Still: While nurse practitioners for rural areas are a partial solution, too many left behind places nonetheless lack specialized knowledge among their own citizens.

What might be done? Eventually, time arbitrage could create long term solutions for rural communities which seek vital roles for their own citizens in a knowledge based economy. Where once it was difficult to bring knowledge specialization to limited population densities, the digital realm has the potential to change this.

While debating organizational possibilities for applied knowledge, only consider how tradable sector activity has successfully internalized knowledge and skill in small groups, for centuries. Plus, these organizational forms have often thrived in areas which otherwise lack economic complexity. Recall also, how tradable sector activity has achieved vast productivity gains via internal resource reciprocity, thereby reducing internal inflation. Fortunately, with sufficient time and effort, the good deflation of tradable sector activity which brought such progress to humankind, is possible for non tradable sectors, as well.

The Hidden Danger of a "Fully Grown" Economy

Is there cause for concern, should mature economies appear to no longer "need" additional growth?  Perhaps so. Too much non tradable sector activity - much of which is also non discretionary - does not accurately reflect the reality of wide income variance. Since the need for full economic participation (at a basic level) is not taken into account, many citizens also cannot contribute, to what would otherwise be shared responsibilities. Indeed, these hidden losses indicate that a market gap exists which is far too significant to be addressed via aggregate demand "remedies". Essentially, non tradable sector requirements now demand more long term monetary revenue (and consequent need for higher monetary growth levels) than what is actually transpiring.

These systemic burdens are also faced by individuals in their daily lives. Many who aspire to success, come into adulthood convinced they have little choice but to do so on fully monetarily compensated terms. This, in spite of what many workplaces can reasonably expect to offer their employees. And while struggles for full access may suggest illogical meritocracy, consider what is at stake. Until non tradable sector consumption options become more flexible, one's decision to forgo a college degree, will often lead to a lifetime of uncertainty and excessive personal risk.

Despite this reality, even college degrees hold diminishing rewards. For instance, 33.8 percent of college graduates now work "in jobs that don't require a college degree". Given the high costs of non discretionary consumption, societies struggle to create more fully compensated wage capacity than their institutions can actually offer. Is there any wonder our political systems are creaking under the strain?

Yet in all of this, a stronger growth trajectory would be beneficial for reasons which go well beyond mere additional monetary revenues. In a modern day knowledge based economy, it is vital to make economic room for the growth and positive challenges of the human mind. That said, we need to think about doing so in ways which are not near as socially restrictive as the ones we currently rely on.

For these and other reasons as well, I question whether long term growth issues for mature economies are essentially "settled". And economists in particular, should be careful about this assumption. In one recent example, John Cassidy in "Can We Have Prosperity Without Growth?" highlights Dietrich Vollrath's new book, "Fully Grown: Why a Stagnant Economy is a Sign of Success".

Vollrath argues that slower growth is appropriate for a society as rich and industrially developed as ours. 

Of course, services play a major structural role in this circumstance. In 1950, services were only 40 percent of GDP, today they comprise more than 70 percent:

Taken together, slower growth in the labor force and the shift to services can explain almost all the recent slowdown, according to Vollrath.  

It is probably not safe to declare all is well in a "fully grown" economy, until most communities and citizens are at least able to take part at a basic level in economic activity. When citizens lack the ability to do so, their contributions to tradable sector markets are also disrupted. Does it really make sense to declare markets as fully matured, when millions of citizens remain in holding patterns and have yet to truly take part?

What might make it simpler to determine, whether the economy is "fully grown" to an extent it becomes obvious all is well? For one, citizens would be become less inclined to seek more extensive monetary compensation than systems can actually bear. Should non tradable sector activity become more reflective of actual income levels, fewer would be compelled to use higher education as a supposedly necessary signal. Granted, meritocratic preferences will always be important for some, as means to judge and reward accordingly. But merit should not have be the sole path, by which one might create a meaningful and productive life.

3D Printing Holds Vast Economic Potential

Some of the most encouraging news in recent years, is due to advances in 3D printing and technology. Recently I came across the video "3D Printing is Changing the World", which is well worth the twelve minutes it takes to watch.

