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.