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.

"Political" Equilibrium is Not the Same as Natural Equilibrium

When might politically motivated budgets create too much confusion for general equilibrium conditions? Even though there's no clear answer, economic dynamism and long term growth potential may depend on how these matters are ultimately approached. It's now apparent that the fiscal dominance of today's service centered economies, could hinder progress in the near future.

Until recently, ultra-low interest rates were becoming taken for granted as inevitable. And not only did this prompt national governments to borrow in excess of earlier norms, it discouraged a rational general equilibrium framing as output driven. This loss of a quantitative understanding, has made it even more difficult to create productivity improvements in domestic markets. Instead, the fiscal "freedoms" of late are fueling the ambitions of multiple political parties. Alas, the results aren't encouraging, since fiscal policies tend to reward specific group preferences instead of positive market outcomes.

However, does fiscal irresponsibility account for a rising equilibrium rate, and might this impact equilibrium stability? Scott Sumner considers equilibrium effects, and notes: 

The "natural" or equilibrium interest rate also has multiple meanings, but generally refers to the interest rate that provides for some sort of macroeconomics equilibrium, such as stable prices. Throughout most of the world, the equilibrium interest rate has been trending lower since the early 1980s. Until now...

He continues:

A more complete model of the equilibrium interest rate might also account for the political economy of fiscal policy. Suppose that the natural interest rate falls so low that politicians become tempted to run larger budget deficits. Eventually, the deficits become so large that the equilibrium interest rate begins rising again. 

In retrospect, the new UK Prime Minister also went too far with the extensive tax cuts of her fiscal package.

All of this makes me wonder whether ultra-low interest rates are not a stable equilibrium, at least in most places. I still believe that low rates are a technically feasible equilibrium, but perhaps it is inevitable that politicians in many countries will abuse the privilege of almost costless borrowing - right up to the point where that privilege is removed.

Indeed, the Washington Post notes the new Prime Minister's predicament and adds

Across the supposedly advanced economies, the return of inflation has magnified the riskiness of extravagant political gestures. For the most part, however, politicians have not gotten the message.

How to think about all this? For one thing, I'm inclined to believe that fiscal policy (rather than monetary and supply side circumstance) would not be responsible for a rising natural interest rate, whether or not a government "crosses the line" in this regard. Especially since fiscal policy correlates with credit dominant outcomes which substantially differ from the time correlated aggregate output of natural equilibrium. 

In terms of aggregate output potential, total hours worked are an important part of the equation. Specifically, when considering equilibrium potential, one might ask: How much aggregate output is defined by exponential representation, versus the linear representation of (naturally scarce) time and place dominated output? Especially since fiscal dominance could eventually be undermined by expectations in the secondary markets of applied knowledge. And if service sector output doesn't presently appear linear, it's because areas of exponential gain are not being adequately defined in relation to the scarce resources of time and place defined product. In all of this, the fiscal dominance of political equilibrium is not well suited for the creation of a better defined and stable general equilibrium.

The Fragility of Economic Momentum

Why do societies tend to label certain activities as "unproductive"? Or perhaps said another way, what's so special about "productive" endeavour? These questions matter in part, because they closely relate to sectors of the economy specific to equilibrium balance.

Activities considered most productive, are those which encourage further momentum and additional monetary gains. Whereas activities labeled "unproductive", regularly require other existing wealth sources for social continuity on economic terms. While some aren't convinced regarding this causation, ultimately it matters for the ability of mature economies to maintain productive economic complexity. When too many things go wrong, even the strongest economies can start to become fragile. And how can anyone really know where such tipping points exist? I believe it can't be stressed enough, how right Adam Smith was centuries earlier, to worry about the fragile nature of economic momentum. Otherwise, he might not have felt the need to describe "unproductive" activities in ways which can still offend readers of Wealth of Nations today.

Nations have always experienced political struggles regarding fiscal activity, so whatever is viewed as productive or unproductive, depends on cultural framing as well. Still: When it comes to wealth creation, "low productivity" maintenance services are necessary to preserve what people, businesses and nations build in the first place. Importantly, Adam Smith believed in the value of "unproductive" labour. For that matter he noted its worthiness in what was also a description of economic momentum: 

A man grows rich by employing a multitude of manufacturers: he grows poor, by maintaining a multitude of menial servants. The labour of the latter, however, has its value, and deserves its reward as well as the former. But the labour of the manufacturer fixes and realizes itself in some particular subject or vendible commodity, which lasts for some time at least after that labour is past. It is, as it were, a certain quantity of labour stocked and stored up to be employed, if necessary, upon some other occasion. That subject, or what is the same thing, the price of that subject, can afterwards, if necessary, put in motion a quantity of labour equal to that which had originally produced it. The labour of the menial servant, on the contrary, does not fix or realize itself in any particular subject or vendible commodity. His services generally perish in the very instant of their performance, and seldom leaves any trace or value behind them, for which an equal quantity of service could afterwards be procured.

Productivity is a macroeconomic concern, because excess resource aggregation in areas which are not direct wealth creation, can eventually pull down areas which most contribute to economic momentum. Despite the fact societies aren't directly aware of such tipping points, much depends on how populations feel in this regard. When economic momentum slows, citizens begin to feel the difficulty of getting ahead and making the most of their lives. Plus, when free markets are held back for too long, people begin to assume it is also okay to take away the freedoms of their neighbors. 

