Ownership and Output in Excess Nominal Claims

Excess nominal income claims are too common in local service markets which are not discretionary. Governments and special interests alike tend to limit these options, thereby reducing effective management for both our personal obligations and physical environments. If this unfortunate circumstance weren't enough, excess claims in these areas are starting to impact monetary policy as well.

Our potential for ownership and personal responsibility are sorely compromised, when too many markets for basic life needs are narrowly defined. The markets most affected are those involving human capital, skill potential and housing. Alas, these are now mostly intended for the use of higher income groups. What's left for ownership potential, includes traditional housing (with its legal benefits of family inheritance), financial markets for the traditional capital of wealth building, and the formal institutions which now link human capital to status and monetary gain. All of these are associated with equilibrium imbalance and excess nominal claims. 

How might one think about this? What's most affected includes the framing of artificial scarcity. Recently a gap has opened between aggregate nominal income and the output of GDP. Might this gap have been induced by purposeful reduced output (artificial scarcity), while maintaining similar levels of income expectations? And how does artificial scarcity contrast with natural scarcity for such correlations? After all, when income is derived from production via natural scarcities, existing output is more likely close to what is feasible and consistent with equilibrium or GDP potential. Perhaps due in part to the contributions of production via natural scarcities, nominal income has closely mirrored aggregate output for quite some time.

I'd like to think that production reform for non traditional housing and applied human capital, could help diminish the unexpected gap between aggregate income and GDP output. Non traditional housing options and horizontal alignment for services coordination, could lead to good deflation. Eventually such reform could lead to better equilibrium balance with other sources of wealth.

Indeed we've been fortunate that equilibrium imbalance can take centuries to become a macroeconomic problem. It's interesting how Adam Smith worried about equilibrium imbalance in his framing of"productive" and "unproductive" workers (Wealth of Nations), before the closely related Baumol effect became a legitimate concern. Perhaps the fact this process took so long to evolve, is what makes it difficult to relate to in the present.

Just the same, much is at stake. We need to recognize and respond to the burdens imposed by the expectations of our domestic services markets. Should we instead elect not to change anything, even the best NGDP monetary policy scenario would eventually lead to less applied knowledge for societies in the decades to come. Excess nominal claims with no other market options, would mean a gradual loss of our capacity to fulfill the challenges of a modern economy. It's time to consider building a future on more viable and sustainable terms.

The Baumol Effect: Benefit, or Problem?

Is the Baumol effect a positive contributor to economic activity, or is its frequent description as the "Baumol Disease" more realistic?  Perhaps much depends on who and what is involved in the discussion. Timothy Lee (in a January post) explains how a negative framing can be unfortunate:  

From my perspective as a parent, it might be a bummer that child costs are rising. But my daughter's nanny probably doesn't see it that way - the Baumol effect means her income goes up.

Lee explains how productivity gains in some industries may mean higher wages in areas with a more personal focus, via time based activity. He sees this as beneficial, for humans are social beings who often value personal experiences with others over robot encounters to get things done. Indeed, time based product is subjective, which is why it can be more highly valued than products requiring more technology than labour. Personal instruction is a good example, particularly when a given subject is actively and voluntarily sought out by avid students. 

Nevertheless, a concerning issue re the Baumol effect, is its uneven equilibrium dispersion which impacts both short and long term outcomes. As it turns out, well paid and fully functioning service markets are generally limited to places where originating wealth plays a dominant role. Despite the fact many scenarios lack this level of economic complexity, it's easy to assume the societal coordination of the Baumol effect is more widespread than is actually the case. Yet anyone who spends much time outside the more prosperous regions, will notice a dearth of markets for many important skills sets and services. Since applied knowledge and its related maintenance are necessary for modern economies, places where the Baumol effect is largely missing, tend to lack social cohesion and community purpose.

Hence we need to come to terms with the Baumol effect as an incomplete societal coordinator, not really capable of generating the level of applied knowledge which is crucial for modern day economies. Granted, the Baumol effect functions as a positive where it does contribute to economic dynamism. However, time based services run the gamut from the mundane to what are far more aspirational goals. Fortunately, many people remain willing to pursue their higher aspirations on non pecuniary and even solitary terms. That said, not all that is necessary and mundane in our lives is accomplished this way, particularly when recognizable markets for time value remain missing. We need to recognize where personal freedoms are too often lost to cultural expectations - expectations where many are pressed to sacrifice the whole of their lives for mundane and necessary tasks, while others remain free to pursue broader goals or perhaps higher callings.

Consider again the fortunate nature of free market framing, which at least has created partial equilibrium compensation via the Baumol effect in today's secondary markets. Since Timothy Lee could afford to pay his daughter's nanny (who accepted this work voluntarily), that created tangible benefits not only for the nanny, but Lee's family also in terms of their own expanded time use options at home. 

Alas, it's a shame the Baumol effect is often missing in places where it is needed most. Which is why we are challenged to bring stronger economic value to a wide range of time use options. Let's face up to the fact we can't always achieve interpersonal goals through money alone. Without a broader range of economic options, societies stand to lose even more voluntary societal coordination, to what are often outdated and rigid cultural "norms".

To sum up, the Baumol effect is problematic due to what it can't readily accomplish for a majority of citizens, despite what people hoped for via monetary and fiscal policy potential. This is one of the main reasons I've promoted time arbitrage as an economic option, especially whenever the Baumol effect falls short. Let's make certain that free markets can be preserved in the meaningful use of our time, and that voluntary economic coordination remains a real possibility for the foreseeable future.

The Role of Formal Education in Cultural Divides

What makes our formal educational institutions such a problem when it comes to long term economic stability? Unfortunately, they contribute to our cultural battles by dividing people into haves and have nots, when it comes to skill sets and access to vital information. While this is obviously a problem for citizens in mature economies, these educational divides impact lesser developed nations as well. 

For instance, when emerging economies lack sufficient wealth sources to fund high level human skill, formal education can become associated with "brain drains" or possibly even the need to escape one's country to achieve success. Hence such circumstance pose a threat to many in underdeveloped countries (alas, such as Afghanistan), where knowledge based skills are not yet a dominant factor for local economic activity. Indeed, how could "nation building" ever substitute for the economic pursuits which local citizens need to generate for themselves?

In advanced economies, cultural divides play out differently. All too often, the asymmetrical financial obligations of today's human capital, can crowd more direct wealth sources. Not surprisingly, battles over who even "deserves" access to high skill human capital, lead to social instability and polarization. This lack of long term monetary sustainability for high skill human capital, is already undermining national economies regardless of their level of economic complexity. Hopefully it is not too late to embrace a wide range of valuable human capital formation which doesn't require college degrees, familial wealth, or extensive monetary compensation for that matter. I believe it is still possible to make time use an integral source of wealth in its own right. With a little luck, our formal educational institutions may eventually recognize the need for such an approach as well. 

At the very least, nations now sense that nation building is not a reasonable option. What's more, top down "solutions" leave little room for the true potential of local knowledge and skill alongside tradable sector wealth sources. In order to bridge our cultural divides, new communities are needed, where local participants can generate sustainable sources for human capital formation. Such communities could actually function as knowledge priors, since participating group time could be coordinated symmetrically. Reciprocal time value would in turn allow new wealth to be built via knowledge and skill, without need of compensation from other forms of wealth. 

