Is the Fed Committed to a Stable Growth Trajectory?

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

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

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

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

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

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

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

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

A Level Target is Representative, Not Interventionist

John Tamny of Forbes, insists that the intentions of market monetarists are interventionist. He writes:

While they surely mean well, "Market Monetarists" like David Beckworth and Ramesh Ponnuru ascribe to the Federal Reserve an ability to centrally plan money supply which is no different from the Soviet era conceit that governments could plan production. And that's exactly what the economist and pundit are calling for, a planning of production. Their commentary is very explicit that specific rates of money growth from the Fed will lead to specific GDP outcomes.

He continues:

Where there's production, there's always money to facilitate the exchange of what's produced.  

If only the latter assertion were actually true. Just one of the unfortunate results of a slow but steady monetary tightening, is the decline in brick and mortar retail. Despite the recent prevalence of online shopping, this retail "substitute" only represents a portion of brick and mortar losses.

And so far as "planning" goes, no market monetarist predicts - nor would they want to - that a level target would lead to "specific" GDP outcomes. A level target rule would be put into place, to encourage free markets to the greatest extent possible. If anything, a level target could be thought of as the most obvious means by which to protect production which already exists.

Tamny's interventionist argument, while leveled at market monetarists, is also reflective of further interventionist arguments against the Fed itself. Nevertheless, the role of the Fed is complex, in that the use of fiat monetary representation is essentially quite new. Presently, a level target could help to smooth the process by which which the dynamics of tradable and non tradable sector activity interact with each another. Services generation has meant substantial changes to the real economy, as both fiscal and credit based relationships have become more complex.

Nevertheless, those who attack the Fed more directly, also have issues with the fact that both governmental and financial intentions for Fed policy are by no means benign. Money is vital as an institutional path, and its marketplace role needs to be more broadly understood, so as not to be continually hijacked by competing interests.

To the degree a central bank may be thought of as interventionist, also depends on how policy makers approach monetary representation. Why, for instance, do some policy makers downplay the role of money, in an institution purportedly created to provide monetary representation for a nation's citizens?

There are three competing factions within the same institution that are attributed to interventionist intentions: monetary representation, government (fiscal) activity, and financial activity. Yet the market monetarist goal, which is a further adaptation of earlier monetarist roles, is to promote economic stability. This monetary "well being" for the greatest number possible, by forming an accurate representation of all economic components, is different from the fiscal and financial activities which are always partial income claims on a given set of equilibrium conditions. Interest rates in particular, tell stories about those claims. The Fed may be complicit in such claims to the degree that it chooses to give priority to governments and/'or financial interests, for whatever reason. Of course when central bankers do so, the result can be lost monetary equivalence for society as a whole.

Fortunately, many have moved past the simplistic rhetoric of individuals such as John Tamny, but the arguments he employs can still be misleading. In short, it helps to consider context. Some groups may consider a level nominal target to be "interventionist", should it appear to prevent further spending for the preferred programs of one's constituency. Likewise, a level target might frustrate the preferences of financial interests in terms of central bank actions. When it comes to charges of interventionism, context matters.

"Compensating" for Missing Participation, Isn't Easy

Since there's too little direct participation in the marketplace, can today's institutions somehow "compensate"? In other words, can (existing) economic time value, maintain a stable relationship with total resource capacity?

Prices reflect existing scarcities. Still, important scarcities which affect underlying structural dynamics, aren't always taken into consideration. In particular, what sometimes appears as though "too high" asset prices, could instead be indicative, of scarce productive agglomeration. Why is the Fed getting this wrong? Scott Sumner echoed Tim Duy's concerns re excessive monetary tightening, and muses:

It seems to me, that the Fed is wrong about both inflation and asset bubbles...In recent decades, the Fed has pretty consistently overestimated the natural rate of interest. If the natural rate is lower than the Fed assumes, then both of these claims are true:
1.  Equilibrium asset prices are higher than the Fed believes.
2.  The Fed's current policy stance is tighter than the Fed assumes, and hence unlikely to deliver on target inflation going forward.

Equilibrium asset prices, ultimately reflect how society values productive agglomeration, in relation to other resource potential. Housing - as a primary income destination - is one of the most important costs of economic access. Yet if broader economic complexity could be generated, what presently appears as "excessive" high housing costs, would eventually spread across new destination points for productive agglomeration. This would also serve as a relief valve, on the price pressure of today's most highly valued areas.

With too many individuals stuck on the economic sidelines, some institutions are attempting to "compensate" in ways that are confusing or even counterproductive. The Fed's insistence on normalization is disconcerting, as policy makers attempt to curb forms of inflation which have nothing to do with monetary representation - particularly as it is currently practiced. The relative scarcity of productive agglomeration, has yet to be recognized for its monetary implications. Meanwhile, some observers still believe too much money is being printed, which in term generates excessive housing costs.

In spite of an economy which needs substantial structural assistance, the Fed is beginning to unwind its balance sheet, even as IOR is left intact. George Selgin recently noted that if the Fed is serious about reducing its balance sheet, it would need to quit paying interest on reserves to banks. Yet the fact banks have grown dependent on this revenue source, suggests they are not ready to return to a real normal - one in which bank revenue revenue is derived from traditional sources.

Of course, the semblance of a normal life was lost for too many, with the onset of the Great Recession. Given the fact extensive nominal representation was lost, with nary a public explanation, this unfortunate circumstance might have served as a warning for tradable sectors. Could the Fed be counted on to maintain nominal stability, especially during negative shocks when economic stability was most needed? Lingering uncertainties such as this, likely contribute to the recent trend in maintaining increased cash holdings, which would allow quick adjustments in inventory when necessary. Even so, this is a simple form of institutional compensation for economic uncertainty, and one which is easier to understand, than IOR.

Thus far, governments have mostly "compensated" for falling labour force participation, by adding more burdens to their budgets. But what happens if they lose this option? Narayana Kocherlakota, in "Someday Congress Won't Raise the Debt Ceiling", notes that voters in both parties already oppose increasing limits on federal borrowing. He sums up:

My own prediction is that Congress will yield to the administration's demands and raise the debt ceiling sometime this summer. But the aging of our population means that the federal debt is only going to grow, and it would be surprising to me if voter concerns about the debt, didn't keep pace. If economists don't like the debt ceiling, they'd better come up with some other mechanism that allows voters to impose a credible cap on the size of the national debt. Otherwise, I expect that, sometime in the next decade, Congress is likely to yield to constituent pressures and not raise the debt ceiling, despite the attendant economic turmoil that is sure to ensue.

Admittedly, it's difficult for me to imagine an alternate policy scenario that would suffice, given everyone's desire that governments run smoothly in the short run, yet also manage to maintain accountability in the long run. And budgets especially become difficult to manage, when too few citizens are meaningfully engaged in their economies. A gradually falling participation rate will need to be approached directly, if the above mentioned compensation measures are to ultimately be reduced. Even though it is difficult to address the need for full economic participation, ultimately it's simpler to do so, than dealing with the burdens of institutional compensation measures which fail to work properly.

Level Target Hopes vs Open Ended Claims

Perhaps encouraged by positive signs of late, Scott Sumner makes a prediction:

I am going to go out on a limb and predict that we are now entering a new Great Moderation, even more stable than the 1985-2007 period. Let's start with what we know.

We are only a few months away from being eight years into the expansion. This 8-year period will likely be the second most stable in all of American history, outdone only by the ten years of stability from 1991 to early 2001...the recent stability of NGDP growth is about the same as during the 1990's albeit averaging somewhat below 5%, rather than somewhat above 5%. 

He goes on to give seven reasons why he believes this could be the case, some of which are reasonably persuasive. Nevertheless, monetary stability is normally linked to political stability. If central bankers are within range of this goal, why so much political instability in the present? Plus: as market monetarist James Alexander wanted to know, has Scott given up on level targeting?

Granted, returning to the 2008 trend line is no longer a practical matter. Even so, I've plenty of sympathy for market monetarists who question whether nothing can be done re the present lackluster NGDP growth level. Even now, nominal income loss is an important factor in economic difficulties which continue unabated.