Adam Smith lived when expanding economic momentum and free markets contributed to the hopeful expectations of citizens in his time. He observed that when people felt better about their own life options, they were more willing to give consideration and respect to other citizens. 

In other words, economic dynamism made people more civilized. Whether or not our own economic times have become more fragile, we already see how people have lost some of this consideration for one another. Perhaps we could give more credit where credit is due, for the earlier freedoms we've lost in full market representation. In particular, where some forms of work are deemed "unproductive", we can assign more economic value to our own time use potential, so that ultimately, less money is necessary for those activities to take place. If we work to regain free markets for all income levels, citizens might hope again for continued progress, prosperity, and personal freedoms.

Quality Product Isn't the Same as Rising Standards of Living

Often it appears that quality product gains and productivity gains are one and the same. However, might quality product occasionally detract from rising standards of living? Confusion about quality product as an aspect of productivity, deserves more attention than it receives. For example, recently Timothy Taylor opened a post re the productivity slowdown after 2005 with this observation: 

In the long run, a rising standard of living is all about productivity growth. When the average person in a country produces more per hour worked, then it becomes possible for the average person to consume more per hour worked.

But, how do we know when this desirable process actually occurs?  When might organizational processes to generate product quality, diminish aggregate consumer potential instead? Societies need better measuring indicators to determine how aggregate input/output requirements affect basic levels of consumption potential. Only recall how presently, many of the costs of excessive inputs for quality services are being shifted to future generations, via deferred debt and budgetary burdens. Indeed, much about our future economy, depends on the extent to which human capital contributes to exponential output gains, symmetric time coordination, or else the excessive time scarcities that today's knowledge providers have generated.

The differences in time versus exponential product designations, are vitally important for how we frame organizational capacity and the productivity which contributes to GDP representation. Nevertheless, these sectoral differences are difficult to conceptualize, because productivity is not often described in such terms. Consequently, the highly valuable yet costly product of time based services, poses undue financial societal burdens. Our lack of understanding as to the actual inputs and outputs that time scarce services involve, might consequently leave some of this future organizational capacity in doubt. 

Oddly, much of the present confusion, actually comes down to a one size fits all productivity perspective. Given the lack of more precise tradable sector and non tradable sector measures, the present combination is statistically confused as what an "average person in a country produces". Since this perspective doesn't distinguish between time centered output versus exponential forms of output, many forms of applied knowledge lack economic clarity. In particular, we still don't know approximate time increments that are expected of the average individual for the most basic aspects of non discretionary consumption. Before anyone gets sidelined by productivity factors such as leisure time or seemingly "free" consumption gains, basic non discretionary requirements are really the starting point for other productivity considerations. Plus, knowing a base level of expected consumption costs in relation to multiple income levels, provide clues how production input/output ratios matter most for consumers and producers. 

Should tradable and non tradable sectors gain more accurate forms of input/output representation, it would become simpler to think about the differences in approach these groups really need for purposes of long term productivity gains. All the more so, since when non tradable sectors focus on quality product, thus far they've inadvertently done so in ways which detract from further consumption options in the marketplace. 

Ultimately, even though quality product isn't the same as rising standards of living, that doesn't mean time based forms of product aren't important. Not only are many forms of time based product desirable, the time scarcities of production and consumption are among the most important considerations for total or multi factor productivity. Even though organizations logically seek to "save" time (via traditional productivity reductions of time/hours in relation to other inputs), there's still our personal motivation to "use" our economic time in the most significant ways possible. 

Occasionally, the best choices in this regard turn out to be experiential time spent with others. For the most part, we seek to balance the economic time we hope to gain from others, with the economic time we hope to share with them. Rather than leaving such decisions to a relative few professionals or possibly artificial intelligence, the best approach really comes down to the kinds of economic time that all citizens hope to take part in.

Might Macroeconomic Theory Be Incomplete?

Surprisingly, given the structural changes which have taken place in recent decades, macro theory still takes a back seat to other factors in our economic debates. Even if theoretical issues are highlighted, they generally lack the depth of theoretical discussion which took place during the Great Recession. 

While this is unfortunate, perhaps it also indicates that something more is needed in terms of stories and explanations. In particular, some believe that macro theory should further evolve in order in to remain fully useful. However, mainstream economists are reluctant to advance the horizons of economic theory, indeed some have also noted that economists are the only ones with "rights" to do so. Inexplicably, this approach means economists are becoming more inclined to follow the lead of policy makers. And since the latter have become quite polarized, economist are also less inclined to agree among themselves about theoretical constructs.

In particular, the lack of attention to general equilibrium dynamics in a time of non tradable sector dominance, makes it difficult for economists to productively respond to long term fiscal budgetary burdens. For instance, excess fiscal policy means more taxation later on. Scott Sumner recently mused on what this means:

I don't think the fiscal stimulus is a good idea, but not because I expect much inflation. The inflation rate will be determined by the Fed. Rather, it's a reckless policy because it will lead to higher tax rates in the future and won't do much to generate growth beyond Q3. (Deficits do cause higher interest rates, but only slightly higher in a country like the US.)

