Wrap Up for September 2020

Pandemics have always been hard on great cities.

What will the future of R & D spending look like in the United States?

Progress studies: Moving from the "what" to the "how".

Rising Debt: Will financial repression be the result?

"The obliteration of the Republican-libertarian alliance"

John Cochrane: We just passed a crucial milestone: U.S. federal debt is now at 100 percent of GDP. "Greek interest rates were low right up until they weren't."
And, what happens when we grow the debt to GDP ratio to 200 percent?

A response from David Andolfatto. Also here. 

Kindness is "an excellent coping skill for the COVID-19 era."

Exploring "The Economic Impacts of COVID-19".

Credentialism as the last unquestioned prejudice.

Some aspects of the current economic crisis are similar to what took place two decades earlier.

COVID-19 will have lasting effects on healthcare.

Tiny offices may eventually make an appearance in public spaces. Imagine how helpful this concept would be in new communities with a walkable core, especially for working students with substantial tutoring loads.

Margaret Hefferman's interesting conversation with Russ Roberts: "The future may be unpredictable but that doesn't mean you can't prepare for it."

It's worth revisiting how "good jobs" are often envisioned.

Some of us dread decline. Others seemingly can't wait for it to happen.

Though services are vitally important, manufacture is still the main driver of global growth.

For the UK, "The Great Realignment is only just getting started".

In a recent Econtalk episode, Matt Ridley notes he would like to "rescue the reputation" of average individuals who keep "tinkering" their way to innovation.

New places are good for memory retention, staying at home, not so much.

Supply shocks matter, especially when we are in the middle of one that's severe. Hence George Selgin is not as optimistic as Scott Sumner and David Beckworth re the recent Fed changes.

When urban sprawl was a reasonable objective.

How much knowledge continuity actually exists in our institutional structures?

"The pandemic will leave the country in an even weaker position to manage the costs of an aging population."

Most of the increases in the CEO/worker pay ratios took place in the nineties.

What is the reference point for our life experiences?

Climate change has also accelerated coffee rust.

Scott Sumner explains why the Fed is taking inflation targeting more seriously.

However, the Fed still lacks sufficient rationale to commit to a "new normal".

"Patience and trust are not going to happen." In the course of my lifetime, I never imagined the country of my birth might actually lose its peaceful transfer of power process. There is plenty of danger associated with this situation, and by no means just for city dwellers.

Why has Abe's additional monetary stimulus been overlooked?

An Econofact podcast with Greg Mankiw.

Why have so few academics and intellectuals spoken up in defense of an open global order?

Covid is still wreaking havoc on rural hospital finances.

"Luckily, the Supreme Court is staffed by adults and will save Obamacare and the Republicans from themselves."

Nevertheless, "While our political leaders play power politics with health care, the system is collapsing."

Women and young adults in particular tend to hold multiple jobs.

Trump's 2016 promise for lower prescription drug prices never materialized.

"The answer is to change the definition of productivity." Plus, the same realignment of time value that could benefit us in our personal lives, could also benefit decentralized group endeavour at a macroeconomic level.

Some unexpected praise for Congress. From the Joint Economic Committee.

Not all average inflation targeting is the same, yet the differences are subtle.

The current emphasis on soft skills can sometimes miss what many people are actually capable of.

"In a modern economy, the power of exit belongs not to people but to capital..."

How fragile is the preservation of knowledge?

Planet Money with Jacob Goldstein on "The Birth of the Greenback".

After last night's discouraging political debate, I'm at least glad to end this wrap up with a positive post about private incentives for racial inclusion from Alex Tabarrok.

An Economic Alternative for the Baumol Effect

There are ways to counter the Baumol effect. But how badly do we want to? Indeed, to what extent are we aware that other options exist, in terms of productivity?  An article from Noah Millman, "How a productivity phenomenon explains the unraveling of America", highlights the seeming inevitability of the present conundrum which inhibits long term growth and prosperity. Perhaps it is not surprising that he frames the Baumol effect as a "chronic illness" which everyone will simply have to live with. Still, I am encouraged that a mainstream publication such as The Week, was willing to explore a concept which till recently was relatively obscure outside academic circles. 

