Low Income Wage Pressures in General Equilibrium

As the Fed's efforts regarding wage deceleration continue, the good news is unprecedented job growth which now holds greater responsibility than nominal wage gains. However, while nominal wages were rising, low income groups actually benefited the most. As Joseph Politano earlier noted:

Arguably, the only group to see real wage gains since the pandemic has been low-income workers, with workers in the bottom 10% seeing very strong real gains. The labor shortage has also enabled rapid wage gains for young, non-white, non-college-educated, and part time workers to a degree that is nearly historically unprecedented, and was helping break America out of the cycle of labor market underperformance it suffered throughout the 2010s.

How might one think about this phenomenon at a general equilibrium level? For one, even as the earlier low wage pressures affected nominal stability, the fact remains this group needed its real wage gains the most, since there's been too little supply side effort to generate housing and time based services for a full income spectrum. Just the same, the Fed was slow to react - and nominally adjust for - the fact many employers ended up "paying the price" to retain low income workers who otherwise would have gone elsewhere, or possibly exited the workplace.

Given this relatively brief but substantive rise in low income levels, why weren't there also real wage gains for higher income level groups? Indeed they've mostly missed out on this latest inflation cycle. One reason could be micro level pressures haven't been as strong as for lower income groups. Perhaps the lack of such pressures is due to (most) middle to upper income groups having sufficient economic options to remain gainfully employed.  

Alas, while lower income levels still have fewer economic options for workplace participation, their employers can only offer additional monetary reimbursement up to a point. Consequently, some time based services which people find valuable will gradually become more difficult to offer on monetary terms, which is one reason I've argued for time arbitrage. Unfortunately, many municipalities don't yet understand this general equilibrium reality, which especially matters in terms of housing options. Consider also that as many Baby Boomers retire, housing and time based services limitations affect them in crucial ways. Not only do fixed income retirees struggle to find affordable low maintenance housing, retirees of all income levels struggle to obtain home services, since many of these workers have understandably departed for more rewarding employment options.

There's another important aspect of secondary market domination in time based services for higher income levels. While employment options are plentiful now for these groups, this unprecedented scenario still obscures the fact aggregate price making in time based services is only feasible up to a point, given general equilibrium revenue needs for redistribution. Granted, such revenues were expanding alongside originating wealth gains in primary markets during the Great Inflation, and more recently, via redistribution which accompanied global dollar dominance during the Great Moderation. However now, aggregate revenue potential for secondary markets in time based services is plateauing in mature economies, which is why high income wage growth is more likely to result in inflation. Indeed, this helps explain a recent healthcare paradox in Britain, which was noted by Marginal Revolution:

Universities have been told they must limit the numbers of medical school places this year or risk fines, a move attacked as "extraordinary" when the NHS is struggling with staff shortages.

Lest this seem ridiculous, only recall how the conundrum is more evident for Britain due to the straightforward nature of its healthcare system. Less obvious are similar sets of supply side problems in the U.S., which are more difficult to discern due to numerous intermediaries between healthcare practitioners and patients. 

Nevertheless, underneath it all, the evolving general equilibrium dynamic is the same. Even though secondary market higher income levels have become relatively less likely to benefit from wage gains, lower income levels must deal with the reality of partial and incomplete non discretionary markets. It's these incomplete markets which can create financial obligations that are higher than wage realities. So much so, there will likely be more instances in the foreseeable future, the Fed needs to adjust monetary representation downward once again, should low income citizens need additional wages just to participate in work activities which citizens and businesses alike, continue to find important enough to maintain.

Inflation Relief Can't Address the Missing Market Divide

Despite what investors and others have hoped for, it's possible the Fed could continue with a 75 basis point increase after September. Hence some are asking, isn't the worst inflation behind us? After all, consumers seem to be fairly confident. And what of potential "fallout" from additional employment losses the Fed would impose?

Admittedly, personal perspective affects the framing of these circumstance. Even though low income groups can't readily contribute to monetary debates, many (such as myself) are even more affected by market gaps now, than was the case a year and a half earlier. Doubtless, others like me would argue for continued tightening on the part of the Fed, if they could. 

The Fed's job has become more difficult than before, since nominal income expectations started getting out of hand last fall. There's even some partiality towards higher than normal nominal income levels, but chances are these advocates don't have to worry about being priced of home ownership. Yet home ownership possibilities continue to slip away for low income groups. Unfortunately, thus far, few communities are reaching out with more forgiving accommodations in land use for manufactured housing and modular homes.

Even so, there's more at stake than missing housing markets. The higher transportation costs of missing auto production, doubtless contributes to rising income demands from low income groups. Both these in turn lead to employers paying more for the staff they are still able to hire. If these issue weren't enough, protectionism remains a structural problem for use of applied knowledge in lower income groups.

Missing markets particularly lead to losses in economic freedom for millions of individuals. It's this lack of participation in what are basic forms of production and consumption, which makes it difficult for low income groups to (productively) make their voices heard. Is it any wonder when supply side reform proves intimidating, how attempts for economic inclusion and participation get rerouted into cultural battles instead? Unfortunately, some free market proponents are migrating to these cultural battles, whenever supply side innovation for basic markets seems too daunting to pursue.

Missing markets leave unaddressed supply side issues which force the Fed to walk a fine line for appropriate monetary representation. Clearly, citizens need the inflation relief which central bankers strive to provide. Nevertheless, even the best that can be done seems hardly enough, for the Fed catches blame and undue expectations for problems that aren't their responsibility. I find it frustrating when market observers take this route as an excuse to shirk their own responsibilities. In particular, even the most appropriate inflation measures and relief can't address the missing market divide for low income groups. Only supply side production reform for domestic markets in housing and services can accomplish this! Alas, Fed responsibility for price stability does not equate to stability in basic market access. For this reason, there is only so much the Fed can do about political stability as well.

What does the Fed need to accomplish for nominal income (including hours worked) and output to maintain stable levels over time? Adhering to a stable nominal level in the present, will gradually mean less insistence and reliance on price making, beyond what originating wealth sources can fully support. In other words, societies need to practice applied knowledge in ways that no longer distort general equilibrium or lead to further income imbalances. A more rational approach is needed for knowledge based services, which provides more economic participation, not to mention economic freedoms. Granted, the Fed can't make full monetary representation possible for all comers in our dependent secondary markets. But there are ways to overcome this problem and it's time to get started.

Too Many Market Claims on Nominal Income

I've been anxious to start writing again regularly. However, much has come to pass since posts here were frequent, and not all of it has been good. Unfortunately, our political and social circumstance have continued to deteriorate. How will I proceed? How might others proceed? 

For now I'll need to focus less on how I feel things could be improved, and more on structural explanations why our unfortunate economic reality has come about. At the very least, a better understanding what led to this impasse, might encourage warring factions to lighten up on the destructive cultural wars. Nevertheless I've lost confidence that a cultural/political peace can be achieved during the course of my own lifetime. We simply waited too long to make supply side improvements at local levels, and the consequent fighting over scarce resources - even though many were artificially induced - won't be easily eradicated.

Meanwhile, we are in danger of losing more personal, market, and political freedoms in the years to come. While a relative few still defend free markets, the majority of these seek solutions along the margins. Alas, this approach mostly accrues to those who already benefited from recent sources of prosperity. Yet societies struggle to remain free, when economic progress doesn't occur in ways which lead to gains for all of society - not just those who have already won. 

