Don't Forget About Basic Resource Scarcities

Not long ago, some became convinced society's main problem was finding better ways to share resource abundance! But it didn't take long for a global pandemic and the vicissitudes of war, to remind everyone once again that resource scarcities are still part of the equation. For mature economies in particular, resource scarcities in the utilization of time and place are starting to impact how the Fed manages inflation. Limited markets in time based services are evident in high skill human capital, but this phenomenon is also emerging in simpler forms of (highly sought after) personal attention. Meanwhile, place based scarcity is reflected in the high costs of housing relative to actual incomes. 

Still, it's easy to forget how these imbalanced markets affect current underlying inflationary levels. Instead, macroeconomic discussions tend to alternate between employment issues or irresponsibility on the part of fiscal and monetary policy. At the very least, some of our supply side resource scarcities should resolve in 2023 via resource substitution, which can in turn help ease inflation. Unfortunately though, time and place based resources need to be framed in more understandable context, before the Fed benefits from supply side assistance towards monetary stability. In the meantime, the Fed is reduced to inadequate measures such as reducing traditional housing starts, when what is really needed is more accessible non traditional housing production!

One way to think about the natural scarcities of economic time and place, is determining how we created too many additional layers of artificial scarcity to the real scarcities we already face. It could also help to respect the rationale that existing institutions initially used for additional limits to market access, then move forward to create new beginnings from this understanding.

Respect for existing institutions which work with resources involving time and place based product, means fewer attempts to dismantle them, and more attempts to evolve production processes where these institutions are actually growing fragile. Consider for instance what it actually means when builders cannot afford to build affordable homes for low to middle income consumers! Recall as well the fragile nature of healthcare institutions which can ill afford to function in many areas which don't benefit from vast wealth holdings. Both of these are institutional fragility. New institutional efforts would do well to create alternative means of social support to address where older institutions can no longer easily function. 

Indeed, by not attacking existing institutions directly, we can still respect how they evolved to address different sets of social realities and historical contexts. For instance, Nimby based zoning allowed people to at least partially manage their personal fears around living close to others they didn't know enough to trust. Likewise, skills use limitations were a way to address people's fears about what might happen if they paid for services which turned out poorly. And enforced professional limits in human capital, also made it possible for professionals to live among others who already benefited from higher and more directly derived incomes.

Nevertheless, regulatory moves which increase artificial scarcity now mean basic non discretionary markets beyond reach of average consumers. Such markets also require a level of monetary representation which makes the job of central bankers more difficult. What's more, these domestic market income sources - not to mention their corresponding housing representation - contribute to an NGDP growth level which is currently too high to maintain economic stability. Clearly, more is now at stake than missing markets for lower income consumers, as this aspect of market dominance could compel central bankers to impose additional reductions in aggregate demand. Alas, doing so would further reduce the output potential of discretionary markets in more direct wealth origination sources as well. 

Should new institutions arise to create broader domestic market options, they would nonetheless need to acknowledge the main reason consumers tolerated earlier forms of market dominance for so long despite lack of access: trust. Many countless regulations arose in environments where social trust had been eroded at least to some extent. Hence people became willing to pay dearly (when and if they could) for specific quality promises in time based services and housing options. New institutions need to build much more than just greater economic access, for they would need to restore societal trust through time value which doesn't require the same level of monetary compensation as in decades past.

At the very least, we've been quite fortunate our current services sectors functioned as long and as well as they have. Nevertheless, we appear to have entered an era in which today's services sectors could impart undue burdens for inflation, should new domestic markets not materialize. For this reason I might add that when it comes to Fed inflation management, I would probably understand if they maintain a "hawkish" stance in response to continued supply side inaction. Especially should NGDP levels remain as high as is currently the case. 

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.

Arbitrage Potential Includes Time, Resources and Systems

How does arbitrage function as a component of economic dynamism and long term growth? While many associate arbitrage potential with monetary gains, this feature is only a fraction of what arbitrage is capable of. Indeed, one might envision monetary arbitrage as a residual effect of aggregate efforts and time based priorities. After all, the nominal representation of general equilibrium depends on the extent to which all resource capacity gets defined. What matters most for monetary provision is its continuous accurate representation as a level nominal target, so that all arbitrage potential might remain stable as well.

As humans, we are naturally inclined to make improvements on whatever resources happen to be at our disposal. Three arbitrage possibilities are especially important: physical resources, time arbitrage (human capital potential), and systems arbitrage. In particular, time arbitrage could benefit from stronger market patterns and commodification. Only recall that when service offerings become highly specialized, by definition this limits access and commodification, as is currently the case with many high skill services.

Today, wealth creation as systems arbitrage has become mostly associated with movers and shakers in prosperous regions. Yet only a century earlier, individuals in millions of small communities were also direct contributors to wealth creation processes. Much of the earlier participation in physical resource arbitrage was decentralized. Even though it offered sustenance for local individuals and communities, these production patterns did not always generate sufficient additional output to be readily captured for broader economic activity. Time arbitrage existed alongside resource arbitrage in these settings, often on even more limited terms of monetary representation. As time arbitrage becomes more important in the near future (once again), it needs to return with a formal baseline monetary representation, to create additional incentive for local community trust and mutual reliance.

The physical resource arbitrage of yesteryear, gradually transitioned into immense wealth that negated the need for local production in countless communities. Unfortunately, even though small town populations gained in terms of tradable sector consumption, they still lack the ability to fully participate in high skilled time based services. That said, the need for decentralized services generation in the present, is vastly different from the production patterns societies once utilized locally. And since time based product is naturally limited, it is the logical employment replacement for tradable sector production - given the latter's centuries long history of exponential output. Even though time arbitrage would include microeconomic characteristics, it still offers a macroeconomic solution set to help solve long term employment issues.

Time arbitrage in the form of new markets for human capital, could also expand general equilibrium in ways that money has only been able to partially represent. Consider why this matters. Skills arbitrage, though certainly a reasonable approach to human capital investment, becomes unable to fully maintain a strong growth trajectory once tradable sector dominance gives way to non tradable sector dominance. Hence the need for further systems arbitrage, which instead of replacing prior systems, would function alongside them. Economic time reciprocity would give applied knowledge the conceptual space to function as a more direct means of wealth creation.

