Wrap Up for July 2020

Can the U.S. sufficiently recover from its present decline?

Like the coronavirus, the debt problem didn't just "come out of nowhere".

Illegal immigration has not risen since the Great Recession.

Don't start a cold war with China, it's just not worth it.

"...NGDP is still 5.3 percent below its pre-crisis path even after 2022."

Keep NGDP on target, for supply side conditions to remain as stable as possible.

State bankruptcy would be complicated. But what makes it compelling?

For police, the danger imperative is paramount.

MMT is too focused on a particular causal relationship.

Dixie cups were the breakout startup of the 1918 pandemic.

"...even prior to 2008, there were important splits in the field of monetary economics."

"Simplification" for citizens, or for bureaucrats?

What can be learned from the laboratory of state experiments?

Bitcoin and ham radio "are both clunky and old-fangled" However, their decentralization is their strength.

Rich countries benefit from a "citizenship rent".

Credentialism is still a problem.

COVID-19: "I'd say at best, we're a quarter of the way through this thing. This is unsettling, which is why people are rejecting reality."

K-Briqs is one example of several recent brick innovations.
Also, a bricklaying robot in action.

Birthrates aren't likely to rise any time soon.

How is COVID-19 similar to a natural disaster, for healthcare systems?

"What will bounce back after the pandemic, and what will never be the same?"

An interesting reading list from Sarah Skwire.

"The United States has more pervasive licensing requirements than most European countries."

COVID-19: Symptom data helps estimate risk levels.

Nicholas Crafts discusses the long productivity slowdown with James Pethokoukis.

How does the Swiss political system manage to avoid political polarization? For one, "Voting necessarily means understanding that things are never clear cut."

Conservatives are not in agreement about zoning reform.

When it comes to urban design, experiences matter.

We shouldn't expect past economic momentum to carry us through the present crisis.

How would Medicare reimburse hospitals and other Part A providers if the fund runs out of money?

Timothy Taylor highlights a recent Brookings series which explains how COVID-19 could change the economy.
Also from Brookings, Bernanke and Yellen on COVID-19.

"Unschooling allows kids to follow their own interests and define their own curriculum."

"The Closing of the (Urban) Frontier"

Cancel culture is pervasive.

Experiments are important. So why do we hate them?

Assortative mating and income inequality.

Good news for plastics recycling.

The best coronavirus tests are frequent, fast and cheap.

A road map for reemployment from AEI.

Tech is becoming a regulated industry.

COVID-19 may worsen public perceptions re finance

International trade: "The high watermark really was around 2008, just before the financial crisis."

"The Henry Fords of Healthcare" Standardized procedures for better group coordination. However, this approach is not always politically viable. In this instance the process creates (mostly) middle class access.

Some of the recent fiscal stimulus will certainly help. But how much of it is properly aligned with actual need?

"Working as an ICU nurse is like flying a plane."

Claudia Sahm interviews David Beckworth: a discussion about NGDP.

Bookkeeping operations by the Fed still can not "conjure up real resources". And more needs to be done to avoid moral hazard.

Libertarianism has become dysfunctional, but liberty is as important as it ever was.

Some early data for the pandemic effect on world trade. Also, a loss comparison between the U.S., the EU and China.

Notes on Time as a Unit of Measure

Time as an economic unit of measure, could bring needed clarity to the now mysterious nature of what the real economy actually consists of. Healthcare is a notorious example, how difficult it has become to determine productivity and long term growth potential. In a recent post, Scott Sumner also stressed that the intangible nature of healthcare is just one factor which distorts the utility of RGDP measure:

...NGDP is at least an order of magnitude more clearly defined and more easily measured  than RGDP.

Even the term "real" has been somewhat of a misnomer in the measure of GDP. At a lecture for the Bennett Institute, Diane Coyle highlighted an explanation given by Thomas Schelling:

What we call "real" magnitudes are not completely real, only the money magnitudes are real. The "real" ones are hypothetical.

Despite their centrality to economic activity, statistics such as RGDP and NGDP are only useful up to a point. Hence Sumner also emphasized:

Most importantly, don't ask any statistic to do more than it can. 

At the very least, NGDP is simpler because it is the monetary expression. In the above linked lecture, Coyle explains how the real economy might be envisioned:

The philosophical base of GDP is utilitarianism. It measures current period flows of income, consumption, investment and trade. Assets contribute to economic welfare only when the services they provide are consumed.

It's fortunate we don't have to measure asset wealth as a component of the real economy, especially since asset wealth from previous time periods can be quite misleading in terms of revenue flow potential. Plus, at a time when tradable sector activity often requires less capital or overhead to achieve profits, much more capital than what is actually necessary is often required, before vital time based services are even implemented. Healthcare and education in particular are burdened by extensive regulations which create additional overhead costs. And because of the centrality of healthcare, its additional costs become burdens throughout the entire economy.

Importantly, overhead costs tend to overwhelm the revenue capacity these requirements actually make possible, in non tradable sector time based services. Further taxation, redistribution, and debt have carried the burdens wherever revenue potential leaves off. Perhaps this partly explains why services product remains poorly measured. Again, Diane Coyle:

The industrial and occupational classifications provide startling detail on manufacturing industry and almost none on the services that make up four fifths of the modern economy.

This level of services dominance makes it clear that services generation could benefit from a stronger, yet simpler statistical and organizational approach. In Scott Sumners's post, the debate on the growing mystery of what healthcare is supposed to even accomplish, continued in the comments section. For instance, how does one determine the value of prolonging life as long as possible, when doctors suggest treatments for incurable forms of cancer?

Let's say you "prove" that cancer treatment adds 4 months to a lifespan. Is that good? How do we determine if it's good? Do we use revealed preference? Utilitarian measures? And if it is good, how do we determine "how good". What is the value of four extra months when suffering from cancer. I'm willing to believe the benefit might be huge or tiny. I just don't know. There are lots of imponderables here.

When we try to decipher healthcare in ways which aren't specifically market related, the mystery only seems to deepen. Part of the problem is that so many aspects of healing and well being - prior to the professionalism of the twentieth century - were extremely diverse and multi-faceted. These conceptual universes and their associated activities were shared by average citizens, which meant the inclusion of diverse levels of skill, knowledge and approach. Too much of practical value was gradually stripped away, in the ongoing attempts to professionalize what were previously basic aspects of human life and mutual assistance, not to mention personal curiosity and intellectual challenges. Much of this was gradually and reluctantly surrendered to others who were better positioned in society, yet it has never been an easy matter to convey to others how such losses actually felt.

One can only imagine: For many students and practitioners of life, how must it have impacted their daily existence? To take for granted an active participation with others in intriguing aspects of applied knowledge, only to face an ever growing pressure to stop doing so, once the practices of applied knowledge were reserved for far away prosperous cities and distant buildings with seemingly impenetrable walls. A light which had long illuminated human imagination and motivation, assumed a more limited and somehow physical presence, in hallowed halls which many would be students of life would never have the chance to see.

Time as a unit of measure, could provide ways to restore what were once informal means of mutual assistance and personal challenge, but in a much needed economic framework. Time as measure, could become like a vase to once again hold the potential of applied knowledge for average citizens wherever they may happen to live, or regardless of their current level of resource capacity.

