Good Deflation and the Monetary Human Capital Role

Why does the form of deflation we call "good" (since it translates into more affordable product and more output), not function as the same clear positive, for the economic value of human capital as time based product? After all, if the cost of high skill services could be gradually reduced and made more widely available, much as tradable goods have become, "small" wages would hold more real economic value. Likewise, smaller aggregate wage levels would gradually allow the productive agglomeration costs of real estate to be modified in many areas as well.

There's a problem however, for good deflation in terms of time based service product. Alas: What tends towards cumulative inflation rather than good deflation, is how many individuals meet their ongoing expenses and asset costs as those costs currently exist. Unlike forms of product separate from time (which of course aren't human), time based product costs are attached to our human responsibilities to pay bills on an ongoing basis. While we are appreciative if we can access someone else's time, good deflation for time product may nonetheless feel like the bad deflation which impacts labour value during depressions, if that time value happens to be our own.

Our time is also scarce in relation to most goods. Consequently, in order to meet the human capital costs others posses, many seek to raise their own time value. This sets up a chain reaction, whereby others still need to increase the value of their time, so as to access important forms of time based product. This extensive internal inflation process runs exactly counter, to the good deflation which tradable sector activity has contributed to prosperity in recent centuries.

All this holds, regardless of one's monetary compensation for their time units in the form of labour or skills arbitrage. It certainly matters for the time arbitrage I've suggested as an alternative, which would need to be crafted so as to directly address the internal inflation problem. That's why it would be necessary to define new organizational settings for services, learning patterns, infrastructure, housing and other building components so as to make good deflation for time value a reasonable possibility.

Consider how infrastructure and real estate costs have proven relatively amenable to good deflation in tradable sectors. While limited aspects of tradable sector activity needs locations in areas with high real estate costs, much tradable sector production has far more flexibility and mobility. However, in order to accomplish this, many aspects of organizational capacity are integrated into single sustainable settings which have at least a relative degree of independence from place and geography.

Conversely, too many aspects of high skill services have been excessively place dependent for productive agglomeration, which only contributes to the difficulty of achieving good deflation in non tradable sectors. This coordination problem helps to explain why the high skill work of our most prosperous areas is no longer a simple matching process in terms of employment, given the relative few who now manage wealth in lieu of others. Since non tradable sector high skill knowledge does not scale as does tradable sector activity, it needs a horizontal organizational approach which encourages greater marketplace capacity and productive agglomeration which goes well beyond our most prosperous areas.

A new institution is needed which could place productive agglomeration for non tradable sector knowledge use into a combined organizational framework. In these defined equilibrium settings, individuals would not suffer the extreme losses in purchasing power, that would otherwise accompany good deflation in time based services in a completely open equilibrium. Of course, open equilibrium would still apply for tradable sector activitiy, since most individuals can still access and contribute to the good deflation of tradable sectors. However, the closed non tradable sector equilibrium would make it realistic to pursue good deflation as an important time based services goal.

Valuable though good deflation would be for time based product, there are other reasons to utilize symmetrical time value as a mass produced services commodity. Time arbitrage would allow time based product to function as a basic human capital building block, instead of simply another societal cost which places uncertain demands on the earth's resource capacity. One of the main problems of inflationary time value, is the fact there is no time based services steady state to rely upon, when time value exists solely in a dependent relationship with earth's other resource capacity. By bringing good deflation to time value, we could create a steady state for applied knowledge which allows us to more precisely determine the productivity of our own efforts, in relation to the productivity relationships of our other institutions.

Degree Deflation and General Equilibrium Expectations

Might a recent example of degree "deflation", illustrate good deflation potential for the economy as a whole? In a recent post for AEI, Preston Cooper writes:

Last week, Kentucky's teachers licensing board made a decision all too rare in today's credential-happy labor market: Teachers in the Bluegrass state will no longer need to get an advanced degree in order to keep their jobs.

The board's move is a rare example of "degree deflation". Previously, Kentucky teachers were expected to obtain a master's degree or other advanced credential within ten years of first becoming licensed as an educator. The American economy has experienced degree inflation in recent years, as employers have attached new degree requirements to jobs that did not previously require such advanced education. 

It will be interesting to see if more educators follow their example. And how might other employers respond? All of this matters, insofar as societal expectations are concerned. In his article, Preston Cooper also noted the opposition from both the teacher's union and Democrats in the state legislature.

The initial good that could come from this scenario, of course, is partial relief in the form of reduced human capital investment costs. One might envision education in general, as part of a knowledge production "factory", whereby aggregate inputs (in this instance at general equilibrium level) required in relation to aggregate outputs, are somewhat relaxed.

However, will there be positive societal expectations regarding degree deflation? It remains to be seen, how the education board's action could affect economic circumstance in Kentucky and possibly elsewhere. Might approaches such as this start a trend? If so, how how to discern whether the deflation effect turns out to be positive?

Only recall that good deflation potential, involves more than just lower input costs and/or requirements, which are sometimes a response to economic downturns - even if mostly regional in nature. Ultimately, positive forms of deflation result in higher aggregate output. Real output gains would make it possible for degree deflation to translate into standard of living gains (perhaps discounting certain quality product implications). Nevertheless, if apparent limitations to economic access were partly responsible for the decision making process of the school board, one hopes the decision doesn't prove to be too much of a gamble.

Much also depends on which sectors decide to take advantage of degree deflation. Will various sectors reduce wages accordingly? If so, other costs of living would need to be responsive to such a reality, in order to (at least) maintain total or aggregate output. Even though more tradable sector activity in the region could lead to greater output; non tradable sectors - given their present dependent status (and time/place logistics) - may lack incentive to increase output. Importantly, the ability to reduce wages could encourage non tradable sectors to enhance professional rewards as well.

Hopefully the licensing board has made a decision that turns out well. Even so, I feel the greatest potential for reduced human capital costs, is via defined equilibrium settings - structured so as to generate additional output on primary market terms. Perhaps defined equilibrium settings would prove more reliable for good deflation, than what much of today's non tradable sector activity is structured to provide. The catch in all this, is that it's difficult for non tradable sector providers to raise output, if and when they function in revenue dependent contexts which could dilute professional income levels in the event of additional supply side capacity.

Free Trade? Don't Knock it Till You've Tried It

I know, the title isn't completely on the mark, for the world has in fact embarked on considerable free trade in recent centuries. But there's real problems on the horizon, which could negatively impact what thus far has been the most beneficial free trade of all: our tradable sectors. It is the lack of free markets for our aggregate time value (only the "best" need apply), which make job loss in tradable sector activity, appear more dangerous than necessary. As labor force participation declines in the face of non tradable sector protectionism at home, policy makers increasingly resort to protectionist actions, abroad.

Regular readers of this blog are familiar with my arguments for free trade. Perhaps mercantile reasoning would not have gotten such a stronghold, had existing trade imbalances already been addressed via a marketplace for time value. What many of us aspire to accomplish - and experience - in our lives, is scarcely represented in today's marketplace. This dearth of wealth creation is like a gaping hole, in both the supply and demand dimensions of non tradable sector activity. Hence the free market reference of my title.