The monetary flows which exist between primary and secondary markets, affect our structural economic realities in ways that aren't always easy to understood. Let's observe more closely, the nature of existing originating wealth sources. Why do they already exist, and how might they be further augmented? Applied knowledge via coordinated time could serve as a more direct form of wealth creation, so that primary markets eventually come into better balance with dependent or secondary markets. Best, more efficient patterns for human capital formation, would make it possible to address the limitations of formal education which exacerbate our cultural divides.

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.

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.

Baumol Effect Recognition is a Good Starting Point

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

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

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

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

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

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

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

Does the Baumol Effect Impact Long Term Growth?

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

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

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

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

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

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

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

However, what if this is actually a positive outcome?

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

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

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

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

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

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

Does Real Estate Contribute to Baumol's Disease?

Is real estate a source of Baumol's disease? Like the chicken and the egg, it's difficult to tease out which comes first - local income averages or local real estate cost averages. And regardless of productivity (or lack thereof) in relation to income, people from all walks of life often need to come together to get things done. Hence income smoothing for social and economic coordination - all the more so at local levels. Still, there are additional burdens from the Baumol effect which dramatically affect overhead costs for a wide range of activity. This in turn can ultimately impact the dynamism of both tradable and non tradable sectors.

Tradable sectors have long employed whatever means they could dream up, to escape the burdensome nature of real estate overhead. Non tradable sectors don't often take this route, and since their product tends to be linked to time and place, they also lack incentive to do so. But why? For one, they tend to conceptualize real estate "exclusivity" as a signal of quality product. Of course this form of quality product carries additional costs for everyone, since much of it is non discretionary. The more impressive and "solid" each building where time based services are provided, the greater the problem for total factor productivity in general.

Real estate expectations such as these can lead to disequilibrium, once non tradable sectors dominate tradable sectors. In this historical instance, non tradable sector dominance is placing too much money in a passive position with limited potential for investment. Plus: Currently, all economic activity is designated solely as money. One issue is that when money represents all formal activity, aggregate revenue ultimately flows to real estate. Alas, non tradable sector dominance can hasten the process. For instance, we currently see it playing out as landlords "capturing the wealth" of prosperous regions. Once a certain amount of real estate becomes associated with services consumption instead of tradable sector production, substantial monetary flows get "parked" on the sidelines.

Nevertheless: The main problem for Baumol's disease in relation to real estate, is that governments won't be able to maintain adequate taxpayer revenue much longer, since the cost signal for quality product is repeated over and over throughout the entire applied knowledge (supply side) chain. Unfortunately, quality signal costs are borne by all individuals and institutions. More than anything, this is precisely what stands in the way of sustainability for applied knowledge in the 21st century.

One way to address the problem is a new approach to ownership - one which not only promotes greater flexibility and incremental options for citizens, but places less emphasis on real estate as a quality signal for time based product. Plus, by making time value a viable economic unit in its own right, less economic value would flow to real estate as a final resting place. Alongside the flows which money creates in real estate, would be a time flow continuum which culminates in greater use of applied knowledge and skill, and greater economic participation by all concerned.

To sum up: Once service sectors begin to dominate, they generate a different macroeconomic reality than what exists during tradable sector dominance. Still, should systems be negatively impacted (making them appear as though "full"), time value could prove a vital economic unit for additional wealth creation, alongside money. Otherwise, too much human potential can end up parked on the sidelines or on the other side of borders. Economic time value could capture knowledge and skills in ways which make them a constant component of economic dynamism. It could help reduce the Baumol effect, and the problem of landlords passively capturing the sum total of wealth value. Indeed: Perhaps Baumol's disease really is linked with what have become unnecessary real estate costs.

Inclusive Economies Can't Be Built on Exclusive Pricing

What goes into the creation of a more inclusive economy? For one, there's plenty of additional participation whenever economies are in processes of expansion. While employment tends to be the main focus, expanding economies also correlate with provision of goods in an affordability range for most consumers. Given its association with oft affordable product, tradable sector activity is more beneficial of late (thus far) for greater inclusiveness, than non tradable sector activity. Yet it's probably the growth factor which helps to explain why - upon looking up inclusive economies - I was redirected to a brief explanation for inclusive growth from Wikipedia:

Inclusive growth is a concept that advances equitable opportunities for economic participants during economic growth with benefits incurred by every section of society. This concept expands upon traditional growth models to include focus on the equity of health, human capital, environmental quality, social protection and food security.

Sustainable economic growth requires inclusive growth...an emphasis on inclusiveness - especially equality of opportunity in terms of access to markets, resources, and an unbiased regulatory environment - is an essential part of successful growth. The inclusive growth approach takes a longer-term perspective, as the focus is on productive employment as a means of increasing the incomes of poor and excluded groups and raising their standards of living. 

Much of this is relevant. Where the problem lies, however, is that we are frequently encouraged to conceptualize economic access as mostly feasible through higher wages. Alas, the conditions of general equilibrium tell the story: Say everyone wants and gets a higher wage than they had before. What has really changed? Or, should the cycle of higher wages stop before each group gets on board, how do we frame the moral story of deserving groups which didn't make the cut?

For instance, the local news has been carrying a story of a fire department which demanded wages equal to those of the police department, but the city mayor (a Democrat) resisted. The measure was finally voted through just the same. Now, there's an uproar, as some of the fire department employees will have to give up their jobs to smooth out the consequent revenue problem. In all this, the push for higher wages didn't cause the city's budget to miraculously expand. Likewise, when higher wages are demanded in private sector firms, sometimes the money is there, and sometimes it is not.

Even if we could wave a magic wand so every deserving person, association, or group gets a better wage, it is doubtful this approach can make it simpler for everyone to more effectively coordinate their time based mutual obligations. As it turns out, this is a relatively new economic problem. The uncertainty these circumstance have caused is already making our political environments more fragile, in part because we lack the ability to use our time priorities as a fulcrum at a formal economic level.

Think about it. What we are actually trying to accomplish via time coordination with money as the only applicable fulcrum, is actually quite new, historically. For centuries money has functioned reasonably well in this role. After all, most time based services occurred on the sidelines in ways almost incidental to the revenue flows of general equilibrium, even though some acknowledged a "circular flow" between industrial production and services. For the most part, tradable sectors not only determined divisions of labour, but also the output which defined a mostly commodity based general equilibrium. However, once service sectors began to dominate economic activity and more citizens were brought into the formal economy; despite the recent introduction of fiat money, the Baumol effect is slowly making money less effective as the sole fulcrum between tradable and non tradable sector activity.

When I suggest symmetric time as a way to coordinate time based services, it's not because everyone's time value becomes "equal". In time arbitrage, since everyone would be free to choose who they wish to work with, the challenge is to make one's own time value (and skill sets) desirable to others, so as to make up for one's own time scarcity as much as possible. Doing so, makes it much more likely that - for those willing to put in the effort - it's feasible to maintain sufficient access to a wide array of time arbitrage options.

In other words, instead of functioning as an "equal" wage, symmetric time arbitrage makes it possible for most participants in a continuum group setting, to set up and clear mutual obligations in real time. Eventually, we will need to let go of the seemingly never ending struggle over nominal wages, so as to improve the effectiveness of real wages via production reform in non tradable sector activity. Perhaps we'll know we've arrived, should economic expansions become directly correlated with more inclusive pricing in non tradable sector activity, such as completely new options in home ownership.