Various aspects of healing are just one part of life which could benefit from a statistic which records how people ultimately choose to coordinate their time priorities and preferences over extended periods. While some suggest new statistics which measure factors such as happiness and well being, those potential measures are mostly envisioned as alternatives to GDP. Whereas economic measure of time value could be more practical, for the new statistic would instead make room for shared experiences as an additional component of GDP. How much happiness and well being might even ultimately be derived through such a statistic, as millions of individuals finally regain freedom, personal autonomy, and meaningful challenges in their economic lives?

A primary reason for adopting time as a unit of measure, is that doing so allows us to record and build upon what we experience in shared interactions with others. GDP classification for time arbitrage could be expressed via roles such as coaching, mentoring, mutual corroboration, etc., instead of more specific aspects of applied knowledge and skill which are closely associated with professional time based product. When assistance takes place on voluntary terms, these informal - yet economic - roles could allow individuals and groups alike to benefit from assets being utilized in other capacities as well. When assets provide multiple contexts, more services output can be derived via greatly reduced overhead costs.

Ultimately, everyone needs better means to manage their own time scarcities, than what presently exist. When time isn't actually counted or measured as a valid economic component, too much time value potential is unseen, unappreciated, and consequently lost. As Diane Coyle emphasized, "we see what we count and not the other way around." Adopting time arbitrage as a means of measure, makes it possible to tap vast reservoirs of hidden wealth, in the form of human capital. Of course, these are just a few of the reasons doing so could prove worthwhile. There are doubtless many more.

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.

Where is the Potential for Services Growth?

Tyler Cowen linked to a Christopher Balding post which is most helpful for me, because it explains an important concept in economist language that I've yet to do justice for in layman's terms. Hence I will include a fair amount of what Balding discusses in this post, with some additional thoughts and comments. While he wrote about the Chinese services sector, these dynamics apply to economies in general - which he also notes.

We are fortunate to have the speeded up circumstance of China joining other developed nations, because their broad and complex story is being captured in real time - even if still somewhat "misunderstood". Consequently, China's economic story exposes elements which can sometimes be missed when shifting resource use patterns evolve over decades, instead of years. Here's Balding, who notes the connection of the services sector to real estate and related financial services, and adds:

Financial services are widely recognized as a service but there are two important factors which imply we should at least recognize the unique nature of arguing for a healthy economy due to service sector expansion. First, financial services still derive the vast majority of employment, assets, and revenue from the major SOE commercial banks. Second, these banks give out the large majority of their loans, by some measures almost 90% to old industry firms that are facing large declines in revenue.

Regarding the overall slowdown in growth around the world: at the very least, there is some understanding that limits in real estate formation are arbitrary in the sense such limits are hardly necessary. Indeed, Kevin Erdmann's "decade long depression-level behavior of housing starts" is matched by what has already been a 15 year real decline in knowledge backed services formation and its associated income. These unnecessary limits to both services production and housing formation are finally affecting the outlook of old industry firms, because an insufficient amount of time aggregates (on the part of populations) are involved in present day production processes. This is something governments of all stripes need to come to grips with - sooner, rather than later.

Balding continues:

...if we strip out financial sectors from the tertiary sector, services have actually declined since 2000 and relatively significantly by probably at least 5% of GDP. Even if we look at other services, service sector contribution to GDP excluding finance is near all time lows. In other words, any rebalancing has come from the service sector feeding capital to old industry declining firms not from the growth of new firms or organic growth in services. 

Given the degree to which traditional housing and credit formation has been allowed - relative to government avoidance of time aggregate production potential - small wonder housing can statistically appear as though a boom, instead of the bust that has actually occurred. Even though aggregate spending capacity patterns show the nature of these overall declines (such as the U.S. has experienced), many onlookers still do not take the overall spending context into account. Here is the remainder of Balding's post:

The numbers bear this out. While listed A-share operating revenue for financial services and real estate has grown 17% and 31% annually for the last three years, wholesale and retail operating revenue grew at a mediocre 4% annually over the same time period. That is the complete opposite of rebalancing. 

I want to strongly re-emphasize that there is nothing here out of the ordinary in how things are classified officially. What does need to be recognized are what exactly is considered a service sector industry and their dependence on old declining industries. If we account for that, the picture looks decidedly different.

His emphasis on service industry reliance on old industries, also ties in with my explanations why it is not possible for government fiscal activity to supersede the potential growth capacity of monetarily based activity - despite the fact governments gained the additional wealth benefits of financial assets in the twentieth century. While governments might have had little choice but to rely on old industry to fund services formation in the past, that does not mean services formation should be expected to solely continue on these limited terms in the future. If long term growth is to be maintained, more production capacity needs to be extended to all citizens if for no other reason than making certain traditional production value is not lost.

Even though services growth slowed - due to its reliance on other wealth - new service patterns can be generated through local and direct wealth creation. What's more, the process can take place alongside flexible real estate patterns which do not require credit formation. Local corporations would provide what could be considered an alternative production to services equilibrium. Local knowledge use systems would exist alongside internal services and real estate formation.

These in turn would utilize time backed money to augment the fiat monetary systems of the present, so nations can regain confidence regarding nominal income (and aggregate time value) alongside capital formation. Potential for services growth still exists. Just the same, governmental reliance on meritocratic knowledge use may eventually become associated with the elite, as others seek to grow services systems directly through local and inclusive means.

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.

Notes on Wicksellian Considerations

At the heart of the Neo-Fisherian dilemma, one also senses a determination to find out if the natural interest rate can be made to "conform" to those who want better returns on their investments! Indeed - as Bonnie Carr recently pointed out - is Janet Yellen even taking the Wicksellian equilibrium into consideration? And after a particularly frustrating CNBC interview with James Bullard, Lars Christensen responds, "Jim, it is not complicated. NGDP tells you NOT to hike."

How much does the Wicksellian natural interest rate matter? In other words, what does today's low level suggest, regarding the current post recessionary equilibrium? Like other observers, I continue to sort through the "fallout" of these discussions. From the Wikipedia page for anyone who might benefit from a "refresher", re Knut Wicksell:

Wicksell died in 1926 while writing a final work on the theory of interest. Elements of his public policy were taken strongly to heart by the Swedish government, including his price level targeting rule during the 1930s...Michael Woodford has especially praised Wicksell's advocacy of using the interest rate to maintain price stability, noting that this was a remarkable insight when most monetary policy was based on the gold standard...Wicksell invented the key term natural rate of interest and defined it as that interest rate which is compatible with a stable price level...If the interest rate falls short of the natural rate, inflation is likely to arise; if the interest rate exceeds the natural rate, this will tend to produce deflation.

Will the Fed induce deflation in the near future, by insisting on prematurely raising interest rates? After all, the so called "strong" economy remains dependent on an incomplete equilibrium, i.e. built on lower labor force participation than what existed prior to the Great Recession. Ultimately, inadequate employment results in problems for both aggregate supply and aggregate demand. As James Alexander recently noted, "The stance of monetary policy can only be measured by looking at whether demand for money is outstripping supply of money, and that can only be seen by looking at where nominal growth (aka Aggregate Demand) is headed." And yet the ongoing requests for central banks to follow aggregate spending capacity, continue to be ignored.