Indeed, it's surprising that the near future possibilities of 3D printing have not been more widely discussed. Instead, artificial intelligence gets much of the innovation spotlight, despite the fact that 3D printing could prove equally significant - if not more so. For that matter, emerging 3D printing technology is already evident in cutting edge research applications.

Granted, it may take some time, before 3D printing technology finally benefits local environments and improves the quality of life for millions with limited incomes. But once this finally occurs, the process could also usher in long term productivity gains. After all, 3D printing for local manufacture, would produce building components in ways which vastly reduce required time (purchase) hours for a wide array of building needs.

In the meantime, the above linked video highlights some 3D printing applications which are taking place in the here and now. For instance, healthcare researchers are taking 3D printing to a wholly new organic level, in hopes that organ donor scarcity might finally be alleviated. Plus, 3D printing is already contributing to models, parts and tools on demand, thereby assisting multiple development processes. For that matter, we have already entered a crucial period in which prototypes are evolving into mass manufacture design. From here, 3D printing processes will assume their first widespread production stages.

What directions might all these efforts take? Since there are currently many unknowns, perhaps this transitional effect helps to explain a recent manufacturing lull. While everyone's attention has mostly been on national trade disputes as disrupting global supply side patterns, there's also the reality that initial mass manufacture changes are still in progress. Doubtless, some participants wish to observe what takes place in the next few years, before broad investment options become more obvious. Some manufacture response patterns may change the extent to which global manufacture supply side patterns are configured, as well.

Another interesting aspect of the video was how advanced recycling technology could emerge, from research efforts to create sustainable site based manufacture on Mars. Should this research come to fruition, it could create impetus to produce more plastics as a permanent component of local recycle for local manufacture. I find it most encouraging, that research intended for projects far from earth, could create vast potential at home, by restoring production possibilities for millions of us - quite literally in our own backyards.

Recall that in the not so long ago past, local production in tangible goods, made it much simpler for citizens to pursue intellectual and artistic challenges without dependence on revenues from centralized national budgets. With a little luck, 3D printing could not only lead to production gains in non tradable sector activities, but also tradable sectors, thereby restoring the viability of decentralized manufacture in millions of left behind communities.

State Capacity, Endogenous Design, and Exogenous Wealth

What is state capacity still capable of contributing to modern economies? In some important respects, state capacity is no simple matter. Yet there is plenty of wishful thinking on both sides of the political aisle, as to what governments "should" be able to accomplish for long term growth and prosperity.

Not so long ago, the governments of advanced nations were better positioned, for fiscal policy to function as an active component of economic dynamism. However, as commitments to special interests and citizens in general have grown, fiscal policy has gradually become better suited as an economic stabilizer, than for additional growth prospects.

Perhaps this is a reasonable outcome, for national governments which have long depended on endogenous monetary design. Much of this capacity exists quite separately, from the vast exogenous monetary wealth that extends well beyond national borders. Yet the more tangible nature of the latter is largely due to tradable sector activity as our primary source of wealth origins. Consider how crucial are the roles of exogenous monetary wealth. Should any global calamity reduce this capacity, the ability of national governments to function normally via fiscal policy would be immediately compromised. Despite the supporting role of governmental endogenous design, exogenous wealth generation is still central to long term economic stability.

Nevertheless, the relationship between endogenous and exogenous sources of wealth has become so complex, one can be forgiven for imagining monetary realities as solely endogenous in nature. The main problem with endogenous monetary creation, is that populations can become too dependent on future forms of resource reciprocity, making individuals less inclined to seek direct reciprocity with others in the present. Even though future commitments in the form of monetary wealth can be quite versatile, they should not be be relied on to such an extent that people forget how to apportion time and skill for mutual reciprocity in the here and now.

Too much reliance on endogenous future wealth to fund today's services, may lead to excess passive monetary holdings in the GDP of nations. The dynamics of general equilibrium are essentially defined by interactions between the primary markets and the secondary services markets of future obligations. When expectations become too rigid in secondary market flows, sectoral balance is gradually disturbed. Today, there are rigid expectations in housing and time based services, which have contributed in turn to outsized expectations elsewhere in the economy - for instance levels of income supposedly now "necessary" to live normal lives.