Many communities struggle to take part in time based services production today, since high skill services tend to rely on the redistribution of residual wealth. More often than not, this limits the most important facets of useful knowledge to prosperous regions. New forms of systems arbitrage, would allow time reciprocity to expand human capital roles beyond their present reliance on wealth redistribution. Once applied knowledge takes place via direct means, it can also serve as a valid source of community building. Systems design for new communities would establish knowledge priors as prime reasons for community origin. Flexible building components and infrastructure, would give these communities added mobility which is similar to what private firms are capable of. These components could be reconfigured according to the knowledge priors which are most readily coordinated during any given time period.

Since time based services markets lack the ability to grow exponentially in terms of output, we need ways to regain time arbitrage as output defined in quality gains for all human capital potential. Time arbitrage has the capacity to directly coordinate mutual time priorities. Indeed, systems of time arbitrage make it possible to utilize human capital as a lever in the production equation, so that less intense human capital investment is necessary in the first place.

Monetary Stabilization Needs Real Economy Stabilizers

When recessions call for extensive monetary stabilization and fiscal stimulus, also consider how real economy factors tend to either support or undermine the process. Or, more specifically: Given the importance of reliable long term financial flows, a flexible real economy approach could help to ensure they are maintained.

The current recession is somewhat different from many earlier recessions, since extensive supply side disruptions have also come into play. If this weren't problematic enough, without NGDPLT as a guide, the Fed lacks sufficient rationale for the temporary inflation levels that could smooth and maintain the current monetary trajectory.

Despite the initial stimulus, additional fiscal and monetary assistance are being called into question. Some are now asking, who is really going to benefit? Likewise as Scott Sumner recently noted, the Fed is beginning to falter in what recently appeared a strong commitment to a level trajectory. And unfortunately, increased public skepticism could derail what is still needed for sufficient monetary stabilization. It doesn't help that losses in the current trajectory could mean more extensive business losses than otherwise would have been the case.

Even though monetary policy can't do the entire job of economic stabilization, it is still the primary consideration for what is needed in macroeconomic terms. A level nominal trajectory ensures that real economy efforts have the greatest chance of overall success. What contributions from the real economy, then, might contribute most to continued stability?

The real economy particularly suffers from a lack of structural flexibility. It lacks the ability to respond to what are also rapidly changing events. Consequently, too much economic participation ends up undermined by excessively rigid rules of engagement. Since these rules also result in limited economic options, recessions invariably leave millions of participants on the sidelines, afterward. All too often, many individuals never fully gain the economic and social connections they once enjoyed.

Structural change - in order to be truly effective - would make room for more flexible forms of ownership and financial obligation. One way to think about such processes, is that each example of non tradable sector good deflation, would also function as a real economy stabilizer in times of recession. In other words, good deflation would mean greater stability for business formation and employment in general. Production reform could make it easier not only for businesses to stay afloat, but also for employees to remain gainfully employed.

Recessions are difficult enough, without the structural rigidities that make it difficult for societies to carry a full load of financial obligations. Fortunately, there are ample opportunities for making real economy circumstance more resistant to recession. Greater structural flexibility, especially for building and time based services options, could give investors and average citizens alike more confidence in continued economic dynamism. Let's not forget, how basic aspects of supply side potential could be configured in ways that restore hope for a better future. Such options are especially needed now, to help recover confidence not only in monetary policy, but in real economy potential as well.

When Monetary Representation Becomes Fragile

Can monetary policy retain a stable and relatively constant level (near to mid term), given the uncertainties of the pandemic? Since this most recent recession began with extensive supply side disruptions - subsequently impacting aggregate demand - no one knows for certain. However, even though the Fed has yet to adopt NGDPLT, the Mercatus center has created a new measure called the NGDP Gap, which among other things will highlight nominal income stability. This new measure could help people determine how closely the Fed adheres to representing economic activity without undue gaps or changes in valuation.

Nevertheless, overall monetary representation may remain somewhat fragile in the years ahead, even if central bankers adhere to an optimal course. Only consider how prior to the pandemic, monetary policy became compromised by structurally uneven equilibrium coordination between tradable and non tradable sectors. The latter is more prone to price making than the former. Plus, they represent human capital in highly different ways which have yet to be fully accounted for. By way of example, the marginal revolution which is so important to tradable sector activity, is less a determinant of economic outcomes in non tradable sector activity. Ultimately, better defined economic roles are needed for all human capital, before non tradable sector activity ceases to detract from equilibrium balance and optimal monetary representation.

Extensive price making in non tradable sectors tends to compromise aggregate output, which in turn makes it difficult to align aggregate output with a stable nominal income trajectory. Since price taking involves better coordination of all resource capacity, it has proven simpler for monetary policy to represent tradable sector output, during long periods of relative tradable sector dominance. However, once general equilibrium is dominated by price making outcomes, assets tend to experience additional pressure as well. As asset values rise, some become convinced that monetary policy is too "loose", even though this actually may not be the case. Rather, when full economic participation is limited to subsets of given populations, the consequent output reductions impose higher prices elsewhere, thus making it appear to some that monetary policy has become too expansionary. In short, monetary policy may struggle to contribute to optimal aggregate output, once price making becomes dominant in general equilibrium.

Fortunately, this sectoral imbalance could be addressed through a broader interpretation of human potential in the marketplace - one which includes more price taking for time value in equilibrium context. By bringing greater economic value to all human capital potential, we could also do much to stabilize monetary representation. A better representation of aggregate time value, would make it simpler for a level nominal target to serve as a reliable snapshot or historical memory of economic value. Toward this end, the adaptation of time use potential as a valid economic unit, might help to restore money to its vital role in defined economic wealth and value.

Further, time use as an expression of economic value, creates more space for a wide range of maintenance functions which otherwise become limited in mature economies, as budgets are strained by competing objectives. Time arbitrage would not only preserve time value for society as a whole, it could contribute to maintenance activities involving a broad spectrum of knowledge and skill, so as to better preserve already existing wealth.