Which brings me to the post title: are hopes for a level target being dashed by open ended claims on nominal income? For one, open ended claims are indicative of firms which lack sufficient competition in the marketplace. According to Cyril Morong in a recent post "What Industries Have the Highest Profit Rates?""

For example, we expect firms in perfect competition to earn an average profit rate or rate of return because, if they are above average, more firms enter driving prices and the profit rate back down. When there is not enough competition, firms can stay above average.

Morong then highlights a Forbes article re the most lucrative industries of 2016, which explains in part why these firms don't face normal profit margin constraints. What are the most lucrative? From the article: "The answer depends on how it's measured, but based on pre-tax net profit margin, the top money-makers include specialty service providers in accounting, law, health care and real estate."

Only remember the open ended claims on nominal income these activities consequently pose, and the level of relative inflation they generate in relation to the good deflation and productivity of many traditional firms in more normal competitive settings. Do the open ended claims of these competition constrained firms, keep the Fed (through crowding out) from printing sufficient nominal income for all concerned?

Indeed, this situation also poses problems for fiscal revenue availability, as governments are more inclined to seek revenue from firms they are not as closely associated with; firms which also tend to have more tangible forms of output and lower profit margins. For instance: retail has seen more than its share of problems in recent years. This sector would take a hard hit from border tariffs, regardless of how they may be defined.

Consider how the technological gains which augment professional service income, tend to maintain an already existing output level instead of contributing to growth. In aggregate, these dominant service sectors with their low productivity and secondary market position, mean fewer total output gains, but at the same time, reduced aggregate input particularly in the form of nominal income. In all of this, less revenue remains available for the hopes and dreams of further government economic activity, regardless of political party. Does anyone really wonder why immigrants who don't even come close to the definition of "bad hombres", are being chased out of the country?

As a market monetarist, I am grateful for the victories that have been achieved, in terms of the Fed becoming more careful about maintaining nominal stability. Still, I would be most hesitant to claim victory too soon, especially since some of the more important challenges have scarcely begun, in terms of true economic stability. We continue to live in a world which is losing labor force participation - an unfortunate circumstance that doubtless affects both nominal income potential and full economic engagement.

The Non Political Nature of a Growth Level Target

Even among those who agree with market monetarists regarding monetary policy, some prefer growth level targets, while others would be equally comfortable with growth targets. However, a growth target isn't necessarily anchored to economic activity in aggregate, as an unbroken continuum over time. How might one think about the difference between these two options, as a potential monetary rule?

For one, a growth level target would be less subject to either discretion or political favoritism. Even though populists and others might declare a "need" for greater growth, a growth level target rule would nonetheless instruct central bankers to continue following the lead of the marketplace. After all, economic stability is a result of monetary representation which aligns as closely as possible, with existing conditions across the real economy. Despite the supply shocks which may affect GDP and output, a nominal target level can smooth the disruption among sectors which aren't directly connected to the supply shock.

While a growth target could closely approximate changing supply side circumstance, chances are this form of discretion - as a policy rule - would instead be used for the wrong reasons. For instance: today's sluggish market conditions were also a result of a high level of central banker discretion, prior to the Great Recession. Even though monetary policy returned to a familiar growth trajectory, there's no escaping the fact that (overall) trajectory exists at a lower level. Yet in spite of this important fact, too much confusion surrounds the fallout which also occurred, due to excess central banker discretion.

There's no denying the importance, of maintaining via monetary policy, a reasonably constant level of economic activity over time - wherever possible. And prior to the Great Recession, any further discretion on the part of central bankers which could have amended a heavy loss of monetary support, needed to occur quickly. Instead, they only utilized a heavy level of discretion once and in basically one direction: downward. Consequently, even though the Great Recession began as a loss of monetary representation, that loss spread to the real economy as well.

Since the loss of that earlier level of output has not been carefully discussed with the public, it's difficult to know for certain, whether central bankers are willing to adhere to a stable monetary level in the near future. Will they keep the monetary policy focus on the supply side (instead of credit) conditions that are responsible for long term growth?

Indeed: should a growth target be adopted, such a rule could still lead to discretionary problems - especially if growth levels are adjusted for the wrong reasons. Whether implied or explicit, monetary policy decisions may either be subjected to wishful thinking, or possibly negative assumptions which do not accurately designate existing marketplace conditions, among other things. Hence some might be tempted to use the rationale of a growth target, to arbitrarily shift down the money supply, once again.

Granted, a growth target is more logical than today's interest rate targeting. Just the same, such a rule would still face pressure from existing political and/or credit driven circumstance, both of which may interfere with real economy conditions and obligations. Whereas a growth level target would return monetary policy to a more practical position that is less reactive to political disturbances.

Most important, a level nominal target rule would highlight where the real responsibility lies, for a better economic reality: the supply side. Real growth is still possible when special interests do not stand in the way. Yet it's been too easy for many of their representatives to hide behind the discretionary mistakes of central bankers, instead of facing their own shortcomings. With a level target rule, monetary policy would be able to proactively respond to supply side conditions that generate new growth, instead of making constant adjustments on behalf of the special interests which seek to limit growth.

Notes on Time Aggregate Imbalance and the Medium of Account

A recent post ("India's Money Shortage") from Scott Sumner, provides useful framing for circumstance reflecting the monetary roles of medium of exchange and medium of account. India continues to suffer from a negative supply shock, via the medium of exchange role. Theirs is a highly unfortunate reality, in which the poor now pay a (temporary?) heavy price of lost access, since larger bills were removed from the marketplace with little to actually replace them. Yet this occurrence is different from today's ongoing medium of account money "shortages", which disproportionately affect lower income levels in ways that are more hidden. From Econlog:

Both old monetarists and market monetarists like to describe recessions in terms of a "shortage of money", caused by either a drop in the money supply or an increase in money demand. In this view, the focus is on money as a medium of exchange.

I've always been uncomfortable with that framing, as I don't think the term "shortage" accurately describes the problem. Rent controls and price controls on gasoline lead to huge queuing problems. In contrast, there are usually no lines at ATMs, even at the worst points of a recession...In my view, it's more useful to think of the problem as an increase in the value of money. My focus is on money as a medium of account. 

I don't want to overstate these differences as we both believe the problem is caused by either a decrease in money supply or an increase in money demand, and we both believe that the effects are higher unemployment and monopolistically competitive firms having more difficulty finding customers at their current (sticky) prices.

I find these arguments compelling, and would suggest that the role of money as medium of account is not sufficiently acknowledged. In the twentieth century, the monetary flows of general equilibrium were subjected to the increased valuation of highly specific skills sets. The Baumol effect particularly highlights this equilibrium shifting pattern, since it also generates wide variance in otherwise basic sets of service and asset consumption costs. Indeed, tradable sector activity more quickly adjusts to any lack of monetary representation, in part since the skills sets associated with tradable product tend to be more temporary in nature, than skills sets associated with the knowledge endeavour of non tradable activity.

Monetary problems for the U.S. in particular, reflect broadly expected medium of account valuations in non tradable sector formation. Yet despite the reality of sticky wages and prices, central bankers have gradually become less inclined to represent their full array of aggregate claims to marketplace inclusion. Even though these kinds of very real money shortages don't translate into long lines at ATMs in the U.S., there's a hidden "wait" just the same: much of it, in a wide array of ("innovated") services product not intended for all comers, despite what the evening news might suggest. The high skill services "wait" for low or otherwise fixed incomes, simply occurs on different sets of terms. Some of the "return to gold standard" discussion, can be thought of as medium of account related, in terms of more fixed monetary limits, which would prove less inclined to accommodate high skill services participation in the marketplace.

How to think about the medium of account role for money, in relation to other roles? Consider how money as a unit of account, contributes to overall medium of account marketplace representation, in terms of aggregate resource capacity. For instance: in "An Empire of Wealth" on page 43 (I'm less than 100 pages into this interesting book), John Steele Gordon provides some basic explanations of monetary functions:

As a unit of account, the value of all other commodities is expressed in terms of money. And money acts as a store of value, a place to hold wealth temporarily between productive investments.