In his article, Noah Millman is understandably concerned about the Baumol constraints of time based activity on education, healthcare and public safety, given the importance of "hands-on person to person interaction". He explains:

We can - and should - look for ways to make all three sectors more efficient. But we should also rationally expect them to get more expensive, and to consume an ever-increasing share of the national income, unless we're willing to let their quality deteriorate or put them out of reach for an increasing share of the population. 

Regular readers know how I feel about time based services consuming more national income than is already the case. We need local patterns of economic time reciprocity, so that broader services access becomes possible without additional budgetary obligations. Nevertheless, Millman continues:

If Baumol's Cost Disease is an important driver of costs in these sectors, then we should expect them to consume an ever-increasing share of the national income - but not only that. If we socialize those functions so as to provide equal services to the citizenry, taxes will have to increase every year just to keep quality steady. And if we don't raise taxes enough, then inequality will increase even as costs rise, leaving more and more of the population poorly provided for. And in either case in a world of tight budgets, these sectors will increasingly be competing with each other for the marginal public dollar, and devaluing competing sectors' contributions to the public good.

Ultimately, individuals who care about inequality, could utilize time arbitrage in participating groups so as to coordinate supply and demand of services, thereby making them more affordable for all concerned. Importantly, this decentralized economic option means a willingness to adjust one's own income expectations accordingly! However, accepting less income also means confronting the present necessity of monetary sacrifice for the human capital expenditure now required, for what is often simple mutual assistance. Even though it is no longer feasible to increase time based services via today's general equilibrium revenue, what impressed me about Millman's article was his recognition how the struggle for time based services affects today's political environment:

It's a recipe for perpetual revolt by both those who pay more into the system, who feel - rightly - like they're paying more and more for less and less, as well as by those who pay less into the system who feel - rightly - like services are getting less and less equitable even as they are getting economically squeezed harder and harder. And if "perpetual revolt" sounds a lot like America today - and it should - then sadly, because of Baumol's Cost Disease, satisfying the demands that fuel that revolt may not be possible.

He sums up: "Sadly, Baumol's Cost Disease is incurable. All we can do is learn to live with it as a chronic condition". If only we could! Alas, this structural issue can't be neglected any longer, for the level of political discord has already ratcheted up to an extreme level. We can no longer assume or hope for a benign outcome, if our political turmoil is not addressed via specific and decentralized economic means. Without a productive response, not only is our nation increasingly likely to deteriorate from within, it might also lose its ability to positively influence other nations. Sadly, many nations are not presently well positioned to address existing inequalities. But individuals still could, so long as they are able to secure and maintain the production rights which make it possible to do so.

Millman thought through his arguments carefully, and for good reason I agree with his summation in certain respects. In a similar vein, already existing debt and budgetary burdens should not be used as excuses for austerity, especially if the relevant supply side chains allow service markets to collapse, or the "wrong" party happens to be in power. However, expectations for the supply and demand of skill and knowledge provision will continue to exacerbate cultural battles, should economic access be sought solely through this form of organizational capacity. Stated another way, my disagreements with Millman are not based on moral grounds, but on what I believe overall monetary revenue to be capable of in the foreseeable future.

We can build supply side alternatives which better align supply and demand for time based services, before modern economies are completely undone by financial repression and/or unwanted austerity. However, we need to get started now, if we are to build a structural response to the Baumol effect. Fortunately, when our economic time commitments are symmetrically aligned, we gain the ability to create services based wealth which is not subject to total factor productivity losses. Even though nations will still need the economic option of paying for applied knowledge on asymmetric terms, symmetric time alignment allows us to productively respond to the Baumol effect.

Time as Journey, Money as Destination

Why is economic time an important consideration, especially in terms of GDP measure? Recall that today's GDP is all about what transpires in the current year of our economic journeys. After all, few aspects of life capture this process more effectively than the time commitments we assume, in part to meet our financial obligations. For anyone who doubts the significance of time based participation as wealth creation, the close correlation of nominal income with aggregate spending is an apt example. 