In particular, the winners have all but cancelled the game for many participants, by making too many claims on nominal income. One reason this matters, is that the Fed learned the hard way decades earlier, what would happen once it allowed too many winners to insist on their excess claims! Yet the Fed monetary policy tool is a blunt tool. Meaning, the Fed can't choose who wins and loses once the monetary limits are drawn. For that matter, governments shouldn't have to choose, either. Instead, economic inclusion and the good deflation which encourages it, should be the responsibility of millions who participate in supply side activities. Yet many supply side decision makers have instead stood by, while societies lay blame - or excess expectations - in places where they really don't belong. 

Both the pandemic and the unexpected circumstance of primary market (originating wealth) turmoil, has meant hard lessons for this writer. Like many, I had taken "efficiency" aspects of primary markets for granted. What I never realized, was the fact such efficiency can take decades to achieve, in times of general equilibrium change. Plus, oil production is so central to how our most recent equilibrium became defined, in the first place. I should have understood well before now, that primary markets would need more nominal income space as absolute necessity, for wealth origin activity to continue as before. This, in contrast to the nominal income which secondary market participants demanded, in some instances for no better reason than knowledge providers were morally worthy of the sacrifice populations "should" make. 

As it turns out, our most direct sources of wealth have little choice but to make additional claims on nominal income, instead. Until now I'd believed secondary markets would try to keep pushing originating wealth sources out of their way, for Fed handouts. Instead, cutbacks in applied knowledge as it is currently utilized, are already underway. What recently happened to some of our most important markets, is also a reminder how peak oil finally arrived, despite recent fracking gains. Yep, we worried about peak oil decades too soon. 

Going forward, I will continue to focus on the lack of overall balance in general equilibrium conditions. For now, the Fed needs to make space for primary market evolution, but that doesn't mean citizens can't find ways to further evolve the human capital of secondary markets. Recall also that housing is a bridge between primary and secondary markets, for its monetary value represents both originating wealth and services generation. The paradox of traditional housing is that too many claims on nominal income now exist, while millions continue to need housing. Yet the Fed had little choice but to pull back early, well before existing need could be met. It's time for housing to further evolve. Due to its very nature as a bridge between primary and secondary markets, housing is paramount in equilibrium balance. Housing and its associated ownership frameworks must change into more realistic forms, or societies will continue to suffer.

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.

Supply and Demand Still Determine Equilibrium

Supply and demand are conceptual basics not only in microeconomics, but also for economic activity at the macroeconomic level. However, Raj Chetty recently returned to Harvard with a different introductory approach in mind, than what Greg Mankiw has taught. Mankiw's basic emphasis and textbook contributions have likewise been utilized by other universities for some time. Interestingly enough, Chetty also aims to make his course a model for other schools. An article for Vox by Dylan Matthews, explains:

The courses could hardly be more different. Chetty has made his name as an empirical economist, working with a small army of colleagues and research assistants to try to get real-world findings with relevance to major political questions. And he's focused on the roots and consequences of economic and racial inequality...

There's little discussion of supply and demand curves, of producer or consumer surplus, or other elementary concepts introduced in classes like Econ 10. There is no textbook, only a set of empirical papers. The material is relatively cutting-edge. Of the 12 papers students are required to read, 11 were released in 2010 or after. Half of the assigned papers were released in 2017 or 2018. Chetty co-authored a third of them.

Is econ 101 broken across the university system, as some now believe? Granted, students aren't being well prepared for a world in which markets do frequently fail. But what if markets function poorly because they have gradually become less complete, not "broken"? If so, it would seem that supply and demand remain as relevant as ever.

If introductory economics students aren't acquainted with the basics of supply and demand in the near future, it may only become more difficult for the average individual to envision the less than optimal trade offs between sectors which are presently occurring at system wide levels. Lack of understanding in this regard, further inhibits the potential of public policy responses as well. Given this reality, a stronger emphasis on supply and demand is needed, not less. Already, non tradable sector dominance has considerably altered how many aspects of supply and demand play out in the marketplace as a whole.

What also encouraged me to write this post was a recent conversation between Tyler Cowen and Ezekiel Emanuel. Their discussion provides an apt example of supply and demand dynamics in general equilibrium, for high quality services which are dependent on other sources of wealth origination. When Tyler Cowen pressed him on physician shortages, Ezekiel Emanuel noted the existing human capital investment burden, and why it's better to task shift going forward instead of adding more doctors:

once you train a doctor, it's basically a million dollars or more.

That's quite a societal burden! And since today's healthcare is organized as a market which is dependent on general equilibrium dynamics, adding more doctors would only drive up the cost for all concerned, in ways which subtract other aspects of general equilibrium potential. Yet even though the supply side would appear relatively more adequate, this general equilibrium dependence on a limited revenue pie, dilutes salary potential. In other words, a lose lose scenario. Hence Emanuel adds:

Medicine is a classic case of supply-induced demand. Doctors write orders, and they have a certain income in mind, and they will do things to get to a certain income, and especially on the margins, where what's called unnecessary care, or low value care.

He would like to see more tasks assigned to other health professionals, even as physicians remain in control of the outcomes. That said, hierarchy is vitally important for how healthcare is currently structured. Which means the desire of physicians as a group to maintain control over both income and the processes of patient diagnosis and response, could make task shifting somewhat difficult. This poses a problem, given recent changes in demographics and also healthcare losses in regions without sufficient economic activity.

In the meantime, worsening budgetary realities for healthcare compensation, suggest a different approach is needed for applied knowledge in general. In recent years I've suggested the horizontal patterns of time arbitrage, which would make it feasible for services to more directly align as wealth creation, rather than budgetary burden. Symmetric organization of time as an economic unit, could also make it feasible to integrate healthcare with other high skill services activities via deep learning AI.

Even though we don't yet know, whether more physician supply might be deemed "necessary", the real issue for many physicians is to be able to preserve human capital investment in its current form. Indeed, a horizontally aligned knowledge use system would likely pose less of a threat from without, than the internal reforms of traditional healthcare that could make it difficult to preserve the integrity of human capital value for physicians today. When services markets such as healthcare are dependent on other sources of wealth, societies can only generate supply side high quality human capital, up to a point. I remain convinced that since this point has basically been reached, given today's low growth economy, it's time to pursue more direct means, for the continuation and preservation of high skill knowledge in the 21st century.

Some Thoughts re Mankiw's Textbook Essay

Several weeks earlier, Gregory Mankiw reflected on his years spent in textbook authorship and teaching. The whole essay was quite interesting, and Scott Sumner also highlighted in an Econlog post a part I particularly liked. In this post I at least want to consider how savings decisions and market expectations matter for equilibrium outcomes. Output variance between non tradable and tradable sector activity, could also impact how investments affect aggregate output and demand. Nevertheless, here's Mankiw (page ten):

As a sign of how times have changed, imagine asking a group of introductory students the following question: If Americans decided to save a larger fraction of their income, how would this change affect the economy?  The answer I learned as a freshman in 1977, studying macroeconomics from Paul Samuelson's celebrated text, was based on the Keynesian cross and the paradox of thrift: Higher savings rates depress aggregate demand, reduce national income, and in the end fail to result in higher quantities of saving. By contrast, the first answer I teach as an instructor today is based on classical growth theory. Higher savings means more investment, a larger future capital stock, and a higher level of national income. Most economists now agree that both answers have some degree of truth, depending on the circumstance and that students need to learn both perspectives to understand and debate public policy.

Previously, savings as investment has been more likely to result in increased output during periods of manufacturing expansion. Yet it isn't difficult to imagine, how manufacturing losses during periods of extensive monetary tightening (such as the Great Depression) could seem as though depressed demand from higher savings. All the more so, when extensive depreciation further discourages spending. Fortunately, once manufacturers regain the confidence to increase output, savings are once again better able to translate into output gains, thereby returning to a long run trend or classical interpretation. Gregory Mankiw stressed that when long term economic conditions are emphasized at the outset, it's easier for the student to interpret Keynesian factors as short term fluctuations in trend.