Once labor force participation began to decline, governments "compensated" by utilizing housing stock as means to "park" income for needed capital flows. While this was a reasonable temporary response, production and investment needs to be increased for all income levels. Further, traditional housing construction has been suppressed, well below actual marketplace demand. Decentralized investment strategies are now needed for new housing options, given the fact that centralized (and government) investments are more closely aligned with upper income levels.

Mass production of building components for lower income levels, would be among the most reasonable means to grow the economy on terms which matter for all consumers. It's unfortunate that policy makers haven't seen fit to encourage this development, given the fact more supply and demand for housing would eventually increase the Wicksellian rate of interest on normal terms. Indeed, real innovation which expands the marketplace is precisely what would build the strong economy, which the Fed wants to believe exists, now. Don't raise rates "just because". Raise rates when the work of making a stronger real economy has actually taken place.

Why Does Monetary Representation Seem "Unimportant"?

While this subject continues to get short shrift in public dialogue, monetary representation has also been overshadowed by non-monetary concerns where it matters most: monetary policy. Somehow, I get the feeling it wasn't always this way. Only consider dialogue from U.S. historical accounts, before governments became so heavily involved in the economy. Even though many individuals only partially understood what was at stake, presidents, policy makers and citizens alike appeared more concerned with monetary representation, than policy makers or citizens of the present

Whereas today, monetary representation takes a back seat to practically everything else imaginable. This makes it too easy for the Fed to obscure from the public, that they are gradually pulling away the monetary foundation of aggregate spending capacity - albeit in slow motion. Even now, too few realize what is happening to the long term growth trajectory, or how tight monetary conditions could generate further political instability.

Given the abundance of present day statistics and measuring capacity, why is it difficult to recognize where monetary representation exists? Even though there was less measuring capacity during the Great Depression, many forms of product still existed in simpler terms. Traditional manufacture played a much larger role, and the measurement uncertainty of services product was far less of a concern. As a result, aggregate wages and income were easier to correlate with overall product formation. So long as this was obvious to the average citizen, monetary representation for the average individual was doubtless more important in the public's mind.

Even though the challenges to GDP as "appropriate" measure must seem odd to market participants, the lack of correlation of GDP with understandable product formation is not lost on the public. Plus, much of GDP represents intangible wealth such as housing - also difficult to recognize as the primary capital formation now held in common. Just the same, calls to find something more "meaningful" than GDP do not take into account its central necessity for monetary representation. In other words, were it not for the ongoing capacity of GDP measure, monetary stability would be even more difficult to achieve, than has been the case already, particularly with a Fed which appears to have lost its monetary bearings.

Complexities regarding taxation, could also play into the seeming lack of concern regarding monetary representation. Even for students of economics, the quantity theory of money may not necessarily square with what is perceived to be government's role in the economy. Add in the difficulty of visualizing what gets spent on real product, and one does not even know how subjective values can be considered in context. When product formation becomes unrecognizable in economic activity, monetary representation cannot be far behind.

Another area of confusion regarding monetary policy, is that aggregate numbers are beginning to overwhelm the average individual. How does one think of monetary representation in personal terms, when the amounts are in the trillions? Indeed, this may be part of a growing rationale, to throw up one's hands and rely on "infinite money" (no backing) to tend to the enormous responsibility of financial matters. Even though trillions still make sense for the aggregate resource capacity of the world, it is difficult to understand where or how to match this capacity to the finite and limited capacity of time aggregates. One internet joke put it thusly, "CNN just said the world is 40 trillion dollars in debt. Who the *#&% does the world owe...Jupiter?"

Some of this might explain why central banks insist their current monetary policy has been "expansionary" when it most definitely has not, and have gotten away with this declaration for so long. For the average layperson, it has been easier to take the opinion of pundits at face value, than to dig deeper to discover what is actually occurring. Plus, the task of digging deeper - while rewarding in the sense of discovering the truth - is not going to make anyone popular at dinner parties!

Of course a lot more is at stake than popularity contests, and this is particularly true for the Fed. As David Beckworth recently indicated, it is time for the Fed to end their guessing game, and get back to a rule based framework which once again places monetary representation front and center. Granted, there are other important considerations for economic stability in the months and years ahead. Just the same, the Fed needs to get real with the public, as to what its most important job actually consists of.

Thoughts on Monetary Policy and the Real Economy

Monetary policy - especially in times of low growth - can be too easily confused with both supply side and financial considerations. If that were not problematic enough, central bankers are presently allowing cutbacks in credit formation to detract from growth capacity in commerce as a whole.

As a result, the importance of monetary policy is often downplayed, when real economy and finance issues are inexplicably discussed time and again...in the wrong arena. It's as if there weren't enough "reasons" already, for central bankers to neglect adequate monetary representation. In a recent post regarding Australia's central bank, Scott Sumner offers an argument for NGDP - one which particularly applies in a time frame when central bankers find too many reasons to short aggregate spending capacity.

Let's clear up some misconceptions. Monetary policy is a panacea for stable NGDP growth. And you need stable NGDP growth (or nominal total comp.) regardless of what else is happening in the economy. Monetary policy does not boost the economy by encouraging lending, it boosts the economy by encouraging more NGDP. Higher lending is a side effect.  

If there is excessive lending (due to moral hazard, tax breaks or debt, etc.) you still do whatever it takes to keep NGDP on target, but you also have tighter regulation of lending, so that more of the NGDP growth is non-credit oriented growth (like restaurant meals) and less is credit oriented growth (like housing). 

Monetary policy is not a panacea for a lack of RGDP growth. Indeed the central bank should ignore RGDP. Instead, policymakers should try to boost RGDP growth with supply side reforms.

Why do central bankers get bogged down with financial concerns and the activities of the real economy? By doing so, they make economic conditions more fragile than would otherwise be the case, especially during negative supply shocks. Struggles between a credit centric view, versus sufficient monetary representation of the real economy, hide another important issue. What is the problem with the real economy, in terms of present day growth? And why aren't there ways to discuss this pressing concern in public, which need not derail what the Fed should concentrate on in terms of monetary policy? 

One problem is that supply side reform is more focused on ways to gain government assistance, than on generating a stronger framework for commerce, overall. If representatives of the real economy could work together to find ways to move ahead, political frameworks might serve a much more useful purpose than is presently the case. Right now, taxpayers are sacrificing a major part of their time and resources for what has become essentially a circus - both in Washington and on the campaign trail. Non tradable sectors in the U.S. scarcely even make a attempt to function as free markets. Where does one even begin?

Marcus Nunes has a message for the FOMC in the form of a Joe Jackson song, "You Can't Get What You Want (Till You Know What You Want)". While it certainly applies to central bankers, I suggest this is a broader problem as well, for the governments which appear to be clueless as to the growth and prosperity their citizens still seek.

When Aggregate Spending Capacity Meets Budget Realities

What is actually possible for the budgets of households and governments, given aggregate spending capacity? Particularly when job substituting technology means that confidence regarding said spending capacity, is not exactly high? In any event, the Fed needs to continue honoring the commitments that citizens have already made to one another. It needs to utilize monetary offset for economic stability, as fiscal activity becomes more constrained alongside already existing obligations. However - because of the ways services are structured - their marketplace representation is not always amenable to monetary solutions. This means a lack of balance in a services dominated marketplace, where questions abound regarding even basic monetary printing needs.