Nevertheless, some of the more obvious forms of wealth end up as destinations such as buildings and other physical assets. Real estate in particular tends to be passive holdings that aren't closely associated with economic dynamism, once they are constructed. Despite their reliable qualities in terms of asset values, passive holdings are mostly indirect contributors to current economic circumstance, and their value fluctuates accordingly. 

Since money naturally flows toward real estate holdings, this passive tendency helps explain why monetary representation isn't completely straightforward in the measure of GDP. Meanwhile, much of our aggregate time value lacks monetary equivalence. Despite the importance of time participation in the measure of GDP, aggregate time value is so unevenly represented, that consumer inflation does not readily correlate with asset inflation in general equilibrium. 

If we are to achieve greater economic stability in the near future, more emphasis will be needed on the journey itself, and not just the destination. By no means is the measure of GDP unimportant in all this, for it is closely connected to how we go about our economic lives. Should economic time become a valid measure alongside money, not only would this increase the overall value of GDP measure, it could create additional market depth for the time value of all citizens. 

Our focus on economic journeys is especially needed for the long term preservation of applied knowledge. By far the most important aspect of economic time, is its ability to function as a vessel which carries experienced knowledge from person to person. Time is the vessel which gives societies the ability to carry forward applied knowledge in recognizable patterns. Even though money preserves activities for applied knowledge to some extent, money will always be better suited for ends than means. Alas, when money is the sole representative unit of economic value, so much of it eventually flows into passive economic destinations, that not enough remains for the actual journeys of our lives. 

Fortunately, time arbitrage patterns could supplement money by ensuring that more economic activity remains in active roles, instead of excessively flowing to passive destinations. Time arbitrage as a valid unit of economic measure, could help ensure that important knowledge flows can be maintained even in historical moments of budgetary and financial limitations. Hopefully, we will be able to create new means to sustain full levels of economic participation in the near future. Time as an economic unit of value alongside money, could bring better balance to the activities of our journeys and their eventual destinations.

When We Forget How to Live and Let Live

Some resources are truly scarce. Nevertheless, other forms of resource capacity have become artificially scarce. Indeed, one reason capitalism is occasionally called into question, is that special interests too often maintain artificial scarcities in what are basically non discretionary markets. Unfortunately, when societies limit their own economic potential by doing so, the political centers which lend both economic and social stability, gradually lose their hold. Even though various groups and individuals continue seeking solutions for pressing issues, political polarization tends to drown out their voices. In other words, economic conditions may lead to circumstance in which people gradually forget how to live and let live. 

What can be done? Might the underlying structural factors which now get in the way of mutual understanding and civility, still be addressed? How could we make amends for the artificial scarcities which undermine economic stability, long term growth, and even human empathy? Hopefully we have not waited too long, for our present cultural impasse also stands in the way of possibilities for innovation. In a discussion with James Pethokoukis, Caleb Watney describes innovation as an engine and further elaborates:

one of the main things I try to stress...is that the components of the engine have been under considerable stress for decades. We really have not been supporting them through policy at all. In fact, we've been very actively working against them in some ways. But COVID might represent a breaking point of sorts. Sometimes, you can have so much bad policy going on for so long, and then you just need the final straw or a big enough disruption that can really make things start spiraling.

Watney also notes how people no longer feel the world is a positive sum place.

How can we make sure that economic growth does feel positive sum, that everyone's benefiting, that it doesn't have to be one person benefiting at the expense of someone else.

Alas, economists, policy makers and even most citizens grew weary of discussions regarding structural issues, once the economy rebounded from the Great Recession. Hence there was no real response insofar as reforms or other adjustments in organizational capacity. What few predicted, however, was the extent to which neglected structural issues would cause additional problems in short order, with the onset of the pandemic. Had those discussions a decade earlier not been abandoned so quickly after the Great Recession, perhaps we would not have reached the extremes which have surfaced in today's identity politics. Now, it is no simple matter to back up and begin anew. 