Three Basic Ingredients for Economic Stability

While there are many ways to envision what contributes to economic stability, the current pandemic suggests a closer look at basic ingredients. Should it prove difficult to maintain current wealth levels, a focus on the essentials could also lead to sturdier safety net options. I find it useful to think about three elements in particular: First, the importance of stabilizing what is nominal. Then, building a simpler framing for physical and non physical aspects of the real economy which the nominal represents.

As a market monetarist, I also believe it is vital to maintain a level nominal target, so that general equilibrium will (hopefully) remain stabilized. And even though level NGDP targeting is not the stated approach of the Fed, central bankers have more closely adhered to nominal stability since the mistakes of the Great Recession. The greater danger now, however, is that monetary stabilization could be threatened by extensive supply side disruptions. Adjusting for optimal aggregate demand will be quite the challenge, since present supply side uncertainties - unlike many previous shocks to the real economy - are due to factors too numerous to understand.

Consequently, despite what it can accomplish in the near future, monetary policy still needs to adjust to lost general equilibrium capacity, at some point. In other words, accurate nominal representation also depends on what the real economy is able to accomplish. Clearly, there is a great deal of interdependence between the nominal realm, the physical realm, and human oriented aspects of our economic lives.

Again, consider what present uncertainty consists of, insofar as many chains of financial obligation are being disrupted. How will society respond? Understandably, fiscal policy also seeks to stabilize general equilibrium conditions. Nevertheless, doing so is only feasible up to a point. All the more so, when fiscal stabilization attempts to include many activities that are not essential to getting things done.

In all of this, many small businesses won't survive, and some Main Streets could end up even less dynamic than before. For instance, one third of Americans missed their rent payments in April. This means problems for renters and landlords alike. Stephen Cecchetti and Kermit Schoenholtz explain what financial institutions also face:

Banks will not be able to dodge the financial fallout. Many borrowers are likely to suspend repayment soon, presaging widespread default. We will not know the extent of the damage or who will ultimately bear the costs, for some time.

Yet this time really is different, as they further note:

Rather than the financial system undermining the real economy, it is very much the other way around. With few exceptions (like Sweden), advanced economies have entered a form of suspended animation. As a result, households and business are losing income that they can never replace. The hope is that the COVID-19 crisis does not trigger a full-fledged financial crisis, exacerbating what is already destined to be the most severe global downturn since the 1930s. 

Many households and businesses are going to need financial options in the foreseeable future, which rely on lower monthly expense levels. Hence when considering basic ingredients for economic stability, simplification of everyday living circumstance is key to making this possible. By way of example, in my most recent post , I suggested flexible building and infrastructure options as a way to address structural physical aspects of the real economy.

Likewise, broader options for economic participation and use of human capital, are needed for non physical aspects of our environments. We need locally applied time arbitrage, to rescue what are increasingly endangered knowledge chains. Two recent articles offer unsettling examples. From NPR:

According to a report released this month by the Chartis Center for Rural Health, nearly half of rural hospitals were already operating in the red before the COVID-19 crisis.

Further, Dylan Scott writes for Vox that hospitals are cutting staff "just when America needs them most". Even though the initial healthcare losses took place largely outside of hospitals, staff cuts are beginning to spread inside of these institutions. Only recall that much of this problem stems from the fact today's healthcare is heavily dependent on existing wealth - much of which is in jeopardy at least in the short term.

Let's create simpler procedures and settings for ownership and economic participation, so that individuals and businesses aren't jeopardized every time a month's revenues fall short. Ultimately, we could end up struggling to maintain general equilibrium in its present configuration. But even if existing wealth is somehow diminished, imagine what could still be done, to strengthen and preserve its core.

Why not make our physical and non physical environments easier to access for all concerned. If we can shake loose structural rigidities how productive activities are "supposed" to occur, oppressive financial burdens could be lightened as well. A direct structural approach today, would be better than the indirect response of a debt jubilee later on. Perhaps debt jubilees of the past also reflected the unwillingness of societies to relax their own expectations for working and living requirements. Debt jubilees may have been no real panacea, if they left in place the same rigid requirements that negated the economic participation of millions - even in good times. Let's work on reducing unnecessary barriers to ownership and economic participation, so that a better new normal might eventually emerge.

Some Considerations re Economic Stability

Already it is evident that pandemics don't provide easy answers, when it comes to maintaining economic stability. How to know, who or what could most benefit from assistance over extended periods? Appropriate fiscal policy is no easy feat, yet governments have few options to directly address workplace losses which have occurred practically overnight.

Granted, fiscal support for pressing healthcare needs will remain crucial in the immediate future. Access to testing and other vital services, will also play roles in the time it takes to regain normalcy. But while support for healthcare systems is paramount, some aspects of financial stabilization may not prove optimal in the months ahead.

Determining where financial stabilization could help most, is even more difficult in a time of growing budgetary pressures and extensive long term debt obligations. Hence two questions on many minds at state and local levels, basically come down to this: Which spending options are discretionary? Or, which spending is absolutely essentially for individuals, firms and organizations - regardless of what happens? It helps to recall that while fixed production costs are generally associated with private firms, individuals and families have relatively close equivalents, in many instances.

Washington has finally completed its deliberations for a massive stimulus package, yet this might only be the first. For example, James Pethokoukis expressed concern that the current round of fiscal stimulus may only address a months' worth of necessities.

Fiscal assistance for supply side losses is all the more challenging, since policy makers are tasked with taking the fixed costs of businesses and citizens alike, into consideration. Still, governments still have little choice but to pick favorites, with a fiscal policy approach. Even now, there are ways in which monetary policy functions more efficiently, to "get in the cracks" where fixed cost remedies can't be readily ascertained.

Nevertheless, monetary policy will face its own challenges, due to extensive supply side disruptions from millions of people staying at home. Given this reality, will central bankers remain willing, to preserve full monetary representation at present capacity? In particular, rising unemployment is going to be a real issue in coming months. A record 3.28 million workers filed for unemployment last week, and as the WSJ noted, "The long run of American job growth has ended." Gred Mankiw adds further perspective from data compiled on hourly employees. Already, "hours worked by hourly employees is down by more than 50 percent", and this is approximately 60% of the labour force.

Fortunately, there are improvements to unemployment claim processes in the stimulus package, which will provide additional access for small businesses and the self employed. With a little luck, once people start to return to their workplaces and the economy begins to improve, today's short term fiscal assistance can gradually transition to the broader stabilization methods of monetary policy.