A recent post from Nick Rowe has me thinking how aggregate spending capacity correlates with taxable wealth formation. When Nick debated the potential of a debt to NGDP structure, Bill Woolsey pointed out the fact that a debt to tax revenue structure could be more effective, given uncertainties regarding tax formation stability. Tax revenue potential would vary from aggregate spending capacity, in part because of constantly shifting income flows between active and passive resource use. For instance, when the U.S. had more active use of human capital in a manufacturing economy, higher rates of taxation did not present the same kinds of problems that they present now.

When the marketplace for time based product remains uncertain, is it possible to keep aggregate demand, and aggregate spending capacity in perspective? Governments need to consider whether the wealth they tap for tax based purposes is passive or active, because the latter is more reliable. In particular, this is why assets or capital which are results of stored income, don't always hold up well for tax purposes in the long term. Most important for any government seeking stable means of redistribution, is a direct association with present use of human capital - not just its end results. And while human capital redistribution is strictly for voluntary time based coordination, other forms of resource windfalls are for government obligations which are not ongoing. Otherwise, tax and time value for redistribution, become complicated beyond any hope of rescue.

While supply/demand debates are mostly approached in macroeconomic terms, the results matter for family, state and local budgets. Why is this important? Individuals and policymakers alike tend to view the economy through the lens of specific budgetary and accounting perspectives. Even so, there is quite a problem in this regard: time aggregate values do not (yet) exist in direct relation to accounting perspectives or macroeconomic perspectives.

As a result, time value in association with high skill knowledge use, has little direct relation to either local accounting equations or politically perceived limitations for national budgets. Instead, high value skills sets have mostly been structured according to what they can command through a national medium of account, which also incorporates international resource sets wherever possible. For instance, the U.S. healthcare system attempts to straddle both worlds, and has become impossible to measure in meaningful terms.

Hence local time aggregate potential has become more asymmetric over time. Instead of remaining aligned with local determinants of aggregate spending capacity, high value skills sets became aligned with international economic circumstance. This is one reason why policy makers often overreact to the domestic economic conditions of other nations, which they perceive as affecting their own. In the meantime, cutting budgets in one place so as to tend to needs elsewhere, mostly hollows out the marketplace, with too little thought as to what likely happens next.

Since a substantial degree of time value originated in a fiscal context which responded to total resource capacity, much of the services marketplace is now constrained. For example: in spite of projected healthcare obligations in the near future, populations as a whole are less willing to take on additional tax burdens than they once were. One thing for certain: already existing fiscal obligations will not be helped by a still declining labor force participation rate.

If the time value of populations as a whole cannot contribute to general accountability, protectionism and mercantilism become natural responses - so as to "safeguard" the kinds of resources which still serve to supplant the value of human capital, where needed. Without the stability of time aggregate functions in economic systems, populations may become willing to completely disregard even the simplest macroeconomic theories.

How - then - to account for the fact that in an incomplete marketplace, consumer surplus exists in other product based capacity? Consumer abundance can be downright confusing, when human capital is but a small part of the equation. After all, there is no "consumer surplus" in either employment or time based human capital. And without broader utilization of human capital, many communities have few means to maintain either services formation or infrastructure.

Still, services of all kinds will need to become easier to understand and measure than they are now. One reason politicians still "want their (old) jobs back" is the fact manufacture meant tangible and easy to measure income streams. As a result, much of what became "intangible" wealth in recent decades, will need to become tangible realities. And in order to accomplish this, citizens will need the courage to provide a green light for their own economic representation.

Time value in the form of services coordination, needs to become a valid contributor to economic activity. No one can afford to forget that human capital is the point of origination for the supply side. Otherwise many local governments and marketplaces will struggle - even in the near term - to maintain dedicated income streams. That means standing up for the capacity of human capital as the most reliable source of wealth there is. It means standing up for the hopes and dreams that people still hold, well into the future.

Economics: It's About the Journey, Not The Destination

Michael Boskin asks, are the good times over? Well, it depends. Who is still willing to accept the uncertainty and risks that much needed change would entail? Who still wants populations as a whole, to move ahead together? Like so many of late, Boskin cites the fact that Moore's Law cannot go on indefinitely. Did he even need to? I get really grouchy every time someone cites that law. For no version of it has yet been applied to innovation for building components, or knowledge use in applied group settings.

Broad based innovation and economic flexibility, are the long forgotten center of the economic journey. But where is any national commitment to the journey? Right now it's all about bragging rights for the destination. The journey is completely missing from both sides of the political aisle, and the destination for every American girl and boy now appears as though predestined from an early age. You're either "in" or you're "out" so get a grip and deal with it. Grrr...

Why should any of this matter? The journey is where meaningful growth could still occur. It is where people still get second chances and are not forced to reconcile themselves to numbing sameness. It is where the willingness to take risks can mean new beginnings. The journey is where the mysteries continue to unfold...it is where the noteworthy aspects of human life play out. Unless - of course - today's upscale version of destination zombies, have the last word so as to completely stop the vital processes of economic evolution in its tracks.

True, there are uncertainties in every journey. Who doesn't want certainty? But carried too far, economic certainty stifles both imagination, and the ambition that is part of human empathy. Certainty squanders the gains which the future otherwise could hold. Uncertainty means waking up in the morning with anticipation as to how the day might unfold. It is human nature, to find great energy in the quest to greet the unknown. Whereas a focus on the destination can be sleep inducing, even as it represents the slowly deteriorating end of growth. History tells us that no desired destination ever remains intact, and that things generally turn out much better when no one insists that everyone live the same way.

It is sad that present generations aren't getting the chance to experience life on broader economic terms, and the threat of any closed economy is always a threat to an open mind. Indeed, America was once known as the best place in the world for starting over. The U.S. was known as a place where life felt as though "wide open", and could be defined through a multitude of economic options. Today's America has little room for the journeys which the world still seeks. This also means local economies which have little ability to bend or heal. And when the winds blow strong, what cannot bend or heal, too often breaks.

So long as there are new generations, there needs to be economic activity which remains capable of evolution. Otherwise, the new generations cannot expect to take part to the degree that earlier generations did. Anton Howes makes an excellent point about economic growth, such as I attempted to make in a recent post but he does a much better job of it. From his post, which is also a reprint of a magazine article for the UK:

By far the most important issue for modern economics is the ability to achieve and sustain economic growth. This does not necessarily mean the level of Gross Domestic Product, the total value of goods and services produced by an economy in a given year, but rather the annual increase in the actual living standards conferred by the full exploitation of technological advances...The key point here is that economic growth trumps all other political concerns. 

In this article, Howes also advocates NGDPLT, and notes that monetary policy "potentially renders the debate around austerity meaningless from the point of view of general economic growth". Howes recognizes the fact that innovation remains held back to some degree:

In the long run, finding out what boosts innovation in a society could have transformative effects.

When services formation and building capacity cannot innovate, too much energy is lost in attempts to preserve participation rights for already existing destinations. If there is anything that spirituality can impart to economics, it is the journey of discovery. This is why I have such a strong degree of respect for GDP as economic measure, because fortunately it was formulated with the journey in mind. One can only hope that time value will eventually become a central component of GDP. And also that the GDP measure is able to withstand the withering criticism it increasingly comes under, as multiple observers insist on the markers of destinations, instead.