A recent Brookings post also brought a new institute to my attention this morning. The "Opportunity and Inclusive Growth Institute" is associated with the Minneapolis Fed. I was encouraged to note they already have scholars working on employment possibilities for the formerly incarcerated - one of the few areas where there is still political agreement for greater inclusion, on the part of both Democrats and Republicans.

While putting this post together I also came across a recent book from Michael Tanner, The Inclusive Economy: How to Bring Wealth to America's Poor. From the Cato review:

Rather than engaging in yet another debate over which government programs should be increased or decreased by billions of dollars, Tanner calls for an end to policies that have continued to push people into poverty. Combining social justice with limited government, his plan includes reforming the criminal justice system and curtailing the War on Drugs, bringing down the cost of housing, reforming education to give more controls and choice to parents, and making it easier to bank, save, borrow and invest.

How to think about these useful suggestions? Perhaps the bad news, at least from a libertarian standpoint, is that no one can realistically expect limited government, anytime soon. For that matter, both political parties are seemingly consumed with taking control over governmental budgets and maximizing political spending to the fullest extent possible. At the very least, from the standpoint of bridge building between parties, positive reforms of the criminal justice system could be on the horizon, and the War on Drugs might finally be over soon. As for parents having more control over educational decisions, what really matters is that students are given more chances to take better control over their destinies from a young age. Perhaps this could also be approached in ways which reduce the fight over public versus private schooling.

The main problem we now face, is that what's rational for non tradable sector bottom lines in terms of exclusive product definitions, has been slowly - but surely - increasing the carrying costs of our markets, workplaces and personal lives across the entire economic spectrum. The best way to bring back a full level of economic participation and marketplace access, is to create more flexible settings for our mutual time priorities and physical infrastructure.

Doing so, would allow both for profit and not for profit endeavour to contemplate their own possibilities for sustainability - because of lower operational costs. What is sustainability, if not our own logical wish to survive in the world, however we happen to define ourselves? When it costs less to tend to the fabric of our lives, we all get the chance to breathe easier, and find renewed energy to meet our responsibilities and obligations. Again, when it comes to nominal approximations, what if we've been going about this "inclusive economy" process the wrong way?

Good Deflation and the Monetary Human Capital Role

Why does the form of deflation we call "good" (since it translates into more affordable product and more output), not function as the same clear positive, for the economic value of human capital as time based product? After all, if the cost of high skill services could be gradually reduced and made more widely available, much as tradable goods have become, "small" wages would hold more real economic value. Likewise, smaller aggregate wage levels would gradually allow the productive agglomeration costs of real estate to be modified in many areas as well.

There's a problem however, for good deflation in terms of time based service product. Alas: What tends towards cumulative inflation rather than good deflation, is how many individuals meet their ongoing expenses and asset costs as those costs currently exist. Unlike forms of product separate from time (which of course aren't human), time based product costs are attached to our human responsibilities to pay bills on an ongoing basis. While we are appreciative if we can access someone else's time, good deflation for time product may nonetheless feel like the bad deflation which impacts labour value during depressions, if that time value happens to be our own.

Our time is also scarce in relation to most goods. Consequently, in order to meet the human capital costs others posses, many seek to raise their own time value. This sets up a chain reaction, whereby others still need to increase the value of their time, so as to access important forms of time based product. This extensive internal inflation process runs exactly counter, to the good deflation which tradable sector activity has contributed to prosperity in recent centuries.

All this holds, regardless of one's monetary compensation for their time units in the form of labour or skills arbitrage. It certainly matters for the time arbitrage I've suggested as an alternative, which would need to be crafted so as to directly address the internal inflation problem. That's why it would be necessary to define new organizational settings for services, learning patterns, infrastructure, housing and other building components so as to make good deflation for time value a reasonable possibility.

Consider how infrastructure and real estate costs have proven relatively amenable to good deflation in tradable sectors. While limited aspects of tradable sector activity needs locations in areas with high real estate costs, much tradable sector production has far more flexibility and mobility. However, in order to accomplish this, many aspects of organizational capacity are integrated into single sustainable settings which have at least a relative degree of independence from place and geography.

Conversely, too many aspects of high skill services have been excessively place dependent for productive agglomeration, which only contributes to the difficulty of achieving good deflation in non tradable sectors. This coordination problem helps to explain why the high skill work of our most prosperous areas is no longer a simple matching process in terms of employment, given the relative few who now manage wealth in lieu of others. Since non tradable sector high skill knowledge does not scale as does tradable sector activity, it needs a horizontal organizational approach which encourages greater marketplace capacity and productive agglomeration which goes well beyond our most prosperous areas.

A new institution is needed which could place productive agglomeration for non tradable sector knowledge use into a combined organizational framework. In these defined equilibrium settings, individuals would not suffer the extreme losses in purchasing power, that would otherwise accompany good deflation in time based services in a completely open equilibrium. Of course, open equilibrium would still apply for tradable sector activitiy, since most individuals can still access and contribute to the good deflation of tradable sectors. However, the closed non tradable sector equilibrium would make it realistic to pursue good deflation as an important time based services goal.

Valuable though good deflation would be for time based product, there are other reasons to utilize symmetrical time value as a mass produced services commodity. Time arbitrage would allow time based product to function as a basic human capital building block, instead of simply another societal cost which places uncertain demands on the earth's resource capacity. One of the main problems of inflationary time value, is the fact there is no time based services steady state to rely upon, when time value exists solely in a dependent relationship with earth's other resource capacity. By bringing good deflation to time value, we could create a steady state for applied knowledge which allows us to more precisely determine the productivity of our own efforts, in relation to the productivity relationships of our other institutions.

Occupational Licensing Has a First Mover Problem

What can be done about the awkward fact that occupational licensing reduces labour supply? Alex Tabarrok cited an NBER paper which suggests employment losses due to occupational licensing could be as much as 17% to 27%. And the recent report from the Institute for Justice that he linked, provides additional detail re state licensing requirements. The report also notes how occupational licenses are basically

government permission to work for pay in a particular occupation. Securing a license may require education, experience, exams, fees, and more, which means licensing can pose a major barrier to entry for aspiring workers.

Some of the commenters at Marginal Revolution highlighted the fact it is easier to emphasize licensing issues for low or medium skill workers, than for high skill workers. While not all occupational licensing includes the logic of quality product, it's difficult to escape such an argument in many circumstance. Perhaps one could even imagine licensing of lower skill levels as a "logical" form of follow through for quality product requirements which occurred in terms of high skill work, especially requirements which transpired early in the 20th century.

Nevertheless, rules and work patterns for time centric product have had plenty of time to evolve. Indeed, the rationale of limited supply side access, exists in part due to the limited output potential of individual providers, as contrast with tradable sector output. These individuals uphold quality product values which are expected to reinburse traditional forms of expensive building maintenance and infrastructure, not to mention prime locations. They have understandably resorted to extensive knowledge protection since they lack the deep pools of output which provide revenue for tradable sector activity to function in areas of prime real estate. Yet this approach has now created real limits for knowledge use and dispersal, as a result.

Before much of today's high skill services framework became standardized, professions which weren't necessarily perceived as contributing to new wealth, felt the need to go to great lengths to prove their worth. Insofar as potentially reversing what has become a well rationalized status quo, the initial groups which gained both respect and protected status, are positioned for a good defense. Even a rollback of licensing requirements in low to medium skill ranges would mostly be nibbling around the edges of the problem. Where to begin?