Money as medium of account, could be thought of as a natural extension in terms of aggregates, for the unit of account function. But what if the restrictions of a given general equilibrium, make it difficult for "single price" extensions to fully represent production and consumption of goods and services?

Time value could also be expressed as a valid medium of account (with other traditional monetary roles), so as to create more economic complexity and a more complete marketplace. However, money would still provide its normal functions alongside time as a medium of account. Only local asset formation and services formation would exist separately from the broader general equilibrium. Even though knowledge use systems would utilize an alternate equilibrium (for time as medium of account) they would still share the broader economic equilibrium with surrounding economies - especially in terms of tradable sector activity. Eventually, time value as a recognized alternative medium of account, could help to address the high skills marketplace expectations which central bankers have become increasingly disinclined, to fully represent.

Capping Inflation Means Never Having to Say You're Sorry

Never admitting one's faults, also means not having to make amends for one's past mistakes. In particular, without a level target rule, central bankers don't need to explain to anyone why they may choose (via discretion) to withdraw aggregate spending capacity for any reason. Yet due to the way the Fed frames its communications processes, the public hardly understands what is at stake in their deliberations - nor is it easy to decipher what has actually been lost, since the Great Recession. On Milton Friedman's 90th birthday, Ben Bernanke made a surprising admission:

Regarding the Great Depression, you're right, we did it. We're very sorry. But thanks to you, we won't do it again.

Scott Sumner must have remembered this astonishing moment of honesty on Bernanke's part, in a recent monetary conference, when he mused: why, if apologies were in order for that earlier calamity, is admitting fault for the Great Recession still off the table? Granted, Bernanke and company did what they believed was necessary to rescue the financial system, and even congratulated themselves in the process. Ah well, when it comes to expecting inflation targeting to guide monetary policy, perhaps an arbitrary cap is simply Fed "toughlove" which means never having to say you're sorry.

Or perhaps the moral hazards of inflation targeting have yet to be publicly emphasized, because so much of economic debate remains "above the fray" in this regard. Yet without this perspective, it can be a bit of a struggle to explain the importance of a level nominal target to others, so as to reinforce one's points at an emotional level. Greg Ip's incisive questions for the last panel (well after an extended lunch!) at the "Monetary Rules for a Post-Crisis World" conference, was a case in point. Hence I agree with Bonnie Carr, that emphasizing the moral hazards of inflation targeting, may be a good tactic, especially now. In a recent post, she asks:

Why is it imperative, above all else to keep inflation low and stable rather than being allowed to reasonably drift with supply side conditions?...If headline inflation is nearly always a supply side phenomenon, what effect does it have to effectively cap pricing pressures as a matter of policy?...Don't those pressures have to go somewhere?

Indeed they do. Given that services (of non tradable sectors) are a larger component of developed economies than tradable sectors, inflation targeting has reached a point where it could be distorting the production potential of marketplace structure.

After all, remember what resides below a hard inflation cap. The relative inflation of non tradable sectors leaves less room for tradable sector formation. Think of this as expensive necessities versus "cheap" everything else. Yet the consequent lack of growth in tradable sectors, means less redistributed revenue remains available for service sector formation. As secondary markets, service sectors must rely on the very tradable sector wealth which their relative inflation continues to suppress. This state of affairs likely contributes to what has now become the slowest services growth in six years.

David Beckworth also pointed out in the above mentioned Mercatus conference that with a level target rule, the Fed would be formally committed to take care of past mistakes. Even though the Fed has become fairly consistent in representing aggregate spending capacity since the Great Recession, no one can really discern how those earlier monetary and production losses impacted output and growth potential. And because of inflation targeting framing, many still do not recognize how or why, so many of these losses took place.

According to Scott Sumner:

It is NGDP growth shocks that destabilize labor markets and financial markets, not inflation shocks...

He also responded to a recent claim from Michael Hatcher, that NGDP targeting is "confusing":

The public would actually find it much easier to understand NGDP targeting whereas the public is completely mystified by inflation targeting...When the public thinks about "inflation" they tend to implicitly hold their nominal income constant. Thus they wrongly think that inflation lowers their living standard...But of course the Fed has no impact on supply side inflation, it can only influence demand-side inflation.

What I find especially significant about Scott's remarks, is what the public mistakenly believes as to income already being held constant. Without the appropriate framing of nominal income or aggregate spending capacity for this discussion, it is only more difficult to deal with the fact that policy makers remain uncertain as to human contribution to economic activity in the near future. Because of the language of inflation targeting, people have few means by which to engage in the most important economic debate of our time: keeping citizens front and center, in both monetary representation and economic reality.

Thankfully, Trade Doesn't Have To Be A Zero Sum Game

That said, societies could be making efforts to make certain trade remains open to all, so that economies don't become a zero sum game. Too much rigidity in non tradable sector formation, now contributes to a general impression that it's all zero sum! It certainly doesn't help, that central bankers have been reluctant to provide accurate monetary representation, for those who hold economic commitments to one another. Hence it's not difficult to understand why some are becoming convinced trade is a zero sum game, in spite of arguments to the contrary - such as my own.

Perhaps the fact I recently wrote a post defending neoliberalism, accounts for a scolding I received from a commenter in that post - one seldom knows for certain. When I looked up John L. Davidson, I found a Miles Kimball post from 2013 which highlighted an article from this attorney. Never mind any discrepancies he may hold in terms of economic viewpoints, as contrast with market monetarists such as myself. That's not what's important in this context. What I am concerned with, is clearing up some misconceptions he apparently held of me - indeed one could say misconceptions as to my entire purpose for blogging. From Davidson's comment:

You seem to think deflation has a place in economics. Not when 85% of your economy are services for which deflation is not a choice or option. Medicine, law, and haircuts have too large a labor component to get cheaper w/o reducing the incomes of those providing the services.

First, if I have come across in my blogging as a deflationist, then I have done a poor job of communicating to my readers. So first, for the record, I am most certainly not in favor of deflation, especially given today's structural circumstance and the need to further include many who still lack economic access. All the more true, when the good deflationary potential of tradable sectors remains swamped by the bad deflationary potential of non tradable sectors (and tradable sectors by extension). Even bloggers such as George Selgin who have highlighted good deflation over the years, would acknowledge this unfortunate fact. Regardless, central bankers need to maintain present day income levels in aggregate - both to make it possible for individuals to maintain their financial obligations to one another, and to protect central components of asset value in general equilibrium conditions.

Also, it may have my neoliberal arguments in the above linked post, which led Davidson to assume I don't believe in progressive taxation. In terms of the fiat monetary structure of governments and nations, taxation has been and will always will be important, for the kinds of activity which are difficult to carry out otherwise. That said, taxation needs to be implemented far more effectively than is now the case. Taxation has been abused in entirely too many instances, to support forms of activity which otherwise could be more directly and broadly generated. However, devolving economic activity to state or local control with no intent to build a broader marketplace for time value, would be an unmitigated disaster. Still, much of today's taxation is not effective for its intended purpose. Among other problems in this regard, much of the economy is structured on terms which don't allow growth to overcome debt based fiscal requirements, at aggregate levels of output.

How to think about this problem? Anything that is fiscally backed, has to be paid for again, with already existing revenue. Further, fiscal multipliers often don't apply, for what is little more than ongoing fiscal obligations. Once developed economies evolved towards fiscally supported services as relatively more important than monetarily driven tradable sectors, governments initially had means to make up revenue shortfalls. In particular, government held direct involvement in the wealth creation of asset formation, through the international monetary flows of fiat monetary formation. So long as worldwide economic growth remained strong, this connection served as a substantial government multiplier, which tended to "cancel" the debt issues of ongoing economic obligation such as subsidies and (certain aspects of) entitlements.