The journey is also that part of money which can be designated as flow, much as destinations can be thought of as stock. Normally, we "take stock of a situation" in order to preserve flow, but central banking processes have diverted towards protecting stock, while pretending the flow can be (temporarily?!) circumvented. But none of this is about outcome or stock - it is about the ability for populations to contribute to the flow of economic journeys. It is about everyone's ability to take part in - and remain responsible in one's own way - for the outcome.

"...the will of the group is not the outcome. The will of the group is the way that it constitutes itself to decide." - Mike Munger.

Wage Growth? Context Counts

Adam Ozimek is concerned, and with good reason, about a growing consensus as to the need for wage growth. Why? Because of the terms by which this reasoning is often structured. When one hears arguments for wage growth, are those arguments to increase wages for some? This framing is incomplete logic, because it has nothing to do with wage growth in an aggregate sense.

By no means do specific wage adjustments imply increased growth overall, or an improved economy for that matter. Whereas, increased wages in aggregate would have the potential to move central bankers closer to the normalization they now seek, and improve labor force participation at the same time. The different is important. From Ozimek's recent post:

So when economists like myself argue that the Fed should let wages grow fast before raising interest rates, it sounds like it has a lot in common with the "new consensus" arguments. In fact, it is a distinct case for higher wage growth, and it is quite possible to believe, as I do, that we should be dovish about cyclical wage growth now, but be very wary about trying to mandate higher wages in the long run. Nevertheless, a chorus of economists making the cyclical case for faster wage growth is useful background noise for those making the "new consensus" argument for higher wages.

Ozimek continues:

This is all to say that those who don't buy the "new consensus", again including myself, have a lot to worry about. While you do read pieces that challenge individual elements of the "new consensus"...there is nothing with the same coherent and oft-repeated narrative...Rebuttals are piecemeal, attacking the minimum wage or unions alone, while the new consensus provides a whole story. Just as importantly, those voicing dissent are outnumbered...Nobody else has a very easy-to-tell story right now, or at least those that do have good stories aren't addressing the recent trends in empirical evidence. 

He concludes that others need to do a better job of presenting their case, particularly given the fact this will be a substantial part of Hillary Clinton's economic agenda. While her focus is in some ways a positive - especially since little about the economy is actually "back to normal", the context is problematic. Wage growth for "deserving" groups as "new consensus" focuses on minor tweaks to existing equilibrium, rather than much needed overall growth strategies.

For instance, consider how different the market monetarist argument actually is from the "new consensus". What is needed is aggregate wage growth that is capable of assisting labor force participation as a whole. More than anything, the Great Recession was an outcome of the fact the Fed abandoned support for already existing income based commitments, just when they were needed most. Even though aggregate spending capacity has followed a relatively stable path since, there's little guarantee the "new consensus" would contribute to gains for the earlier growth trajectory. Especially since the present cap on inflation, could mean that increased wages for some would (instead) lead to further losses in economic access, for others.

Part of what makes it difficult to provide a cohesive message for wage growth, is the fact that real supply side reform is still needed - not public announcements of intention to come to the aid of a "struggling" middle class. A considerable amount of aggregate supply and demand were destroyed when the Fed took the actions which exacerbated the Great Recession. This lost capacity is still reflected in a marketplace suffering from limited investment, and limited options for both producers and consumers.

While the Fed has long since allowed "bygones to be bygones" (the earlier level of output), residual problems in this regard still thwart their desire to raise interest rates this year. As a result, there has been so much reaction to the Fed's intent, that a "windfall moment" for symbolic wage hikes may well be the result. Just the same, it is difficult to imagine targeted wage hikes as the kind of cyclical response which would have actual impact. Hence there is likely to be confusion as to symbolic wage gains, as opposed to the real wage gains, that would indicate the actual growth environment the Fed - and supply side participants - are still reluctant to provide.

What's Wrong With a Little (Marketplace) Faith?

For market monetarists, it was encouraging to get a response from Simon Wren-Lewis to Tony Yates, after Yates summarily dismissed NGDP in recent posts. Granted, Wren-Lewis mostly sees NGDP as a useful intermediate aid, which in turn raises its own set of questions.*

Nevertheless, a Wren-Lewis endorsement represents a bit of progress for all concerned. Indeed, particulars for a nominal target depend on both the central bank in question, and the nature of any given economy. How, then, to think about his assertion that "faith based" beliefs need to be replaced with models? Or the further implication that economic heavyweights need to "take it from here"?

While models are important, that's true mostly in the sense of the economists who need them as reference points. Those reference points of course need to be distinguished from events "on the ground". For example, central bankers need to focus on and respond to what is happening in the marketplace in real time.

Under normal circumstance, the input of the layperson might not seem necessary in either instance. But these are not normal circumstance and the present day economy is very much in a state of transition. In the years ahead, there will be times when governments need to "give the floor" to citizens who seek to redefine life in the 21st century.

As a result, economists won't be the only ones debating what represents useful models. Some of those "unnecessary " faith based components, include the marketplace expectations of any given year. When central bankers are willing to be faithful to aggregate spending capacity, people have more confidence that they are able to meet the obligations and contractual arrangements which are already in place.

In recent years, different factions have vied for economic supremacy, often with governments and financial interests at the top of the heap. Just the same, every financial instrument and government program ever devised, can be thought of as a result of wealth created by people in their interactions with the world. When central bankers refuse to follow the nominal intersections of time and resource use, they eventually lose the trust of populations which depend on accurate monetary representation.

Part of the faith based aspect of a nominal target is its simplicity, for it has the potential to make extra targets completely unnecessary. Granted, NGDPLT in and of itself is not what leads to greater growth, and work participation levels need to rise before a more substantial growth level becomes possible. Just the same, too much growth is being lost in the present, as central bankers continue to adhere to a level of inflation targeting which is increasingly asymmetrical.

The expectations associated with any given growth level, need to be matched with supply side and production reform which could lead to increased output. While developed nations made great strides in growth in the 20th century, completely different definitions of growth are needed now. What's more, preexisting commitments make it difficult for governments to assume the active roles they previously held. Still, the marketplace can do this in government's stead, if it is given a chance - particularly for much needed services formation.

For anyone who still harbors doubt, Have a little faith in the marketplace. Allow monetary policy to express that faith, so that long term growth potential will not continue to decline.


*Commenter James in London asks Simon Wren-Lewis how he would address:
1) The "single monetary and fiscal authority question", a key part of the monetary offset critique of fiscal policy.
2) The effectiveness of G question. Put another way, isn't there an upper level of G/GDP that becomes sub-optimal?
3) Do you agree with Market Monetarists that obsessive IT was the prime cause of the Global Financial Crisis?

2015! Let's Ditch the Zero Bound. But First...

Can't we all get along? Or at the very least...make the demise of the zero bound threat a mutual New Year's resolution? In spite of recent growth, a (less than) 2% inflation target in the U.S. means the Fed could still "bottom out" in future recessions. Even though the blogosphere continues to discuss "breakaway" options, the public has yet to be invited to the main aspects of the conversation. Consequently, political factions distort the dialogue for their own purposes, and the Fed has too little incentive to call them out on all the nonsense.