Quality product models are becoming problematic in part, because many near future employment opportunities can't compensate at a level that generates access to present day housing or high skill services. Our quality product conundrum can be attributed to the Baumol effect as well - particularly in prosperous regions which limit access not only to preserve existing housing wealth, but also the time value of local service providers who are already established.

One reason it is increasingly difficult to add to the wealth aggregates of present day service sectors, is that today's time based service product (with its general equilibrium dependent position) has mostly offset the equilibrium potential of a tradable sector derived wealth base. Even though service sector activity accounts for approximately 80% of GDP in the U.S., production norm limits will likely come to define both monetary policy and general equilibrium structure in the near future. If present day knowledge provision seems demand driven, much of it was crafted for what was perceived as potential demand scenarios which could readily meet costs, rather than optimal supply for entire populations.

Even as some attempt to reduce costs of economic access for lower skill workers, we see that economic access costs associated with today's higher skill levels are deeply embedded, particularly in the knowledge production requirements associated with formal education and real estate overhead. Much of today's wealth creation framework, includes high skill endeavour which could be imagined as the support walls of a building, while lower skill positions contribute additional scaffolding. All of which makes it difficult to rationally establish a first mover position, for supply side economic access within prevailing general equilibrium conditions. For that matter: Should the process begin, where would it stop?

Occupational licensing issues are yet another reason I've suggested alternative or defined equilibrium settings, for greater economic access in terms of both supply and demand. Time based services and flexible housing/infrastructure in particular, need a viable context in which they contribute to - rather than threaten - the established framework of asymmetric high skill services generation, and its supporting physical infrastructure.

Plus it's possible to pinpoint at least two factors which make it difficult to dislodge the Baumol effect that contributes to the present rationale of quality service product. For one: As tradable sector wealth grew, non tradable sector activity and quality expectations followed in its footsteps. All wages (with some breaks of course) have risen for centuries due to tradable sector dominance and its associated output gains. It's not easy to accept the fact wage increases aren't as reliable during periods of non tradable sector dominance.

The other factor? Attempts to reduce the Baumol effect via lower economic access requirements, may come across as increased personal risk - whether on the part of consumer or worker - via lower product standards. Hence arguments for less regulation so as to promote well being and economic access in some settings, may backfire in others. What's more, in some circumstance, lower product standards do become a problem. But there's a difference between low quality standards which might result in a cheap, essentially worthless coffee pot for instance, versus the product or service "lower standards" which clearly contribute to irreversible problems, which of course include death. It's those irreversible problems that make it all too easy to defend higher product standards across the board, whether or not they're needed.

Hence the need to move the focus away from what appears as a lowering of quality standards, to a different approach where quality standards are part of an internal approach. Not only could such an approach be capable of providing greater transparency, it would internally coordinate what otherwise consists of multiple services platforms which tend to be at odds with one another. Again, organizational capacity could ultimately create good deflation in non tradable sector activity. But instead of saying "less educational requirement is necessary in order to achieve X", go about the process differently, so as to better align the relevant resource capacity at the outset. Internalizing knowledge production as an "in house" process, means achieving output gains that are also quality gains. And it could be accomplished without "less education is necessary" arguments, which in some minds suggests a willingness to settle for inferior services.

Perhaps the best first mover position in this instance, is to establish exploratory settings for new forms of services generation. After all, no one should have to argue against "unnecessary" quality, in a world where quality is increasingly appreciated! It's misleading to assume that "lower" quality standards are the way to good deflation and additional economic access in non tradable sector activity. That said, more effective human capital alignment can create more precise applications for knowledge use and experiential gain. Fortunately, tradable sector innovation has already paved a prosperous path of reciprocal resource utilization, in recent centuries. With a little luck, our non tradable sectors might eventually be able to accomplish the same.

Does Price Making Affect Total Output and Investment?

Could extensive price making affect investment potential, for revenue which otherwise would have generated output gains? In particular, does price making in non tradable sector activity, lead to quicker diminishing returns in aggregate for capital investment, than would otherwise be the case? If so, this could be one of the ways in which some aggregate revenue claims on the part of non tradable sector activity, negatively impact total factor productivity.

One often hears arguments, how government spending crowds what private sector activity could otherwise achieve, in terms of economic dynamism. Alas, it's not quite so simple. Much crowding also results from price making in non discretionary private sector activity which is further compounded by the fact supply side potential can be limited at the outset. If there were less price making and more price taking, aggregate investment and output for all sectors could become more pronounced. Meanwhile, once low income discretionary income is shifted towards non discretionary "requirements", less revenue remains for the output enhancing potential of discretionary spending in tradable sectors.

Nevertheless, recent corporate tax cuts were extended to tradable and non tradable sectors alike, in hopes of generating fiscal stimulus. Did this help economic conditions, overall? With total (and business) investment rising at about 8% per year, Scott Sumner opines "The data suggests it has, unless I'm missing something."

Of course, short term boosts aren't comparable to permanent gains. For instance, Sumner recently stressed as well, how most growth initiatives boost the level of GDP without actually increasing the long run growth rate. By way of example, capital investments in general are only useful up to a point, in part due the diminishing returns highlighted by the Solow growth model. Once market saturation is reached, further capital investments no longer provide sufficient dividends. Importantly, this same market saturation (at least within a desired price range) applies for extensive investment in human capital as well, consequently limiting supply side knowledge production regardless of demographic change.

Fortunately, a broader economic context for price taking in time based services, could ultimately delay that market saturation point for all concerned. Plus, the price taking symmetry of time arbitrage could provide additional organizational means for knowledge preservation. With a more dynamic and independent form of services capacity, our knowledge based economy might gain much needed economic stability, well into the future.

However: In fairness to the prevailing system, knowledge providers have created a form of quality product requiring extensive human capital investment, as a defensive means of ensuring services coordination with individuals who are among the most valuable contributors to society. The problem? There are societal expectations of standard methods and relatively standard or "single" time based service prices. This in turn has worsened the Baumol effect, so that societies are no longer able to effectively coordinate wide income variance. Even though it's feasible to organize time based services activity differently to address income divergence, we still need a carefully thought through response - one which doesn't pose a threat to the expected human capital investments in general equilibrium services generation.

It's possible to create symmetric economic options, whereby knowledge can be utilized and dispersed via price taking means. A combined group approach in defined equilibrium conditions would allow new knowledge based services generation. Such an approach could even make it unnecessary to be the recipient of extensive family support, in order to have the freedom to take part in knowledge based activity so long as one desires to do so - instead of waiting till retirement, for instance. Sometimes a mind - or body - can't wait that long!

A price taking services approach could eventually lead to increased societal demand for tradable sector activity, once more. After all, this is the activity which historically provided investing dividends due to high levels of output. It was the simple pleasures of the Main Street material world many of us remember from youth, which created such high hopes for the pursuit of knowledge in the first place. Yet the pursuit of knowledge can be its own reward, and not every intellectual challenge has to take place on extensive monetary compensation terms.

Much of today's investment potential is in a holding pattern. Excessive non tradable sector claims on what should have been discretionary income, have made it difficult to generate a level of output gain which could restore economic vitality to a higher level. And should a higher level of output become possible, diminishing returns would not set in near as fast for personal investment, as has been the case of late. Perhaps a price taking option for non tradable sector activity, could even increase the long term growth rate as well.