Indeed, worldwide growth made government asset management a fallback position, for more than half a century. However, with the recent pause in worldwide tradable sector activity, more than asset management is needed for long term budget considerations. A broader marketplace is now necessary, for continued worldwide growth. Plus, the adoption of more direct forms of wealth creation would offset growing burdens in fiscal obligations and requirements.

One approach to this long term growth dilemma is a marketplace for time value. A marketplace for time value would provide means to stabilize general equilibrium, by restoring internal trade at local levels. By opening trade options to the potential of time value, nations would not need to worry, what their unique mix of tradable and non tradable sector activity actually consists of.

Fiscal policy, like monetary policy, is not "out of ammo". However, fiscal obligations have not been closely considered, as to where they could provide the most support to populations as a whole. As a result, present day fiscal restraints represent problems for aggregate growth potential. And without full employment, adherence to an inflation target (instead of NGDPLT) could lead to gradual deflationary effects. Fiscal policy cannot provide an indefinite stand in for aggregate time value. Today's time value in aggregate has to "wait in line", for time which is deemed to have value. The effect is low economic velocity, both in terms of time coordination and monetary flows. This pattern impedes both monetary and fiscal efforts for stimulation.

Plus, today's high fiscal levels of economic activity are largely responsible for the "full" equilibrium conditions which now limit economic access to a minimum. The structural change that is particularly needed for lower income levels, is economic activity which need not be backed by debt - either at the level of individuals or nations. Why? Today's debt requirements are immediate barriers to both economic access and growth, at microeconomic and macroeconomic levels. By integrating time value into the fabric of non tradable sector activity, alternative equilibrium conditions can be built which don't rely on government or private sector debt, to take place.

Doing so, would also make it obvious that trade need not be a zero sum game. Indeed, the fact that service sectors are a major economic component, makes it mind boggling to expect so much non tradable sector activity to occur on fiscal terms. Likewise, for tradable sector wealth to be supposedly somehow responsible for backing the vast majority of knowledge and time based product! And yet this is the reasoning that policy makers have inexplicably made, instead of looking closer to home to reformulate 21st century time and services based product.

Granted, the asymmetric compensation that progressive taxation and government redistribution provides, is still vital for the forms of knowledge use that have important applications beyond local spheres of economic activity. Eventually, with closer attention given to non tradable and tradable sector flows, one can hope that government budgets ultimately do a better job of moving budgetary obligations towards the forms of knowledge use that matter most in this capacity.

Sometimes I am called to task for what I appear to say, instead of what I've tried to express. Those are the times when I wish my early education included a better grasp of mathematical concepts. If only my mind worked so that I knew how to provide visual representation of the economic concerns which worry me most! Suffice to say that much of what appears as austerity, really is not. Instead, it is indiscriminate political handouts with little rationale for the economic ends they serve. If budgets are not carefully addressed in the years ahead, much of the very good could be lost with the needlessly included. Governments have maintained such a large stake in economic outcomes, that fiscal policy as handouts for all comers is finally getting in the way of growth.

In order for future governments to thrive, they need to discover what government budgets best serve, and then leave ample room to respond in changing economic times. Government provided asymmetric compensation should tend to knowledge based functions which are truly state and nation centered by nature. Instead, governments have compensated local knowledge sets in ways that resulted in the extreme loss of aggregate time value. As a result, too many individuals found their level of skill capacity deemed insufficient, to contribute to the greater whole.

Economic activity that is backed by mutual time value, would give fiscal policy a chance to stabilize general equilibrium conditions and the role of fiat monetary formation. General equilibrium conditions cannot always provide full integration, during periods of low worldwide growth. This is the time when knowledge use systems are most needed, to make certain that entire generations are not lost, and valuable knowledge preserved, as well. Trade does not have to be a zero sum game. Don't let that happen.

Tyler Cowen's Challenge: Get "Real"

How so? The way I read it, "real" in the sense of market monetarist persuasion, which could go even further than the rationale presented by market monetarists thus far. For instance, what real economy conditions have contributed to slower growth and tighter monetary conditions? How has monetary policy contributed to problems for the real economy? There are ways to bring more elements into the discussion, without using structural considerations as diversionary tactics - as has often been the case.

Yesterday, Tyler Cowen explained why he didn't feel that present market monetarist arguments were (quite) adequate. He also questioned recent posts from Lars Christensen re tight Fed monetary policy, which makes me wonder if Cowen has thought through the ramifications of a rising dollar on the global economy. For instance, in a recent post from David Beckworth re China, one commenter noted that tight money in both the U.S. and China has prevented the drop in oil prices from having the effects of a positive shock. Beckworth wondered whether these negative global wealth effects on oil, are currently being researched. One can only hope so, because this information is sorely needed right now.

The reason I find Cowen's challenge useful, is while I've been sold on market monetarist arguments for quite some time, I'm not sure they are enough to convince a public which appears to be in greater need of explanatory stories. Whether or not central bankers are following aggregate spending capacity (in different time frames), has real economy effects which I believe the average person could understand - given the chance. In the meantime, those "simpler" - but devastatingly inaccurate financial stories - are still "winnning the day" for both voters and policy makers.

Unfortunately, without pressure from the public (i.e. not just economists), central bankers may not be willing to adopt the logic of NGDPLT. A regime change for monetary policy becomes a greater likelihood, when economists and citizens seek to make it happen. Here are some of the responses to Cowen's arguments, from Nick Rowe, Marcus Nunes and Scott Sumner. And, from Cowen's post:

I would encourage market monetarists to define - now - how tight or loose monetary policy really is. Then stick with that assessment, based on whatever variables you consulted. 

If only it were possible to pin down a given set of variables and specific indications of lost output once and for all, to gauge a seemingly appropriate Fed response! There's a problem with this particular request, which also explains the rationale for following a level target rule. Economic conditions and circumstance are always changing. A level target would not leave real economic conditions in a "static" mode, but rather see to it that Fed responses (to changing conditions) are not a series of overreaction to supply shocks.

What would change with NGDPLT, is the present day lack of support for aggregate spending capacity. What has been missed by too many policy makers, is that a somewhat smaller level of damage has been ongoing, since the initial level of high destruction at the onset of the Great Recession. Meanwhile, marketplace capacity is still being lost in ways which aren't readily apparent in the employment statistics.

The need for full inclusion on economic terms is also a fairly recent historical development. This need for full labor force participation instead of redistribution, could explain why some remain unconvinced that faithful representation of nominal income really matters. However, there is an odd wrinkle in the efforts of banks to protect their own interests. When income representation is insufficient, this lack of marketplace support eventually boomerangs back to the banks, even though central bankers are bending over backwards to protect asset formation.

By far the most pressing issue regarding tight monetary policy, are the global effects which are being set into motion. Had policy makers been willing to encourage innovation (i.e. a broader marketplace) in non tradable sectors, tradable sectors would not be paying the price now, in terms of lost growth. The challenge for everyone concerned - not just market monetarists - is making certain that tight monetary conditions do not devalue worldwide wealth anymore than has already occurred. The nominal income of many a nation, depends on monetary stabilization at the international level.

When General Equilibrium is Not Enough: Recession Debates

The recent supposed "normal" is not an inflation story, even though central bankers still use these threadbare descriptions that resulted from a different era of growth. Today's economic conditions also highlight a hefty dose of social and economic exclusion, which in particular don't do justice to inflation or Phillips Curve conclusions on the part of the Fed. Regular readers already know I don't find these aspects of general equilibrium framing to be sufficient, for the circumstance of the present.

When supply side factors hinder inclusion in general equilibrium, real economy factors emerge which - given the chance - can also initiate recessionary trends, such as occurred in 2008. As a result, circumstance in the real economy sometimes needs to be distinguished from the "recession as technicality" garden variety. The latter is the result of Fed overreach - particularly given excessive discretion, instead of a monetary framework which promotes monetary stability.