Will monetary policy prove capable of restoring long term growth, once employment levels normalize? Hopefully, yes. Just the same, perhaps better methods are needed, which can take into account the non discretionary obligations which all citizens face, regardless of workplace participation levels. These non discretionary obligations are vital to general equilibrium dynamics, and the act of recognizing them, might better ensure that full monetary representation continues to take place. Non discretionary fixed costs in our daily lives, are an important focus of current fiscal policy. But hopefully, a broader range of non discretionary obligations will gain prominence in monetary policy, once fiscal remedies are no longer necessary.

Might the Fed Be "Purposely" Holding Back Growth?

In a recent post, Scott Sumner reasons that the actual scenario is just the opposite. While he adds that "the Fed may start holding down growth in the future", recent gains in NGDP growth are not to be denied:

One can't just argue that the Fed is holding down growth, without providing any evidence. All the evidence points in the other direction, that the Fed has been juicing the economy.

Juicing? He adds:

Some will inevitably argue that there has been a supply side "miracle" that's hard to see because the Fed refuses to "let the economy rip". Supply-side miracles leave very specific tracks in the data, such as a slowdown in inflation. But inflation has been rising. And of course that doesn't explain the strong NGDP data.

There's certainly no supply side miracle yet. It's always good to remember that actual supply side contributions which increase output, aren't the same as those juicing "contributors" which tend to create additional inflation and output uncertainty.

Even as Scott stressed recent strength in the data, he noted the the possibility of recession in the near future. However, he also echoed an all too common emphasis on short term data. Some of us feel this short term emphasis can be unfortunate, since it's already too easy to neglect how a permanently lowered growth trajectory affects many statistical indicators. Many have rightfully noted how the present "expansion" lasted a long time, because it was a weak expansion to begin with.

I've another qualm, regarding some of the discussions which followed his post. Scott adheres to a model which doesn't take into account the fact that market and employment conditions might actually worsen, over time. My main concern in this regard, is that excessive price making is becoming a threat to markets in general, for it can directly impact both output and employment. It's not feasible for every economic actor to price make in general equilibrium. Are too many economic actors attempting to do so? If so, how could we make sense of what is taking place? Yes, there's a model hidden somewhere in this possible scenario.

Since many central bankers closely adhere to inflation targets, price making has been restricted to internal inflation which is not always as simple as it may appear. However, inflation targeting only makes it easier for price making to partially crowd out revenue which would otherwise accrue to more efficient and dynamic markets. In all honesty, I don't know how much this growth reducing effect could be reversed via NGDPLT, should it be the main targeted response. After all the imbalance between sector dynamics is a structural problem, and a production norm could pose similar restrictions for asymmetric non tradable sector dominance.

In aggregate, of course, price making is not an option for everyone. But how does any society know, when the process becomes insidious to the point of no return? And what does this have to do with the possible intentions of the Fed, regarding growth? It's the imbalance between tradable sector and non tradable sector activity, and the prevalence of price making in portions of the latter, which makes it so difficult to determine whether the Fed is maintaining an optimal position in terms of monetary representation.

Again, all of the above has bearing on why I promote the economic option of price taking in non tradable sectors - particularly for time based services. We presently lack context for doing so, because services are normally structured in ways that don't allow for immediate reciprocity of time and resources. Resource reciprocity is what makes it a simple matter, for tradable sectors to utilize the spontaneous and wonderful coordination of price taking options. Even though many economic actors would prefer to work with more equal templates, markets can get stuck in positions where price making appears as though the only reasonable choice.

Chances are, the Fed is not purposely holding back growth. Nevertheless, its hands are tied by our present lack of ability to coordinate time based services in a more productive and dynamic context. In all of this, the Fed is only adhering to sub optimal general equilibrium realities which have yet to be addressed.

If asymmetric compensation could ultimately be reduced to levels where price making doesn't undercut general equilibrium gains, symmetric compensation could help restore output and employment certainty. We need coordinated price taking markets which account for the actual scarcities of our time, as a valid part of economic dynamism. At the very least, one can hope.

Knowledge Production as a Monetary Constraint

One characteristic of today's non tradable sector activity - particularly given the structural shifts which have occurred since the Great Recession - is the nature of intentional constraints for knowledge use which translate into wealth capture. Only consider the income gains presently accruing to high skill services management, which doubtless contribute to the divergence between productivity and the typical workers pay as a "relatively recent phenomenon" described by Lawrence Summers and Anne Stansbury. Already, these recent high level income gains are leading to calls to pull back on monetary policy representation, as well.

Knowledge use constraints especially affect a nation's long term growth potential, and the marketplace limits they impose could help to explain some of the recent losses in national well being. While many continue to be concerned about the implications for lost middle income compensation, I've stressed how hierarchical services sector dominance affects marketplace suppression at the margins. These arbitrary limits to production and consumption, help to explain at least some of the lost aggregate spending capacity that originated in the Great Recession. Indeed, the extensive drop in nominal representation was never fully recovered, or otherwise sufficiently accounted for by the Fed.

Limits to production and consumption in knowledge based services, are also reflected in limits to housing ownership. All the more so, since there are few mass produced housing components or infrastructure options that represent the full range of income levels in the U.S. And while aggregate income gains are normally associated with greater growth and output, the fact recent income gains are linked to sectors which intentionally limit total output, likely contributes to calls from many quarters to pare back monetary representation. Even though the idea of a possibly overheating economy seems preposterous - given today's low levels of labour force participation - this is an important part of our structural reality which has yet to be addressed.

The real challenge is not to break up the dominance of today's knowledge gatekeepers, but to encourage them to support organizational patterns that would contribute to broader participation in the production and consumption of time based services. After all, until more people participate in these activities, the limits of knowledge production will act as constraints on aggregate levels of tradable sector production as well.

Wealth capture is an understandable impulse, and occasionally it can occur in relatively benign ways. But presently, extensive limits to active knowledge use have destroyed any illusions about benign outcomes, and not just in the U.S. Hopefully, some of our knowledge gatekeepers will become more open to renewed prosperity that does not arbitrarily exclude human capital potential at the outset.