Understandably, the Fed is hoping for a supply side recovery to do some of the heavy lifting for them. Just the same, there are conservatives who seek to restrain monetary policy beyond the point of adequate representation. Often they do so, because of a lack of desire to to reform supply side problems which contributed to the Great Recession. At the same time, many progressives refuse to budge re fiscal policy as "more important" than monetary policy. Is it because they sense that even if they did, little would be gained in a slow growth environment?

Monetary policy also lacks clarity, because much of it is being expressed in the wrong language: that is, language which sends confusing messages to the public. The U.S. is hardly alone in this problem, as special interests and political factions use inflation targeting as a foil to cover their own efforts to influence monetary policy. Tony Yates in one of the above linked posts, argued that the public could not be expected to understand an NGDP target, so central bankers should not take it seriously. Even so, the basic premise of aggregate spending capacity - were it given enough coverage in the media - should be possible to convey to most anyone.

Simon Wren-Lewis also remains adamant that fiscal policy is being ruled out as a potential solution. But compared to the Great Depression, fiscal activity is now such a widespread element of economic activity, that it has mostly reached a natural bound in terms of growth capacity. Multiple aspects of the marketplace need to be recreated on monetary terms. There needs to be clear, recognizable circumstance for further monetary growth, which makes sense to citizens at an instinctive level.

What about helicopter money? To be sure, this is a concept which is easy for folk to relate to. Unfortunately, there's a more important issue than just the temporary nature of tax breaks. They mostly contribute to consumption patterns which are already in primary equilibrium. In other words, this is an element of the economy which already exists at a relatively steady level.

When tax breaks in the form of helicopter money target those who already have steady jobs, intact family formation, housing and transportation, the middle class "gets a break" but little else happens. A permanent level of new growth, would need to generate new, steady production and consumption patterns for those who do not already have them. This is where supply side representatives need to step up to the plate and assist the Fed, instead of insisting that the Fed is the entire problem.

If no one comes to any agreement for growth in the near future, what might happen? The possibility of negative interest rates has been discussed at a serious level for some time. It's one thing to talk about implementing such a monetary reality in theory. But...the real thing?

The thought of a cashless society would be particularly frightening for anyone who does not have a reliable paycheck. How would the homeless get their meals, especially in cities which have already outlawed the provision of food to the homeless in public areas? What about the people who do not maintain the use of credit, because it eats away too much of the money they receive? Let's just don't go there. Better to address the underlying problems which have prevented real growth, and make monetary policy normal, once again.

Time Arbitrage and the Nominal Factor

There is a chart of changes in the NGDP growth trajectory for the U.S. that Marcus Nunes often portrays, which illustrates a slow but steady drift from an earlier growth line. While the chart is indicative of Fed monetary policy realities, it also serves as a reminder that time aggregates continue to be pulled away from total spending capacity - as represented by falling labor participation rates. Falling participation rates affect the time aggregates which are so important for total spending capacity. Is this why some are not willing to commit to an anchor which includes time representation, as viable?

If this were not problematic enough: economic time value holds a smaller role in current measurements, even as the healthcare component of U.S. GDP continues to grow. Chalking this up to demographic changes, tends to miss the larger point of general equilibrium imbalance. These changes in economic norms are presenting problems for healthcare measures which further distort what aggregate spending capacity represents. Available monies vary to such a degree, that healthcare now distorts quarterly GDP reports.

This also matters, because healthcare is a major (and growing) contributor of any consumption basket that might be compiled - with or without a nominal target as a viable consideration. As James Caton is discovering through a recent series of posts, his ideas for a fixed reserve ratio aren't quite as simple as he'd hoped.

Indeed, the same problems healthcare adjustments create for income measure (or) aggregate spending capacity, mean similar complexities in determining the composition of a basket of consumption goods. These problems occur primarily because healthcare is being nudged to increase representation beyond the (primary or central) pricing equilibrium which is actually possible. From part of my response to James in the first above linked post:

A nominal target recognizes how asset formations and commodity flows coalesce around the use of time aggregates. Which is why a nominal target already has a fixed component which is more reliable than other variables because it has a constantly dependable relation to money use, unlike other resources and commodities which gradually change.

Of course, there's somewhat of a problem with the (still wishful) nominal target defense which I provided for James. Even though time use needs to be our most reliable economic factor, it has been increasingly been called into question: which is one of the main reasons I started blogging in the first place. No one can afford to forget that economies would not exist without the actions of individuals - robots or no. James Caton is one of a growing number who recognizes that a nominal target is far better than what currently exists. The challenge is not only to define why this is so, but how it can best be delineated.

However, a political obstacle lies in the fact that the present day Fed does not find these ongoing considerations important. Thus far the dialogue has taken place without their input. Many in those exclusive halls remain convinced that the elite can run things without the help of everyone else. Unfortunately, that is no longer the case. While some seek to determine the direction and intent of fiat money, further population representation on the part of money is lost in the meantime. Governments can forget that fiat money is only possible, so long as the representation of whole populations remains in the mix. In other words, the real strength of government relies on the strength of individuals.

While time arbitrage (compensated time use in coordinated time settings) is not a complete economic representation by any means, it would return balance to an equilibrium which continues to falter in time use terms. Compensated time elements would be standardized (compensated) in relation to local resource use patterns, hence serving as a focal point for economic activity. One's time use would leave an imprint on other economic components, hence unique local nominal "imprints" would gradually form. Time use would be an ongoing choice by which to engage with others in compensated activity. Matched time use would also correspond with local investment options, which give flexibility to time use decisions.

Time arbitrage settings would provide further economic momentum by extending local investment access to all citizens, instead of having them need to rely on government redistribution for one's retirement needs.* Since non standard (services production) time aggregates directly correlate with local standard production, the benefits of a fiat standard are easier to recognize. Once populations begin to coordinate services formation in direct relation to normal production formations, the ongoing struggle to return to a gold standard (in some quarters) could well lose the better part of its intensity.

Money becomes capable of providing growth capacity, when individuals are (once again) given the right to define product. How so? The innovation which counts most, is when individuals transform resource use so that large scale time use gains are realized - something that most single mission institutions have little incentive to provide.

When innovation occurs, monetary growth can sometimes be stepped up to accommodate resource gains, depending on whether innovation triggers further (local aggregate) resource use other than fixed time quantity. Even though the horizontal nature of time arbitrage does not directly contribute to the growth pattern, it provides the setting in which knowledge use becomes capable of remaining front and center stage of a given (local) economic environment. Since time use freedom is desirable, local economies would sometimes opt for infrastructure which would not be possible in a national setting.

Among the details which need deciphering, are some very basic questions as to what the economy even means today, for all concerned. Time use has been externally defined for so long, that few really know how they would prefer to spend their time - in any number of capacities. Even though many accept this as normal: when one's time use is externally defined for a prolonged period - particularly if other social access is at stake - control over one's destiny can be lost.

The best way to determine monetary representation at a personal level is to directly compensate the "search" itself, through time arbitrage. What's more, doing so provides a recognizable point of economic entry which is not possible in normal income terms. Where other forms of time arbitrage have been notoriously difficult to determine, these would be locally recorded and measured. This particular point of entry would not easily be challenged, by those who claim that (today's) QE does little to help where it is most needed. Today, QE is often challenged in terms of inequality for instance, by those on the left and right who insist it does not get to the intended "targets". (Of course an ongoing rise in low wage job availability indicates the argument is not that simple.)