Even though the supply side factors of real economy conditions aren't responsible for recessions (statistically speaking), supply side factors do have the ability to strongly affect nominal growth direction - be that direction positive or negative. Plus, one does not always know whether better numbers reflect greater marketplace capacity, or simply more wealth capture. In spite of supply side shenanigans in this regard: what is at stake monetarily, is that the wrong Fed response (or overreach) exacerbates a given supply side "direction". For instance, David Beckworth indicated in a recent interview, how the latest U.S. recession was already underway before the Fed finally intervened, but the Fed made it much worse with an inadequate response.

How to think about the larger real economy conditions, which now impact growth potential in the near future? While I have serious issues with Robert Gordon's resignation about future growth, I must admit that the way Larry Summers sums up his viewpoint in this Prospect article, is one I have harbored for some time, due in part to my own family history.

Gordon's most compelling argument is that the greatest generation was also the luckiest generation.

Over the years, I've noticed that family members from my Dad's generation, usually didn't have the same problems with class polarization that now affect family members. In those historical moments when economic access is similar, there's also less need for anyone to judge. While some will still insist luck has nothing to do with it, my response is simply that general equilibrium conditions may no longer be sufficient for economic access. Those earlier conditions Gordon attributed to good fortune, existed in part because crucial elements of today's general equilibrium formation, were still being defined. As general equilibrium has become more exclusive, people will still play musical chairs, even in (statistically defined) non recessionary instances.

Nominal income factors extend well beyond the circumstance of the short run, which contribute to the nominal growth trajectory over time. What's confusing is even though central bankers influence long term growth through immediate action (especially needless destruction of supply side capacity), real economy elements determine the nature of the trajectory as well. Hence these reinforce each other in ways which move beyond simple calculations of recessionary periods. When market monetarists express the desire for a stronger growth trajectory, they are also promoting greater confidence in monetary policy and marketplace conditions. For instance, as Marcus Nunes indicates in a recent post:

I believe that even if there are no rate hikes in 2016, that will not be near enough to get the economy "unstuck"!...What's needed is a reversal of nominal growth expectations that translates into a reversal of actual nominal growth.

Where things get tricky in this regard, are the ways in which real economy conditions intersect with monetary policy conditions. Market monetarists stress the need to keep monetary policy dialogue as simple as possible, with a rule which would limit Fed overreach and overreaction. Ultimately, the long term growth trajectory does depend on supply side circumstance. Even so, that is no excuse which should allow anyone to get off scot free, by refusing to pick up the torch that is future growth potential. There are means to do so, which have yet to be explored. And those means include the fortunate possibility, of being able to overcome present day limitations in general equilibrium conditions.

Wrap Up for December '15

From Eduardo Porter, saying what needed to be said in "Imagining a world without growth"

Whatever the ethical merits of the case, the proposition of no growth has absolutely no chance to succeed. For all the many hundreds of years humanity survived without growth, modern civilization could not. The trade-offs that are the daily stuff of market-based economies simply could not work in a zero-sum world.

And he continues:

Economic development was indispensable to end slavery. It was a critical precondition for the empowerment of women...Zero growth gave us Genghis Khan and the Middle Ages, conquest and subjugation. It fostered an order in which the only way to get ahead was to plunder one's neighbor.

Why have so few remained optimistic, about the kinds of growth which matter most for the world? For instance, future growth in terms of knowledge use, could also take place without undue strain on the environment. Physical aspects of growth would be less problematic in developed nations, if more populations had the options of physical infrastructure and assets that are strong, mobile and lightweight.

Fossil fuels could be utilized more effectively, with transportation design which improves time use options for the activities people want to do, and for those which they generally have to do. By way of example, fewer fossil fuels and expensive transportation requirements would be needed in central areas for living and working, with more traditional transportation infrastructure at the peripheries for activities that don't have the same daily deadlines. These patterns would reflect the fact that many individuals wish they didn't have long commutes to work, whereas they enjoy long trips using traditional transportation, when they are not in a rush for daily work needs.

Development economics is taught quite differently in developing countries. http://blogs.worldbank.org/impactevaluations/how-development-economics-taught-developing-countries-what-we-learned-looking-more-200-courses

http://chrisblattman.com/2015/12/01/this-graph-says-the-welfare-state-is-to-blame-for-belgian-isis-recruitment/ Chris Blattman explains, "It does not seem to be poverty, but exclusion...Another possibility that I find quite plausible: the shame and injustice of exclusion, not poverty, is what leads so many to rebel." I would only add, exclusion is not just a reaction from neighbors or strangers, but can also come from one's own immediate and extended family.

Another example, how the not so efficient non tradable sectors continue to crowd out more efficient tradable sectors, especially in environments of tight monetary conditions. http://blogs.wsj.com/economics/2015/12/01/what-americans-spent-more-on-last-year-housing-health-care/?mod=WSJBlog

Peter Boettke highlights a lecture from Mary Morgan, who wrote "The World In The Model", in 2012: http://www.coordinationproblem.org/2015/12/imagined-worlds-and-economic-science.html

Chris Blattman notes an important issue for field experiments, regarding publishing difficulties in the years ahead. http://chrisblattman.com/2015/12/07/if-you-run-field-experiments-this-might-be-paper-that-will-make-it-harder-to-publish-your-work-in-a-few-years/ Many of these individuals will generate important work which needs to be preserved in the future, and I continue to hope that knowledge use systems would be one means for doing so.

Not everyone wants, needs or can otherwise procure a driver's license. It may be a while before environments in the U.S. reflect this reality. http://blogs.wsj.com/economics/2015/12/08/the-fastest-growing-group-of-licensed-drivers-americans-age-85-and-up/?mod=WSJBlog

Finland's basic income experiment http://www.vox.com/2015/12/8/9872554/finland-basic-income-experiment

"These are dangerous times for the study of the past." Paul Bartow (AEI) "The growing threat of historical presentism"

George Selgin with Russ Roberts on monetary policy and the Great Recession: http://www.econtalk.org/archives/2015/12/george_selgin_o.html

It is becoming more difficult for non profit hospitals to compete with for profit hospitals. http://www.valuewalk.com/2015/12/nonprofit-hospitals-hedge-funds/

Simpler ownership options are especially needed. This is a higher percentage than I expected, which would prefer ownership: http://blogs.wsj.com/economics/2015/12/16/nearly-95-of-young-renters-want-to-buy-but-many-say-they-cant-afford-it/?mod=WSJBlog

Given the importance of better services definition in the near future, women especially need more representation. http://timharford.com/2015/12/economics-still-a-job-for-the-boys/

Roger Farmer now supports Scott Sumner's NGDP futures markets proposal, although he is not "sold" on a level target: http://rogerfarmerblog.blogspot.com/2015/12/scott-sumner-and-musical-chairs.html

An important post from Scott Sumner: Lower interest rates are contractionary

Lars Christensen explains why so many oil exporters have chosen to float their currencies this year, and why doing so is the best option for all concerned: http://marketmonetarist.com/2015/12/23/oil-exporters-do-not-devalue-to-boost-exports-but-to-stabilize-public-finances/

Steve Randy Waldman makes a well reasoned argument, as to why it is not so easy to redistribute land value. Also, from his post:

We encourage people to take on highly leveraged, undiversified exposure in homes with promises that they are good "investments" meaning they will increase or at least retain their values over time...Much of the work we have to do if we wish to increase housing supply is to deemphasize the housing as investment narrative in favor of the housing as consumption good.

Stop the war on drugs. The opposite of addiction is human connection.
http://themindunleashed.org/2015/12/the-likely-cause-of-addiction-has-been-discovered-and-its-not-what-you-think.html

Nick Rowe considers an argument made by Vincent Geloso, regarding variations in output and NGDP: http://notesonliberty.com/2015/12/28/dont-target-ngdp-target-ngo/

Happy New Year, to all of my readers!

An Economic World, in an Indicator

The nominal indicator - which is NGDP or nominal gross domestic product - combines the relevance of income aggregates with total resource capacity, in the economy. Why should this matter? Despite changes in inflation or deflation in the course of a year, the nominal indicator is capable of maintaining accurate income capacity at a complete macroeconomic level. As a monetary policy indicator, NGDP is far more valuable than RGDP, because the latter can't account for wage or income transitions, relative to resource representation as a whole.