Can Political Extremism be Reversed?

Might there be a common thread that illuminates similarities between the nationalist extremism of the early twentieth century, and what has appeared more recently? Thus far, many observers remain confident that today's forms of political extremism should remain - at the very least - manageable. But what if this confidence doesn't hold?

Perhaps there's an underlying rationale regarding our present approach to wealth generation versus wealth distribution, which exacerbates political divisions. Even though some supply side advocates are quick to highlight government dependencies, there's too much dependency for already existing revenue, on the part of private interests as well. And both dependencies are now responsible for structural imbalances. Yet rather than challenge excess claims on wealth in relation to new sources of wealth generation, central bankers - in part due to their excessive financial interests - have unfortunately responded with lower levels of monetary representation, particularly since the Great Recession.

Still, many remain unconvinced that those earlier monetary losses matter. These individuals often believe that monetary representation is presently too "easy". Worse, without an adequate understanding of the role a nominal level serves (as a symbol of total and ongoing economic participation), some can be swayed by monetary historical contexts such as hyperinflation, which have no bearing on present circumstance in today's advanced economies.

In all of this: Despite recent economic gains, structural imbalance means long run growth is still compromised to an extent that the marginalized - more than ever - tend to be perceived as a societal burden. And history has shown that if wealth creation is stymied for too long, populations often begin to add more prosperous citizens to their list of perceived burdens. Perhaps the fact so many populations feel threatened - in spite of apparent prosperity - should serve as a call to include all human capital as sources of wealth generation. This, instead of imagining "inclusive economies" as mostly further redistribution from what is already stretched too thin, in the collective imagination of many a taxpayer.

When monetary policy stays relatively tight for long periods, that could be part of the common thread which leads to extremism. After all, more demands continue to be made on monetary representation by all concerned, than central bankers are willing to accommodate, or entrenched interests are inclined to account for. And even though tight money vastly contributed to the Great Depression, it's hardly a simple matter to trace wealth creation in relation to wealth capture for that earlier period. Oddly, similar problems for quantification still exist today, since neither governments or private interests fully account for the ways in which human capital is used at a mere fraction of its full potential.

So why bring up (yet again) tight monetary conditions and lackluster dynamism, if little can be done? Because resignation to structural issues such as this, may worsen nationalistic impulses in the near future. Fortunately, we still have the ability to craft a supply side response which could eventually cut through much of today's divisiveness and excessive blame.

Only remember how long it took over the course of the Great Depression, before the marginalized of the South finally gained economic access, via Washington's commitments to physical infrastructure. How much twentieth century prosperity in the U.S. stemmed from what was essentially an invitation for the marginalized to finally participate, after what had been decades of economic isolation after the Civil War? Recently, while gathering together a near century of immediate and extended family pictures, I was fascinated how that invitation to prosperity played out in those images over the course of the twentieth century, in terms of wealth gains and family outcomes.

Today, much of the infrastructure for potential participation is already in place. Yet oddly, an extended invitation to the full use of knowledge in every community, seems to be the hardest part. But think about who - and what - has become marginalized this time: Cities, towns and rural areas which have little access to the globalized economy of the present.

Hence the new call to wealth creation, needs to take a different form. It now means allowing those who have been left behind, to gain the chance to make full use of their human capital investments and and aspirations. Today, an invitation to take part in knowledge based wealth creation, is the only form of inclusive economy which matters. It is the only one that has any validity, in a time of stretched government budgets. There's even a chance that a broader invitation to wealth creation, could be the best means we have, to lessen political extremism.

Notes on Productivity, Mark-Ups, and a Bold Response

This post will hopefully illuminate some common threads in my recent reading and writing. In "Productivity Growth and Real Interest Rates in the Long Run", Kurt Lunsford of the Cleveland Fed, considers negative interest rates in a context of long term productivity growth. He writes:

The results of this Commentary suggest that low productivity growth is not driving persistently negative real interest rates. The results also indicate that an upward shift in productivity growth will not necessarily lead to higher real interest rates. Finally, the results suggest that low productivity growth does not condemn the economy to low or negative real interest rates.

Even though low productivity growth doesn't necessarily condemn the economy to lower interest rates, the Fed's best approach to productivity issues, is to make certain its commitments for monetary representation are fully honoured, for all participants. Otherwise, central bankers can inadvertently contribute to needless destruction in wealth generating potential. In particular, today's (unfortunate) interest rate targeting shouldn't include Fed second guessing, as to whether existing marketplace circumstance could diminish aggregate capacity. (Especially if private sector participants become anxious to take action, which I'll explain towards the end of this post.)

Indeed, a level nominal target would not only prevent such second guessing, it would lessen the Fed's arbitrary impact on economic forecasts, and make it more likely that the natural interest rate finally turns positive. Interest rate targeting of late, includes too many judgement calls, as to whether real economy factors will worsen productivity by generating less aggregate output, in relation to aggregate input.

I've written frequently regarding services as a drag on productivity, but in some respects, services are nonetheless associated with productivity gains. For instance, Stephen Broadberry has documented services productivity in terms of organizational capacity changes:

The key to achieving high productivity was the "industrialisation" of market services, which involved the adoption of high-volume, low-margin methods to produce industrialised or mass market services.  The uneven spread of industrialised services across sectors and across countries explains the shifting comparative productivity performance of Britain, the United States and Germany.

"The Social Transformation of American Medicine" was - in many respects - a documentation of the numerous occasions when physicians resisted services industrialisation. Did the physicians' preferences for autonomy, stand in the way of productivity gains?

Our desire for personal autonomy is not the real problem for productivity, because this preference is intricately connected to how we perceive our relationships with others in all aspects of our lives. Time based product is experiential, in ways which go beyond the practical necessities of knowledge based product. However, personal autonomy can unfortunately encourage widespread price making, as opposed to the price taking that is (informally and spontaneously) suggested by the marketplace for group coordination. Only recall that price making, from a production standpoint, increases the amount of input that is necessary, before output is possible. Which means it's lousy both in terms of economic progress, and the ways in which societies coordinate mutually desired activities over the long run.