A more recent aspect of protectionism, is the possibility of what - as far as I can tell - is essentially heavy tariffs that are somewhat disguised as border adjustments. The effects of such a revenue grab could play out similarly for low income levels and retailers - both of which have already been compromised by tight money conditions for some time. I'm concerned that the ongoing circumstance of grocery retailers is not well understood, at all. Scarcely anyone noticed not long ago, when some of them sounded the alarm about low profit margins which were making it difficult to keep their doors open. There's a good chance that extremely low profit margins for basic foodstuffs, is a sign of overly tight monetary representation.

Since grocery retailers are already in a compromised position, they may experience more difficulty in setting aside additional government revenue, than people realize. In all likelihood, already low profit margins would mean passing most additional costs to the consumer - some of whom may respond by cutting back on grocery budgets.

Also, some of the potency of free market advocacy (re gains) for the poor could be reduced, should widespread tariffs on imports be adopted. It saddens me to think of the extent to which tradable sector good deflation could be undercut by these measures, especially as nations begin to retaliate. However, grocery retailers have experienced additional layers of bad deflation since the Great Recession due to tight money, on top of decades of good deflation which brought food prices well within reach of most budgets. In all of this, non tradable sectors have been unwilling - thus far - to encourage free market environments which permit deflation of any sort.

Nevertheless, it must be tempting for policy makers to consider the high tariff route, since incomes for many have risen enough that tariffs may not pose a burden to the average consumer, as in the earlier days of the nation. Hopefully, policy makers will remember, that should tariffs once again become a reality, history has shown how difficult they can be to reverse. For anyone who still believes in the potential of free markets, it's more important than ever, to make one's voice heard in Washington in the days ahead.

More Money Chasing Fewer Goods...

Economics can get confusing indeed, when neither monetary or fiscal policy is well positioned to provide sufficient economic stimulus. If neither appears necessary, does that mean an economy is already close to its "full potential"? If this be so, then why do so many problem areas and pockets of low labor force participation, remain?

While structural factors continue to inhibit the effectiveness of fiscal and monetary policy, it's not clear how they do so. Mostly evident, is the fact ordinary forms of stimulus are increasingly off the mark, given present circumstance. Supply side issues contribute to these problems in ways which leave many scratching their heads. Sure, the prospect of cronyism has become even stronger than before. But what, specifically, about favoritism, stands in the way of progress and long term growth?

Like the monetary inflation that central bankers are so determined to "destroy", cronyism contributes to its own internal form of inflation. In other words, pro business policy - as opposed to pro market policy - often leads to "more money chasing fewer goods" as well, with time based services and housing among the more egregious examples. If an already constrained marketplace weren't enough, recent suggestions for fiscal stimulus would likely be subject to monetary offset by the Fed, as Scott Sumner noted in a recent post.

Unfortunately, the Fed is not equipped to respond to what is essentially a real economy equivalent of monetary inflation. However, that does not mean a response is not needed. Why so? Over time, the real economy equivalent of more money chasing fewer goods (in spite of Fed inflation targets) begins to crowd out the marketplace options of our most productive sectors, particularly those associated with tradable sector manufacture. Yet the problem goes well beyond crowding out, for this process is occurring in terms of limits on primary market formation, or original wealth. Consequently, gradual losses in primary market representation, lead to gradual deflation, as secondary market crowding has to adjust to the gradual losses of primary market revenue which these sectors depend upon. The result is a gradual - but consistent - negative form of deflation.

Some of the retro trade policies presently being proposed in Washington, could also result in more money chasing fewer goods for tradable sectors as well. However, it is the long trajectory of NIMBY non tradable sector activity, which has constrained output (in product diversity) to such an extent the process now distorts general equilibrium conditions.

Structural problems can no longer be ignored, because disallowing inflation at the level of national economies is only making things worse. It is dangerous to assume that central bankers are actually capable of providing good deflation on behalf of their citizens. Good deflation is purely a real economy construct, and fortunately it is still possible to organize markets in ways that provide positive incentive for more output, instead of less. Without more marketplace choice, the present retreat to authoritarian "solutions" may only continue.

Good and Bad Deflation: From the Glossary Notes

A glossary will be ready soon, and in the meantime I decided to share some notes on good and bad deflation, which are now close to a reasonable edit. After checking a few online references prior to this post, it quickly became obvious that the relationships between organizational factors versus national monetary policy factors for deflation, aren't always clear.

Organizational factors are microeconomic settings which lead to macroeconomic results, which in turn are considered "bad" inflationary or good deflationary in some instances. Whereas monetary policy is an initial macroeconomic action - one which also does not exist as a construct that is capable of generating good deflation. At best, the deflation that monetary policy might achieve would be neutral, as it relates to aggregate spending capacity. I especially need to be clear about these matters, because of what an equilibrium corporation would seek to accomplish in this regard. An equilibrium corporation construct, would include organizational capacity for non tradable sector good deflation, as a primary objective.

Good deflation can be thought of loosely as more product for relatively less cost. This, in contrast to the same amount of product for less cost (and consequently less product at some point) that would occur with bad deflation. In other words, greater marketplace expansion, due to organizational capacity which purposely seeks to reduce production costs over time for consumers (that is, not just the organization) where possible without sacrificing quality.

Often, good deflation can provide the same benefits as rising wages for bringing about prosperity, since it brings the marketplace closer to the consumer on sustainable terms which don't monetarily distort equilibrium. In particular, tradable sector activity generated tremendous progress in recent centuries through willingness to externalize the gains from greater organizational capacity. Hence more purposeful good deflation could be productive strategy, in a historical juncture when it is proving difficult to maintain rising middle (or other) class wages in spite of today's non tradable sector expectations.

As a supply side phenomenon, good deflation would likely not be difficult to distinguish from monetary policy, in the event central bankers become more willing to honor a nominal target level. While monetary policy has of late led to lower costs (in some respects), these occur because marketplace capacity and supply side potential is in the process of being destroyed, albeit slowly at the moment.

Granted, today's disinflation may only mean a little "what's the harm" destruction, but given the fact non tradable sector activity continues to crowd tradable sector activity, even a little disinflation can be too much, since the latter is composed of primary markets or first mover activity, which (today's) non tradable activity still has little choice but to rely upon. As businesses and consumers alike find themselves in worsening circumstance in a tight money environment, few are still able to gain from the bad deflation of poor monetary policy on real economy terms.

Bad deflation occurs when central bankers neglect to honor the aggregate spending capacity that already exists, in a given set of economic conditions. Why would policy makers refuse to maintain sufficient monetary representation for all concerned? When too many experts and policy makers assume that monetary policy - or the basics of supply and demand for that matter - don't really count, the result is economic participants who gradually lose the ability, to honor their social and monetary commitments to one another.

One reason central bankers increasingly find it tempting to take the unfortunate monetary tightening route, is due to the broader macroeconomic effects of what is essentially, purposeful intent at a microeconomic level. That said, the anti-competitive and exclusive nature of local asset and knowledge based services formation, exists for a reason: to maintain populations capable of maximizing a given area's wealth structure.