One policy concern for macroeconomic issues, is the extent to which governments can meet existing near to medium term budgetary obligations. Clearly, there are links between equilibrium capacity and what governments might achieve, in terms of the revenue this capacity suggests. I found Mankiw's explanation for welfare economics helpful, for deliberating how societal expectations could alter what otherwise appears as producer and consumer surplus. Once specific markets become saturated, those limits tend to become part of general equilibrium constraints. It's not difficult to extrapolate how that creates limits for government revenue potential as well.

Market saturation may also vary, depending on whether what appears as natural limits is due to tradable sector or non tradable sector market capacity. Some portions of aggregate output in the latter, mostly scale according to time/place linked participation in consumption and production. When governments agree to additional restraints on non tradable sector activity, it becomes even more difficult for fiscal policy to stimulate demand. The resulting asymmetries in supply side production potential, add to other difficulties governments already experience, in gaining sufficient revenue for budgetary requirements.

Why does this matter? Government incentives to stimulate economic conditions are closely connected with what they hope to gain for their own support, via stable or increased revenue potential. A recent WSJ article, for instance, noted how the Trump budget could be relying in part on phantom revenues. But will the needed $1.2 trillion in the next decade, actually materialize?

Healthcare services - in spite of what they demand from governments - have become a source of government revenue in their own right. But what if consumer healthcare decisions change in the near future? If so, equilibrium capacity for healthcare markets as presently constructed, could be reduced. As healthcare spending continues to shift from insurance contributions toward increased out of pocket expenses, will consumers continue to perceive this approach to well being as totally necessary? Ultimately, increased consumer responsibility for all healthcare considerations, might include a reevaluation of overall healthcare spending.

If so, changes in healthcare market demand might eventually lead to changes in organizational capacity as well. Would a DIY approach for healthcare needs, become a part of reduced government expectations for revenue in the coming decade? It's certainly a possibility, and one which also speaks to the importance of welfare economics as noted by Mankiw.

Has GDP Measure Lost Its Practicality?

While no one knows whether GDP will remain the primary economic measure for the long term, there's nothing yet on the horizon which could reasonably be expected to take its place. In a recent Project Syndicate article, Diane Coyle notes "the widespread consensus that GDP is no longer a useful measure of economic progress". However Coyle is refreshingly realistic as to what this actually means:

Official statistics are similar to a technical standard. It's hard for anyone to move from one framework to another without a lot of other people doing so at the same time.

She continues:

Dissatisfaction with the prevailing GDP approach is therefore insufficient: a sufficiently large coalition has to agree on an alternative framework. Any successor to GDP also must be easily implementable because statisticians will have to set out detailed definitions and methods, and collect the data.

Even if GDP is discontinued or at least discounted as a primary measure of progress, much of the data and statistics it provides remain a valid and vital component of economic measure. After all, these figures bear the responsibility of capturing the most current economic activity taking place - regardless of what occurs which ends up defined as non economic. While today's methodology is far from perfect, it's still the best approximation we have to determine the amount of monetary representation a nation needs in any given year.

One issue in all this, is the fact monetary representation is only a partial approximation of economic progress. And while output is determined by supply side activity in the real economy, the rise in intangible factors has created problems for output measure as well. Might that mean we need to create separate tangible and intangible measures - all the while tracking how wealth creation potential is affected since intangibles can impact aggregate demand? Perhaps.

As to other approaches, multiple perspectives are presently being debated. Nevertheless, practicality and utility are important to the outcome. Both are not only important for productivity considerations, but also to provide clarity regarding disagreements over what recent growth capacity actually consists of. Scott Sumner in a recent Econlog post highlights what I believe to be important considerations in this regard, especially insofar as how progress, productivity and long term growth potential, tend to be perceived.

To most people, actual economic growth is something tangible and positional, like a better house and car. New products like iPhones and HDTVs are just "how we live today". If boomer's kids have to downsize from their parent's 5 bedroom 3000 sq. foot home to a small three bedroom ranch that's perceived as going backwards even if the smaller home is full of gadgets that they could only dream of back in the 1960s. And I'd say the same is true of lots of other changes.

How much is progress, and how much is simply a hedonic treadmill?

Growth is getting increasingly hard to measure as we move from an economy of stuff (commodities) to an economy of intangibles. If we can no longer measure growth in terms of quantity of "widgets" being produced, we need some measure of the value provided by economic output. You could use money, but the value of money itself changes over time, so that won't work.

Economists typically speak in terms of "utility". But as far as I know there is not a shred of evidence that we have more utility than we had 60 years ago.

Like Scott Sumner I have my own utilitarian tendencies. That said, I can't help but believe that growing income variance is making it increasingly difficult for citizens of large nations to create government policies capable of benefiting clear majorities. In particular, attempting to do so is burdensome because time aggregates have partially uncoupled from other forms of resource capacity. Consequently, time based services decentralization (along with local infrastructure definition), may be better suited for small limited income groups to promote the success and prosperity of their own "largest number". Indeed: Small houses are still "tangible and positional" for individuals who otherwise may not own a house at all. These groups would also need to generate statistics and data (for time based activity) in a new framework - such as Diane Coyle stressed - so their ongoing personal efforts are recorded and can be preserved for society as a whole.

What's particularly important for GDP, is that money remains a well suited measure for all the economic activity which occurs in a given year. Even though GDP is far from perfect, it's the closest proximate we have which (hopefully) ensures sufficient monetary representation for public demand. Perhaps since GDP measures the good and the bad (regardless of its societal "value"), a more definitive name may be in order. In all of this, activity and output are represented, as are total wages and income. Add to this any inflation (or deflation), which then provides the nominal representation which is a reasonably accurate estimate of monetary demand. As it turns out, monetary demand is not always the same as other forms of demand.

Just because GDP may be eventually demoted in importance, doesn't mean we no longer need a monetary gauge for economic activity. How might our perception of this measure change? Should it be framed as a nominal economic activity index? Meanwhile, intangibles will make it difficult to measure output, plus both need to contribute to a stronger utility base if progress is to continue. Should we know how many intangible forms of economic activity exist in contrast with those which are tangible, and track their measurement accordingly?

Another statistic utilitarians may find useful, is what percentage of a nation's citizens have sufficient economic connections to routinely take part in their own environments. For instance: How have the costs of individuals with too few connections been shifted onto taxpayers? Measures of poverty don't really get at these issues, in that costs are blurred with multiple layers of state and national assistance for select groups. Nevertheless: One of the most important ways to determine base level utility, is whether individual and family units actually have a reliable roof over their heads.

GDP measure still has practical features, even if its emphasis becomes changed in certain respects. Meanwhile, I continue to believe that time units would be one of the most useful new measures. Time units as a formal economic measure, would not only have potential to capture aspects of well being, but also ongoing gains in knowledge and skill utilization over time. It's not hard to imagine how per capita applied knowledge gains per time unit, could provide what would in some respects become non monetary representation for ongoing production gains, as well.

Some Notes and Thoughts on Community

While reviewing potential reference links for the February wrap up, I noticed a common theme regarding community which suggested a post of its own. Formal economic activity has been associated with global markets and nations for so long, that many possibilities for renewed economic dynamism in local communities have been neglected. Perhaps this lack of local economic definition, contributes to the fact that men in the U.S. who are out of work, also experience more difficulty in life than would otherwise be the case.