Mark-ups are just one example of the problems which arise re price making. George Lundberg, M.D. (and editor of JAMA) in "Severed Trust: Why American Medicine Hasn't Been Fixed" (2000), noted the problem of mark-ups when he wrote:

I had to do one test at a time, and the cost was passed on at a fairly high rate for those days. The hospital charged five dollars for one blood sugar analysis. Then automation entered the laboratories in the late 1950s and early 1960s. The first major instrument was the Autoanalyzer...This instrument revolutionized the chemical lab business by making it possible to load multiple serum samples from patients into the machine and to run through one after another without any handling by humans. So what happened to the price? It stayed the same. The hospital continued to charge five dollars per test even though one person, running the machine, could do fifty in the time it used to take to do one. Why did the hospital continue to charge five dollars? Because it could get it.

Standard practice now may require blood sample analysis every hour, and sometimes instantaneously. I knew many pathologists who received a percentage of all the income coming into hospital labs...Many other medical procedures have a similar pricing history. Changes are initially high because of the labor-intensive nature of developing new procedures. The coronary artery bypass operation provides a perfect example. The surgeons who pioneered the procedure spent a lot of time and money on research and development. They spent many hours in laboratories, working with animal models, to perfect the technique. The time they spent with their first patients also was intensive. Everything was new, and it all required close monitoring and attention. The total cost for the new procedure exceeded $60,000 - a reasonable price considering the investment that had gone into it.

But then more and more surgeons learned the procedure, often in the course of their regular residency training. They had no research and development costs, and their patients did not need to be so intensively monitored. In fact, the bypass operation now is the most common in hospitals, but the charges haven't moderated in many places...Over and over again in the medical marketplace, a new commodity is introduced, high prices are charged because the commodity is rare, but the prices are maintained even when the commodity is commonplace. Why does this happen? Because the patients do not know any better, the insurance companies let it happen, and the purchasers do not care or are hoodwinked. This is how the costs of care in this country have gotten out of control.

Consider these markups in a context of aggregate productivity, where input demands in excess of output potential, have macroeconomic effects. In "Aggregate productivity and the rise of mark-ups", the authors note that average mark-ups in the U.S. have been increasing over the last 20 years, which in turn has coincided with slowing productivity. They add:

Mark-ups increase firm's prices and reduces their production. A high average mark-up reduces output and depresses the demand for labour and capital, generating low aggregate employment and low aggregate investment. It reduces the aggregate labour and capital shares, and increases the aggregate profit share. In fact, increasing average mark-ups has been proposed as an important cause for the declining participation rate, the slow recovery, the weakness of investment, the decline in interest rates, and the declining labour share in the US economy.

However, the level of average mark-up does not, by itself, affect aggregate productivity. Instead, aggregate productivity depends on the heterogeneity of mark-ups across firms. From a social perspective, low-mark-up firms are too large and high mark-up firms are too small. This inefficiency in the allocation of resources across firms, reduces aggregate productivity.

Baqaee and Farhi expressed that "low-mark-up firms are too large". Might this mean that recent healthcare mergers will choose the option of lower mark-ups, as political intransigence is unexpectedly being parlayed into private action? This is what healthcare providers have actively fought off for as long as many can remember. Perhaps autonomy would not have been lost to hierarchy, had individuals and institutions not turned the gains of high-volume low-margin methods among providers, into high-margin final product for healthcare consumers.

Mark-ups. Who could resist them, while they were there for the taking, and so many individuals and organizations had the autonomy to do so. Of course the cumulative effects of countless "lucky" price makers, has doubtless contributed to recent government cutbacks in healthcare. Yet it remains to be seen how these mergers on the part of healthcare providers, will affect actual marketplace dimensions. Will we get more output, with less input - meaning, more productivity? Only time will tell.

Medicare Cutbacks? No Rationale for Monetary Tightening

Clearly, there's problems with organizational patterns for healthcare, when losses in government support lead policy makers to assume the marketplace as a whole will be somewhat diminished as a result. Especially given basic structural reasoning, that private industry remains responsible for the dimensions of the real economy.

How many elites are giving up on economic dynamism, hence urging the Fed to adjust monetary representation downward, accordingly? In "What's Down With Inflation?", Tim Mahedy and Adam Shapiro argue that (expected) slow growth in healthcare prices is likely to remain a drag on inflation, and write:

We show that the key driver holding down acyclical inflation, and hence core PCE inflation over the past few years has been persistent changes to the health-care sector that began after the end of the recession. Specifically cuts to Medicare payment growth rates - which can affect prices throughout the health-care sector - have restrained health-care services inflation...Because health-care makes up a large share of PCE, price changes within this sector can have sizable effects on overall PCE inflation. We estimate that low inflation from this sector is currently subtracting about 0.3 percentage point from core PCE inflation, that is the measure that excludes food and energy prices. While health-care services inflation is expected to pick up in the coming years, it appears unlikely to return to its pre-recession level, which could restrain core PCE inflation for the foreseeable future.

Note first that "slow growth in healthcare prices" refers to expectations for aggregate or overall levels. However, my primary concern for this post, is with how the Fed is responding to cutbacks in fiscal support for healthcare. Given this rationale, the Fed is effectively allowing political curtailments for specific aspects of knowledge use, to be a drag for the monetary support of all economic activity. Why should political considerations for healthcare provision, be treated by the Fed as a negative supply side shock - particularly a fiscal adjustment that could prove relatively permanent? Where is the standard monetary offset to such a circumstance?

As Jeffrey Rogers Hummel indicated in a recent interview with Dave Beckworth (episode #83), "Inflation targeting doesn't do well with supply side shocks." Consider why this matters. If a nominal level target were in place, the loss in government spending for healthcare would be offset by monetary spending in other parts of the economy. As things stand, reactions to political healthcare constraints as negative supply side shocks, could make monetary policy directly responsible for the arbitrary reduction of long term growth potential.

Alas, this policy response, which does not take aggregate spending capacity into account, is an unwarranted judgement call about "necessarily" reduced output in general equilibrium. Nevertheless: When central bankers react by reducing monetary representation due to specific sectors, other areas of aggregate spending are affected.