Time Arbitrage as a Contestable Market

One potential advantage of time arbitrage, is that knowledge would be experienced and applied in non rival context. Non rival use reduces market frictions and encourages a fuller, more diverse range of group skills capacity. Imagine the process as a concentrated and decentralized community setting, for productive agglomeration. When knowledge use is non rival, there's fewer cost burdens of entry and exit for all concerned. Likewise, the resulting continuum for mutually obtained skills coordination, promotes market competition for the many - not just the few. Exchange velocity increases, since knowledge application is less likely to bottleneck or be treated as absolute and exclusive of interpretation.

Given the reality of time scarcity, we don't always have the economic time value at our disposal, to reimburse what others may deem the economic value of their own exclusive skills arbitrage. Nor do governments always have the budgets to completely reimburse skills arbitrage for given groups beyond a certain point - which in turn limits both the production and consumption potential of valuable knowledge and skill. Consequently, the extent of marketplace vitality which is possible for time based services, depends on how many actually take part. How much aggregate participation is presently lost, due partly to extreme variation in skill value which is further compounded by present day accreditation processes?

What's more, the reality of time scarcity, prevents (standard) economies of scale when human capital investment (mostly) accrues to time based product. Fortunately, time value unit symmetry would allow scaling up through added participation. Here's how Economics Online describes contestable markets:

The theory of contestable markets is associated with the American economist William Baumol. In essence, a contestable market is one with zero entry and exit costs. This means there are no barriers to entry, such as sunk costs and contractual agreements. For a market to be perfectly contestable, relevant industry technology would be readily available to potential entrants.

The existence, or absence, of sunk costs and economies of scale are the two most important determinants of contestability. On the basis of these two criteria, natural monopolies are the least contestable markets.

Nevertheless, no market can be completely competitive in its entirety. As William Baumol explains:

In our analysis, perfect contestability...serves not primarily as a description of reality, but as a benchmark for desirable industrialization which is far more flexible and is applicable far more widely than the one that was available to us before.

While Baumol's focus in this (early eighties) instance was industrialization and tradable sector activity, contestable markets as concept, could also be useful for the market potential of non tradable sector activity. In particular, for high skill time based product, a contestable market would be one in which knowledge could be utilized as freely as possible.

To this end, time arbitrage could eventually help reverse the trajectory of excess rival knowledge costs which are now lodged in rising government debt loads. And interestingly enough, while Baumol's disease tends to be associated with non tradable services income in geographic correlation with tradable sector income, non rival knowledge use could lessen the chronic severity of this "condition" in a macroeconomic capacity - given its unfortunate contribution to sectoral imbalance.

In recent decades, numerous opportunities have surfaced which could help reverse the costs of human capital investment. What's more: Of late, these possibilities have greatly increased, and AI deep learning could make it possible for the average citizen to work alongside AI in a "just in time" knowledge production capacity. Will the reality of today's growing debt burdens finally encourage societies to remove constraints of human capital investment when they are no longer necessary? How many sunk costs for today's high skill services, are actually self imposed? After all, it wasn't so long ago, that healthcare mostly functioned as an open, dynamic, highly contestable market - one with minimal entry and exit costs.

Centralization or Decentralization? Scale is Important

When long term growth potential is discussed, differences in scale also matter. Is the economic activity in question, primarily centralized, or decentralized? For today's advanced economies, the reality of too much centralization, now means too many limits to growth as well.

It wasn't always this way. Tradable sector growth, due largely to its internal wealth generation, meant it included economic characteristics which were simultaneously exogenous (related to global commodity and product value) and decentralized, in relation to the nominal value and nature of a nation's general equilibrium. Still, the growth of tradable sector activity (in recent centuries) allowed advanced nations to substantially centralize economic frameworks, often in the form of secondary or general equilibrium dependent markets.

Once tradable sector activity finally experienced crowding (1981 was a tipping point) by the present organizational capacity of non tradable sector activity, it became more difficult to transmit gains from tradable sector wealth into more inclusive markets for the knowledge use of non tradable sectors. Part of the problem is that much of the latter can't presently scale, and asymmetric compensation for specific skill sets (skills arbitrage), only functions efficiently up to a point. This reality has not only posed issues for today's (knowledge product dependent) entitlement systems, but also democratic governance as a long term political framework.

Only consider how recent non tradable sector dominance also affects the density potential for productive agglomeration in desirable urban regions. When factories were a major component of urban activity in advanced nations, they contributed to endogenous output gains which translated into demand for more local employees. Urban employment demand on the part of private industry, further translated in local greater worker density, which was consequently reflected in real estate patterns that were formerly less inclined to place NIMBY limits on social mobility. Retail settings (and their associated employment levels) have provided an indirect, less reliable revenue source for maintenance of density patterns, by comparison.

Today, supply side scale limitation in non tradable sector activity, is reflected by limits in urban densities as a component of experiential product. Even though physical aspects of housing could readily scale if exposed to marketplace innovation, such potential still requires a geographic land use equivalent - such as decentralized non tradable sector productive agglomeration for instance - in order to gather economic momentum. One way to achieve decentralized productive agglomeration, would be walkable communities which internally design for shared non tradable sector coordination. This organizational capacity would tap into wealth creation via locally defined equilibrium, instead of the secondary market revenue dependence of general equilibrium.

Meanwhile, the revenue dependent status of today's non tradable sectors, has limited knowledge participation so as to boost income - a strategy reflected in the higher income limitations of building requirements in our most sought after urban regions. What's more, when central bankers get anxious to "reduce" high housing prices in closed access areas, they neglect the direct correlation of these housing prices with the high incomes that approximate the closed access of knowledge production participation, in general equilibrium conditions.

When knowledge and skill are mostly utilized as secondary markets in general equilibrium, time based production tends to take on rival characteristics, hence losing the ability to benefit from gains in scale. This, even as technology gains and tax structure continue to augment the professional income of time based product. Understandably, there's little incentive to increase the supply of secondary market non tradable sector knowledge production, given today's general equilibrium restraints. Given this circumstance, where do scale gains for the application of vital knowledge, actually exist?

Non rival knowledge use would require a decentralized form of organization, capable of building revenue in defined equilibrium settings instead of requiring the taxation or subsidies of general equilibrium. In other words, decentralization for high skill knowledge would not function as markets that are dependent on general equilibrium revenue.

Via a local equilibrium "blank slate" for time based product, there's two means of replication for scale gains: First, when time purchases symmetric time, the compensation process sets up a sustainable pattern, whereby non rival knowledge would disperse as one "lit torch" (individual) to the next. Second, there's the greater utilization of time aggregates as a whole, via recorded knowledge use memory structure. Time arbitrage, unlike skills arbitrage, need not depend on non rival status for economic sustainability.

A new institution for this process, the equilibrium corporation, would no longer remain compelled to "harvest" the best skills of today's formal education while abandoning the rest. Instead, a new corporate structure could (finally) generate an internal, informal education structure, which utilizes the multi skill capacity of all who take part. Only recall that the expectations and requirements of asymmetric compensation, all but force the signalling process which many now find so dispiriting.