And in an interesting article for the Adam Smith Institute, Ananya Chowdhury highlighted the once stateless nation that was Medieval Iceland. Customary laws may have been part of what encouraged this decentralized society to combine cooperation and competition in their mutual efforts to get things done. Indeed, it could be said the only "King" in their society was the consumer! Among the references listed in "Vikings or Vagabonds?" for ASI, some readers may be particularly interested in Elinor Ostrom's "Governing the Commons."

Raghuram Rajan also has a much anticipated book about community coming out this spring ("The Third Pillar"), and Diane Coyle highlights his arguments for more power at local levels:

Rajan advocates devolution of power "from the international sphere to nations, and within nations to the regional to the community level." The Third Pillar needs to be reinvigorated. There needs to be more scope for people to fill gaps left by formal economic structures, to experiment with structures of political and economic governance, to create meaningful, non market work.

Nevertheless, I would stress that increasing levels of time scarcity have made it difficult for high skill providers to also pursue work which could be productively defined in non market ways. Why should it be "necessary" to task high skill individuals with this responsibility? Fortunately, in most respects, it isn't. But sadly, many imagine those who are not already gainfully employed (or lack college degrees), to lack skills or other abilities which could prove useful for others. Thus far, we lack the structural mechanisms which could meaningfully challenge this perception. Consequently, many unemployed or underemployed individuals end up with "excess" time on their hands, since too few actually welcome them to participate in ongoing voluntary forms of non market activity or workplace activity.

Ultimately it could prove helpful to define many aspects of voluntary time on formal economic terms, so as to bring more individuals back into normal settings who otherwise end up socially excluded - especially when others have few other means to gauge their trustworthiness. I remain convinced that more - not less - market definition is needed for time use potential, to begin filling missing gaps in local community organizational capacity.

One way to frame these missing gaps is via the macroeconomic result, of missing general equilibrium demand as a result of today's supply side requirements. Yet it's difficult to determine what time based services demand is actually missing in the economy, when job creation is mostly framed by the skills institutions seek from individuals, rather than what individuals would otherwise freely seek among themselves.

Given this limited demand setting, societies also up with an inability to coordinate time based product at a general equilibrium level. In other words, individuals lack the ability to personally negotiate their overall preferences, which not only reduces happiness (clearly), it negatively impacts the nature of supply and demand in time based services. Today's prosperous region approach to high skill time based services provision, means millions either end up experiencing excessive time scarcity or else insufficient time demand, more keenly than would otherwise be the case. Further, structural imbalances in time based product demand only make redistribution more difficult, because many assume those left behind would be incapable of negotiating on their own behalf. In all likelihood this is not the case.

Symmetric organization of mutual time priorities for time based product, could make it possible for the consumer to become "King" as noted in the Medieval Iceland article. After all, by combining both cooperation and competition at a time participation level, consumers would contribute to the nature of time based product in ways that make it simpler for producers to construct what others actively seek. Yet this process could be productively tempered by group efforts to particularly focus on mutual activity which supports intellectual challenges. The end result would mean broader market formation for time based services, and more participants would in all likelihood be happier with the results. With a little luck, local market based patterns for community dynamism, may become a more substantial part of social discourse in the near future.

Exogenous as Expansionary, Endogenous as Steady State

What patterns of wealth creation can be considered endogenous, and which patterns have strong exogenous tendencies? Tradable sector activity has the exogenous features of global networks and product mobility, even as it contributes to revenue streams for non tradable sector domestic activity - much of which is endogenous to wealth creation. Tradable sector wealth can disperse well beyond income levels tracked in individual nations, hence the nature of global wealth partially obscures revenue dependencies. What's more, some aspects of non tradable sector activity have lately taken on exogenous features as well - in particular, product which is not time or place dependent, hence capable of traditional output scale.

Given the growing prevalence of MMT rationale; as a (market) monetarist I find it increasingly important to note recent general equilibrium shifts in endogenous and exogenous relationships, especially since these changes have begun to negatively impact aggregate output. For that matter, some even find monetarist beliefs to be "folk tales" which central bankers supposedly should be rid of! Does anyone imagine that doing so could actually improve productivity, long term growth and standards of living?

And even though prominent economists have seemingly become less concerned about budgets and national debt levels, the idea that budgetary constraints don't matter, feels to me as though a non tradable sector variant of short termism. Put another way: Let's just maintain high levels of monetary compensation for all critical knowledge use until the revenue dwindles, and then spend the next century debating who to blame for the shortfall! The quantity theory of money is important for similar general equilibrium reasons. If we don't choose to quantify money in relation to output aggregates, how would it be possible to even respond, when the variance between input and output becomes too extreme?

Possibly the best option for new economic growth, would be to quantify sets of time use preferences for participating groups on formal economic terms. Doing so, could ultimately help protect the use of knowledge, as it becomes more difficult to compensate personal skills via high income levels - regardless of one's formal investments in human capital.

Presently, the endogenous wealth which is directly connected to time and place, does not exist in a steady state, due in part to its dependence on other points of wealth origination. This post title is what I would hope that endogenous or (time and place specific) domestic activity might eventually be able to contribute to general equilibrium patterns, via the formal economic quantification of time value. While some non tradable sector activity can be expansionary in that it is capable of scale, much of our most important non tradable sector activity does not scale. Given this reality, non tradable sector activity will ultimately detract from long term growth potential in mature economies, if it remains completely dependent on other sources of wealth origination. Symmetric use of time value might counter the dilemma, by creating a steady state for time based services which could gradually reduce the extent of competing governmental debt obligations.

Why is this such an important concern? In recent decades, non tradable sector activity expanded considerably in relation to tradable sector activity. However, that expansion came with some organizational problems: Excessive constraints in both high skill time based services and housing, are making it difficult to maintain normal levels of supply and demand across the income spectrum. These basic marketplace deficiencies consequently reduce the market potential of tradable sector activity, as well. One way to think about this process, is that non tradable sector activity carries non discretionary requirements which crowd discretionary income, in effect reducing aggregate demand.

Even though MMT can seem valid in certain respects, dependent forms of endogenous activity have the greatest capacity to expand, so long as tradable sector activity continues to dominate economies which are still in the process of maturing. However, once revenue dependent forms of non tradable sector activity start to dominate in general equilibrium, they lose the ability to provide adequate economic access to diverse levels of income. Without that access, government programs ultimately face their own limitations as well.

It may be that we now need to create endogenous activity which creates wealth at the outset (no debt required) to bring new growth potential to mature economies. Indeed, a services sector steady state in small communities could also encourage advanced economies to be less dependent on mercantilism as a source of revenue and economic dynamism.

Credit creation, important though it is for some purposes, will always remain a subset of true wealth creation. No one can afford to rely on fiscal policy, credit based activity, or even money printing for that matter, as more important than the ways in which people actually build wealth and long term growth potential in the real economy. In an era when knowledge has become so important to society, the quantification of our time could provide a much needed mutual building block for human capital. We can't expect all non tradable sector activity to be capable of expansion indefinitely. But we can transform vital aspects of knowledge use into a steady economic state.

Occupational Licensing Has a First Mover Problem

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

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

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

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

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

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

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

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

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

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

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

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

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

Debt as a Factor in Output and Productivity

When does debt serve as an actual point of wealth origin, whereby it contributes to output, productivity gains, and long term growth? The answer often depends on whether debt instruments function by shifting (redistributing) wealth, or as direct means to increase output. For example, tradable sector activity provides more debt assisted wealth origin, than non tradable sector activity. Presently, debt as financial intermediation tends to inhibit long term growth, as much of it is utilized to shift ownership patterns instead of generating additional aggregate output.