Locally coordinated time and investment options would provide more direct means to counteract arguments against full monetary representation. As a result (at least one would hope), monetary representation would be less likely to be shorted in the larger whole. In other words, even the utilization of "tiny" production/services economies as viable growth, could help to prevent arbitrary caps in the larger equilibrium. One of the best aspects of local production, flexible asset holdings and services coordination is that the ties between the three would make it evident what "inflation" actually consists of. "Provable" small scale macro? To a degree, yes.

Importantly, the idea of equal time use cannot be separated from access to local investment, personal innovation capacity and ability to define resource use. Why? Cuba serves as a primary example in this regard. While they held up the desirability of equality in time use and knowledge gains, real knowledge use capacity was utterly broken, because of an inability to link knowledge use to resource use in marketplace settings. While their example is extreme, institutions in many countries accomplish the same negative knowledge use result, to a lesser degree.

What's more: the further hypocrisy for Cuba, was the fact their government finally took advantage of marketplace circumstance to generate more personal freedom for government representatives, while personal freedoms on the part of the population remained lost. Much as limited elements of the free marketplace exist for Cuban government officials today, the inverse also exists in the U.S. Here, many who are monetarily compensated for the use of high value knowledge sets have personal freedom, which is quite unmatched by those with low skill sets.

Knowledge use need not be defined either as winner takes all or lose lose scenarios. To be sure, time arbitrage in local investment settings would illustrate the desirability of a nominal target. Just as important: eventually, time arbitrage could also bring back much needed balance in personal freedom, for individuals of lower income levels.


*Should a local community "fail" at some point, locals would still have valuable skills sets that could quickly integrate into other settings which utilize time arbitrage. This could cushion the blow of failed local investments which one was counting on for retirement. The fact that knowledge use would also comprise skills sets portfolios, means being able to work well into one's later years.

Update: New communities which bring production and services into a cohesive whole would certainly be studied. Advantage? Applied studies get plenty of cites! http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2523078

The Economy Will Get Better Because it "Has To"!

An interesting quote from a WSJ post, sounds oddly like some of the same "have to" language coming from the Fed these days. From Lawrence Yun, the National Association of Realtor's chief economist - with a big smile for the camera:

We believe that builders will have to build more, and they will build more. 

Apparently builders are ready to "fall in line". Perhaps Mr. Yun is simply fulfilling a Chuck Norris style role for a major component of the supply side. Git er' done! In the same irrational vein, governments and private interests are still trying to hammer square pegs into round holes by finding ways to put lower income levels into non innovated housing structures. This of course is part of the strategy which backfired on all concerned, prior to the Great Recession. One can imagine the rationale underlying such nonsense...if lower income levels get housing innovation, what if upper income levels want it too?! Where would we ever get our bonuses and local government tax base?

Something about this seems to fit in with the idea of raising the interest rate so that the economy will "fall in line" and return to "business as usual". This "build it and they will come" Neo-Fisherian strategy is based on not just the inverse of reality, but a lot of wishful thinking - and it would not be so bad if central banks weren't preparing to set the wheels in motion for the Great Return to Normal. As Nick Rowe indicated, this is the kind of reasoning that leads to monetary black holes.

Who doesn't want to see interest rates return to a better normal? Sure, everyone wants to see a stronger economy, and many statistics have indeed increased market confidence in this regard. However, the too little noticed indicator of NGDP continues to show where too many measures of prosperity were allowed to fall away. Small wonder the Fed would just as soon pretend that a nominal level target doesn't matter, because they have yet to openly apologize for the damage of the Great Recession. While it is understandable why they didn't, the reluctance to be honest with the public only puts the Fed in a more fragile position among other policy makers in Washington. If the public doesn't support them in crucial moments - who will?

As a result - ready or not - the economy will get better because it "has to". Hmm, can anything possibly go wrong with that logic? Full speed ahead, never mind the hole in the hull which wasn't repaired after hitting that iceberg, even though the water was pumped out this time. In "214,000 New Jobs Isn't What It Used to Be", Josh Mitchell reflects on October's gain and notes:

But there's a big caveat. The U.S. population is a lot bigger today than it was then.

What's more, I would add that many job gains are in prosperous regions. Some cities are not as well represented for job gains, and many rural regions remain in the lurch, as to economic formations that could regenerate hope for the future. Pretending that no structural reforms are necessary, and that the same old strategies can still be deployed by both private interests and the Fed, is a loser's game.  It's time to take a more realistic look, at how real growth for the future might actually occur.

Since this post mostly serves to make a simple point (private interests and central bankers need to work in tandem to improve economic access instead of declaring an arbitrary normal), I'll let Josh Bivens of the WSJ have the last word:

There is a large outstanding stock of workers who lost jobs during the Great Recession, plus all the new labor-market entrants who have appeared each month over the past seven years...that must be worked off before slack in the labor market is reduced and workers start seeing better wage growth. The labor market's stepped up pace of job growth (or faster flow) over the past year needs to continue for some time before all potential workers are reabsorbed into the market, taking up the remaining slack and pushing up wage growth again. And the Federal Reserve should wait for this accelerating wage growth to appear before raising interest rates.

Services and Aggregate Spending Capacity

While I might not go so far as to call these concepts covariate relationships, services factors affect aggregate spending capacity to a considerable degree. Since I am convinced that a nominal level target can provide the most reliable measure of monetary activity, I also try to "connect the dots" between institutional gridlock and the havoc it can play with monetary stability.

There is a simplicity to the nature of the NGDP level target which can be difficult to decipher, especially for anyone who has thought differently for decades. Even so, the efficacy of the measure has been questioned, as income potential turns into a moving target. What concerns me is that some central bankers may be tempted to change a fiat monetary regime back into a no growth commodity standard. In the latter, income aggregates might not hold the central position that they need, for optimal resource utilization.

In part, some policy makers appear to have grown weary of the "shenanigans" of a consumer driven economy which - among other problems - allocated for service needs too randomly in the twentieth century. As growth trajectories have "downshifted", a considerable amount of money remains parked to protect the asset structures already generated and claimed in earlier debt formations. Some onlookers remain confused, in that a vast degree of money was created which nevertheless didn't spread through the economy. What appears as though loose monetary policy remains deceptively tight, even in the U.S.

If this were not enough, services growth has been difficult to track or measure in relation to more familiar economic indicators. Unfortunately, since these inadequate dynamics are proving so difficult to change (or understand), central bankers appear as though backing out of earlier wealth formation in slow motion. Yet they do so with no "plan B" to move forward again, which only leaves them trying to restart the same mechanisms which broke down the first time. Not being able to see beyond the failed plan A, leaves central bankers in "stealth mode". This "stealth mode" - refusing to allow a return to the earlier growth trajectory or explaining what happened - has still not gotten the attention it deserves.

Inflation targeting can also downplay the earlier centrality of individual participation, in a time of growing automation.The sticky nature of institutional gridlock in the marketplace certainly isn't helping matters in this regard. Hypocrites of all political stripes nonetheless try to maintain a services marketplace for themselves, even as they insist on no more growth or services for anyone else.