By refusing to acknowledge the importance of total spending capacity, policy makers have damaged income potential to a considerable degree. In the process, they have provided insufficient reasoning for what is now a lower growth trajectory, than existed prior to the Great Recession. As James Alexander notes in a recent post:

The question of trends is important. If we took the trend from 1996 to 2007, then the current Euro Area NGDP and RGDP growth rates looks awful. What should be unquestionable is the dangers of too low NGDP growth, the only unanimous conclusion of fifty years of macroeconomics. Low or negative NGDP growth causes unemployment and welfare loss - as we are seeing now occurring in Switzerland and have seen in many monetary areas since 2007.

Even as central bankers continue to short monetary policy, they remain sensitive to the favored status of banks in this set of affairs. Hence central bankers are still giving preference to tools for emergency lending whenever "necessary". George Selgin notes a propensity to use emergency lending, in spite of the fact central bankers are resisting full monetary representation for the public, and adds:

...central bank emergency lending can be justified only to the extent that it succeeds in keeping overall spending stable...a central bank that allows the overall volume of spending to collapse has blown it, no matter how much emergency lending it undertakes. Indeed, to the extent that a central bank engages in emergency lending while failing to preserve aggregate spending, it may be guilty of compounding the damage attributable to the collapse of spending itself with that attributable to a misallocation of scarce resources in favor of irresponsibly managed firms. Thanks to moral hazard, the extent of such misallocation, instead of being proportionate to the actual volume of emergency lending is augmented by the expectation that such lending will continue. 

Like Selgin, I am quite discouraged by the fact that policy makers cannot imagine better ways to approach central banking. In particular, asset formation has not changed in any productive capacity, something which has not been acknowledged since the Great Recession. Real reform is needed, in terms of broader ownership capacity. Simpler structures are needed for local asset holdings and building component formation, in order to maintain growth well into the future. Until better economic access is created, the tendency for moral hazard to affect monetary policy could likely remain.

Moral hazard has proven to be a factor, which makes it easier for central bankers to disregard true monetary representation. Perhaps the very accuracy of a nominal target, is what concerns policy makers. If so, why? These are issues which need to be openly discussed. Will citizens finally become more aware, what is at stake in present day central banking? One can only hope that 2016 will be a good year, for the airing these issues deserve.

Preserving Economic Freedom in an Uncertain World

A decade earlier, who could have imagined that our economic freedoms would begin to feel so imperiled?  If only the news were better. Scott Sumner noted that New Zealand will no longer be able to carry the market monetarist prediction market, and Lars Christensen wrote a good post recently. Here's Lars:

I am trying very hard not to become alarmist, but I must admit that I see very little positive news at the moment and I continue to see three elements - monetary policy failure/weak growth, the rise of extremist politics (Trump, Orban, Erdogan, Putin, ISIS etc.) and sharply rising geopolitical tensions coming together to a very unpleasant cocktail that brings back memories of the 1930s and the run up to the second World War. 

It has long been my hypothesis that the contraction in the global economy on the back of the Great Recession - which in my view mostly is a result of monetary policy failure - is causing a rise in political extremism both in Europe (Syriza, Golden Dawn, Orban etc.) and the US (Trump) and also to a fractionalization and polarization of politics in normally democratic nations.

Today's social media tells the story. Many in the U.S. - as elsewhere - don't have a problem with extremist politics at all. Even on Thanksgiving Day: often - in place of the usual holiday greetings - online political diatribes continued with scarcely a break. The paradox in all of this is that so few realize, what is actually at stake. In some important respects, normal economic conditions are beginning to shut down. Why?

Much of today's economy is structured for forms of access which are anything but incremental, in spite of those who could grow stronger from incremental ownership options. One is either able to scale the currently high levels of expectation for living and working, or else exists in a sort of endless limbo, from which it is all but impossible to escape. Because everyone has to work so hard at what access requires, few are willing to see anyone gain access on easier terms. This is why alternative equilibrium is needed: to make further economic access possible, in a world which is quickly donning "no vacancy" signs in prosperous areas.

Nations are reluctant to allow the level of economic freedom that people now need for services formation, because structural evolution in this regard would also require some loss of centralized control. Just the same, doing so is necessary, in order for economic, social and political stability to be maintained in the years ahead. Too much centralization in today's services centered economy, would further destabilize areas which lack sufficient complexity to begin with. Worse, hollowed out regions would become vulnerable to terrorism, extremism or both.

In order to strengthen freedom through greater economic complexity, populations need access to knowledge use in a full range of diversity at local levels. Even so, populations are woefully unaware of an overall lack of monetary representation, which poses systemic threats at multiple levels. Policy makers need to provide faithful monetary representation for their citizens, before any issues regarding long term growth can be realistically addressed.

The challenges of the present are immense, and considerable effort will be needed, to raise the level of awareness that citizens desperately need. Governments jump at the chance to fight for "freedom" on military terms, but the underlying reasons for war have been covered up too many times. One can only hope that the most important battles ahead, will be fought for greater economic freedom, instead of blindly maintaining the status quo.

Wrap Up for October '15

Currently, non tradable sectors tend to organize as though a single, government defined equilibrium actually exists for everyone. Perhaps this suggests why society seems more divisive and tribal, these days?  http://econ2.econ.iastate.edu/tesfatsi/WhomOrWhatDoesRepIndRepresent.AKirman1992.pdf

Fortunately, since tradable sectors (mostly, not always) need to compete at international levels, much of their product does not cater to any single idea of equilibrium. Non tradable sectors need to take a page from tradable sectors. Until they do, family formation and its associated housing are likely to remain weak. Even prosperous areas which are normally thought of as "open to all comers", may seek to restrict apartment building due to overcrowded schools which are already in high demand.

Also, from the initial link: "...subsidies to production are miscalculated if the representative agent approach is used...Thus to infer society's preferences from those of the representative individual, and to use these to make policy choices, is illegitimate."

Even though the concept of GDP as a war invention is a bit disheartening, the measure nonetheless contributed to "government building" on these terms. We've come a long way from GDP for war, to GDP for happiness. Just the same, readers know I will ask: wouldn't accurate monetary and economic representation for all, be a lot more fruitful? http://www.theglobalist.com/warfare-and-the-invention-of-gdp/

In 2011, Venkatesh Rao wrote A Brief History of the Corporation: 1600 to 2100

Emily Washington at Market Urbanism notes the systemic bias against small scale development. My hope is that local corporations can eventually provide means for the small scale development, which prosperous regions do not feel they need.

Dani Rodrik notes some of the problems that nations have experienced with structural reform.

Scott Sumner touches on some of the fallacies which confuse people re monetary policy, in this Econlog post: http://econlog.econlib.org/archives/2015/10/missing_the_big.html

Max Eden of AEI considers education's current supply side problems: http://www.aei.org/publication/school-choices-supply-problem/

Matthew Yglesias takes Ben Bernanke to task for a most obvious exclusion in Ben Bernanke's new book - the potential of NGDP targeting. http://www.vox.com/2015/10/8/9472807/ben-bernanke-ngdp-targeting

Simply stated, from Ramesh Ponnuru: http://www.bloombergview.com/articles/2015-10-07/why-the-fed-s-rate-debate-is-so-odd

"...two-thirds of the decline in unemployment since 2009 is due, not to the unemployed finding jobs, but to their giving up. Bernanke presumably doesn't want us to thank the Fed for that." (George Selgin) http://thehill.com/blogs/congress-blog/economy-budget/256432-ben-bernanke-and-the-art-of-central-banking

Ryan Avent (also) tells it like it is. http://www.economist.com/blogs/freeexchange/2015/10/ben-bernankes-big-blunder

Sometimes, economists offer practical advice!
https://theweek.com/articles/580341/what-happens-when-americas-sovietstyle-food-banks-embrace-freemarket-economics

Scott Sumner takes a look at the Fed's performance - first 100 years: http://econlog.econlib.org/archives/2015/10/its_hard_to_tea.html

Something about tight money in particular, generally means more schooling is "needed"...
http://blogs.wsj.com/economics/2015/10/14/whether-a-job-requires-a-degree-may-shift-with-the-economy/?mod=WSJBlog

More than money is involved: https://www.farnamstreetblog.com/2015/10/reasons-we-work/

And...more than NGDP is involved. An informative post from Scott Sumner: http://econlog.econlib.org/archives/2015/10/market_monetari_3.html

http://www.theatlantic.com/technology/archive/2015/10/raiders-of-the-lost-web/409210/
"Scholars believe that around 300 B.C. the Library of Alexandria may have housed three-quarters of humanity's texts. Today three quarters of humanity's books are abandoned, out of print and housed only in libraries, if at all. The existence of a resource, unfortunately, has little to do with access to it."