In a recent Econtalk with Russ Roberts, Arnold Kling stresses the importance of financial intermediation in the economy, yet downplays the significance of macroeconomic theory (he describes financial intermediation as any institution which issues debt). While my readers won't be surprised that I consider macroeconomic theory the more important factor, Kling's argument provides an apt reminder of the importance of financial intermediation for macroeconomic outcomes. However, just as the complexities of finance don't negate macroeconomic theory, neither do intangible production factors (which he frequently highlights) negate the reality of aggregate supply and aggregate demand.

Financial intermediation serves as a point of wealth origin, only insofar as it increases aggregate output, rather than simply shifting the ownership of resource capacity. Indeed, one might have a more instinctive feel for aggregate supply and demand realities, if they could more readily discern when and where financial intermediation stalls aggregate output. Wealth claims are a non linear process, in which secondary markets can create a "nesting" effect which blurs the correlation between price levels and seemingly apparent productivity gains. Could this have some bearing on the fact that Arnold Kling has his doubts about the validity of aggregate supply and aggregate demand? Productivity can be deceptive, for - like inflation - while its particulars are discerned at the microeconomic level, its totality is measured at the macroeconomic level.

The processes by which financial intermediation rearrange wealth, are closely aligned with secondary market activity. Financial intermediation - while it is still capable of generating real progress - is too frequently utilized instead as claims on already existing output. Wikipedia notes other secondary market processes besides the resale of initial financial offerings, such as markets for used goods and assets. Ethanol production, for instance, is a useful way to think about secondary market goods or services which function as "nested" claims on already existing output. Also I've stressed how today's time based services function as secondary markets, since they make asymmetric claims on circulating revenue.

I should apologize if I've caused my readers any confusion re my description of government financial intermediation as secondary market activity, since the initial activity for government bonds is described as a primary market. That said, I can't help but feel the official description of a government bond as a primary market is misleading, for it encourages observers to envision government bonds as a point of wealth origin. Alas: Like other secondary market activity, government bonds more often shift resource capacity, instead of generating new output which is reciprocated at the outset. In terms of initial offerings as primary markets, I believe the primary market designation is accurate when financial intermediation applies to equity for output gains in tradable sector activity, or the one time output gains of new home mortgages.

Perhaps the most important question to ask re financial intermediation from a productivity perspective is this: Do debt instruments increase output, or do they make output claims which shift ownership patterns? While the latter circumstance is often benign, it still tells an important story about measurable economic progress - or not, of course. Presently, some official financial designations for primary market activity are confusing, for they encourage many observers to believe new wealth is being generated, when existing wealth is actually being shifted. It's too easy to forget that new government securities in particular, don't directly contribute to additional output gains in a real market capacity.

Why does it matter, whether financial intermediation serves to advance wealth, or to redistribute wealth? By discerning the difference, we gain important clues about changes in aggregate supply and demand, and more clarity re output and potential productivity gains. While redistribution of wealth is relatively benign up to a point, once economic stagnation sets in, prosperity could be lost, should redistribution take precedence over wealth creation. Ultimately, we need a better understanding whether - at a macroeconomic level - we are actively advancing wealth, or merely circulating already existing wealth.

Does Perfect Price Discrimination Affect General Equilibrium?

And is perfect price discrimination more of a problem for institutions which rely on time based product, given the growing scarcity of time aggregates in relation to other resource capacity?

Price discrimination incentives for the context of this post, include the extensive requirements of human capital investment for physicians in the U.S. In particular, twentieth century physicians were careful to preserve a direct negotiation position with patients and customers. After all, if they had not done so, other institutions would have quickly stepped in to impose "greater efficiency", which would have translated into quick losses for their personal time management. Such losses would have been even more difficult to bear, given the costs of access for their production rights.

However, physicians preserved direct negotiation in an environment of growing general equilibrium division between (a full range of) time aggregate value and global wealth value. The effects of price discrimination for time based product become more pronounced, as total wealth continues to expand in relation to the full range of aggregate time value. In this organizational setting, healthcare gradually becomes limited to higher income levels. Possibly the only reasonable way to address this general equilibrium coordination problem, is to generate local settings where time value can be negotiated without the (presently necessary) total correlation of aggregate monetary wealth.

From Economics Online:

First-degree price discrimination, alternately known as perfect price discrimination, occurs when a firm charges a different price for every unit consumed. The firm is able to charge the maximum possible price for each unit which enables the firm to capture all available consumer surplus for itself. In practice, first-degree discrimination is rare.

Is first-degree discrimination actually rare? After all, U.S. hospitals appear to be organized so as to encourage this practice, even as physicians are sometimes inclined to make amends with more benign institutional norms. Nick Rowe also has concerns about the practice of perfect price discrimination. He writes:

I have always thought, and taught, that Perfect Price Discrimination leads to an effective allocation of resources. I now think that is wrong. It only seems to work if we use partial equilibrium reasoning, for a single monopolist, that practices PPD...It doesn't work in general equilibrium. 

Ultimately, if everyone took the route of perfect price discrimination:

If you make the rich pay more, because they are willing to pay more, nobody will do any work to produce anything. 

One of Nick Rowe's commenters sent him a paper which appeared to reflect Rowe's concerns, "Is Perfect Price Discrimination Really Efficient?: Welfare and Existence in General Equilibrium*" Even though the math made it difficult for him to understand (and of course impossible for me), there were still some pertinent aspects of the paper which seem useful to highlight, here. In the abstract the authors noted an inefficient equilibrium, yet

we validate partial equilibrium intuition by showing (1) that equilibria are efficient provided that the monopoly goods are costly...However, we find that Pareto optima are sometimes incompatible with surplus maximization, even when transfer payments are used.

Indeed, the requirement of education more extensive than other countries, rationalizes the high cost of this monopoly good in the U.S. Nevertheless, the lack of "Pareto optima" for transfer payments, in this instance, also translates into the fact that no government can give additional healthcare time to patients and consumers, which physicians don't already have at their disposal.

This also explains why there's no such thing as "surplus maximization" for sought-after time based product, especially given the fact technology is used (thus far) to change the product into something which is not necessarily time based at its core. What's more, as technology increasingly augments the income and leisure of high skill providers, the result is one example of Nick's observation that people could eventually lose their incentive to work.

Still, the above explanation is a production perspective. How might one think about broad decision making re consumption, in a labor force participation context? One example is employer provided healthcare, which was advantageous at the outset because it allowed insurance markets to seek consumers (workers) who - in relation to total population - were relatively healthy. U.S. healthcare was initially offered to those who didn't find healthcare consumption particularly necessary in many instances. Unfortunately however, as employees age, they are in greater need of the healthcare benefit. Which in turn encourages employers to fire older workers. The shared employee responsibility for healthcare - given its costs - encourages age discrimination, as employees become more expensive.

For the worker, a process can be set into motion after losing full time healthcare with benefits, which eventually leads to a premature exit of the formal workplace. As we age, our employment offers tend to be less likely to include full health coverage. In particular: once workers experience health setbacks which may include bankruptcy, there's a growing awareness of excess risk for remaining employed in work which takes an additional toll on health. And this may be the only work on offer in many locations, especially without a college degree. Once older workers face health risks which could prove more substantial than their personal resources, it may actually be less risky - odd though this sounds - to stay out of the formal workplace, so as to preserve one's health as best as possible.  In short, healthcare price discrimination, even though it is supported by partial equilibrium validation, doubtless contributes to reductions in labour force participation which have yet to be fully understood.