In other words, locals gain by maximizing costs for both knowledge/time based services and asset formation. However, everyone can't take this approach in aggregate. When many communities adopt a similar non tradable sector stance, doing so eventually negates the positive effects of good deflation and economic progress. This hurts everyone who can't keep up with the high local expectations for participation, along with the industries which of necessity built competition which extends well beyond local borders. Good deflation still has the potential to bring the progress that so many seek, within reach. Whereas the bad (monetary) deflation which also seeks to check internal inflation, eventually breaks down hard won progress. Yet it has proven difficult to address this problem, on general equilibrium terms.

Is Global Trade Beginning to Reverse?

In "A Little Noticed Fact About Trade. It's No Longer Rising", Binyamin Appelbaum provided several good reasons to be concerned about the global economy. He argues that the Walmart "revolution" is over, and notes that premature industrialization means (for instance) India is not following in China's footsteps, and of course there's the global political backlash to economic stagnation. The image of a single "lonely" Hanjin shipping container at California's Port of Long Beach in the NYT article, was enough to lower my spirits for a bit.

Hold that thought! While reading Appelbaum's post, an old song "Love Lies Bleeding" kept running through my mind, and I was fortunate enough to find it on YouTube. The last seconds of the song are missing but the live performance is impeccable:

Funeral For a Friend (Love Lies Bleeding)

However, is a "funeral" for global trade, really on the horizon? Dean Baker reminds his audience that the trade story line is not quite so simple.

There are a couple of points that complicate this issue. The first is that the drop in the dollar value of trade is the result of lower prices, not a smaller volume of goods and services being imported and exported...the actual amount of goods and services crossing U.S. borders was in fact higher in 2015 than in 2014, we were just paying less for what we imported and foreigners were paying less for what we exported to them.

Doubtless, some of these lower prices are a result of good deflation. Good deflation results from trade that "escapes" the less competitive pricing structures which non tradable sectors tend to impose on local citizens. Global trade - for instance - is largely unencumbered by the supply side restrictions which put pricing pressures on housing and time based services. One is reminded how George Selgin's production norm could apply for global trade, since it escapes the hostage taking of non tradable sector mark ups.

However, the ultimate paradox is that non tradable sectors deflect attention from their own (all too often arbitrarily) increased costs, by attacking inflation as a monetary policy construct which occurs far from their own influence in the marketplace. Inflation becomes a bogey to be "put down", as local interests encourage central bankers to reduce the necessary monies that should normally apply for all non tradable sector costs in aggregate. It's the monetary policy response to these tight money advocates, which contributes to a form of deflation which is anything but good.

Put another way, there's also a global bad deflation component, in what could otherwise appear as good global deflation - one which can be partially attributed to local producers imploring their central bankers to print less money. It's a shame that what happens locally, now transpires globally as well. In all of this, good deflation is a result of fortuitous supply side factors which contribute to long term growth. Whereas bad deflation is often due to the negative influence of supply side representatives on monetary policy makers. Bad deflation threatens long term growth potential, among plenty of other things. Dean Baker continues:

The big factors here were the sharp drop in oil prices and comparable drops in the price of many agricultural commodities that we export. It is not clear that this is bad for economic growth, but in any case the issue is not a drop in the quantity of goods and services crossing national boundaries.

Let's put Baker's assertion into perspective. Not so long ago, central bankers overreacted to what they perceived as negative supply side conditions, and turned what otherwise would likely have been a garden variety recession, into the Great Recession. Will central bankers negatively affect global trade to the same degree? Dean Baker seemed to question Appelbaum's negative reaction, but who has ascertained whether the drop in global trade is due to good versus bad deflationary factors.

If world trade is indeed at a turning point because of bad deflation in commodity prices, central bankers are likely playing a greater role in this occurrence than it may first appear. Dean Baker wanted to assure everyone that the trade of international goods and services remains intact. Policy makers need to make certain that bad deflation does not remain a contributor to the valuation of international trade, because if it does so, the real value of exports would eventually decline, much as the nominal value is already beginning to fall.

Notes on Human Capital, Missing Rents, and Manufacture

Today's services markets, extensive though they are, are nonetheless structured in ways which make their lack of human capital participation less obvious. Presently, only a limited portion of human capital is tapped so as to allow individuals to tend to daily affairs on economic terms. And much of the employment in this regard, takes place via the asymmetric compensation of secondary markets for time based product. It is the lack of conceptual space for knowledge participation, which currently limits employment potential, and distorts the capacity of both tradable sector and non tradable sector formation.

Some would ask: why should it matter? Yet among the many reasons it does matter, too many individuals end up structuring both the pragmatic and experiential aspects of their lives, as solitary endeavor. One has to wonder, how many solitary efforts might gain greater personal and social significance, if they could be shared with others in recognizable forms of economic product? Untapped human capital is not just potential employment, it is the best 21st century possibility for greater productivity and output. In many instances, human capital is ending up either as previous forgotten investments, or else lost investment potential. Worse, lost economic potential, equates to loss of human freedom, in relation to others in the marketplace. Why is human capital so underutilized?

Something about marketplace rents is part of this mystery. As Bill Woolsey recently suggested, a scarcity of rents could well be responsible for a lack of labor where it might otherwise be found. He mused that even though jobs aren't scarce, labor could well be scarce because rents are scarce. Let's think this through a bit, in terms of time based service product. Purveyors - or marketplace providers of knowledge - limit the supply of knowledge use (aggregate knowledge rent potential), hence employment, in the marketplace. Their position is occasionally strengthened, via reasoning that a general rise in wages will lead to greater output. However, a rise in wages without a rise in time based services employment, doesn't lead to more time based services output. Instead, already existing rents within already existing income, gain additional benefits.

A similar strategy results in additional government subsidies for education, which can lead to skills beyond what many of today's institutions actually need. Indeed, rent pooling in concentrated form, is reflected by skills acquisition in concentrated form. Today's education is sold as (hopeful) economic access to those areas of concentration, rather than actual increases of marketplace representation for the use of knowledge product. Consequently, "free tuition" will not put more pieces on the game board, in terms of one's options for knowledge based endeavor in the marketplace, upon graduation.

If education is to actually grow the marketplace, time based knowledge product will need to gain experiential and pragmatic use in the same context as holds true for manufactured product, in all places and time frames. Even one's tradable knowledge product (an author's non fiction books for instance) has limited marketplace context, if potential consumers can't use those products to generate economic interaction with others. In other words, educational product can only be sold as economic access only up to a point, and that point may have well been reached in the short term. Meanwhile, today's formal education does not position most individuals to utilize knowledge in either a practical or experiential context. Just as Scott Sumner noted in a recent post, a greater supply of education to expand educational access, hardly gets to the root of the problem.

Employment limits in terms of human capital, also means hard limits in today's supply side circumstance. However, knowledge rent potential needs to be approached with a recognition of the marketplace variations in ability that currently exist. There's nothing wrong with these variations, especially given the fact knowledge use constantly takes place across a wide spectrum of possibility. Only envision knowledge use as the fruits of the field, and the practicality of making good use of all the fruits. Even though common sense often prevails for the product that can readily be seen, a leap of faith is necessary for the product which cannot be seen, until it has a chance to come into existence in the marketplace.