Any efforts to expand on state capacity in the present, are going to run headlong into these expectations which have led to extensive budgetary obligations and social commitments. Producers and consumers alike are heavily vested in these particular alignments, which largely define how domestic wealth is constructed. In a post which reflects on state capacity, Scott Sumner explains:

...one aspect of state capacity is the ability of countries to act in a way that is seen as desirable by a consensus of people who don't have a special interest to inhibit change. A government that is able to "do the right thing" has more state capacity than one that does not, even if somewhere between 1% and 40% of the time the "right thing" turns out to be wrong.

Once societies rely on inefficient centralized coordination patterns, citizens move further away from a consensus on how those patterns should function - all the more so when millions of citizens are involved. Scott Sumner has often noted his own belief that a nation's democratic potential to achieve the "right thing", is likely only feasible in decentralized settings.

However, part of the problem for decentralized decision making in the use of knowledge and skill, is that special interests in the 20th century sought out national protection for how skills and knowledge could be utilized at local levels. Consequently, the U.S. may not be able to devolve important skills and knowledge use decisions to local levels in the near future, in a general equilibrium capacity. For this reason, I've suggested defined equilibrium settings which could create more accessible environments for human capital potential.

Time arbitrage would make it feasible for local citizens to gradually build stronger forms of democratic governance. Possibly the greatest benefit of time as symmetric wealth value, is that it would allow time to function as an exogenous or original source of wealth. Ultimately, time arbitrage could build upon decentralized settings in ways reminiscent of the organizational capacity of tradable sectors.

The knowledge use systems of time arbitrage, would make it possible for participating groups to bring aggregate time value into better balance with other forms of exogenous monetary wealth. Once time units become capable of purchasing other time units, the resulting new commodity standard would allow time to function as a reliable wealth source. Time as direct resource reciprocity would place (gently guided) mutual assistance into tangible and primary market forms. As an exogenous wealth source, time arbitrage could gradually help to reduce the political pressures and expectations that state capacity now faces.

Defined Equilibrium as Defined Product Quality

There is a practical dimension for the potential of defined equilibrium: People would gain economic freedom to define products they regularly use, which are also linked to place and time. In other words, there would be more opportunities to take part in the construction of product which is part of our everyday lives. Non tradable sector product is heavily represented by the basic scarcities of time and place, hence lower income levels could greatly benefit from personal management in these areas.

Without such options, non tradable sectors impose numerous quality requirements on product with time and place connections - especially building construction and services. However, governments are poorly positioned to generate affordable non tradable sector product, in part since quality requirements for luxury product create additional governmental revenue. What's more, when governments seek to impose regulations on non tradable sectors, sometimes the only way to do so is to grant additional favours to the private interests involved.

Ultimately, more decentralization is needed, to prevent these unfortunate incentives from reducing the economic access of even more low income groups. Locally defined equilibrium settings could allow citizens to determine the extent of quality requirements they can reasonably afford. It helps to ask: Which quality gains are obviously real and possibly deemed necessary? How difficult is it, to separate these categories from what are perceived as luxuries?

Fortunately, tradable sectors have been answering such questions with extensive market choices for a long time. Indeed: In recent centuries, alongside the beautiful and exclusive, we have countless examples of inclusive and accessible no frills production. While there are of course notable exceptions, much of this tradable sector product proves capable of fulfilling the required task with minimal fuss and expense. Why has it been so difficult to gain similar options in our non tradable sectors?

Defined equilibrium settings could provide such opportunities, by bringing aggregate non tradable sector costs more in line with the (monetary) wealth potential of tradable sector revenues. These decentralized communities and areas would function in certain respects like opportunity zones, except they would provide new economic opportunities for those willing to invest with personal time commitments. This is an altogether different approach, from the opportunity zones open to investors who are primarily concerned about monetary results. By allowing time units to assume economic value, there would be considerably more breathing space, for society to fulfill its most important tasks and challenges.

Local participants would be able to contribute to non tradable sector innovation, if they can regain sufficient legal production rights in defined equilibrium settings. These locally zoned permissions would once again make it possible for individuals without college degrees, to become part of decision making processes for housing, infrastructure and time based services needs.

Nevertheless, local citizens would have plenty of prior assistance in their efforts to construct simpler functionality in services and the physical building components of their environments. Hierarchical organization remains quite rational in earlier stages of manufacturing components, for instance. These are complex processes which require precise and standardized procedures to function as intended. However, citizens need a stronger say in production management, once physical resources are configured for the "final" product forms that support living and working arrangements.