Time Based Product Affects Aggregate Demand

To what extent does time based product, bear responsibility for lost aggregate demand? This matters, in that high skill services product now requires more revenue and investment, than actual output can readily account for. What we don't know in this regard, continues to translate into increased debt loads as well, for the hidden costs of human capital.

Yet it is no simple matter, to determine the degree to which high skill time based product could be reducing either marketplace output, or potential labour force participation. Even though knowledge capture means less production and consumption of time based product than would otherwise be possible, this "lost demand" factor - due to existing supply side limits - is only part of the story.

Today's organizational patterns for time based product are not only incomplete, but they also turn what could have been discretionary consumption, into non discretionary consumption requirements. Yet it is discretionary income which has the potential to expand the marketplace, thereby generating additional (sufficient?) revenue for non tradable sector activity.

If full marketplace representation was actually in effect for non tradable sector activity and its corresponding non discretionary income, such income diversions might not be so problematic. However, the fact that more revenue is gradually being required for what is still translating into less non tradable sector output, is effectively a reversal of long term progress.

High skill time based product, also serves as a specific geographic and time oriented marker, which in some instances affects how much economic activity occurs within specific time frames. Consequently, the non tradable spatial element, means product formation which is of a more fixed nature than what occurs through tradable sector organizational patterns, given the fact tradable sector activity is not time or geography dependent.

In order for tradable sector activity to provide a sufficient counter to the fixed points (and revenue relationships) of non tradable sector activity, tradable sector organizational patterns need enough dominance so that aggregate demand is not ultimately lost to the insufficient supply structures of non tradable sector product.

Fortunately, there are organizational means which could diminish these spatial limitations, in both time based services, and the housing assets which are now following high income levels too closely. A different approach is needed, to generate new growth beyond the non tradable sector activity which is responsible for excessive limits on aggregate demand.

Even though demand constraints on time based product are problematic for consumers, they are responsible for other pressing concerns as well. Not only have these non tradable sector limits encouraged central bankers to scale back on potential long term growth, they also contribute to serious budgetary issues at the national level. Bottlenecks in both time based product and housing, are translating into further difficulties for Republican policy makers, who are still attempting to subsidize both. In an article for Bloomberg, Michael Strain writes:

The way to keep critics from assuming the worst about your intentions is to say exactly what you want to do.

Alas, saying what government actually means to do is difficult, especially a national government which is compelled to offer something for everyone who is in a position to give back. Nevertheless, governments now face their own extensive non discretionary budget requirements, which include heavy doses of 20th century quality standards for input driven time based product.

These 20th century requirements have gradually become less affordable for the 21st century, especially given the fact of economic stagnation. Granted, no one wants to take away superior quality product, when and where it remains possible to provide. Just the same, why not begin the process of building new forms of quality product which are less budget dependent, so that time based services will not have to make such extensive future claims on aggregate demand.

Say's Law Musings and Equilibrium Effects

The much maligned law of markets may still have useful applications for equilibrium dynamics. Often, discussion revolving around Say's Law has been an attempt either to affirm, or negate, its existence. But what if there are subtleties involved, in which this classical construct functions, at a certain, critical point? Do the supply and demand relationships that exist between tradable and non tradable sectors, hold important clues for output potential?

After mulling this over the past few years, I thought of a way to frame how Say's Law appears to function: via what I'll call "equilibrium stock" and "equilibrium flow". These terms differ from the normal usage of stock and flow, which is also important since in traditional definition, stock lacks a recognizable alignment with flow at a macro level.

In GDP measure, as far as I can tell (please someone correct me if I'm wrong) we don't yet have a way to conceptualize how differences between stock and flow affect output. Why? Because traditional stock accumulation has little definitive active economic context. Plus I'm still crazy enough to imagine that a better macroeconomics can keep our society from falling off the edge of a cliff, given events of late. Here's Wikipedia:

A stock variable is measured at one specific time, and represents a quantity existing at that time (say, December 31, 2004) which may have accumulated in the past. A flow variable is measured over an interval of time. Therefore, a flow would be measured per unit of time (say a year). Flow is roughly analogous to rate or speed in this sense.

For example, U.S. nominal gross domestic product refers to a total number of dollars spent over a time period, such as a year. Therefore it is a flow variable, and has units of dollars/year. In contrast, the U.S. nominal capital stock is the total value, in dollars, of equipment, buildings, inventories, and other real assets in the U.S. economy, and has units of dollars.

Whereas, equilibrium stock would consist of product which is derived via internalized costs, for product which has not been previously sold (the time arbitrage I've suggested would function this way as well). Theses costs can be readily discerned, and while they generally take place within one institution, in some instances they may be coordinated with other institutions, so long as product costs are met as product enters the marketplace.

Product which takes place in these circumstance, establishes the perimeters of a given marketplace equilibrium, whereby additional flows take place. In other words, output gains for this "first marketplace" position, is when increased equilibrium supply can meet (the overgeneralized Say's Law interpretation of) increased equilibrium demand.

Unlike equilibrium stock, equilibrium flow is externalized, so that cost and output patterns cannot be readily discerned at the time of marketplace entry. While I've emphasized the example of government compensation for time based product, even government expense for tradable sector product is subject to this equilibrium constraint, in terms of already existing aggregate spending capacity. Distinctions such as these could apply to endless debates re government restrictions on growth potential, since plenty of private activity is also further riffs on equilibrium flow.

For purposes of GDP, equilibrium stock would categorize what is internally or recognizably purchased at the time of marketplace entry in the previous year, because this holds important clues about existing flows, which are important for monetary representation as the currently existing agreements which economic participants seek to uphold. Why return Say's Law to ongoing dialogue? It's not enough to explain that new income generates new income (arguments which essentially "replaced" Say's Law), without considering whether income derives as a source of equilibrium stock or flow, in the previous year.

One reason why a "natural" interest rate can appear as though negative: far more economic activity may take place in terms of equilibrium flow, instead of as equilibrium stock. Nevertheless, there are important reasons why some prefer less output, if that is necessary to control what derives from a dependent, or secondary, market position. Importantly, supply side factors which control how knowledge is utilized in the marketplace, carry more ongoing responsibility for employment limitations, than the missteps of fiscal and monetary policy.

Consider that the only equilibrium stock component of real estate, is new building construction. So far as real estate is concerned, mortgages, "reused" land, and rent are all components of equilibrium flow, since they function as claims on already existing income and/or resources. Yet even the equilibrium flow element of land costs, simply tells a value story about scarcities in productive agglomeration. Indeed, this is why I have doubted the efficacy of land taxation as a reliable revenue source.

Also note that incentives for the entrepreneurs of non tradable sector activity in a dependent market position, are not the same as incentives for tradable sector entrepreneurs, who gain from output expansion. In part since a dependent market position only encourages non tradable sectors to limit both supply and employment, those earlier supply and demand structures appeared less relevant, as non tradable sector activity began to dominate the marketplace.

Fortunately, a marketplace for time value, or time arbitrage, could restore entrepreneurial incentive for both output and employment. I believe that time arbitrage could give Say's Law greater validity in the future, than what has been possible since the secondary market dominance of the 20th century.

Time Based Product: The Same Results Via "Less" Effort?

What if we were to think about achieving the same (aggregate) result with less effort, in terms of time based product, at a macroeconomic level? The productivity of time based product, includes some hidden factors which have yet to be explored. Individual firms often reduce time input via automation for time based product, in order to reduce budgetary burdens. Nevertheless, potential losses of time based product, need to be understood, in relation to the inputs that society already expects for human capital investment, as one's personal responsibility.