And continued: 

For 250 years of American history politicians have held the peacetime budget deficit in check because of fears of either inflation or higher interest rates (or perhaps a loss of confidence in the gold standard). What would happen if they began to sniff out that the actual risk is not inflation or much higher interest rates next year, rather the risk is higher taxes in 20 years, after they've safely retired. How would they respond to this information? I fear that we are about to find out.

Meanwhile, many policy makers are drifting towards an MMT rationale, despite its lack of theoretical validity. Noah Smith notes the lack of academic depth in current discussions, and suggests: 

it seems fairly clear to me that the reason is that everyone quietly stopped believing in the usefulness of academic theory.

Tyler Cowen in turn responds to Noah Smith:

His whole Substack post is very good, though I give the entire matter a different interpretation. I do not view contemporary macroeconomics as wonderfully predictive, but it does put constraints on what you can advocate for or for that matter on what you can predict. I saw the Republicans go down this path some time ago, and now the Democrats are following them - it ain't pretty. I think what we are seeing now is that (some, not all) Democrat economists want Democrats to be popular, and to win, and so they will rearrange macroeconomic thinking accordingly.

Some also appear to believe that revision of macroeconomic theory is needed, so that economists might feel better about their profession. But is that really enough? I suggest that a better understanding of macro theory could provide more insight, how 20th century general equilibrium dynamics allowed nations to introduce knowledge based endeavour for citizens. Alas, this was only an introduction! As it turns out, these methods are insufficient for more complete levels of economic integration in the 21st century. Will we, can we, meet the challenge?

In short, macroeconomic theory may not prove truly useful, until it creates potential for all communities, not just the economic prospects of governments and prosperous regions. Part of getting to a better place in this regard, is understanding how no level of fiscal policy is going to address the aggregate demand realities of regions which were left behind. No economic theory is going to be complete, if it does not take today's built in supply side limitations into account. All the more so, since many future attempts to pour fiscal policy into the bottomless buckets of supply side constraints, will be doomed to fail. It's time to bring supply side considerations to what have become the general equilibrium equations of the 21st century.

Are There Really Too Many PhD's?

Some have come to believe the talent pool for PhDs is diluted in ways that result in diminishing returns to the marketplace. Might this actually be true? Even though the argument carries a certain logic, it hardly means that societies should shift toward workplaces where knowledge is deemed less important! In particular, a majority of citizens now rely extensively on knowledge and skill, to lead meaningful and successful lives. How might society respond to a perception of "too many" advanced college graduates, given this reality? 

Alas, the "too many PhDs" argument also presents thorny issues for many who seek well compensated workplace opportunities. Recall that much of the rationale for seeking advanced degrees, is due to non tradable sector expectations of degree enhanced incomes. Even though high income levels should not be a prerequisite for basic non discretionary spending, this structural circumstance has yet to be addressed. Consequently, it's not a good idea to argue that millions shouldn't even pursue advanced degrees, so long as there are inadequate supply side mechanisms in place making it feasible to maintain financial responsibilities with anything less than advanced degrees. 

Nevertheless, I have to admit that present day general equilibrium revenue is woefully insufficient, for millions who still seek to enter well compensated workplaces. So much of this revenue is already claimed by price making in secondary markets, that the wealth creation of primary markets has also been compromised to some extent. However, what frustrated me to the point of writing this post, are group identity arguments which question intellectual aptitude and even the supposed cultural limitations of various groups. How exactly are millions of citizens expected to bear financial responsibility, if they are deemed incapable of full participation at the outset? What this essentially boils down to, is the suppression of human capital (with general equilibrium limits as excuse), in a historical moment when human capital is vital for getting things done. And too much valuable human capital output is essentially time based in nature, for anyone to logically deny entry which boosts aggregate time based output.

If there is any supposed "excessive dilution" in the provision of ideas or intellectual strategies, it is only due to the inefficiencies of a general equilibrium structure - one which never accounted for the possibility of full citizen participation in the first place. For this and of course other reasons, I continue to promote time value as a more inclusive source of wealth building, so that all citizens gain a chance to contribute to positive economic outcomes. Time arbitrage could create a durable free market context, so that personal ability and aspiration can be more fully represented. 

Again, the 21st century - in order to have real meaning - is about raising the value of all human capital - not just the opportunities of the best and the brightest. If we neglect to create time based wealth options for left behind communities, these recent rounds of anti-intellectualism and political division are likely to worsen. And anti-intellectualism is a poor substitute, for the kinds of useful and experiential knowledge which may not continue to flourish, should it remain mostly the province of experts and prosperous regions. We can make knowledge valuable in the eyes of all citizens once again, if we allow it to become part of the economic potential of all communities.

Until now, part of what has made it difficult to take definitive action, is the understandable frustration surrounding near future income limitations. While the fact we cannot raise all incomes is of course bad news, the good news is we can innovate our way to good deflation in non tradable sector activity, so that high income levels aren't necessary to live a good life. Fortunately it is within our ability as a society, to create the non tradable sector innovation which brings new spending power to small incomes. In the future, whenever money falls short of hopes and expectations, time value could be tapped as well, for the creation of durable economic outcomes. And best, we can ultimately change our perceptions, as to who is eligible for full participation in a knowledge based society. 

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.

Does Internal Inflation Affect Market Outcomes?