Indeed, this central banker response could be likened to a form of unnecessary or artificial austerity, via the assumption that private interests can't maintain economic dynamism, when Washington is reluctant to maintain fiscal spending in any capacity. Are our private sectors prepared for the political fallout, should taxpayers become convinced this is the case? Already, the problems of healthcare organizational capacity, have contributed to further attacks on capitalism, in general.

P.S. Again: It's important to emphasize overall market reductions as responsible for "lower" (?) inflation in this instance. Consider the illusion of "lost" inflation in an insured family context. From JAMA, "Challenges in Measuring the Affordability of US Health Care":

The average employer plan had a premium equal to 9.2% of the median income in 1999 and increased to 18.4% in 2014.

Lane Kenworthy also recently noted marketplace limits in healthcare, when he stressed that "The share of wages going to benefits has been flat since the seventies (even though healthcare costs more), since - in aggregate - fewer employees receive healthcare benefits."

Monetary Policy and the Politically Possible

Would temporary price targeting be an improvement for the Fed? At the very least, it could provide limited means by which central bankers are better able to manage problems at the zero bound. Even though "temporary" seems like so little, especially since prices aren't the most relevant consideration, temporary price targeting might be politically feasible. Hence Scott Sumner was encouraged at a recent conference, by a paper which Ben Bernanke presented (Here's an abbreviated version).

Granted, temporary price targeting is a long way from the level nominal targeting rule that would be preferred by many market monetarists. Nevertheless, this may be a step in the right direction. Of course, it's worth pondering: What is it about a nominal level target - especially one that takes nominal income into consideration - which appears politically unfeasible? Or, why is a broader commitment to the maintenance of total spending capacity, still being rejected?

Perhaps the nature of the dominant services economy is part of the problem. Unlike the readily quantitative output of tradable sector activity, much of what takes place in non tradable sector activity - particularly time based services - tells few stories about output that are recognizable in terms of aggregate resource capacity.

However, there's another aspect of this problem as well, which might help to explain some of the ambivalence central bankers appear to have, regarding the stability of aggregate spending capacity. How much nominal income - in aggregate - actually derives from price taking, as contrast with price making? The reason this question is important, is that price taking is a more reliable means of coordinating resource capacity according to broader resource realities.

Whereas price making in terms of nominal income, derives from personal positioning and power in the marketplace. So long as tradable sector activity was dominant, more nominal income derived from price taking for wages and income. It's far simpler to achieve the price taking mechanisms of broad resource coordination, when commodity use definitions for final product are not tied to specific time and place. But with the increased dominance of non tradable sector activity, more nominal income - particularly that of high skill knowledge use - is presently in a position to require demands on resources which don't necessarily reflect aggregate resource capacity. Indeed, the recent income dominance of high skill time based service providers as price makers, could also be amplified by tax law changes.

Only consider that some of the conversation in FOMC minutes in the lead up to the Great Recession, seemed absolutely outrageous. How could policy makers actually laugh, for instance, over the predicament of healthcare practitioners who, due to monetary tightening, were losing customers for elective procedures that were dependent on disposable income? It's hardly irrational, to question whether nominal income demands on general equilibrium in the form of price making, are part of what make central bankers reluctant to consider nominal income as a reliable component of monetary stability.

General Equilibrium Capacity: Rising, or Falling?

Might general equilibrium capacity be lost within a relatively short period of time, in the U.S.? Let's hope not, especially if Kevin Warsh is chosen to chair the Fed. And even if we are fortunate enough to gain someone who understands the danger of excessive monetary tightening: Without a level nominal target in place, supply side shocks could still mean more inappropriate responses from central bankers that may negatively impact equilibrium potential.

However, supply shocks are somewhat different, from the real economy effects of tradable and non tradable sector dynamics. While supply side shocks often lead to short term economic effects, the dynamics of sector formation are more likely to contribute to long term effects. And the present organizational structure of non tradable sector activity, includes a crowding out effect which - if not addressed - could eventually lead to equilibrium loss.

General equilibrium capacity can be expected to rise, as has been the case in recent centuries, so long as tradable sector activity continues to expand. Even though much tradable sector activity has moved well beyond its earlier beginnings in today's advanced economies, national income is greatly supplemented through direct investment links with tradable sector capacity around the world.

Nevertheless, the extent of general equilibrium capacity at a national level can be difficult to discern, for much of it is supplemented with the time based product of non tradable sector activity - especially through redistribution and governmental debt structure. A nation's asset formation in particular, can reflect the equilibrium circumstance of multiple nations. Since the Great Recession, general equilibrium capacity in advanced nations has been somewhat reduced, since central bankers shifted nominal income to lower growth trajectories. Even though the process is occurring in slow motion, general equilibrium capacity continues to be reduced in advanced economies.

The growth potential of service based economies can be misleading, since today's time based services lack a resource based point of wealth origin. Fortunately, it is not necessary for entire service structures to be supported via debt and fiscal means which lack the ability to contribute to real economy growth. If rising equilibrium capacity is on the horizon, we need a better approach to aggregate skills potential. In the meantime, our institutions continue to cherry pick from vast quantities of skills potential, in ways that would only deplete general equilibrium dynamics in the long run.

Time value could also become a point of resource and monetary origination, in the form of a recognizable commodity. This process would actually allow time value to function as a locally tradable good, which is why time arbitrage would become a direct contributor to equilibrium capacity. By allowing time based units to function as vessels for the storage and activity of knowledge and skill, advanced nations could gradually regain equilibrium capacity, via the active use of human capital. Indeed, the sooner the process can begin, the better, so we can finally return to the long term growth trajectory which - prior to the Great Recession - was our monetary means for a more inclusive society.

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.

Is a Natural Rate of Interest No Longer Relevant?

Perhaps the concept of a natural interest rate, is a less important consideration than it once was. After all, much has changed since Wicksell made this contribution to monetary theory. For instance: In a recent interview with David Beckworth, Scott Sumner mused whether the new economy - services dominated as it is - might also affect variations in what appeared as though a natural rate. At Econlog, he writes:

Economists define the natural rate of interest as the interest rate that is expected to deliver a level of aggregate demand which is conducive to macroeconomic stability. Wicksell thought of macro stability in terms of price stability. So he defined the natural rate as the interest rate likely to lead to price stability. But there are as many natural rates as there are theories of macroeconomic stability.