Time value needs better representation as aggregate supply potential. Today's managed pools for aggregate demand, are resulting in arbitrary input reductions at the level of the firm, in spite of ongoing input expectations of human capital investment, outside the firm. This result also suggests problems for Solow Residual effects in time based product. Not so much because of firm specific input limits, but in terms of broader limits to output potential. It means that due to externalized investment expectations for human capital, there are far more investment inputs than are actually being utilized by today's knowledge use organizational patterns. Some human capital investment never gains economic compensation, while other investment processes for human capital end up reimbursed many times over; by consumers, governments, businesses and taxpayers alike.

If one were to consider the production of input requirements (formal education) in a total or aggregate input/output context, the ongoing losses for wealth potential and marketplace formation, would become more obvious. When extensive human capital investment (input) is required before output ever becomes possible, multiple institutions and populations are held responsible for the balance. Individuals bear ultimate responsibility for building time value, and the consequent human capital losses for knowledge use production primarily as institutional aggregate demand, have not been well understood.

One can only imagine, how an incomplete production process such as this would impact tradable sectors. It would be as though multiple suppliers were making tangible product, of which only a small portion would finally be sold as final product. Few companies in such a position would last very long. Yet this has been the institutional process for time based product, thus far. We are fortunate indeed, that so much lost human capital potential in the twentieth century, did not have the negative effects which are beginning to accrue in the present.

A more rational approach is more output via better use of already existing input, for time based product. Time based product needs to be understood as a macroeconomic variant, to the normal institutional application of the Solow Residual. By internalizing input and output for services generation, more educational inputs would result in matched time use outputs, for all concerned. Through time arbitrage, one's human capital investment would begin to receive compensation much earlier than is presently possible, by making services output an integral part of the process. Whereas now, formal education has little room for output formation, until the participant has spent years completing input requirements.

Historically: So long as tradable sector activity remains dominant over non tradable sector activity, management of time value as pools of institutional aggregate demand, need not be problematic. But once non tradable sector activity and its associated knowledge use comes to the fore, it is no longer enough to treat time value as institutional demand. The introduction of time value as an aggregate supply function, could restore the productivity patterns which move growth forward. Managed pools of human capital supply, would bring greater transparency to the input to output ratios that are currently required for human capital.

In summary, if we consider educational inputs as part of the reality of aggregate input, the entire picture for aggregate input in relation to aggregate output (for time based product) takes on a whole new meaning. Yet the current dependence of today's time based product on other existing wealth, has obscured this important fact. Instead of creating more uncertainty for human capital investment through arbitrary reductions of time value, better results could be achieved by reinforcing educational input as continuous output. At issue is not so much a further reduction in input as contrast with output, but instead, allowing aggregate output in time based product, to gain greater quantification and representation, throughout the entire process.

Aggregate Time Value: Demand, Supply, or Both?

System imbalance between today's tradable and non tradable sector activity, is exacerbated by the lack of aggregate time value for supply, in the latter. An apt example of untapped labour abundance - given a demand dominated role for time value - is the consequent restrictions in housing supply.

Unless time value also serves as an active source of supply, individuals can gradually lose their ability to contribute to economic progress. Such an occurrence is more likely, if governments and special interests choose to limit the economic freedom of time value, as a potential supply function. While time representation as demand remains sufficient in tradable sector activity (via output gains for a full range of product), human capital supply potential is being lost, in today's non tradable sectors.

When human capital is mostly tapped via institutional demand terms, it can become incapable of contributing to full marketplace participation. Even though tradable sector activity achieves production gains via reduced time contributions (the Solow residual), non tradable sector activity inadvertently diminishes the marketplace, with this approach.

In order for time based services to contribute to a more complete marketplace, aggregate time value needs to move beyond the demand management functions it is presently assigned. While managed demand pools for institutional needs are quite valuable, they lose the ability to move economic progress forward, in historical time frames when secondary (wealth dependent) market activity is dominant.

The twentieth century offered ample opportunities to grow the marketplace through pooling for demand management of human capital - both in educational and workplace context. The main reason human capital was able to contribute to long term growth in this arrangement, was its association with tradable sectors which continued to expand output in relation to the increments of time involved. As output has come to be more closely associated with human capital than with tradable sectors, it becomes increasingly important to consider how growth can be achieved on human capital terms. A recent post from Tyler Cowen regarding the compound interest of learning, provides helpful ways to think about the process. He writes:

Compound learning occurs when your new learning, and your new analysis, builds steadily upon the old. Over time, learning is a bit like compound interest and it accumulates. When compound learning is possible, you wish to keep a relatively well-defined set of analytic pieces on the table. It is fine and indeed essential to add to those pieces, but then the new piece should be one that you may learn with it. Furthermore, it should be readily shared with other people...

I was glad to see Cowen highlight the fact that knowledge use accumulates as wealth capacity, through active sharing. However, it can be difficult to secure knowledge gains - even when individuals commit to steady work habits and schedules, when their personal circumstance becomes subject to stresses that make it difficult to maintain or share earlier time investment gains. An institutional framework is needed, which makes a productive knowledge continuum more likely for all who commit to human capital investment, in the course of their lifetimes.

It would be easier to recognize learning as economic processes capable of compound interest, if time were used as a vessel (economic increments) to create a knowledge continuum for individual and group participation. Time value works as a supply side component when the time of one person can build new wealth, through the purchase of time on the part of others - especially to reinforce education and learning as a part of workplace structure.

A time continuum of pooled supply management, much as the learning space of a given individual, gives opportunities for human capital compound interest which are not yet being tapped. Aggregate time as demand, gives opportunities for compound interest in the form of social capital for the group. Nevertheless, this process is associated with individuals who experience only a partial knowledge continuum with today's organizations.

For instance, formal schooling thus far has been a cut off point for an otherwise organized continuum of human capital. It stops precisely when individuals and groups need to start taking advantage of mutual learning gains with one another. Likewise, when firms require non compete clauses, they restrict the compound interest potential of knowledge gains in society - especially when firms can't fully utilize the capacity inherent in any given employee, beyond what takes place in normal workplace hours.

Even though today's institutions contain important elements of compound interest for learning, their present organizational capacity is too thin, to preserve knowledge use in the event of catastrophic events or political setbacks which often disturb important organizational patterns. Fortunately, knowledge use can be preserved via managed pooling for supply functions, to move progress forward, when human capital demand aggregates face the limits of secondary market dominance.

Does Government Redistribution Affect Output?

While government redistribution can supplement aggregate demand to a degree, it's an approach which could eventually mean cumulative detrimental effects on aggregate output. This post title question is also another take on secondary market imbalance, in relation to the wealth creation of primary markets.

When the historical context is right, fiscal policy can contribute to the growth of a given equilibrium. Indeed, vast improvements in twentieth century living conditions for the southern U.S. provide an apt example. However, these improvements can be attributed to what were fiscal purchases in the form of new infrastructure commitments.

One might liken those earlier fiscal purchases to citizens getting "a leg up" from government. It was especially a boost for those who had previously lacked economic access, who now could put their own economic energy into motion. Their subsequent inclusion in the formal economy also translated into vast supply side gains.

However, fiscal contributions such as this and the multipliers they may include, are different from the ongoing maintenance of government redistribution. While the fiscal purchase approach contributed to local self sufficiency, ongoing fiscal redistribution detracts from the potential of local self sufficiency. Once people lose the economic means and ability to productively engage with others, it's easy for society to fall into the trap of believing they are not able to do so.