How could internal inflation affect aggregate market capacity? When most participants choose price making over price taking in non tradable sectors, crowding out elsewhere becomes more likely. Plus: When price taking is not an option for time based services production, societies gradually lose their ability to fully coordinate activities that require considerable knowledge and skill.

One point of confusion regarding internal inflation, however, is whether it also occurs at the level of an entire economy. For the most part, mature economies have learned to avoid such an outcome. Consequently, even though internal inflation can negatively impact discretionary spending as a market outcome, it doesn't pose direct issues for monetary representation at a general equilibrium level.

Indeed, when it comes to inflation at macroeconomic levels, policy makers are now inclined to go too far in the opposite direction. Since central bankers have little - if any - patience for general equilibrium inflation, healthcare providers, given their dependent market status, are now responding in kind with their own supply side limits. After all, healthcare is such a substantial part of GDP, that there is little remaining political freedom for more healthcare revenue burdens, in spite of the challenges of today's aging demographics.

Perhaps recent efforts by healthcare providers to control aggregate or supply side level cost burdens, could be better appreciated, were it not for their organizational inefficiency, as recently noted by Jerome Powell. For that matter, a post from Tyler Cowen earlier this month, highlights how healthcare doesn't necessarily lead to the market outcomes one might expect. From the abstract of the Health Affairs study:

In the period 2010-17 the number of NPs in the US more than doubled from approximately 91,000 to 190,000. This growth occurred in every US regions and was driven by the rapid expansion of education programs that attracted nurses in the Millennial generation. Employment was concentrated in hospitals, physician offices and outpatient care centers, and inflation-adjusted earnings grew by 5.5 percent over this period. The pronounced growth in the number of NPs has reduced the size of the registered nurse (RN) workforce by up to 80,000 nationwide.

Cowen also questioned the relative losses in nurse capacity:

Given the growth of the health care sector, should not the number of nurses, broadly construed, be rising at a higher rate?

When organizations face revenue constraints due to dependent or secondary market status, a slowing economy can lead to hard choices regarding the most important skills sets for the medium term. Likewise, just as some believe we would benefit from more nurse capacity, others argue that more physicians are needed in rural areas. At the very least, the decision to place more nurse practitioners in rural areas makes sense, since many physicians prefer not to practice in rural regions. Still: While nurse practitioners for rural areas are a partial solution, too many left behind places nonetheless lack specialized knowledge among their own citizens.

What might be done? Eventually, time arbitrage could create long term solutions for rural communities which seek vital roles for their own citizens in a knowledge based economy. Where once it was difficult to bring knowledge specialization to limited population densities, the digital realm has the potential to change this.

While debating organizational possibilities for applied knowledge, only consider how tradable sector activity has successfully internalized knowledge and skill in small groups, for centuries. Plus, these organizational forms have often thrived in areas which otherwise lack economic complexity. Recall also, how tradable sector activity has achieved vast productivity gains via internal resource reciprocity, thereby reducing internal inflation. Fortunately, with sufficient time and effort, the good deflation of tradable sector activity which brought such progress to humankind, is possible for non tradable sectors, as well.

The Hidden Danger of a "Fully Grown" Economy

Is there cause for concern, should mature economies appear to no longer "need" additional growth?  Perhaps so. Too much non tradable sector activity - much of which is also non discretionary - does not accurately reflect the reality of wide income variance. Since the need for full economic participation (at a basic level) is not taken into account, many citizens also cannot contribute, to what would otherwise be shared responsibilities. Indeed, these hidden losses indicate that a market gap exists which is far too significant to be addressed via aggregate demand "remedies". Essentially, non tradable sector requirements now demand more long term monetary revenue (and consequent need for higher monetary growth levels) than what is actually transpiring.

These systemic burdens are also faced by individuals in their daily lives. Many who aspire to success, come into adulthood convinced they have little choice but to do so on fully monetarily compensated terms. This, in spite of what many workplaces can reasonably expect to offer their employees. And while struggles for full access may suggest illogical meritocracy, consider what is at stake. Until non tradable sector consumption options become more flexible, one's decision to forgo a college degree, will often lead to a lifetime of uncertainty and excessive personal risk.

Despite this reality, even college degrees hold diminishing rewards. For instance, 33.8 percent of college graduates now work "in jobs that don't require a college degree". Given the high costs of non discretionary consumption, societies struggle to create more fully compensated wage capacity than their institutions can actually offer. Is there any wonder our political systems are creaking under the strain?

Yet in all of this, a stronger growth trajectory would be beneficial for reasons which go well beyond mere additional monetary revenues. In a modern day knowledge based economy, it is vital to make economic room for the growth and positive challenges of the human mind. That said, we need to think about doing so in ways which are not near as socially restrictive as the ones we currently rely on.

For these and other reasons as well, I question whether long term growth issues for mature economies are essentially "settled". And economists in particular, should be careful about this assumption. In one recent example, John Cassidy in "Can We Have Prosperity Without Growth?" highlights Dietrich Vollrath's new book, "Fully Grown: Why a Stagnant Economy is a Sign of Success".

Vollrath argues that slower growth is appropriate for a society as rich and industrially developed as ours. 

Of course, services play a major structural role in this circumstance. In 1950, services were only 40 percent of GDP, today they comprise more than 70 percent:

Taken together, slower growth in the labor force and the shift to services can explain almost all the recent slowdown, according to Vollrath.  