Why is aggregate spending capacity - which relies on targeting the intersection between economic participants and resource use - so important? Fiat money also represents a relationship where income sets up recognizable geographic patterns between asset formation and broad services flows. This pattern is more complex than a commodity standard, where "formal" economic flows (from production and commodities) don't have the same middle class assets to services capacity. Also the pattern is only partially complete, in that many services formations still rely on international wealth flows for their monetary valuation.

Earlier commodity standards often relied on a less developed marketplace - consequently with less need for knowledge use and skills capacity, other than what was demanded by production and manufacture. Even though today's production requires high skills, it does not require a large labor force.

Working the land was still a viable survival option, before economies grew more complex. Importantly, earlier agricultural ties are inadequate for populations which appear as though "not needed" in the workplace. This is why it would benefit both developed and developing nations to seek means to open the service marketplace to broad citizen participation. In the process, monetary flows could be stabilized, as informal markets become integrated into the broader economy. Broad based knowledge use in the marketplace is important not just for a civil society, but for human aspiration as well.

I am quite skeptical, as to whether developed nations would remain monetarily stable by opting to return to commodity standards. Why then, might that even be a possibility? Earlier income expectations are slowly whittling away with inflation targeting, along with gradual removal of monetary flows as debt structures are decreased. Nations also react to disinflation by paring back services. But instead of "giving up" on full scale service formations, services need to be reconstructed on monetary terms so as to become a central component of the marketplace. This would prevent the loss of countless hours of investment in human capital.

Until structural change is possible, services formations in some instances will continue to decline relative to population. Just one unsettling example of this discrepancy: I live in a state where mothers can now leave newborn infants at any number of public places if they don't have the means to take care of them. That law was intended to keep as many infants alive as possible, to make the best of a bad situation. Even though the law is helpful in some respects, it is incredibly sad that populations have resorted to such measures - all the while pretending that services are not really a necessary part of the marketplace. The fact that Obamacare cannot be expected to work, only means that people need the right to heal, once again.

Solutions are not "found" for government budgets or anything else for that matter, by pretending that missing marketplaces do not matter. Pretending only generates political nonsense and unnecessary personal hardship. Only consider how today's low labor force participation was once not so problematic, in that direct possibilities for resource use were often possible until the early twentieth century. It would be quite difficult today, for the U.S. population to return to informal economic circumstance.

How, then, to revive formal labor force participation? This needs to happen, if developed nations are to maintain a robust fiat monetary standard into the future. The good news is that time use aggregates and knowledge use potential are nowhere near utilization capacity in the present. Both represent an abundance of wealth which can be tapped for new community formation. Time arbitrage can maintain assets to services equilibrium, albeit in revised income/consumption versions from that of the twentieth century. Local economies can provide complete investment, production and services functions which also augment the existing international equilibrium.

Service formations need the accountability of production norms much as any other manufacture, if knowledge use is to remain a widespread component of wealth formation. Matched time use would allow that to happen. Knowledge use systems as newly generated growth could protect fiat money structures, by making certain that services remain a vital component of economic activity at all levels of income.

Services need to become directly created wealth, so that they are not limited to the largess of government or private industry. The additional income potential of services would also allow aggregate spending capacity to maintain monetary stability. Let's hope that the role of income as central to nominal targeting remains intact, in the years to come.

Where is the Foundation? (A Response for Lars)

Does a reasonable argument for an undeclared nominal target already exist, tucked away within the corridors of central banking? Certainly, market monetarists could hope so. Perhaps the logic has really been there all along since the Great Recession and we just didn't realize it. Recent posts from Lars Christensen suggest that the present level target of 4% could be purposeful along those lines. More importantly, he reaffirmed his belief that we need to let bygones be bygones, thereby accepting both the lower output and the growth path which has resulted since the Great Recession.

Regular readers know that I'm not convinced. Not only do I feel that the present (unannounced) level target is too low by at least a percent, but I also believe it is a poor strategy for the Fed to give up on lost output. Who exactly took the vote...in which we all gave up on future growth? In this response for Lars, my first concern (and that of others as well) is whether market monetarists can rely upon the seeming "goodwill" of the Fed to maintain a steady level nominal target. Even if the Fed has inadvertently done since 2009, to a relative degree.

Of course it helps to remember that an approximation of said target, versus a well voiced commitment to a steady nominal level, are far and away not the same thing. If one was to think of this "fortunate" reality more concretely, it's not at all clear that the Fed is very enthusiastic about the implied relationship with market monetarist expectations. If it was, not only would a potential nominal target rule be under active discussion, the Fed would also make that clear to the public as well. Sometimes I wonder whether the public will eventually convince the Fed of the importance of a nominal target, instead of the other way around.

As a result, little about the hopeful assumption on Lar's part really feels solid. Granted, to outsiders the U.S. can appear economically healthy compared to other countries, but many of the positive statistics are coming from cities of which economic circumstance are quite different from the country as as whole. In the U.S., the Great Recession should have been a strong signal for our governments and business interests to get their acts together and overcome the obstacles which stand in the way of innovation and the potential of a digital age. Instead, we have been subjected to moral stories about finance over and over again, as if our economic lives are somehow supposed to consist of little else than bank loans.

Hence, should we rely on hopeful assessments? Or will the first sign of high winds (i.e. the next really negative supply shock) send central bankers running for cover, once again? Supply side issues concerning Obamacare are one thing, as frustrating as they are. However, a primary concern is whether the Fed believes that certain commodities are worth a lot more than the economic participation of actual human beings. Unfortunately, I suspect this still holds true. How does anyone know that central bankers will not overreact again, should oil prices suddenly spike?

Without a level targeting rule in place, it's difficult to assume anything! But if one is willing to settle for "comforting" numbers in the meantime, how exactly does that improve the chances of gaining a rule for a nominal target? In the meantime the Fed continues to take on roles which imply it is capable of doing much more than its assignment actually allows. Even though the Fed concentrates on aggregate demand issues, it spends quite a lot of time debating and studying supply side issues - whether or not it is not in a direct position to do anything about them.

Worse, no one else is in a position either, to be responsible for the supply side problems which continue to create economic gridlock in the present. In spite of ongoing papers which continue to get churned out regarding both demand and supply side conditions, no one is preparing to take real constructive action on supply side aspects of this work as far as I can tell. If they were, we would not have already "gotten the memo" that real growth is out of the question.The problem for both the Fed and the U.S. government is that too many special interests have become highly resistant to needed change. The only way to circumvent the resistance is to begin the process of experimentation around the edges. This needs to happen before the possibility of greater growth in the near future is completely ruled out.

The Fed needs to do its part to break the logjam between government and business interests, instead of contributing to it. This is what worries me most about any praise for the Fed, even though I do not judge them as harshly as I once did. There is a chance that praise for them now, will only be interpreted as an "all clear" signal to move ahead as though everything is back to normal...when it clearly is not. What is problematic for market monetarists is that the Fed is still working from a perspective which lines up with the needs and expectations of finance, rather than the public as a whole.

In short, this is no time to declare victory. Not only is the present growth trajectory far short of its potential, but the purpose and intent of a nominal target is not yet obvious to the public, as a true source of monetary stability. As long as people associate money with financial concerns instead of the reality of their economic lives, not much can change. One only hopes if and when a nominal targeting rule is finally adopted, that its adoption will be associated with success and renewed prosperity, rather than the lack of it. There is still much work to be done.