This 20th century fiscal contribution was also possible, because of the extent to which the economy was still defined by ongoing gains in scale and output. Unfortunately, fiscal transfers became more prominent as the 20th century equilibrium structure gradually matured. When populations become too reliant on redistribution, these government transfers can slowly diminish or even reverse the mechanisms of wealth creation. In particular, too many activities are being subsidized from pools of revenue which have already experienced redistribution from earlier wealth creation. Even in the best of circumstance, a certain amount of nominal spending is liable to be lost, when patterns for new wealth creation are not carefully nurtured and maintained.

Much of today's dominant services sector activity is already exposed to recirculating monetary flows. Even a century earlier, government purchases were a simple matter of tapping the abundant output of wealth from tradable sector activity. Today, when more revenue sources are sought, chances are those potential sources have already been exposed to redistribution dilution at least once.

Plus: while increased output has been a logical revenue source in recent centuries, time based services product doesn't yield comparable output gains - a factor which is only exacerbated by costs which include subsidized access. Yet the different nature of government purchases versus today's subsidy related government transfers, has yet to be discerned. In a recent essay titled "Is something really wrong with macroeconomics?" Ricardo Reis expressed his concern re fiscal policy:

I could have pleaded for research on fiscal policy to move away from the over-study of what was the spending of the past (purchases) and to focus instead on the spending that actually dominates the government budget today (transfers). 

Perhaps this research can still take place.

Skills Use Permissions as a Malthusian Constraint

Economies that rely extensively on skills permissions will eventually run into problems, if those permissions include basic time based functions - especially during times of economic stagnation. Permissions based time value can easily become a Malthusian constraint, in part because this organizational structure leads to a fixed product which is relatively inelastic. Is it possible for individuals of widely varying income levels to live well, without time based product that requires such a high level of skills permissions? Answers may depend on whether other structural options exist, that can taking the finite nature of time value into consideration.

Even though skills permissions have evolved for good reasons (people want well qualified health providers for instance), constraints may become Malthusian, if organizational capacity for time based product remains mostly permissions oriented. Nevertheless, it's difficult to think about supply constraints in context, when time based product becomes an outsized component of marketplace costs. Those costs also imply a broader marketplace range, than what may actually exist.

The time based product of healthcare, is likely more of a Malthusian constraint than is recognized. Recently, Dietrich Vollrath explained how Malthusian constraints might hold:

First, living standards are negatively related to the size of population. This would occur if we had some sort of fixed factor of production. Typically, one might say it was agricultural land, but you could just say resources if you like. It isn't even important that they are truly fixed. So long as the resources are inelastic, whether due to a physical limit or because bringing them into use is prohibitively expensive, you'd satisfy the first characteristic of a Malthusian economy.

Malthus was "proven wrong" so to speak re his original argument, when advances in technology made it possible for agriculture to overcome the tremendous food production constraints he witnessed during his lifetime. However, even though healthcare has also greatly benefited from technology, the underlying problem is the way healthcare is positioned as a secondary market structure. Even though technology could make some aspects of time based healthcare production less expensive, that fact alone won't dramatically affect the revenue sources by which healthcare providers gain incentive to increase output. The harder it is to access revenue gains in general equilibrium, the more difficult it is to pass the lower costs of technological progress, to consumers.

On the other hand: not only did technology greatly increase agricultural output; the reality of vastly more food, benefited other crucial marketplace factors at the same time. That - in turn - meant revenue growth in aggregate from multiple sources. Technological expansion of agriculture was a major first mover - or primary market - event. In order for healthcare practitioners to accomplish anything remotely similar, the process would include providing assistance for institutions which structure aggregate time value as a central feature for replication and output gains.

In other words, time value would function as a basic commodity for further knowledge and skills processing, in a first mover market position. Think local services "refineries" perhaps, only with less costly production procedures! Instead of pipes and metal running everywhere across the landscape, human neural networks would make the crucial connections. Or perhaps one could refer to these processing plants as "farms" for new areas of productive agglomeration. Ultimately, the product of additional economic time value would provide benefits to other marketplace components simultaneously, much as more food meant earlier gains across entire economies.

While time based product will remain a fixed factor of future production, those limits need not exist to such a degree that services production and consumption face arbitrary limits. Today, time based product cannot easily replicate itself, without facing further dilution of the external revenue sources it requires. Fortunately, replication of services product is also possible via internal wealth creation, through cooperative time processing. By organizing for greater services output which need not rely on already existing revenue sources, time based product would be able to overcome some of the Malthusian constraints that presently exist.

Notes on Investment vs Consumption Outcomes

When is it profitable to forgo consumption? On the other hand, when is it profitable to include consumption as desirable (productive) outcome, since it is actually part of an ongoing investment process? Consumption as an active component of investment could be particularly helpful, when investment does not include gains in scale for measured output. Specifically, investment in human capital, because time based product can't replicate a specific time unit.  Nevertheless, the fact that consumption outcomes are an important factor for investment inputs, is not well understood. As a result, both production and consumption outcomes are uncertain, in part because of the terms by which current investment definitions take place.

Is the world still progressing in a reliable manner? I still believe it could, given the chance to do so. But after reading an article from Adam Smith Institute, "The World is Getting Better", I knew I needed to try harder, to explain how (present) economic stagnation stems from a marketplace which lacks investment strategies to accommodate today's abundant resource potential. New forms of organizational capacity are needed - capacity which would not be dependent on gains in scale in the traditional sense of defined marketplace output. Even so, gains in scale would eventually accrue in a broader qualitative context, via the increased output and availability of productive agglomeration. In the meantime, human capital - in its most interactive form of time based product - has become increasingly difficult to access.

Granted, we can still take comfort from the fact our world continues to benefit, from the resource capacity unleashed by centuries of economies of scale production, in tradable sectors. The above linked ASI post noted that a ten year old girl 200 years ago, could not have expected to live longer than 30 years. From the closing paragraph:

The progress was achieved by capitalism, not socialism. It was done by people prepared to forgo present consumption and to invest instead in the technologies that increased productivity...It has uplifted the lives of billions, and is still doing so.

What about today? How do we think about delayed consumption, given the fact many forms of investment don't necessarily translate into a greater quantity of tradable goods? Is is possible to emphasize quality as means to move forward, where point of origin quantity (for final time product) is defined by time scarcity?

Indeed, the same method of intensive investment utilized for tradable sector activity, was adopted for the divisions of labor which involve high skill and knowledge use in secondary market activity. But where the intensive investment of capital for tradable goods meant more marketplace output, intensive investment for human capital didn't provide the same benefit for time based product. Instead, this organizational approach translated into sticky wages, rigid marketplace outcomes, and growing divisions of knowledge use between differing income levels. Basically, these forms of human capital investment didn't necessarily translate into greater output, because much of the final product was time linked.

In these instances, time value equates to a fixed quantity general equilibrium outcome, one which is increasingly hidden in governmental definition of services capacity. Consequently, society has had to take part in the burden of shared human capital investment (think healthcare investment costs), to access the output that remains possible on high cost investment terms. These built in investment costs presently hold back the potential for stronger, more dynamic consumption outcomes.

Costs for today's knowledge access, take place on asymmetric terms. While asymmetric compensation will remain an important institutional strategy, this organizational structure should not be expected to bear the entire burden of knowledge use and preservation in the future. It is possible - and desirable - to augment time based product through symmetrically coordinated time value. By doing so, investment and consumption can be combined in what might be thought of as a pay it forward process. Each unit of learning via compensated and matched time, would translate into individuals providing the same for those who follow similar educational trajectories. A "pay it forward" system of education and workplace participation, could create linked investment which eases today's societal burden, in terms of consumption outcomes for human capital.