It is probably not safe to declare all is well in a "fully grown" economy, until most communities and citizens are at least able to take part at a basic level in economic activity. When citizens lack the ability to do so, their contributions to tradable sector markets are also disrupted. Does it really make sense to declare markets as fully matured, when millions of citizens remain in holding patterns and have yet to truly take part?

What might make it simpler to determine, whether the economy is "fully grown" to an extent it becomes obvious all is well? For one, citizens would be become less inclined to seek more extensive monetary compensation than systems can actually bear. Should non tradable sector activity become more reflective of actual income levels, fewer would be compelled to use higher education as a supposedly necessary signal. Granted, meritocratic preferences will always be important for some, as means to judge and reward accordingly. But merit should not have be the sole path, by which one might create a meaningful and productive life.

Jobs as a Form of Societal Permission

How might artificial intelligence affect employment prospects in the near future? Answers may partly depend on how AI impacts the aggregate output of tradable and non tradable sector activity. Essentially, we may gain more societal permissions for employment, so long as we ensure that aggregate output is not compromised.

And while AI is beneficial for non tradable sectors, in certain crucial monetary respects it is better positioned to increase output in tradable sector activity. After all, tradable sectors don't face the limiting factor of time scarcity in final product. One can only hope that tradable sector potential does not become overly suppressed in the near future by the excessive market demands (price making) of today's non tradable sectors.

AI can only improve aggregate output in non tradable sector activity up to a point. Even though AI can augment time value in non tradable sector time based product, it more often does so for specific or individual efforts, rather than general worker participation. Since these (historically early) patterns of AI are occurring in restricted knowledge environments, AI tends to exacerbate income variance in non tradable sector activity, instead of contributing to greater knowledge dispersion in society.

At first glance, one might expect the professional work of knowledge providers in non tradable sectors, to be among the safest jobs in the near future. Nevertheless, market availability in these areas will still require societal permission in the form of reliable general equilibrium revenue flows. This being the case, many professionals may ultimately have less control over their management of job creation, than they would prefer. At some point, budgetary restrictions could "require" more use of AI to substitute for human capital, even though knowledge providers understandably prefer otherwise.

When considering whether AI contributes to or detracts from job creation, it helps to determine whether the relevant activity provides an initial wealth source which can utilize immediate resource reciprocity. This organizational approach doesn't require redistribution or long term debt formation, plus any budgetary restrictions it creates are mostly immediate and short term. Today's tradable sectors are the most dependable sources of initial wealth generation. Given this priority market position, they should continue to serve as reliable job creation, so long as markets maintain a steady growth trajectory.

Alas, some secondary or non tradable sector market formation is not only heavily reliant on redistribution, but also on the ability of governments to fulfill competing responsibilities without substantial disruption. Eventually, due in part to extensive price making, these forms of knowledge production could suffer losses of aggregate output, even in conditions of carefully calibrated growth trajectories. While many time based services still appear as though steady sources of employment, some of the most highly compensated employment could be disrupted by budgetary issues in the near future.

Fortunately, there are new organizational possibilities for societal permission in skilled time based services. An important difference in future capacity, however, is that full monetary compensation for the time product of knowledge providers, will not always be possible. Despite this reality, time arbitrage could make it feasible for participating groups to coordinate time based services. Advance planning towards this end, would also lessen the negative impact of income losses for all concerned.

Participating groups could especially step up quality workplace possibilities, by giving AI "permission" to assist individuals in the creation of quality time based product. One could readily imagine today's AI assistance for professionals as a starting point, since the real potential for societal gain is in raising the skills ability of all individuals in their workplaces. Even though AI can't multiply existing time scarcities, it can improve the aggregate time value of those who take part in services generation. Let's bring workplace permissions within reach of all individuals who would provide mutual assistance.

Why Do Services Need Monetary Equivalence?

Much of today's political chaos, can ultimately be traced to struggles over who retains access to high skill knowledge. Consequently, it helps to consider: How much of this skills capacity might be artificially scarce?

Still, artificial scarcity was built into quality services product for understandable reasons. Originally, professional services were largely intended for citizens with relatively high income levels in prosperous areas. Over time, however, professional services provision gradually became the norm, replacing the mutual assistance which citizens with limited incomes had long provided for one another. Even though the move from mutual assistance to professional activity has been a centuries long transition, the real turning point towards complete professionalization began about fifty years ago.

By the late seventies, professional healthcare had mostly replaced the last vestiges of local and less formal services options. Nevertheless, the details as to how skilled forms of mutual assistance were legislated away, aren't really well known. Even the latter stages of these transitions were scarcely noticed, since the professionalization of services in general, benefited from widespread media support.

What is belatedly apparent, however, is that when production rights are withdrawn from groups lacking the money for extensive human capital investment, markets for useful services are going to suffer. Fortunately, what has become a woefully insufficient services marketplace, can be addressed. But doing so means not being afraid to explain to citizens what actually happened. The less blame in this regard, the better. Forgiving what happened, means we get the chance to create a more productive and hopeful future. We now have the opportunity to create greater economic meaning for time value, and doing so would extend the skills capacity needed for today's knowledge based economy. Much of this skills capacity will also need to take place on non pecuniary terms capable of creating monetary equivalence.