Of Wicksell's interest theory, Henry William Spiegel ("The Growth of Economic Thought") explains:

In his explanation of changes in the price level Wicksell fell back on the rate of interest, in itself not a startling idea since there was a tradition of long standing, extending from Ricardo to Marshall, which recognized, besides the direct influence of the quantity of money on prices, an indirect one which operated via the rate of interest. If the quantity of money increased, so this argument ran, low interest rates would be accompanied by an expansion of credit, and borrowers would bid up prices when putting their new financial resources to use. High and low rates are relative terms, however, and the argument did not provide a standard that could serve as a criterion whether the interest rate was high or low. Such a criterion Wicksell made available by distinguishing between the "natural" rate of interest and the loan rate. The natural rate was the expected rate of return from newly constructed capital, whereas the loan rate was that which borrowers were charged by the banks. As the two rates diverged, for example, if the natural rate exceeded the loan rate, a "cumulative" process ensued in which prospective investors, eager to maximize profit, bid up the prices of productive resources, causing in turn money incomes and the prices of consumer goods to rise. In the case of an excess of the loan rate over the natural rate, the cumulative process would move in the opposite direction.

Note especially the "expected rate of return from newly constructed capital" in the above quote. This approximation of economic activity held important clues for optimal business investment, hence served as a precursor to today's marketplace expectations.

Nevertheless, much of the earlier contribution of bank loans to aggregate output gains, has diminished. Today's banking plays a smaller role in wealth creation (via traditional manufacture in particular) than before. Consumer based loans - much like the present organizational capacity of time based services - have instead become part of the institutional apparatus which makes further demands on already existing income. While banking activity remains an important part of monetary flows, loan formation is less likely to contribute to the most dynamic sectors of the economy. Consequently, the financial role of banks in investment decisions, aggregate output potential, and long term growth, tends to be overemphasized.

How might the relative dominance of service sectors (since the twentieth century), also affect this scenario? While some non tradable sectors use automation to reduce the costs of - hence "need" for - time based product, this approach doesn't necessarily increase total output. In other words, despite what can appear as though productivity gains because of firm profits, automation for time based services will in some instances play a role in diminished aggregate output levels. Again, like consumer loans, time based services as a secondary market, is institutionalized demand for already existing income - rather than additional output - in a general equilibrium construct.

Another way to reflect on the importance of these structural shifts: remember the importance which Keynes attributed to the role of investment in connection with interest rates, in his arguments for "The General Theory". Today's investment is less driven by a commonly understood interest rate environment for capitalists, than was previously the case. In any instance, lending interest rates have always been the cost of credit, not of money. Why else would individual rates vary so widely, according to perceived consumer risk?

There are other problems with the rationale of Keyne's time, as well. It has gradually become more difficult - especially due to the crowding effects of non tradable sector requirements on demand - for fiscal policy to contribute to economic dynamism. Further, these consumption demands have created a greater "propensity to spend" across most levels of income. While these circumstance hold multiple implications, they also suggest why a level nominal target is more likely to contribute to economic stability, than the interest and inflation based indicators of the present past.

"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.

Matched Time: New Wealth, Complete Debt Obligation, or Both?

Matched time - or time arbitrage - can be likened to a debt obligation, in the sense that a completed time obligation resembles a completed loan. However, unlike the completed loan which solidifies a given state of resource capacity (often in the form of income capture), matched time arbitrage incrementally moves growth forward. Even though traditional loan formation can still generate a similar process; at root it remains technically stationary, or dependent on real economy conditions. On the other hand, matched time could generate new wealth which moves beyond traditional resource shifting functions.

Unlike the nominal representation of money in a loan process, time arbitrage is resource capacity, with real economy or supply side potential. Where a traditional loan is one unit of transferred real economy activity, matched time would generate two units - both of which are capable of expanding the marketplace outward or "forward". Only recall that money is not an actual wealth component, to understand why matched time (as matched loan) is different from the monetary obligations which are gradually reduced on ledgers. Should matched time become part of a recording process, it would tell stories of voluntary economic commitments - each capable of wealth generation and the contribution of real activity to the economic landscape.

In time arbitrage, the mutual employment of time commitments is no longer a system cost, but rather, a cost in terms of personal time choice. Whereas one's time is normally sold as skill demand in the system costs of asymmetric compensation, and skill providers in these circumstance tend to have limited bargaining power for personal time management. Knowledge use systems which organize for symmetric compensation, allow personal time value to become a functional consideration in decision making for skill supply. Via this method, time arbitrage becomes an integral supply side tool, for services generation and mutual coordination.

Some of the confusion about finance as wealth generation, stems from the notion of money as actual wealth. Nevertheless, Adam Smith and many others have emphasized money as merely a representative tool, of the real economy wealth already taking place. While money is the nominal measure of all economic activity, its most vital role is economic stability, in a faithful mirroring of the aggregate spending capacity which occurs along an economic continuum.

Only consider that when central bankers fail to represent real economy circumstance "on the ground", production losses can ensue which aren't readily recouped in the short run, or possibly longer. Perhaps it's the fact monetary policy is fully capable of destroying real economy growth, which sometimes lead to the confusion that money somehow creates growth - independent of real economy circumstance.

Money's representative role is not the only confusion, in terms of wealth creation. Indeed, there were times when it was easy to confuse finance with wealth creation, since broad gains in scale have correlated with a wide range of financial innovations, for centuries. The growth "potential" of fiscal policy, has been caught up in some of these same resource realignment - versus resource multiplication - strategies. And today, many financial tools are not utilized so much for real economy growth, as for holding patterns in already existing wealth. As many earlier gains in scale have moderated, so too the ability of finance, to assist real economy wealth creation functions.

Time arbitrage could help to restore the kinds of long term growth which benefit from incremental time use gains, among populations as a whole. Time value as a supply side function, could eventually contribute to total factor productivity, for it encourages new services generation which does not make demands on the revenue of other productive enterprise. Indeed, today's governments have a limited ability to achieve growth through tax reductions, since so much important economic activity includes budgets in need of those very taxes. In other words, too much knowledge use in the marketplace, remains dependent on the very government revenue, which citizens have become increasingly reluctant, to provide.

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.