Among the first rules of specialization in equilibrium corporate activity, would be to "spread around" not just the challenging skills utilization which so many seek, but also a wide array of "leftover" tasks and divisions of labour. Indeed, people too often face a lifetime of "leftover" economic activities, once the "good" (well compensated) activities are taken, should they somehow "fail" the requirements of today's formal educational settings. For instance, one may know how to cook a great meal, but get little appreciation for doing so unless they happen to operate a profitable restaurant! Just by integrating multiple skill levels for all participants, many of life's most basic tasks and duties, could finally regain some much deserved respect.

One reason economic dynamism is no longer a simple matter in advanced nations, is the fact that differences in scale are not well understood, either in terms of how they have affected workplace density or national budgets. Just the same, understanding how differences in scale affect long term growth is important. Doing so would make it simpler for nations to determine, when it is helpful to let go of micromanagement of economic activity, versus the economic activity that could still be profitably encouraged at national levels.

Again, it helps to remember that national government works best when it utilizes its resources to encourage what is capable of scaling up. Representative democracy functions well when citizens vote to influence broad and national infrastructure decisions. On the other hand, direct democracy works best when time "votes" (use) are utilized on symmetric terms. When time purchases time, it becomes possible to regain forms of scale which are intricately tied to human potential and aspiration. When time purchases time, technology is better able to align with what people want to do, instead of the other way around.

Presently, some national governments are still capable of tapping into revenue for strong infrastructure commitments which dwarf what advanced nations can now provide, given their already existing commitments to secondary markets. With a little luck, national governments of the future, will be better able to build their economies in ways which require less non tradable sector general equilibrium dependence at the outset.

Why is Economic Stagnation Still Problematic?

Even though there's been encouraging signs of growth recently, context matters. After all, the limited growth trajectory which originated in the Great Recession, has not changed. Further, since recent income gains have largely accrued to upper income levels, many individuals (and regions) have yet to recover from at least a decade of economic stagnation.

Nevertheless, for many who prosper, the all too recent economic crisis is already forgotten. Hence renewed calls to further tighten monetary policy, and the collective wish to simply move on. The world economy has "never been better", right? Authors from quite different backgrounds also find it tempting to ride the optimist bandwagon. Such rationale provides much needed encouragement for the average reader, especially given today's political instability. Yet the still growing prosperity of developing nations, makes it easier to ignore the fact that something has gone wrong, in terms of the shared prosperity of today's developed nations.

Of course, who really wants more growth, or believes it could make a positive difference? How could more growth lead to shared prosperity if it hasn't done so already? Haven't people grown weary of a "material world"? As Diane Coyle writes in a recent post:

It's tempting to accept that growth is so over, given how much stronger the sustainability concerns are now than in the 1960s. But I don't think it's so simple.

Indeed. I would add that the sustainability of knowledge also depends on the continued momentum of economic integration and inclusion. Which is precisely what today's equilibrium dependent knowledge based economy can't provide.There's two problems with today's non tradable sector dominance, especially in nations such as the U.S. with large populations:

1) Today's most critical forms of knowledge use tend to rely on the monetary flows made possible by wealth in which resource capacity was settled at the outset (no debt or redistribution as the activity base). The reason this issue has become so important, is the extent of economic activity which now takes place in conditions which lack direct resource reciprocity. What's difficult to directly observe, is that resource matching at the outset creates the general equilibrium dimensions which can readily be tapped at any given moment, by all economic actors. And presently, more of us are seeking to tap into wealth which already exists, than are actually adding to wealth creation via resource reciprocity at the outset.

2) When vital forms of knowledge use are structured as secondary markets, these organizational patterns are dependent on an essentially fixed pool of existing resource capacity during times of economic stagnation. Most supply side reform efforts run headlong into the fact that present providers consequently can't expand their marketplace capacity, unless they're willing to dilute the income they already claim. Hence attempts to increase supply for healthcare practitioners, and building density of areas with desirable employment characteristics, are not well aligned with the realities of those who own real estate or practice high skills trades in prosperous regions. In a sense, recent calls for supply side reform in non tradable sectors - sensible though such calls appear - aren't always essentially different from what progressives have sought, via taxation.

Consequently, today's non tradable sector dominance, in which private sectors are heavily dependent on government largess and closely held production rights, has led to political stalemate. Small wonder for instance that the U.S. has "hit a wall", which seemingly demands the building of a wall, as if doing so could somehow address the underlying domestic supply side issues at stake.

We need defined equilibrium options that won't dilute the income or real estate value which residents of prosperous regions have already claimed. By building defined equilibrium capacity via immediate resource reciprocity, we wouldn't have to plead with special interests to dilute their income or asset values, to create additional economic access.

In the centuries when tradable sector activity was dominant, perhaps it was still reasonable for non tradable sector activity to be organized solely as dependent or secondary markets, where individuals could also benefit from the Baumol effect. But given the present day dominance of non tradable sector activity, it's time for these sectors to make room for resource capacity which is utilized at the outset without debt or redistribution. Fortunately, non tradable sector activity can be organized as primary markets capable of generating new wealth. Just as tradable sectors have done, all along.

Price Taking as a Useful Services Production Norm

How could price making processes ultimately lead to disequilibrium? Each supplier or provider expects given levels of general equilibrium resource capacity, yet not all participants have sufficient understanding where (current) aggregate capacity actually stands. Whereas price taking, with sufficient view to the resource capacity currently in use, implies a more sustainable general equilibrium.

Even though the wealth capture of price making does occur in tradable sector activity, these suppliers tend to have greater awareness of a full range of specific resource capacity in play, especially as it pertains to the product in question. Consequently, tradable sector prices are more likely to contribute to broad resource coordination or "best use" for everyone concerned. An added benefit for monetary policy, is how price taking patterns for tradable sector activity include reasonably constant price levels over time. This in turn contributes to their potential as a recognizable production norm, as a useful consideration for monetary representation.

Alas, the random mining of human capital in non tradable sector activity, has led to a different outcome for coordination potential - especially since the latter decades of the twentieth century. And, as the price making of non tradable sector activity came to dominate tradable sector price taking, monetary policy makers responded by capping aggregate monetary representation (inflation targeting) which effectively sets limits for high skill participation, via the asymmetric compensation which today's professionals require.

While the Baumol effect of price making for skilled time product is understandable in some settings, it creates problems elsewhere, when local income conditions lack the additional benefit of global wealth. Increasingly, professionals avoid such settings as well, which often limits pragmatic knowledge use where it is needed most. This disequilibrium of sectoral imbalance, and its exacerbation due to tight monetary policy, has led to what is essentially the equivalent of human capital dumping on a wide scale, not to mention the lost sunk costs of educational investment.

Nevertheless, there remain arguments in favour of non tradable sector price making, particularly given its capacity for spontaneous national coordination of time product. With a little luck, governments could continue to support this form of knowledge use, so long as they recognize that other means of knowledge use generation will become increasingly necessary in the future. At least since the turn of the century, asymmetric compensation has proven insufficient to integrate millions who continue to invest in human capital, with hopes of full economic participation.

It's the economic connections to time and place which make it difficult to determine the full extent of human capacity at a general equilibrium level. Once price making for human capital reaches a certain threshold in a services dominant economy, societies find it more difficult to maintain general equilibrium potential for all citizens. Even though local price making is rational for time based product, the aggregate pricing effect creates a disequilibrium of reduced production and consumption. And as central bankers have become more focused on combating the inflation implications of price making, monetary representation becomes less effective for all economic participants. What can be done?