In the future, whatever happens, let's hope that representative democracies become more cautious about resorting to cultural battles as a smokescreen for unaddressed issues of economic access and participation. Even though it can be tempting for policy makers to do so, citizens suffer once their governments play the blame game so extensively that little else gets done. Meanwhile, precious energy is being lost in fomented hatreds, even as citizens continue to lose economic access in basic areas of their lives. 

Just the same, if we can once again become willing to live and let live, we need economic context which does not force people to adhere to the same set of structural requirements. The income levels of today's societies are simply too diverse for such unreasonable expectations. Decentralized settings are only worthwhile when they are built so as to encourage a full range of human ability, aspiration, and personal motivation. Even though the gains of some groups would doubtless appear minuscule in relation to other groups, who cares and why should it matter! Just do it! These decentralized settings could still nurture human capital improvement and the preservation of applied knowledge, to the fullest extent possible for all concerned. 

Otherwise, the one size fits all requirements of today's general equilibrium settings, will continue discarding human capital seemingly "unfit" for purpose in relation to the best and the brightest. Fortunately, we have the ability to create a more positive approach to human capital potential. But the time to begin building more hopeful and sustainable settings, is now. We need to productively respond to extreme structural imbalance, before we completely forget how to live and let live.

Notes on Retail as Part of a Two Sector Approach

Retail is somewhat different from other economic endeavour. Is it mostly about the provision of services or goods? Since both are involved in varying degrees, retail also functions as a vital bridge between tradable and non tradable sector activity. And even though services are involved, many aspects of retail still function as direct sources of wealth, so long as basic functions are internally reciprocated with no need for governmental redistribution or insurance reimbursements. 

Regular readers are familiar with my preference for a general equilibrium two sector approach, instead of the three sector model described by Wikipedia. Chances are the three sector model was especially helpful prior to the dominance of services activity in modern economies. However, by combining their primary (raw materials such as mining and agriculture) with their secondary (manufacture) sectors, I am able to keep both tradable sector areas in a logical position as traditional forms of originating wealth. Not only do these groups continue to create a traditional base for new community formation, they comprise the majority of tradable sector activity as a whole. 

On the other hand, services of all kinds have proven most likely to flourish once tradable sector activity (in the form of a traditional monetary prior) is established. For me, this is what made it seem so natural to frame non tradable sector services (along with some tradable services) as the secondary market activity which so contributes to today's economic complexity. Even though I advocate introducing services complexity as a knowledge prior for new community, this organizational capacity would still need to follow the tradable sector example of immediate resource reciprocity. 

A two sector general equilibrium approach is one of active wealth initiation and active wealth response. For example, the non tradable sector of real estate functions as a response, to local income origination. Another response is the extent to which a sustained level of infrastructure maintenance can be generated. In a two sector approach, services can be more readily observed insofar as their contributions to general equilibrium, and also how general equilibrium is ultimately affected by their demands. Consider also, how time as an economic input becomes a common thread for defining and categorizing services complexity. The recognition of time as economic unit is important, since its function as a services common denominator affects productivity aggregates at general equilibrium level. When we measure an entirety of time based services input in relation to output, and contrast this with the input to output ratios of other services capacity, we also gain real economy equivalence to quantitative aspects of monetary representation.

Tradable sectors as primary and non tradable sectors as secondary, is an easier way to conceptualize sectoral relations in quantitative and comparative terms. For non tradable sector activity in particular: What matters most for aggregate productivity potential, is the extent to which time based organizational capacity of final product, makes additional demands on general equilibrium capacity. To what extent is it feasible to create additional immediate reciprocity, to offset the delayed obligations of governmental budgets and other forms of financial product? Consider as well, however, that even though dependent (secondary) services rely on tax redistribution, this is still a relatively direct form of resource reciprocity by comparison with budgets which delay payment obligations for services until well into the future.