By far one of the most important aspects of defined equilibrium, would be simplified legal settings which everyone can understand. Legal complexities are problematic enough in any circumstance, but they particularly get in the way of productive lives for those with small wages. When are extensive regulations and legalities actually necessary? In the book Life Without Lawyers, Phillip K. Howard considers this issue:

Two great intellectual currents came together over the past century to bring America to this state of hyper-legalism. The first, which grew naturally out of the Industrial Revolution, is the idea of organizing to do things. Frederick Winslow Taylor, the father of scientific management, preached the idea of creating systems in order to increase productivity. Organization is undeniable essential for complex products. Henry Ford's assembly lines proved that...Today we assume unquestioningly that any activity will be more effective if we detail in advance how to get the job done.

Instead of greater effectiveness, the non tradable sector hierarchical result has led to extensive problems in societal coordination, along multiple dimensions. All too often, the rigid rules of non tradable sectors get in the way of mutual respect and mutual assistance, instead of creating efficiency. It's time to experiment with defined equilibrium settings, so as to make non tradable sector markets more accessible for all citizens.

Jobs as a Form of Societal Permission

How might artificial intelligence affect employment prospects in the near future? Answers may partly depend on how AI impacts the aggregate output of tradable and non tradable sector activity. Essentially, we may gain more societal permissions for employment, so long as we ensure that aggregate output is not compromised.

And while AI is beneficial for non tradable sectors, in certain crucial monetary respects it is better positioned to increase output in tradable sector activity. After all, tradable sectors don't face the limiting factor of time scarcity in final product. One can only hope that tradable sector potential does not become overly suppressed in the near future by the excessive market demands (price making) of today's non tradable sectors.

AI can only improve aggregate output in non tradable sector activity up to a point. Even though AI can augment time value in non tradable sector time based product, it more often does so for specific or individual efforts, rather than general worker participation. Since these (historically early) patterns of AI are occurring in restricted knowledge environments, AI tends to exacerbate income variance in non tradable sector activity, instead of contributing to greater knowledge dispersion in society.

At first glance, one might expect the professional work of knowledge providers in non tradable sectors, to be among the safest jobs in the near future. Nevertheless, market availability in these areas will still require societal permission in the form of reliable general equilibrium revenue flows. This being the case, many professionals may ultimately have less control over their management of job creation, than they would prefer. At some point, budgetary restrictions could "require" more use of AI to substitute for human capital, even though knowledge providers understandably prefer otherwise.

When considering whether AI contributes to or detracts from job creation, it helps to determine whether the relevant activity provides an initial wealth source which can utilize immediate resource reciprocity. This organizational approach doesn't require redistribution or long term debt formation, plus any budgetary restrictions it creates are mostly immediate and short term. Today's tradable sectors are the most dependable sources of initial wealth generation. Given this priority market position, they should continue to serve as reliable job creation, so long as markets maintain a steady growth trajectory.

Alas, some secondary or non tradable sector market formation is not only heavily reliant on redistribution, but also on the ability of governments to fulfill competing responsibilities without substantial disruption. Eventually, due in part to extensive price making, these forms of knowledge production could suffer losses of aggregate output, even in conditions of carefully calibrated growth trajectories. While many time based services still appear as though steady sources of employment, some of the most highly compensated employment could be disrupted by budgetary issues in the near future.

Fortunately, there are new organizational possibilities for societal permission in skilled time based services. An important difference in future capacity, however, is that full monetary compensation for the time product of knowledge providers, will not always be possible. Despite this reality, time arbitrage could make it feasible for participating groups to coordinate time based services. Advance planning towards this end, would also lessen the negative impact of income losses for all concerned.

Participating groups could especially step up quality workplace possibilities, by giving AI "permission" to assist individuals in the creation of quality time based product. One could readily imagine today's AI assistance for professionals as a starting point, since the real potential for societal gain is in raising the skills ability of all individuals in their workplaces. Even though AI can't multiply existing time scarcities, it can improve the aggregate time value of those who take part in services generation. Let's bring workplace permissions within reach of all individuals who would provide mutual assistance.