First, we can make peace, with the fact today's professionals can only coordinate time based product with others up to a point. From here, we can begin the process of recreating time based product, via the price taking means of time arbitrage. Such an approach would make it possible to generate new wealth which builds stable connections for the valuable product of time and place. Best, doing so would establish service generation patterns which more closely follow the stable production norm patterns of tradable sector activity.

Time arbitrage would eventually allow a rebalancing of services generation to take place. Since time value in relation to itself does not generate inflation, services generation on these terms would eventually make it simpler for monetary policy to fully represent all economic actors, as central bankers (finally) become less inclined to continue their irrational fight against sectoral imbalance. Even though there will always be a certain degree of non tradable sector inflation via professional price making, other citizens have a more sustainable option for knowledge use, via the price taking of a services production norm.

Baumol Effects are Different From Productivity Gains

Why so? Baumol effects act as another form of wealth capture (or at the very least, redistribution), for the wealth of existing local equilibrium patterns. Whereas, productivity gains translate into overall additional output, for existing equilibrium in aggregate. One way to think about this: Productivity is more about gains in output, than gains in wages - particularly when and where service markets have come to dominate mature economies.

Baumol effects in prosperous communities and regions can lead to higher wages for workers in general. However: since many of these workers aren't (yet) positioned to directly contribute to local wealth origination, their local access - regardless of skill level - could be priced out of reach. Especially so, if their input potential isn't connected to a primary market or wealth origination position.

These thoughts are my response to the local wage differentials which Arnold Kling addressed in a recent post, "Are locational wage differentials also productivity differentials?" One of the issues that was debated in comments, was whether specific wages were valued more highly, because of the level of wealth they were associated with.

However, mobility factors are also important, because when local employment at any skill level ends up defined as wealth capture or redistribution functions (for existing local equilibrium), local housing markets automatically act to reduce additional access. Otherwise, local coordination could take place at a reduced aggregate time price point, along a full range of skill levels (only remember for instance that supply side limits for physicians are based on urban - rather than rural - demand and associated constraint). Again, the Baumol effect expresses the time based coordination that appears locally "reasonable" among different skills groups, once the equilibrium dimensions of primary market formation are established.

Importantly, many forms of high skill employment also act as a form of wealth capture in local equilibrium, whereby local providers gain additional monetary advantages beyond what were already established via state and national levels. In other words, it's not just low skill workers who benefit from Baumol effects, but also high skill workers, whose "complete" monetary compensation takes place in a socially or politically sanctioned secondary market capacity.

Time arbitrage could reduce the necessity of today's excessive reliance on Baumol effects, as a form of economic access. One of the potential benefits of time arbitrage, is that by acting in a primary marketplace capacity, it wouldn't detract from the primary marketplace wealth distribution of local equilibrium which is already in effect.

New options for primary wealth formation are vitally important. Otherwise, it is becoming more difficult for citizens to access - particularly via social mobility - the already existing wealth of primary market points of origination. All the more so, when much of this general equilibrium capacity is already claimed via services dominant organizational  patterns. If time could purchase time, with skill and knowledge use as part of the package, knowledge use and service generation could begin to organize as new primary market capacity. Eventually entire attitudes toward skills potential on the part of all citizens, could change for the better.

Processes such as these could occur alongside existing prosperity, and in places where relatively little prosperity exists. Granted, few have taken seriously thus far, the concept of improving economic conditions where people already live. But when so many regions and mature economies are intent on closing their doors to those who still seek access, social mobility faces multiple constraints. A newly created economy at the margin, could be the best response.

Some Considerations Regarding Housing Costs

When we say that housing is not "affordable" in the nation's most desirable regions, what is actually at stake?

Housing costs in these areas not only reflect constrained supply side realities, they are also representative of changes in relative income levels and global ownership patterns. There's a global marketplace which closed access cities participate in to some degree - for both services and housing. As for income, the reigning marketplace efficiencies of general equilibrium, increasingly mean employment via core or peripheral capacities. And much of the high skill knowledge based core, clusters in what have become the most desirable areas. Meanwhile, problems with access to areas of highly productive agglomeration, have been exacerbated by demand based responses which often don't take missing supply into account.

Even though it would be a long term approach, we could alleviate some of these additional access costs, by allowing more use of high skill knowledge in other regions as decentralized, primary market organizational patterns. In other words, we would be creating more productive agglomeration, in part so that aggregate housing costs could be spread across broader marketplace patterns. The excessive centralization of today's most important knowledge use, is an underlying factor in the housing costs of closed access cities.

If non tradable sector time based product is structured solely as secondary market dependence (as is currently the case), the process leads to too much societal pressure, for access to productive agglomeration. Among the many examples in this regard, are healthcare practitioners who (understandably) choose to locate where not only is it most pleasant to live, but where income potential is greatest. Hence these groups have considerable incentive to locate in closed access areas where their income can also be maximized, via locally existing revenue flows. Yet it's a process which can lead to an incomplete general equilibrium, due to lack of production and consumption of time based services in a full regional economic context.

Another way to think about the costs of housing in today's closed access cities, is the Baumol effect, which importantly serves as a coordination mechanism for a subset of potential time based services (at multiple income levels) alongside more direct forms of wealth generation. I emphasized subset here, because local zoning and regulation, also limits the extent by which middle and lower skill levels can partake in these local Baumol effects.

One advantage of knowledge use systems would be that - like the Baumol effect - time arbitrage also achieves income smoothing for mutual local coordination, since time arbitrage allows local group time value to function in relation to itself. One difference between a defined equilibrium and general equilibrium, however, is that time arbitrage would acknowledge the vital relationship between local income/resource capacity and local non tradable sector costs.

A better understanding of this relationship, would make it possible for small groups to take full responsibility for local infrastructure requirements and asset formation. By coordinating economic time value in relation to itself, more groups would be able to take part in our most important knowledge based challenges, without the near necessity of locating in areas which are currently exposed to high housing costs.

Does Money Still Function Well as "Half of Every Exchange"?

So long as money is mostly representative of tradable sector activity, prices serve as a fairly good measure of societal coordination. However, when time is arbitraged in the marketplace with no direct relationship to its existing aggregates, and time based services become more prominent in relation to tradable goods, total societal coordination eventually becomes less effective.

While listening to a podcast between David Beckworth and Steve Horwitz re monetary disequilibrium, I was reminded of some of the implications, when Horwitz stated that money is "half of every exchange". Even though this representation is perfectly suited for tradable sector activity; alas, it has only proven a partial solution for the introduction (and consequent dispersal) of knowledge use in the marketplace. A different set of dynamics comes into play, for money as representative of the non random nature, of economic time.

Since human capital investment makes additional claims on (all) existing resource capacity, the result in total factor productivity terms, has been additional input requirements in relation to aggregate output. These demand requirements translate into additional claims on existing revenue, such as what also occurs in recessions. As a result, monetary disequilibrium is no longer limited to recognizable recessionary conditions.

Which means today's increased dominance of time based service activity, includes disequilibrium effects which extend beyond the recession conditions Horwitz referred to in his podcast with David Beckworth. Recent recessions are increasingly a result of monetary tightening on the part of central bankers. This almost imperceptible tightening, may also represent an attempt to manage a gap which continues to grow, between the monetary value of finite time, versus that of "infinite" resource capacity. Presently, monetary tightening continues at an almost imperceptible level, even though economies may appear as normal or in recovery.