As the labor force participation rate continues to decline...http://www.advisorperspectives.com/dshort/updates/Stuctural-Changes-in-Employment.php

Edward Glaeser took part in this paper on urban networks: http://www.barcelonagse.eu/sites/default/files/working_paper_pdfs/841.pdf

One reason may be the fact that the gig economy is mostly limited to the margins of productive cities and regions. http://blogs.wsj.com/economics/2015/10/22/an-enduring-mystery-of-the-gig-economy-why-are-so-few-people-self-employed/?mod=WSJBlog

Marcus Nunes suggests a better form of "experimentation". https://thefaintofheart.wordpress.com/2015/10/25/looking-for-wally-when-there-are-many-wallies/

There's good reason: http://www.nytimes.com/2015/10/20/business/many-low-income-workers-say-no-to-health-insurance.html

A Matt Ridley article in the WSJ for his new book: http://www.wsj.com/articles/the-myth-of-basic-science-1445613954

John Cochrane spent plenty of time putting this post together, re economic growth:

A well considered response from James Alexander to the twitterati... https://thefaintofheart.wordpress.com/2015/10/29/what-to-target-its-only-rational-to-use-expectations-of-nominal-output-growth/

Lars Christensen highlights a recent paper from Ryan Murphy in this post: http://marketmonetarist.com/2015/10/29/a-sharp-drop-in-nominal-gdp-will-cause-a-drop-in-economic-freedom/

The New York Times provides some helpful graphics in this article:
http://www.nytimes.com/interactive/2015/10/31/upshot/who-still-doesnt-have-health-insurance-obamacare.html

There were plenty of interesting links this month! A few of these I still need to finish reading. Hope everyone has a great Halloween.

Government Intentions and the Zero Bound

Market monetarism is beginning to make gains, as Scott Sumner has noted in some recent Econlog posts. On one front, there is progress regarding consideration of negative interest on reserves. Even more important, is a growing realization that instead of being accommodative, monetary policy has been exactly the opposite relative to demand.

However I have to concur with Bonnie Carr's response to the referenced paper from Vasco Curdia of the San Francisco Fed. Even though the Fed paper is good news, as a CNBC report suggests, this is true insofar as the Fed may begin to provide more honest communication. According  to Bonnie Carr:

And there really isn't anything dovish here. It's basic macro and simply to the point of showing that the ZLB is the new normal...

For instance, an acknowledgement of the need to go to negative interest rates to stimulate monetary policy, is not the same dynamic as the supply side reforms which could have the potential to broaden marketplace possibilities. In the latter, greater capacity in aggregate supply would cause the natural Wicksellian rate to gradually rise. Consequently, negative interest rates on IOR would not be needed for any long period because real gains toward closing the output gap would have been realized, instead. However - that said - a negative interest rate is nonetheless expansionary, as Scott Sumner explains in this helpful and clarifying post.

The remaining problem (beyond not yet having gained a nominal target rule, of course)  is that zero bound territory extends into the future as far as the eye can see. This is also an issue of government intentions, for more than a passive response towards long term growth expectations is involved. Since potential supply side solutions are difficult to contemplate - given today's norms and status quo - policy makers have resorted to telling the public that this is as good as it gets.

Thinking about this, I was reminded of discussions at Scott Sumner's blog about four years earlier re the zero bound. Basically, he explained that the zero bound was not just an anomaly, it was a most unnecessary construct. In 2011, I don't think many of us realized that too many policy makers would abandon attempts to improve long term growth prospects. Who could have imagined then, that the zero bound would come to appear as "real" as it does now. As a result - even as market monetarism gains more advocates - the real economy will continue to generate problems for economic stability.

How might one think about present day government limits to growth in a broad framework? Government activity represents a substantial part of the marketplace, through redistribution and the financial gains of asset formation. Even so, assets result from income aggregates, which affects the wealth potential of assets relative to traditional production. Presently, knowledge based services, which could also be organized as direct wealth (hence marketplace growth), are still secondary in the sense of compensation from traditional manufacture and asset formation.

Even though developed nations were able to build services economies through increased consumption (more income parked in housing), consumers need access to production roles just the same. Too little attention has been paid to the production potential of aggregate supply, which in turn encouraged policy makers to short aggregate demand.

So long as government and special interests maintain control over services formation (in the U.S.) there are additional burdens on income aggregates. Given the fact too much services income is meritocracy based, income aggregates have become somewhat limited by default. Housing assets in particular are a reflection of this reality, as individuals are faced with limited choices for living and working environments. Where one observes tight monetary circumstance for housing aggregates, there is an insufficient marketplace for time value (as opposed to skills value) as well.

It is not necessary for governments to limit long term growth, even if they give the impression there is no other choice. Likewise, austerity is not necessary, but policy makers also need to be more upfront as to what they think austerity even represents. How do austerity concerns square with the misplaced notion that the world has seen "enough growth", for instance? Strange as this juxtaposition may seem, one often hears both arguments from the same vantage point. Perhaps the zero bound is little more than zero incentive to cooperative with anyone else, to get anything done. If so, those incentives need to be changed. The prosperity of future generations depends upon doing so.

Sorry, But Maintaining the Status Quo is not "Courage"

Why so? I'm not the only one who would have preferred a different book title from Ben Bernanke: one which was less about "bragging rights" (huh?), and more about the fact his tasks at the Fed involved difficult decision making processes. Oh, to be a fly on the wall of the bookstores where customers see this latest publication spread across the table. What must they think?

His title also attributes a historical framing for the Fed which is not quite accurate. How much courage has really been involved in the Fed actions of recent years? If the Fed "saved" the banking system (in lieu of other things...) responsibility for doing so was already "built in", even if the public questioned the integrity of doing so this time. Had the Fed not bailed out the banks, the fallout would have extended well beyond the banking system. Why, then, should it be necessary to boast about doing what the Fed was expected to provide in the first place?

There would be little reason to question Bernanke's "job well done", if the Fed had not neglected other considerations - specifically, full monetary representation for the public as a whole. The greatest tragedy, is that few realize the full extent to which central bankers are still willing to neglect aggregate spending capacity, even after the damage of the Great Recession. Through the convenient language of inflation and interest rates, central bankers have been able to keep the focus on banking, finance and governmental obligations, instead of what has been lost in terms of job formation, business formation, and self employment since the Great Recession.

In spite of extensive media coverage which backs central bankers in terms of (imaginary) inflation and interest rates, economists and others are starting to recognize the fact that the Fed downplays what is actually at stake. This likely has bearing why onlookers were exceedingly cautious about the idea of a central bank, a century earlier. Sure enough, in the Great Depression and again in the Great Recession, central bankers would neglect to cover aggregate spending capacity (total spending or nominal GDP) in favor of other priorities.

The measure of GDP reflects how all individuals participate in the economy. But once policy makers decide that "enough" money has been generated, full economic participation could be neglected again, without a level nominal target. These are the times when policy makers use imaginary inflation as a cover, for the fact money is being shorted in the economy. Instead of innovation, some sectors simply increase costs - a process which appears as though inflationary. Yet policy makers panic about increased costs in aggregate. Unfortunately, that means punishing others through the loss of jobs, self employment and business formation, instead of taking overall obligations and existing monetary commitments into consideration.