More knowledge based employment, would gradually increase demand for manufactured goods, once again. It is particularly important to remember that a general rise in employment would benefit manufacture, more than any other initiative that governments could possibly take on behalf of manufacture. Yet there are signs that governments are becoming anxious to find means to spur manufacture, given the fact that other forms of economic activity have not "paid off" in productive terms. In a recent interview with David Beckworth for example, Brad Delong expressed his frustration that healthcare had certainly not provided the productive capacity that was needed, in terms of government revenue potential.

All dreams of additional government revenue aside, manufacture can only provide, insofar as a country's citizens are also given a chance to provide. Whether or not future manufacture experiences good deflation or is instead subjected to more bad deflation, may well depend on whether populations are able to generate knowledge and time based product, so as to maintain productivity and output, well into the future. Previously, the rent potential of land came in varying degrees, and the same holds true today, for many aspects of knowledge use.

However, individuals can make up for these small rents in the same ways they did in the past, via acknowledged supplements for time value. Instead of relying solely on the years of employment in one's prime, knowledge use participation could be symmetrically compensated through the course of a lifetime, a cumulative process which in many respects would make up for the lack of a higher income. Much as no one need worry about retirement from tending gardens, no one has to retire from productive knowledge use. There is only a lack of imagination, for a sufficient amount of knowledge rent to maintain populations well into the future.

The Decentralization Option

One of the problems with present day income inequality, is that some believe monetary policy should be addressed as though it were a great divide to be bridged by bringing spending "under control" for the average household. However, this is a wrongheaded approach, given the fact monetary policy needs to meet the actual monetary obligations that are held on the part of all concerned.

It's difficult to know for certain, whether some central bankers who overreact to today's imaginary inflation, are also being swayed by a subset of Austrian economics which actually reasons that the poor are "better off" when central bankers refuse to print more money. However, this is the same reasoning which - when carried too far - leads to bad deflation. Such deflation scarcely helps anyone living on a small income, it only makes everyone worse off. Even though the disinflation of recent years is not in the same category as depression level bad deflation, it nonetheless has cumulative effects which can't be lightly dismissed.

Fortunately, there are far more productive ways, to bring the marketplace within reach of those with smaller incomes. Instead of attempting to address inequality by destroying existing wealth - whether by war, further redistribution or excessive monetary tightening - why not allow the kinds of innovation that would also reduce the life struggles of those who are sometimes lacking in physical stamina and/or high skill levels. A new form of corporate structure could begin this process, via an alternate equilibrium which would not pose a threat to either the monetary or supply side conditions of general equilibrium.

These local and decentralized economies would benefit from a formalized version of imputed time value, which is particularly important since time value would gain monetary compensation as a starting point for economic activity. A time continuum for services generation and asset structure would be linked with coordinated group processes, in knowledge use systems. The same imputed time value efforts that would provide a cushion for those with disabilities who want to work - for instance - would be the same group supported time use which contributes to local research and development.

Via much needed innovation and new organizational capacity, non tradable sector activity would "move closer" to those who have struggled to meet these requirements on general equilibrium terms. Still, it's not about "dumbing down" or otherwise creating less "exceptional" environments, but providing innovation for desirable environments which encourage the capacity and stamina of the average individual. Of innovation, Alberto Mingardi recently wrote:

Innovation is not about technological progress per se, it is not even about "new stuff", per se: it is about what Deirdre McCloskey calls "market-tested progress", and the market-tested part is not trivial. Making new technology a means to better answer consumer's demands is not trivial, is not a mere "last mile" of innovation. It is its essence. Innovation is about "products", and "products" are about serving people's needs and wishes, not just doing something which was never done before.

The decentralization option would - in some instances - put a name to people's needs and wishes that they did not even realize existed. Often, this is exactly what new products in the marketplace have done, and people have wondered afterwards, how life must have been before those options became available. Indeed. It's time to allow innovation a chance to simplify our environments, so that more of us can gain the ability to move beyond what are all too often, unnecessary burdens and limits on our abilities.

Notes on Endogenous and Exogenous Growth Factors

Endogenous and exogenous factors - while they are sometimes difficult to discern - impact growth potential in multiple ways. Recently, Nick Rowe considered endogenous and exogenous effects regarding immigrants in relation to total factor productivity. Two questions he raised I'll note here:

I wonder if TFP really would be exogenous to the sort of policy experiment I'm using my model for?
I wonder if social/economic institutions really would be exogenous to the sort of policy experiment I'm using my model for?

Institutions exist in both endogenous and exogenous capacities, and total factor productivity depends in part on how different institutions interact with one another - both locally and internationally. Family formation and knowledge/time based services are examples of endogenous institutions, while traditional manufacture and commodity wealth represent exogenous institutions. In particular, tradable sectors contribute to exogenous (international) monetary flows. However, tradable sector wealth tends to accrue in regions with already existing geographic and knowledge product advantages.

How might one think about endogenous and exogenous factors in terms of worldwide economic conditions? Until the Great Recession, developed nations were able to continue the growth of their local, non tradable sectors via connections to still expanding growth in tradable sectors around the globe. As tight monetary conditions now affect exogenous (international) wealth, the implications this also holds for endogenous wealth formation, should be more obvious.

What is being missed, is the degree to which endogenous wealth remains dependent on the exogenous wealth of tradable sectors. For instance, it becomes more difficult for nations to "come to the rescue" with fiscal policy, when international wealth (i.e. sources of fiscal revenue) is steadily losing value in the international marketplace.

No one should lightly dismiss the problems which tradable sectors are now experiencing. While non tradable sectors could ultimately generate growth capacity through more direct means, this process has not yet begun. In the meantime, tradable sector wealth has already begun to slow. Once these forms of production capacity are lost, they can take a lot more time to rebuild, than it ever took to lose capacity in the first place. And no one can safely assume such rebuilding would automatically occur!

Thus far (since the Great Recession) central bankers have mostly attempted to rely on stabilization methods which protect financial interests. But international economic conditions have gradually proven this approach insufficient. Meanwhile, as the Fed remains reluctant to maintain aggregate spending capacity, a too strong dollar is now depressing growth potential, internationally. An article from the NYT points to some of the confusion in this regard:

Did global output rise or fall last year? It all depends on what currency you use to keep track. Measured in dollars, global growth recorded the first drop since the end of the financial crisis late in the last decade, declining by nearly 5 percent, from $77.3 trillion to $73.5 trillion. That's largely because of the dollar's rise, which makes the output of countries with weaker currencies seem smaller when measured in dollars. But if you count in euros, growth soared by 13.6 percent.

Consider what has already occurred, in terms of further monetary tightening on the part of the Fed. As Lars Christensen noted in a recent post, the dollar embarked on a sharp rise two years earlier. This process has gone on mostly uninterrupted, since Janet Yellen's leadership role began in February of 2014.