Why so? Healthcare is mostly a dependent secondary market. Since much of it relies on government support, periods of slow economic growth impact the revenues actually available. Consequently, even though demand continues to grow - especially due to aging populations - healthcare providers have limited ability to expand supply side capacity via the same pricing terms. Yet how could healthcare providers be paid substantially less, if their human capital investment costs remain relatively fixed?

For the U.S. in particular, present day organizational capacity was created during relatively long periods of increasing tradable sector growth. This organizational capacity was also accomplished via strong price making mechanisms, especially in the latter decades of the 20th century. Now, in certain respects the price making approach has reached its natural limits, given other near future budgetary obligations. In other words, even though more capacity is needed, revenue can't realistically grow to meet that demand. Consequently, services demand now needs to be met by different means than what have occurred in the U.S. thus far.  This is the dilemma many high skill providers currently face. What can be done?

The moment is right, to create human capital organizational patterns which include reliable and easily defined non pecuniary rewards. This approach would help compensate the fact that healthcare as a secondary market position, cannot respond to further demand with full monetary compensation for an expanded supply side. Non pecuniary rewards would create greater monetary equivalence for those willing to participate in healthcare, through new forms of organizational capacity.

Services such as healthcare could gain greater monetary equivalence by increasing time value as part of an applied knowledge continuum. This process could be undertaken with relatively minimal costs for human capital investment. Education for services skills would be integrated into local communities and their workplaces. The symmetry of time arbitrage would allow education and other services capacity to function as components of wealth creation, instead of simply more demands on other existing wealth.

Such an approach could be a tremendous boost for communities which presently lack the resources necessary to compensate today's high skill knowledge providers. Plus, monetary equivalence for human capital investment via non pecuniary means, could help stabilize skilled services markets in general. And in modern economies, services stabilization is certainly important for wealth stabilization as a whole.

Time Arbitrage Would Include Utilitarian Benefits

Are utilitarian outcomes a helpful way to think about time arbitrage potential? After all, it's no simple matter to decipher what might generate the greatest good for the greatest number, given the complex circumstance of modern day economies. Not only have individual interests diverged even in (relatively) single cultures, income levels are now subject to extreme variance as well. These societal differences make representative democracies difficult to maintain, when different groups end up competing for the limited options of government revenue. This is especially a concern, when it comes to already existing supply side limits for time based product.

Time arbitrage could ultimately reduce some of the pressure, by created decentralized markets for services which would not have to rely on government revenue. In local markets for time value, better alignment of common interests could also encourage a greater degree of services coordination. The result? More market induced supply and demand for all participants, would generate the greatest amount of mutually desired activity for the greatest number. In other words, a utilitarian outcome which is otherwise difficult to achieve, especially in centralized economies such as the U.S. with populations in the hundreds of millions.

Mutual time management - that which creates space for individual priorities - could gradually help reduce the market losses which accrue to aggregate time value in centralized settings. When merit requires costly human capital investments just to get things done, the resulting skills arbitrage tends to cancel out the service market potential which millions of individuals could otherwise contribute. Indeed, when the time of individuals is mostly perceived as a cost, instead of a component of wealth building potential, people who inadvertently end up on the sidelines are often perceived as having zero marginal productivity potential. This is hardly an optimal result!

Skills arbitrage also became a problem from a utilitarian standpoint, by positioning "advantaged" human capital for time based product so as to create tyrannies of minorities over majorities. In the process, the resulting supply side limits has led to employment uncertainties which have proven difficult for both monetary policy or fiscal policy to address.

One of the most positive aspects of free markets, is when they can provide what also translates into the greatest good for the greatest number. This extensive contribution to utilitarian outcomes, should be ample proof, how non tradable sector activity could also benefit from a similar free market approach - one which allows time value a more complete economic role. All the more so, since free markets have often proven a simpler utilitarian approach, than countless policy efforts which tend to miss the mark in terms of utilitarian policy outcomes.

There is no reason, why the market potential of aggregate time value should have to remain so compromised. By creating reciprocal wealth at the outset, individuals can increase the dynamism of service markets which in turn could extend to millions more citizens than is presently feasible. Even though the greatest good for the greatest number is important as ever, it is no longer a simple matter for governments to achieve utilitarian outcomes on their own. By creating the greatest economic activity possible for the greatest number, time arbitrage could embrace utilitarian principles without necessitating additional taxation burdens.

Does Applied Knowledge Have a Sustainable Future?

When does applied knowledge start to take on extractive characteristics? How many will still be able to participate in the important challenges of our time, in the decades ahead, via full levels of monetary compensation? For once service sector activity dominates national revenue even further, applied knowledge - as an extractive process - will likely face systematic limits.

Why hasn't there been more concern, given how equilibrium imbalance affects both original wealth sources and their dependent markets? Alas, we can't directly observe, when common pools of public revenue potential are subjected to too many takers and competing activities. Further, no one knows when hard limits to public subsidies for applied knowledge, may actually go into effect.

In the meantime, who has incentive to reduce the price making which has come to dominate so much economic activity in general? Those earlier concerns which both Republicans and Democrats in the U.S. once held regarding budgetary deficits, have largely vanished. Yet nothing productive has transpired in fiscal policy which justifies that lack of concern. In all of this, price making has become the preferred option for individuals and institutions alike, to get things done. Even so, at the level of general equilibrium, public revenue is like oceans becoming overfished, once price making becomes the standard for economic engagement.