At the very least, some at the Fed have recognized over the years, that it makes little sense to insist on arbitrary cutting off points in terms of monetary representation. The need to honor aggregate spending capacity, as Marcus Nunes notes in a recent post, has come up plenty of times in FOMC discussion. For instance, in minutes from 1982:

MORRIS. I think we need a proxy - an independent intermediate target - for nominal GDP, or the closest thing we can come to as a proxy for nominal GDP because that's what the name of the game is supposed to be...

What strikes me about this quote was that the speaker recognized just how central the concept of a nominal target is, to the actual task of the Fed - even though total spending has scarcely been emphasized to a degree that the public knows its importance. Total spending. Why does something as basic as this, get lost in translation?

Bernanke now dismisses what amounts to (faithful representation of) aggregate spending capacity by pretending it would be difficult to achieve, and that it could somehow lead to undue inflation. Perhaps I'm wrong - and indeed I would hope to be - but it's hard not to suspect that Bernanke would prefer to disregard aggregate spending capacity. Does he believe that income aggregates are not as important as either the activities of government or finance? The activities of the latter group do not an economy make, at least in most places I have ever visited.

And had the public known 100 years earlier that it would eventually come to this, who would have remained comfortable with highly centralized banking? One has to wonder. In a sense, Bernanke was not even able to maintain a full status quo, because Main Street never really fully recovered from the Great Recession. And yet somehow, saving the banks was supposed to be enough.

Real Economy, Monetary Economy: Rebuild the Bridge

What has happened to the connections between the real economy, versus the Fed's insistence on a diminished economy? Of late, the bridge between the two is all but broken, as central bankers continue to move the goalposts away from aggregate spending capacity.

Scott Sumner reminds his Econlog readers how the Fed is ignoring signals from the market, and devotes the prior post to some of the misconceptions that make it difficult to discern what should be Fed priorities. While monetary policy depends on what happens in the real economy, the real economy also reflects whether monetary policy is willing to faithfully represent aggregate spending capacity. And since the onset of the Great Recession, the Fed has consistently come up short, in doing so.

There is not enough agreement among economists, for the public to understand how much damage the Fed has done to the real economy. And this is no time to be giving the Fed the benefit of the doubt. Even though the real economy involves multiple factors which do not lend themselves to coordination, the coordination of monetary policy could be a walk in the park, by comparison. Much of the present confusion on the part of the Fed has been self inflicted.

Central bankers have particularly distorted monetary policy because of misplaced financial concerns. In some instances, it is as though all sense of responsibility to the public has been lost. For instance, Marcus Nunes highlighted a recent quote from Loretta Mester, at a Boston Fed conference:

If effective monetary policy means taking away the punch bowl just as the party gets going, then effective financial stability policy might mean taking away the punch bowl before the guests have even arrived.

Where to begin? Her reasoning is so poor, that I can only be glad I wasn't in the audience. She voices the sentiment quite clearly: if you're not already on board with the program - so to speak - there are no more seats waiting. Didn't gain economic access at the very moment when it was needed most? Tough luck. Perhaps for the rest of your life.

Does the Fed overreact to events in the real economy, or is it simply beholden to special interests? Indeed, the poor results matter even more than the answer. The Great Recession should have been a time of national soul searching and structural change. It wasn't just a matter for economists and policy makers, because the public needed to reconsider the economic environment which would belong to future generations. The fact this didn't happen is bad enough. But what is worse is that policy makers not only pretended that nothing needed to happen, they are anxious to get on as if everything is normal, now. Unfortunately this comes across as a blatant lie, and it is a dangerous path for policy makers to take.

Doubtless, some think that my suggestions for the real economy are too radical. But no one wishes more than I, that bridges could be rebuilt without completely starting over. If policy makers had admitted early on that change was needed...if the Fed had remembered the hard won monetary lessons from decades earlier, nothing radical would be necessary now. As things currently stand, there are far too many individuals who cannot participate in an economy where people have decided it is not necessary to include them. That's exactly how Loretta Mester's message comes across. And one can only hope, that sanity will return to monetary policy before too many people get on board with that same mentality.

Even now, were the Fed to adopt a nominal level target, it is questionable that many who lost access in the days of the Great Recession, would find a way to participate on the terms now deemed necessary. The radicalism I hold regarding structural change, never should have been necessary to begin with. Like many, I wish that people did not have to suffer so from the Fed's mistakes. I wish that monetary policy could instead have kept the real economy on a strong course. Because now, the real economy cannot be built back, the same way that it was before.

Wrap Up for September '15

How does one know whether or not what appears as though a recession, is the real thing? More countries will likely experience some of the pseudo type in the near future, not unlike Japan. Scott Sumner looks into some of the particulars in pseudo-recessions and actual recessions, at Econlog.

I feel for the people who have even more worries on their mind, just because of the uncertainty of their health insurance requirements and coverage.
https://www.washingtonpost.com/national/health-science/coverage-in-affordable-care-act-health-plans-wanes-since-january/2015/09/08/a8cad442-563d-11e5-b8c9-944725fcd3b9_story.html

Wikipedia has a description of The Theory of Justice by John Rawls, which was originally published in 1971.  For those thinking of purchasing the book, this entry may help:  https://en.wikipedia.org/wiki/A_Theory_of_Justice

It can be difficult for individuals with high incomes to build new traditional homes, in some prosperous regions of the U.S. Likewise, lower income levels don't easily find innovative housing options in other areas. http://blogs.wsj.com/economics/2015/09/10/why-is-home-building-lagging-job-creation-realtors-builders-disagree/?mod=WSJBlog

Perhaps more denial exists on the part of builders instead of realtors, but then what needs to occur is actually beyond the reach of both groups. Another slowdown is due to a lack of construction workers. Readers know what I would suggest: why not mass produce flexible, lightweight and portable building components, instead of waiting for a larger construction workforce which would only have to be whittled down again in the next downturn?
http://blogs.wsj.com/economics/2015/09/11/the-construction-industry-struggles-to-rebuild-its-worker-ranks/?mod=WSJBlog And until something radical takes place in terms of building construction: http://blogs.wsj.com/economics/2015/09/21/renters-will-continue-to-struggle-for-the-next-decade-harvard-study-says/?mod=WSJBlog

Ricardo Hausmann, in Does Capitalism Cause Poverty? has a suggestion for the concerns Pope Francis holds regarding capitalism: eliminate the barriers which thwart its expansion. From Hausmann:

The developing world's fundamental problem is that capitalism has not reorganized production and employment in the poorest countries and regions, leaving the bulk of the labor force outside its scope of operation.

Matthew Yglesias explains why a resurgent, unapologetic left is on the rise globally. http://www.vox.com/2015/9/16/9322625/sanders-corbyn-mulcair  Of course this development echoes the growing political shift to the far right, as well. The fact that the Fed continues to tighten monetary policy, certainly does not help.

Even though the additional information will hopefully assist patient needs, it represents an extreme burden on an already overwhelmed system. And some of these healthcare facilities have already experienced cash flow problems due to sluggish government compensation...http://www.nytimes.com/2015/09/14/us/politics/one-symptom-in-new-medical-codes-doctor-anxiety.html

Tim Harford looks at some historical aspects of city development: http://timharford.com/2015/09/what-cities-tell-us-about-the-economy/

Two on price:
A post from Robin Hanson http://www.overcomingbias.com/2015/09/beware-intuitive-econ.html
and a textbook from Deirdre McCloskey, The Applied Theory of Price

Lars Christensen will be speaking at the Federal Reserve Bank of Dallas in October. Hopefully some of my readers will be able to attend! http://www.dallasfed.org/institute/events/2015/15evening.cfm

Scott Sumner recently highlighted a new paper on NGDP targeting, from the Kiel Institute for the World Economy: https://polcms.secure.europarl.europa.eu/cmsdata/upload/5bcc04fc-0ce1-4934-a240-da5d5249c6a6/KIEL_FINAL.pdf