Due to the dollar's appreciation - particularly given the dollar's additional role as a monetary anchor  - aggregate spending capacity worldwide has been somewhat diminished. While this is reflected in the recent worldwide devaluation of commodities, the problems don't stop there. A growing inability for developed nations to deal effectively with structural issues in their non tradable sectors, contributes to political and social polarization both locally and nationally. Also at stake, are broader questions regarding the capacity for long term growth.

One issue in this regard, is a lack of understanding how a nation's budgets work differently from either local or state budgets. National budgets in particular, tend to have have exposure to the international or exogenous wealth of tradable sectors. In a recent post, David Glasner notes that national budgets are not analogous to local budgets, and he explains: "In the intertemporal context, consumers have a given resource endowment but prices are not known." Potential contributions from exogenous forms of wealth aren't easy to determine (hence price uncertainty), given the fact they are shared by multiple nations for resource coordination potential.

The relationship of endogenous to exogenous resource capacity needs to be better understood, especially since the former has such a strong correlation with nominal income. The endogenous/exogenous relationship also has bearing on the ability of nations to maintain general equilibrium conditions, which in turn allows sufficient knowledge use capacity to continue on asymmetric terms. These are also the forms of sticky wages which matter most in general equilibrium, for endogenous non tradable sector activity.

Central bankers have fallen short, in part due to their inability to consider the correlations between endogenous and exogenous factors of aggregate wealth. As a result, they have prioritized financial stability over nominal stability, which only destabilizes the relation of income to existing equilibrium. This in turn has the effect of reducing asset valuations, and also the value of existing exogenous wealth. Which is vitally important, because maintenance of international wealth capacity, can preserve the primary links nations hold with one another.

Present economic circumstance are somewhat different than what existed in the Great Recession, because the main problems are more exogenous in nature. By way of comparison, the financial crisis included a lack of response to internal structural problems. Lack of resolution in this regard only contributed to current circumstance. In that central bankers believed they actually "took care" of the problems stemming from the Great Recession, this likely has bearing on their slow response and denial of the fact that little has actually been resolved.

Once and Far Away, Inflation Was Not Imaginary...

Stephen Williamson's opening lines from a recent post, reminded me of the heyday of the inflationary seventies. For those old enough to remember, no training in macroeconomics is necessary to notice the contrast between those years and the present. Many from a young age believed that given enough energy and effort, they could accomplish their goals. How long, since conditions have felt quite the same?  Even though widespread inflation brought its own sets of problems, plenty of people were benefiting from additional money on the part of the Fed, some who otherwise would have remained on the sidelines. Williamson notes:

Here's a remark I've heard more than once from macroeconomists who are old enough to remember the 1970s. If you could go back to 1979 and tell people that the big problem facing  banks in 2016 would be getting the inflation rate to 2%, they would all have fits of laughter leading to cardiac arrest.

Even though times have changed, policy makers have so overreacted to the mindset of reduced growth, they are stepping all over themselves to hasten deflationary processes. Today's tight money knee jerk reflex, is the inverse of those earlier mistakes when the Fed consistently generated too much inflation in the seventies. Much as some insist now that printing more money won't "help", others reasoned then that inflation could not be "held back". But who at the time...really wanted to back off? In other words, who was willing to rely on an impartial and level headed monetary framework at the outset - a strategy which also would have meant not everyone would get to benefit from perceived opportunities?

For me, this is a worthwhile question, because it seems policy makers aren't willing to adhere to a true monetary framework unless it is temporarily "convenient" to do so. As a result, too many citizens have to pay the price for the Fed's participation in herd mentality thinking - whether a positive mentality (as in seventies growth), or a negative herd mentality such as the present.

Plus: by ignoring the loss of the nominal growth trajectory since the Great Recession, the Fed can too easily convince the public they are close to "overshooting" monetary targets, when in fact monetary representation remains well below the aggregate commitments which citizens actually hold. Is it really a mystery for example, how oil interests came to be the latest supply side casualty paying the price for insufficient money - here and elsewhere?

In the seventies, so long as everyone was anxious to benefit from worldwide growth, central bankers were willing to tolerate high inflation. High inflation - then as now for what is basically imaginary inflation - meant flimsy monetary policy excuses regarding the Fed's "helplessness" to counteract the problem. Those so called parties with the punch bowl took place a long time ago, and yet this story still provides the oddest rationale imaginable, why no one should expect the "luxury" of moving well past the zero bound, anytime in the foreseeable future. In a sense, excessive discretionary action on the part of the Fed, means that today's populations are being punished with tight monetary conditions for the "sins" of their elders. Even though the Fed was the one responsible for the "sins", or providing the punch!

The worst part? Developing nations may also have to pay the price in terms of growth potential, given that developed nations have reacted to earlier excesses by severely curtailing growth capacity. When central bankers act arbitrarily because of imaginary inflation, they are needlessly cutting short the possibilities of millions of citizens. Central bankers need to stabilize the monetary commitments which individuals make to one another, and policy makers should honor those commitments as faithfully as possible. The fact that monetary representation has prioritized financial interests over the rest of us, has only magnified the booms and busts which economies suffer.

Income Representation is Central to Economic Stability

Without accurate monetary representation for nominal income, economic stability would suffer - in part because production structures remain dependent on continued income capacity in all time periods. For instance, asset formation - despite the Fed's attempts to maintain economic stability in this regard - is nonetheless an end result of ongoing income capacity.

Income representation is not the automatic mirror of aggregate spending capacity, that it may initially appear. Labor compensation and other income structure, serve as a point of origination for what become broad variations in monetary flows. While these different sources of income flow strongly affect one another, their sector activity does not directly correlate with one another. As a result, this creates system wide non linearity, so that products don't automatically or necessarily provide ready substitutions in the marketplace.

The income capacity which is representative of general equilibrium, occurs in what are already non linear paths of private and public endeavor, alongside further variation in tradable and non tradable organizational structure. While I have spoken often of the services capacity of non tradable sectors, the services capacity of tradable sector income follows a somewhat simpler growth path. How so? Tradable services formation (think sales or restaurant work) is more directly reimbursed, hence closer to the (primary) wealth origination of traditional production. One could think of growth capacity for tradable services income as akin to income in finance and assets, in that it directly relies on (non redistributed) income from all sectors for additional growth.

Non tradable sector income, i.e. that which thus far seeks broad redistribution outside of specific institutions, is also part of the secondary marketplace which is nested within existing wealth. When these forms of non tradable services income experience growth capacity, this reflects gains from the primary markets of traditional production. Secondary markets are largely dependent on primary markets. However, should growth decline in the latter - as has presently occurred - non tradable services income can be especially dependent on accurate income representation from monetary policy, in order to maintain nominal stability.

Not everyone is convinced, that monetary representation is important for economic stability. For instance, in a recent post, Dietz Vollrath asks, "Do you need more money for growth to occur?" First I'll address his question in an immediate sense. Monetary growth may not necessarily need to accompany real market growth conditions in the short term, should the supply side provide broad and innovative means to expand markets through good deflation. However, this has scarcely been the circumstance, given the forms of economic activity which the Fed now take excessive efforts to restrain. The monetary needs of non tradable sectors have led to arbitrary caps for production in multiple capacities.