Whereas in tradable sector activity, resource limits are generally more obvious. Perhaps this explains why physical extraction catches a lot more heat, than revenue subsidy extraction. For tradable sector activity, sustainability is often expressed as what the earth appears capable of. Yet we completely lack any moral equivalent, in terms of what societies expect long term of their pooled revenue sources. Just the same, postponed debt obligations could well prove as problematic for future generations, as extractive behaviours which negatively impact physical environments.

Granted, extractive processes are vital as important sources of wealth origination. After all, they create a myriad of economic possibilities which otherwise would not be feasible, due to the extensive scale which is sometimes required. What matters, however, is the pace at which extraction occurs and is managed. When does extraction preserve wealth, and when does wealth end up destroyed in the process?

By way of example, Nameless Towns provides a history of the no holds barred extraction approach, which was earlier taken by sawmill companies in East Texas. Even though local pine forests were finally replenished afterward, those beautiful and ancient old growth forests were completely logged out, first. The entire area suffered greatly afterward, while many temporary communities simply disappeared. Thad Sitton and James Conrad explain:

Most companies saw no alternative to a policy of cut out and get out. Since the Southern lumber boom had begun during the 1870s, companies had bought stumpage rights to blocks of timberland along the new railroads, built mills and tramway systems, and cut their virgin pine groves as fast and efficiently as they could. Buying land made no sense to most companies, since regeneration of pines on cut-over land seemed a dubious possibility, and in any case the next marketable crop of marketable saw timber remained at least a third of a century away. And that would be three and a half decades of paying for land, paying for taxes on land, paying for more careful logging to protect the seedlings, paying for thinning the hardwoods so the pines would not lose the competition for sunlight - money spent with no return and no assurance that the person setting the policy would ever live to see the trees turned into profit...

Far better to keep operations clean and simple, most lumbermen believed - to buy stumpage, build temporary towns, cut out, and move on. Besides, the cheap lumber prices of competitors following these policies discouraged other companies' experiments with land ownership, "selective harvesting" and "silviculture", as did the Southern traditions of the "open range" which allowed landowners only limited control of their own lands. Northern lumberman had discovered to their consternation soon after locating to East Texas that Southern customs gave anyone the right to trespass, hunt, fish, and run stock on the lands of anyone else...When pressed, local courts often supported these informal usufruct rights.

So why compare government fiscal realities to an extractive story such as this? Present day national fiscal capacity has made possible the use of a vast store of high quality knowledge. But what could happen to this wealth and immeasurable value, should it face too many demands and too few sources of willing replenishment? Replenishment depends on time value for resource maintenance - maintenance which by its nature lacks full monetary compensation, as illustrated above. Replenishment requires forms of immediate reciprocity which society as a whole, may lack the patience to provide. Who is willing to work for small wages unless they have absolutely no choice? Would such patience only emerge, if and when it were completely necessary, once a high volume extraction system for knowledge can no longer be maintained? Only consider the propensity of current political parties to spend as much as possible, so long as they are the ones in control of the public purse.

It can be difficult to contemplate solutions for long term fiscal sustainability, once everyone gets caught in the struggle over access to the public revenue commons. How would governments and private interests alike proceed, should their public commons disappear? Hopefully, greater patience for reciprocity and long term sustainability can be found, before these reserves dwindle even further.

Let's Focus on Means, Not Outcomes

Alas, sometimes the Fourth of July serves as a reminder that freedoms have become less certain than they once appeared. Political ideology has especially been damaging for personal liberties, as it increasingly focuses on outcomes instead of means. If Democrats once appeared as though the party most responsible for struggles over governmental redistribution, that has changed. It is disconcerting that Republicans who once advocated for wealth creation on the part of all citizens, continue to shift toward a deterministic and essentially outcome based stance.

Any time a nation decides to limits means of production to the province of special interests, it may eventually be in danger of losing both economic and political freedoms. Organizational hierarchies for knowledge based means, have led to supply side realities which left little room for reform from within. Yet sharing the means of production is quite a different concept than it once was. Unlike the traditional manufacture of discretionary goods, much of knowledge based production is non discretionary. As a result, individuals have lost much of their freedom to participate in activities which - instead of being largely a matter of choice - are often basic requirements for living a normal life.

Outcomes for knowledge based endeavour, also tend to be couched in terms of access and cost. Is there a difference? Not as much as one might imagine, because they are both about supply side outcomes rather than means. Tim Taylor recently noted the distinction, perhaps in hopes that dealing with healthcare policy in terms of cost rather than access might bear fruit. Nevertheless, cost and access in this instance are inextricably linked, making them all the more difficult to internally resolve.

Again, nothing can really be done without ultimately addressing the limits of today's knowledge centered production. Likewise, the desire to slash public spending for education and healthcare, in hopes that private enterprise will step in to fill the void, misses the fact that the supply side would still be faced with a constrained equilibrium, in terms of the extent to which it can fully compensate human capital investment seeking entry. Production means have long since determined marketplace outcomes for the organizational patterns currently in use. Unfortunately, these patterns have inadvertently led to a devaluing of human capital potential at a global level, even though that would scarcely have seemed possible before the recent era of high skill services dominance.