Inflation targeting in particular, is a blunt tool for central bankers to respond to the Baumol effect, which adjusts the value of time based services to to tradable sector income, in prosperous areas. The Baumol effect helps to explain the difficulties of adopting a productivity norm (as explained by George Selgin), which could take the good deflation of tradable sector activity, into account. The inability to do so, helps to explain the constituencies which oppose today's fiat monetary systems.

Yet interestingly enough, consider why the Baumol effect is actually a natural outcome, of the fact that money has functioned as half of every economic exchange! Since money has to coordinate for both "infinite" resource capacity and "finite" or limited time, policy makers are increasingly faced with a need to adjust nominal income as if time aggregates could somehow remain in a constant relationship with other resource aggregates. Yet this is not possible in general equilibrium settings. Fortunately, however, it is possible to account for time constraints in relation to other resource capacity, in alternative equilibrium scenarios.

Decades earlier, the monetary expectations of non tradable sectors, weren't so problematic. After all, tradable sector dominance included a domestic (national) monetary framework which was easier to understand. For centuries, time based product demands could readily be coordinated via the expanding revenues of tradable sector output. Whereas now, the production norm which would have worked well for a tradable sector dominant economy, is difficult to implement at general equilibrium levels, given the revenue requirements of non tradable sector dominant economies.

Meanwhile, aggregate output as measured by all resource capacity, continues to pull away from the finite limits of time aggregates - not to mention their representative asset formation, as banks become anxious to unwind balance sheets. When money has no choice but to "stand in" for more direct forms of coordination for time based product, the random and growing nature of total resource capacity, introduces elements of political and social uncertainty, for the continuation of knowledge use throughout the marketplace.

Even though spontaneous coordination of time based product (at national levels) remains desirable, limits to growth in this form of knowledge use dispersal, are becoming evident. It's important to maintain fiat money for spontaneous national coordination of time and knowledge value, but with a caveat: make room for local coordination of time based product, in which a unit of time functions as half of every time based exchange.To make this possible, a new institution would allow money to further back these transactions, as newly generated commodity wealth. Time value would finally receive the formal recognition that it deserves, as a basic economic activity.

Indeed, time arbitrage could gradually contribute to a productivity norm for time based services at equilibrium margin. Margin equilibrium adjustments would gradually decrease total factor productivity imbalances. This would allow the gap to grow - undisturbed by monetary tightening - between the valuations of total resource capacity, versus aggregate time value.

By allowing money to reinforce time value in relation to itself as a commodity good, no policy maker need be compelled to shorten (or tighten) the gap between time aggregates and other resource aggregates, in order to fight the Baumol effect. Doing so, is only unnecessary constraints on long term growth. Instead of attempting to manage the distance between finite time value and "infinite" resource value, it would be more conducive to allow money to assume an additional function, as commodity wealth for economic time value.

Notes on Human Capital in Relation to Productivity

Why have we been slow to recognize the relation of excessive inputs for human capital, for the total output of time based product? Possibly one reason, are expectations for rising income over time, as automatic with aggregate output gains, regardless of sector. To this end, purveyors of time based product have additional rationale to increase aggregate inputs (human capital investment requirements) in relation to total output, as a quality factor.

Rising wages as automatically correlated with rising productivity, are a major point of contention, where productivity mysteries are concerned. Since productivity benefited from centuries of expanding tradable sector output, it's an understandable societal expectation. But ever more demands on human capital input in relation to output (for time based product), greatly affects total factor productivity. There's also the Baumol effect, which lends further weight to the expectations of human capital input, prior to output.

Also interesting, are the cultural factors involved. The difficult impasse of today's healthcare as a contributor to poor productivity, is due in part to society's acceptance of low final product output, in relation to the human capital input that has been required. Many years of formal education take place, before students can pass the torch of knowledge to others, either through understanding or knowledge application. Even though such requirements detract from total factor productivity, these organizational patterns are backed by such strong cultural expectations, that it is difficult to contextualize them as lost output or marketplace capacity.

Indeed, one normally associates cultural factors with positive economic gains, even though cultural expectations for human capital investment, stand in the way of long term growth and productivity! Fortunately, for a long time, tradable sector productivity was dominant to such an extent, it provided sufficient revenue that extensive cultural requirements for human capital weren't so problematic. In "Good Capitalism, Bad Capitalism and the Economics of Growth and Prosperity", the authors (including William Baumol) agree with the importance of culture for economic dynamism, while wondering if Hernando de Soto's emphasis on turning informal economic activity into formal activity, might have been oversold to some degree.

Yet as it turns out, Hernando de Soto has been proven right in downplaying culture's role as a positive contributor to economic dynamism. All the more so, since many individuals held reservations regarding his efforts to formalize capital. In all of this: Only remember that when human capital is held in check by excessive input in relation to total output for time based product, this gets reflected in the physical capital that receives a "green light" for aggregate representation. Not everyone wants the additional wealth valuation for general equilibrium settings, which is also expressed via monetary means.

Human capital investment in the form of education "inputs" (also noted in "Good Capitalism, Bad Capitalism") ultimately occurs in a total factor productivity context. At least one recent study has highlighted the problematic nature of total factor productivity since the Great Recession, alongside what I believe to be a consequent diminished labour force participation. Again, note the confusion of human capital as it relates to total factor productivity, in tradable/non tradable sector context, where Liberty Street Economics explains,

A major economic concern is the ongoing sluggishness in the growth of output per worker hours, generally called labor productivity. In an arithmetic sense, the growth of the economy can be accounted for by the increase in hours worked plus that of labor productivity.

However, standard productivity gains have accrued on behalf of employees, due to a centuries long process of output gains via tradable sector dominance. What has yet to be actively considered, is that non tradable sector time based product works differently, which is particularly important given its recent market dominance. Marketplace expansion takes place when time participation is allowed to expand through both inputs and outputs. Yet when wages automatically rise for time based product alongside tradable sector wages, equilibrium coordination for time based services gradually becomes reduced to higher income categories. Which then limits the total marketplace for time based product. The result? Limits to both labour force participation and total factor productivity (marketplace size), as mentioned (above) in "The Disappointing Recovery of Output after 2009".

Understandably, economists continue to view rising income - regardless of sector - as crucial to progress. However, this view of continuous progress was established long before anyone imagined a services dominant economy, in which total inputs (while externalized in the form of educational investment) might come to dominate actual output. Again, what matters in terms of time based product, is what the consumer can buy. If output could be incrementally gained alongside input, individuals with limited incomes would no longer remain locked out of vital, time based service markets.

Tradable sectors multiply output gains via resource capacity. Whereas the time based product of non tradable sectors, contributes to marketplace output and knowledge diffusion via replication and additive means. Or, one could express this as passing on the torch of knowledge for economic progress, two people and one shared interaction at a time. Continuous output, while it can certainly appear as though small and incremental, nonetheless adds up a lot more quickly than decades of human capital preparation, so often required before many have a chance to participate on economic terms for the first time.

In alternative equilibrium settings, the human capital investment that is part of time based product, would quickly become eligible as continuous output for final product. Individuals would have the chance to pass on the torch of knowledge, even as they are experiencing its benefits for the first time. The result? Not unlike the output gains in relation to input, which are a result of far more complicated versions, of technological progress.