Towards the end of the above linked post, I unfortunately have some serious issues with his reasoning. Again, Vollrath:

...The level of nominal spending is irrelevant. The stock of money is irrelevant...For any modern economy, it is effectively impossible for there to be "not enough" money to let growth occur.

The stock of money is not at all irrelevant, for that stock needs to closely maintain balance in income and resource capacity. This is what a nominal target can specifically provide. While supply side circumstance might not provide sufficient (wealth) balance between services formation and other forms of production, monetary policy has an easier job in this regard than central bankers have been willing to let on.

Maintaining nominal income levels is important not just in the sense of asset formation and loan responsibilities, but also the stability of income flows which regularly contribute to general equilibrium. No one should dismiss the importance of income aggregates and the ways they affect long term growth outcomes. For instance, Paul Krugman notes the non-linearity of present day oil markets, and the fact that expected product substitution in this regard, did not proceed smoothly as expected. Oil price declines do not provide income or product substitution, when individuals do not have income or transportation strategies to begin with.

As it turns out, specific quantities of money are not the ultimate arbiter of economic measure, because the organizational capacity of supply side factors determine ultimate pricing factors in relation to income capacity. However, the mistake is to ignore the important relationship that exists between income potential, and the marketplace capacity which is actually being honored for total resource potential. This is the relationship which a level nominal target would seek to uphold.

GDP: Don't Shoot The Messenger

GDP is supposed to be representative of our existing monetary obligations in aggregate...or is it? When monetary authorities become distracted by a host of factors including the complexities of finance, fiscal wish lists, invisible digital "luxuries", and even happiness factors, actual monetary obligations can be forgotten. Even though aggregate spending capacity is key to monetary stability, its importance continues to be downplayed in monetary policy.

If that were not problematic enough, some believe that a digital "revolution" is reason enough to allow deflation to occur. What is forgotten, is that good (or naturally occurring) deflation happens when supply side circumstance give it the chance to do so. In spite of consumer gains in the form of entertainment and communication, the costs of housing and services have yet to benefit from innovation which would improve standards of living on the monetary terms that matter most. Instead of "wishing" away onerous economic obligations through bad (forced) deflation, it makes more sense to face unnecessary supply side burdens head on.

Meanwhile, central bankers - and others - have chosen to obfuscate and misrepresent the monetary means which exist to meet ongoing responsibilities. As a result, populations remain confused as to the actual nature of monetary representation. GDP (and the money it measures) is simply the messenger, which provides the "news" regarding economic conditions which populations create. Don't shoot the messenger!

Scott Sumner recently noted that digital deflation is not a good idea, and Tyler Cowen also responded to Scott's post "...we know what a boom looks like and this ain't it." Cowen adds:

Debts and bills must be paid, and jobs must be created at wages people will take, whether or not you're having fun with Angry Birds or cursing at your (least) favorite bloggers...So don't aggregate consumption gains with productivity gains, proudly parading a single number and claiming that everything is fine. It is better, and more accurate to say, "We've now learned to really love those Brussels sprouts, but we may still be in deep doo doo."

Like many other Baby Boomers, I have gradually learned to interact with digital social media. Even so, the digital experience remains a far cry, from how it feels to get out and experience the world firsthand. What's more, experiencing the world firsthand is not always easy, for those who lack economic access. How many individuals would choose the vitality of the marketplace over the internet, if that were truly a viable option?

Ultimately, everyone needs to participate in the economy, and recent actions on the part of the Fed make one wonder whether this fact is actually being taken seriously. It would be far better for the Fed to level with the public, regarding its mistakes in the Great Recession. Unfortunately, while the Fed pretends it is innocent of any wrongdoing, some are being convinced to return to a gold standard, and perhaps even bring it closer to home.

There needs to be greater clarity about the nature of fiat money, and the roles which national governments can reasonably expect to fulfill in the future. Until this occurs, many will remain confused as to what fiat money is supposed to accomplish. Supply side intransigence is at the root of too many problems which need to be addressed. If some remain convinced that "too much money" is being printed, the appropriate structural response is to decipher why given levels of monetary printing are needed in the first place, then what to do about needed changes. Important in all of this is to be proactive with these issues as they actually exist, instead of reacting in ways which only make things worse.

The Problem With Zero

Imagine for a moment, regime change at the Fed. Not just any regime change, but one that would include the adoption of NGDPLT. What next? Even though nominal targeting has a wide variety of advocates, that's where the agreement ends. How so? Agreement would need to be reached in terms of a growth level trajectory. Hence even though there would be agreement regarding a monetary policy rule, by no means would the process be complete. In terms of economic outcome, a zero to five percent growth level is a vast difference, which represents a wide set of expectations for future potential.

As Scott Sumner recently noted, many opinions would come into play, and any resulting growth target would not be lightly determined. Can the present stagnation be overcome? What might ultimately happen to economic access, should group consensus settle on either zero level growth or a close approximate? Due to present circumstance and political gridlock, a no growth future remains a possibility. Indeed, much of the present interest in NGDPLT comes either from a no growth or a low growth consensus.

Whether a monetary no growth future would also mean less economic access, however, depends on political and supply side factors. Consider why a stronger growth trajectory continues to be needed, for instance in the present. Instead of sufficient monetary printing, the Fed has tried to "make do" with a bloated balance sheet. As George Selgin indicated in comments to the above linked post, the Fed is supplanting more productive economic endeavor. The means are not only extremely inefficient, but government and supply side intransigence are major factors in this scenario.

Even with a nominal target rule, the good intentions of a zero or low growth path might still lead to bad deflation. How so? The production norm which was advocated by George Selgin in his book "Less Than Zero", would respond to the good deflation of lower price levels, which have been a gradual result of traditional manufacture and production.

Unfortunately, other areas of the economy still present a deterrent to the benefits such a standard would hold, as their relative price points have instead moved higher over time. Without (reasonably equivalent) gains in innovation to bring down costs in services formation and building components, a zero growth path would still mean lost economic access for a growing percentage of the population over time. What's more, zero growth in these circumstance could possibly bring about bad deflation, by cutting into production potential at arbitrary levels to make up for the difference in price points.

If primary equilibrium actually reflected the production advantages of a falling price level from traditional manufacture, a present day zero growth path would not be problematic for the maintenance of economic access. But there have been few falling price levels or technological gains in sectors such as housing, healthcare and education. How much economic potential would be lost, should a low growth level target fail to take into account the lack of a falling price level from non tradable sectors?

Without substantial innovation in non tradable sectors, there would be losses for both production and consumption in this marketplace, with some degree of knock on effects in tradable sectors as well. In other words, far more than labor force participation levels are at stake. Presently, it is impossible to know the full impact that non tradable sectors actually have on equilibrium price levels. Real supply side reform needs to occur in non tradable sectors, before a (potential) zero growth trajectory could be safely considered.