Since the product of time and place are scarce and don't readily scale, today's time based product providers needed to create revenue for income and overhead costs by limiting supply. Otherwise, it would not have been easy to fully function in the high value equilibrium generated via centuries of tradable sector wealth. Importantly, these earlier hierarchies were an understandable approach, which also worked reasonably well for a long time and for much of the populace. However, as services sector activity has come to dominate the economy, fewer individuals are now monetarily compensated at a level they can still access high skill services as currently constructed.

Consequently, greater means of production potential will need to be restored to those with limited sources of income, so they too will be able to participate in and contribute to a knowledge based economy. By creating new patterns of organizational means, full participation in a modern economy could once again become possible for the vast majority of citizens. For the sake of freedom and liberty, let's focus on restoring means, instead of struggling over restricted outcomes.

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.

When is Technology Relevant in GDP Data?

Even though technology can appear mysterious in terms of GDP measure, there's actually a simple way to consider how tech gains particularly matter for aggregate output and productivity - especially if the product in question has become "free" for consumers. Technology holds an accountable position for productivity gains in GDP data, when tech contributes to reductions in non discretionary costs for both individuals and organizations. When this in fact occurs, individuals and organizations alike experience more economic options and opportunities for commitments than were previously possible.

While prices represent what people are willing to pay for tangible market product, prices can be misleading when they involve the intangible costs of getting things done, particularly when non tradable sector activity is responsible for those costs. In many respects, non discretionary costs lack the voluntary nature of other market decisions, and assuming those costs may lead to other transactions and commitments being (involuntarily) set aside. For any measured time frame in aggregate, many consumers, firms and organizations simultaneously make discretionary or non discretionary decisions which ripple out like waves across a pond. These ripples become cumulative institutional effects which - in the circumstance of excessive non discretionary obligations - can also reduce the clarity of aggregate output as data for GDP.

The most important technological potential of our time, could ultimately reduce the cumulative damage of non discretionary burdens which have settled like layers of sediment across many institutions. Just the same this possibility is not yet on the horizon, despite the fact some optimists believe the problem could actually be with GDP calculations. Hence I respectfully disagree with Tim Worstall's reasoning in "From Facebook to Skype, GDP is not keeping up with technology":

The most obvious answer is that the data has been counted wrong - that has long been my contention. 

Worstall believes we need to make amends in the measure of GDP, to address "low GDP growth in the middle of a technological revolution." But unfortunately, some of the apps he references could actually be making more demands on economic time priorities and overhead costs, than functioning as labour or time savers. Arnold Kling recently noted the problem of overhead costs that apply for labour not associated with traditional production:

Production labor can be incrementally increased or decreased as needed. But overhead labor is not adjusted strictly according to sales volume.

Labour and related personal time priorities function so differently in non tradable sector activity, that these intangible organizational processes have skewed our understanding of productivity. Yet how does any society continue to meaningfully coordinate divisions of labour, or clarify ongoing productivity gains, if aggregate output can no longer be accounted for in relation to overall costs? Due in part to how many professionals derive profit, our non tradable sectors lack the incentive to utilize technology for productivity gains, with the general exception of reducing or occasionally eliminating lower levels of the hierarchy in time based services.

By way of example for the latter instance, technology created productivity gains in the early nineties which could be readily observed. I was just one of many office workers during this time who reluctantly let go of governmental employment, due to the new software programs which made it feasible for attorneys in my workplace to assume activities which previously had been carried out by office assistants. While productivity gains such as these were associated with private enterprise, the fact local and state governments were also able to reduce overhead costs (even if only temporarily), doubtless contributed to Washington's balanced budget during the Clinton administration. Truly, this was a time when digital technology became quite relevant to GDP data.

Why has it proven so difficult to realize similar productivity gains today? One reason is that recent technological innovations actually threaten the organizational structure of today's non tradable sectors. It's one thing to apply automation which increases output in traditional production or services which readily scale, but altogether another to contemplate deep learning which in crucial respects can undermine the logic of extensive human capital investment. Especially when that investment augments the fixed scarcity of professional time value, for time based product.

Not only does AI seem to suggest that some professional human capital costs aren't "necessary", but 3D manufacture could eventually upend the rationale for much of traditional manufacture as well. However, traditional building methods are the bread and butter of countless local developers, in what is still one of the main wealth building activities for any community which continues to have an economic pulse. Yet as long as traditional development holds sway in most quarters, it will determine the nature of local economic activity which is even still feasible, despite what citizens would like to create if they had the chance to do so.

One of the main reasons for economic uncertainty, is that we still have no idea how our existing non tradable sectors will respond to the recent array of cutting edge technological possibilities. Even though the potential for productivity gains is extensive, it nonetheless comes with mind boggling cultural ramifications. Sometimes civilizations are able to coexist with new innovations alongside traditional systems, and sometimes they are not. In the meantime, no one can really pretend the crucial elements have come together for the best optimal economic outcomes, because technology. Again: In order for technology to make substantial contributions to productivity gains, its impact would contribute to overall cost reductions which improve the systems capacity of entire supply chains which coexist with applied knowledge production. Alas, free apps such as Skype and Facebook weren't made for this challenge.

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.