How does retail factor into these considerations? For one, the time requirements for retail services can be quite minimal, in relation to the final product of delivered goods and indeed services which require limited amounts of time commitment for final product. Even though some retail includes a considerable amount of focused attention or personal time commitment, it still functions as a growth multiplier in a monetary context, since the majority of its final product is not dependent on time. Indeed, this revenue generating capacity places retail in a broader services category which is also capable of multiplier activity, hence some economists have begun to categorize services according to their capacity for additional growth. 

While retail still includes time and place specific components, it is no longer as bound to these earlier requirements as is traditional housing, healthcare, and place based education. Consequently, retail has proven more amenable to extensive innovation, which in turn allows it to reflect supply and demand more effectively than housing, healthcare and education. Nevertheless, brick and mortar traditional retail - until recently - was still an extensive revenue source for municipalities. Alas, in a post pandemic economy, many municipalities will need to rethink their budgetary revenue strategies in the years ahead, in order to continue meeting their services and infrastructure maintenance needs.

Is the Fed Committed to a Stable Growth Trajectory?

Does the Fed have full confidence in long term growth potential? Alas, it is difficult to know for certain, since their decision to opt for an average inflation targeting policy, does not include a commitment to a level growth trajectory. Instead they opted for what amounts to a more discretionary approach, after a lengthy period of open discussion in this regard. Something I have found myself wondering as well: When it comes to long term growth potential, could the Fed's reluctance to commit to a nominal level target, also illustrate a degree of uncertainty about the recent dominance of intangible capital as a source of wealth?  

At the very least, the Fed is now willing to take bygones into consideration for the first time, as David Beckworth noted. That's a good first step. Nevertheless, the Fed lacks specifics how they intend to go about the process, and it's a shame they did not provide more clarity. As to the level of discretion they instead chose, Tim Duy lamented - "You can drive a truck through the holes in the average inflation targeting policy." 

While market monetarists certainly have cause for encouragement, the Fed's vagueness as to how the new framework will function, is still concerning. After all, this would have been a good opportunity for the Fed to embrace NGDPLT, and had they done so, we might all have a greater degree of certainty about near future prospects and economic stability. Insofar as their willingness to make up for earlier shortfalls, George Selgin wonders, how far backward is the Fed willing to consider? For that matter, Marcus Nunes is concerned the Fed's continuing inflation framework may end up resembling that of the last three decades. After reading opinions which dissented even more than those expressed by market monetarists, I questioned whether the Fed's desire to maintain a high level of discretion, might have undermined some of the goodwill they sought to gain from market observers and the public in general.

Perhaps the Fed's worries about employment issues prevented them from taking more decisive action. Future employment uncertainty is also affected by the recent dominance in intangible capital. And even though intangible capital exacerbates existing inequalities, by no means is that the only problem. Unfortunately, these organizational patterns also function as an economic divide between prosperous regions and everyone else. In a recent post, Michael Spence explains how a pandemic economy further supports the dominance of intangible capital in relation to labour. He stresses that even though markets do a good job of matching expectations for real returns to capital,

When it comes to measuring the present value of labor income, there simply is no comparable forward-looking index. In principle, then, if there is a significant anticipated economic rebound, the outlooks for capital and labor income could be similar, but only capital's expected future would be reflected in the present.

But there is more to the story. Market valuations are increasingly based on intangible assets, not least the ownership and control of data, which confers its own means of value creation and monetization. According to one recent study of the S & P 500, stocks in companies with high levels of intangible capital per employee have recorded the biggest gains this year, and the less intangible capital per employee companies have, the worse their stocks have performed.

In other words, incremental value creation in markets and employment are diverging. And while this was true even before the pandemic, the trend has now accelerated. 

Let's hope the Fed can keep the faith and not worry too much about things outside of their control. Again, what is needed is a strong real economy response to ensure sustainable forms of employment, well into the future. And chances are, we would have an easier time of recreating reliable sources of tangible wealth, than attempting to bring intangible organizational patterns to small communities and towns. Ultimately, the real economy needs new patterns which make tangible wealth creation a possibility for all communities. Just the same, the Fed will need to do their part through steady and sure monetary representation, so that real economy potential is not needlessly lost.