Another problem with pinning down an "ideal" growth rate, is the interminable problem with data interpretation. Regarding economic statistics, Diane Coyle wrote in a recent post that some things really haven't changed very much. She references an updated version of a 1950 book from Oskar Morgenstern, "On the Accuracy of Economic Observations":

Morgenstern also notes the strong incentives many 'creators' of economic data have to give misleading responses to survey questions. What's your income? What price do you charge for this service, oh oligopoly provider? What is the level of your GDP, oh Greek government? "'Strategic' considerations play havoc with reliability."

None of this is to suggest that a better context for growth needs to be determined before a nominal target is a reasonable proposition. On the contrary. However, some of the confusion now coming from the Fed, appears as though inflation targeting mostly serves as a cover for the fact they are not in agreement about future economic potential.

At the very least, agreement regarding a specified rule would set the stage for the kinds of discussions regarding growth which need to follow. Ongoing directives for growth potential need more support: not just in terms of theoretical framing, but also the pragmatic perspective of populations as a whole. After all, George Selgin had the right idea for a productivity norm. However, it needs more precise application in terms of services and other non tradable sectors, both for economic access and marketplace vitality.

Why is Growth So Important?

Why has everyone become so divided over the desirability of continued growth? Deflation is becoming a real threat, even if it is hard to visualize as central bankers continue applying the monetary brakes in a slow motion process. Now, even Bernanke can speak openly about "lower potential GDP" while scarcely eliciting a startled reaction. Some are convinced that recent monetary gains are more than sufficient - a view which is mostly backed by the Fed. Yet, as this recent Reuters article indicates:

The public mood remains sour. Sixty percent of Americans in March said that the economy was on the wrong track, according to Reuters/IPOS polling data, although that was an improvement from 71 percent in May 2014.

What's more, as political candidates gear up for the next election, they tend to seek out economic advisers who are anything but pro-growth. Even though some economists recognize that monetary policy remains tight, as Adam Ozimek recently noted, the stories being told are too different to gain a unified public response. As a result, even though Ozimek writes for Forbes, this publication often presents the exact opposite argument. Forbes staff member John Tamny, for instance - responds to a plea for continued growth from Greg Ip with the assertion that "Recessions are absolutely beautiful, and should be renamed recovery."

Policy makers can be tempted to resort to monetary deflation when growth becomes imbalanced, in part because structural adjustments require mutual understanding and societal coordination. When structural change seems "impossible", a process of denial can set in, as Scott Sumner has observed regarding changes in core beliefs among economists. Policy makers have taken to reasoning with the public that a slowdown in growth is nothing to "worry" about. But deflation can easily get out of control, in spite of careful management to maintain economic stability. All the wishful thinking in the world cannot make an economy "stand still", when monetary policy pulls away from preexisting commitments for aggregate spending capacity, without creating a new series of economic arrangements.

Thus if central bankers wish to make an economy "stand still" on monetary terms, structural arrangements need to have been made beforehand to make certain that economic access and labor force participation remain stable. Otherwise, a growing number of individuals find themselves excluded, over time. There's a lot of truth in a sentiment also highlighted by Lou Holtz: We are all either growing or dying - unfortunately there is no in between. The same is true of economies. What's more, the growth most capable of providing economic stability, is that which occurs on gradual terms - think of the race between the tortoise and the hare. While one would think of incremental growth as completely logical, the "winner take all" and "all or nothing" options of the present, insist on growth being otherwise.

Fortunately there are ways to address a lack of economic access which need not mean more pressure on primary equilibrium. In other words, it is possible to target growth which would not place further demands and burdens on either governments or taxpayers. One means to do so would be the creation of more inclusive finance structures. However, it is important to distinguish these from what exists in primary equilibrium, because lower income levels often need to experience ownership on completely different terms.

Rather, allow innovation to structure product so that consumption becomes more tailored for the consumer, instead of always expecting the consumer to have to "reach" for the product in question. Otherwise, one gets results such as ill advised mortgages with small down payments on non innovated housing. This approach is part of the process which leads the Fed to assume the process of "walking a tightrope". As it turns out, the tightrope is completely unnecessary. The idea that economies must hinge on credit access - instead of economic access - is part of what leads economists to place undue emphasis in interest rate targeting.

In spite of real gains since the Great Recession, economic access around the world remains problematic in multiple capacities which have yet to be addressed. The remarks made about economic migration by the EU border chief in this article, are almost word for word what one hears about illegal immigrants in the U.S. In too many instances, people from all walks of life are still trying to navigate their way through what appears as though closed doors. This is no time for monetary policy makers to be self congratulatory and claiming all is well. After all, when they do so, other policy makers tend to do the same. History in the coming years will be shaped by whether nations are able to envision growth on more inclusive terms for their own populations. As Michael Barone summarizes in a recent AEI post regarding today's uncertainties:

Let's hope the post-2007 negative trends are temporary and limited. But let's start thinking hard about how to reverse them.

Is Washington still willing to do this? Again, we can only hope so.

Finance, Government, Monetarism: Some Assembly Required

...yet how to put it all together, given the fact these "pieces" scarcely coordinate at all in central banking settings? Even though these areas are vastly different, they remain the expected convergence for present day monetary policy. Truth be told, most among the public are more familiar with the ongoing gyrations of finance and government, than what is at stake in the monetary policies which affect their lives. As a result, market monetarism has more of an uphill climb for broad acceptance, than otherwise might be the case.

This issue has been on my mind since Richard Wagner and Vipin Veetil of George Mason University, dismissed NGDP targeting - basically on "general principle" - in a recent paper. In Bill Woolsey's response to their arguments, he noted that Richard Wagner was his finance professor decades earlier, which at least provides perspective for their rationale. Perhaps this also explains why Woolsey - as a "charter market monetarist member" - seemed nonplussed by their objections!

However, Wagner and Veetil's broad based attack on market monetarism, makes it difficult for some of us to counter their critique on specific terms. Indeed, it almost appears that their lack of confidence in market monetarism is due to a lack of confidence in the monetary role of central banking. For one thing: insisting that NGDP stabilization is a centralized dictate which does not consider microeconomic realities, misses the point. Of all the centralized activities a nation could assume, a nominal target is possibly the most benign of all. Unlike many centralized functions, this is one which seeks to represent all economic participants to the best degree possible.

Among other issues I already have with their assessment, recessions and depressions certainly do not cleanse, as Marcus Nunes also notes. Any lack of monetary stabilization only exacerbates already difficult circumstance in these cycles. In particular, monetary tightening which generates deflation is not helpful, as some Austrians assume. "Bad" deflation is not the result of normal price adjustments or productivity gain. Instead, shorting aggregate spending capacity means negative AD shocks which derail prior commitments on the part of numerous participants. The worst part about this situation is that resource potential is needlessly lost, and is not necessarily regained afterward.

In recent decades, financial and governmental interests have become more closely entwined. In the meantime, important monetary lessons from the Great Depression have been forgotten. One odd aspect of the financial perspective, is that it generates a political common ground among some who would otherwise be ideological opposites. Perhaps this alignment has bearing why the primary monetary interests of central banking appear as though lost in the shuffle. Who will tend to real monetary policy, if the Fed won't?

As Benjamin Cole indicated in a recent post, time aggregates also matter:

The unvarnished truth is that Americans are working the same amount of hours now as they did in 2009 - and also as in 1999.

Whereas the labor force since 1999 has grown by 13 percent. However, these facts are being missed as the media portrays a "back to normal" economy. What monetary printing has been possible, was often disparaged - not just by the right, but many on the left who remain disappointed that more hasn't gone to fiscal activity. Is it possible to return to a central bank which is willing to stress to the public, the primacy of the monetary role? In a sense, the only thing a monetary offset even asks for, is that after financial institutions and governments get their representation, the public gains permission for their monetary representation as well.

Local Settings and Services - The Balance Within

In this morning's post, I pointed out the need for greater balance between different working parts of economic systems in somewhat broad strokes. So in this post I want to look a bit closer at an element one probably wouldn't expect to find in an economics text: interlocking components of local community which might be more amenable to coordination in the future, than simple wealth redistribution. Even though plenty of discussion abounds for taxation and redistribution, what's missing is an overall rationale as to how redistribution can actually accomplish what it sets out to do.

Because redistribution through taxation happens with limited knowledge and decision processes, many aspects of economic interaction simply fall out of balance with the passage of time. When this happens, sometimes it's best just to start over and keep things a bit more simple - only, wouldn't it would be great to be able to do so without the intervention of wars and calamity. So how might a better balance be possible between asset components and services at local levels?

When societies do not find ways to keep flexibility in living and working arrangements, unfortunately there's a good chance that imposed austerity will finally do the job for them. Yet no one really gains by the lower wealth valuations of bad deflation: neither is that a good recipe for greater inclusion. Rather, asset wealth to services scenarios need to happen within more flexible frameworks for participation. In other words, both environment and services could be transformed so that it is not necessary to be wealthy, to be able to access great services of all kinds (through time arbitrage). In particular, the choice of limited consumption responsibility could give far more time for greater services participation and options.

Presently, one doesn't just move to a neighborhood with great services unless there is plenty of additional income to provide one's contribution. What's more, good services require a stronger association with income, than was the case several decades earlier. Also, even if one's home is mostly intended for a good night's sleep, there is a good chance the dwelling's valuation includes nearby  services and amenities, whether one seeks them or not. Indeed that services consumption "package" approximates investment value as well. It's easier to think about the actual connections between income and services consumption in close up settings, than in settings which separate the activities of business and government, or public and private concerns. For one thing, it's easier for larger settings to obscure the important nominal concerns which are such a primary anchor for monetary activity.

Indeed, that is a big part of my appreciation for NGDP and nominal targeting, because they point to the significance of income potential in macroeconomic settings. Local economies have the ability to highlight how important per capita considerations actually are. Plus, local economic experiments in services coordination have the potential to illustrate natural experiments in this regard. The local economy is capable of providing up close - albeit simplified versions of regional or national settings. To do so also allows the observer to forget about government, finance and credit, long enough to ask: what is really happening with monetary flows between all elements and all participants?

With such consideration, it becomes easier to think how services have been funded until now. And for many communities, this distribution form needs to be altered so that services might take on a more primary role. A balance still exists between asset formation and services, but it is a precarious balance which no longer provides adequate jobs in services for actual community need. Even so, present asset formations sometimes present hardships for residents, as they try to maintain at least minimal redistribution flows through the use of the assets themselves.

While a significant part of this burden could be lifted in the future through technological innovations, this is still but a part of the answer. After all, were innovation to take place - in turn leading to less expensive living and working habitat - there would not be enough taxes from these less expensive and more efficient habitats to provide necessary taxes for services. How to think about this? For one thing, it's the first part of the balance adjustment, from which a services adjustment could follow.

A high tech environment would not only mean less expense for the costs of the environment itself, but also less time needed in the maintenance of the environment. Consider for example, the ease of transporting plastics as containers for consumption goods of all kinds, and the low costs of doing so. For a bit more money, better quality plastics could come into use, which would be adequate for many kinds of modular repairs for instance, instead of wholesale repairs on living and working quarters of the present which involve tremendous resources just to do so. What if recyclable plastics were converted to modular home replacements locally, for instance? What if some environments that are prone to natural disasters could choose modular components over traditional housing?

Such an approach to living and working quarters would free up an incredible amount of time for local dwellers, because it wouldn't be necessary to go to a high paying job all day just to pay for suitable shelter. That would leave more time to engage in skills sets, knowledge use and other important ongoing functions without the higher incomes necessary for more permanent forms of housing and construction. What this means is that the lower cost, resource use and maintenance can provide the setting for an alternative approach to services provision which would be inclusive of entire populations. Previously, it was only possible to reimburse a small fraction of those in communities for local services positions because of the additional responsibilities their dwellings placed on income needs.

Inclusivity for services responsibilities means looking beyond the bounds of institutions, for knowledge use. Not only would this provide ways for communities to reorganize their service needs, it would allow them to reconfigure infrastructures when they are no longer able to maintain earlier infrastructures which they previously relied upon. Communities can ask themselves, how can we - as a group - still achieve important societal goals? That is, when it is no longer possible to tax a limited group of citizens who are either stretched to the limits or simply said no.

Importantly, success stories for coordination in skills sets would not exist in a vacuum, in terms of monetary valuations. The fact that knowledge use has been successfully applied and contributed to the transformation of communities would also make previously low valuations start to rise. However, this would not necessarily be a negative in a broad sense, because it would be an indication for any community that smart skills coordination strategies could provide greater options and possibilities for multiple populations. Indeed, other communities would be inspired to follow earlier examples, where real social value was created - seemingly out of "thin air". That is, the skills capacity came first - and the money valuations ultimately followed.

There are many ways to go about such a process. Plus, the needed adjustments can become more income oriented overall, than present circumstances of limited workplace participation allow. The inclusion of whole populations also means that greater subjectivity for product definition is possible, which can be quite important for services provision. How might coordinated efforts become a more effective community tool, than redistribution? After all, coordination does not have the "finality" of redistribution decisions, which imply failures of all kinds when they are not done "properly" or simply become overwhelming. Coordination gives people ways to start over and try again, which can sometimes make all the difference .

"Non-Sequiturs" and other Political Realities

This post serves to take note of some conversations which - for me - are "nested" in the larger issue of productivity reform. Already, productivity concerns had captured my attention this week (see last post). There's a couple of recent comments which deserve a closer look, before I spend some time with a more in depth perspective. Especially in that one of these is from an individual whose work I believe to be vitally important for the (potential) balance that is Market Monetarism: George Selgin.

Selgin was responding in turn to Mark Sadoswki at The Money Illusion. Mark was inspired by a comment from Bonnie Carr several days earlier, to a post by Marcus Nunes. Here I also have the chance to put in my two cents about Plosser: someone who is nervy enough to say in all seriousness"a period of mild deflation could at least in theory be positive". Charles Plosser, grrr, stick it where the sun doesn't shine, for you indeed know this isn't one of those times (given extremely low innovation where it is needed most). Yet he's reasonably confident that the public doesn't know the score, for major media hasn't really stepped in to help. Now, for the dajeeps (Bonnie Carr) comment, which was a nice slap at Plosser:

Depends in the source of the deflation on whether good or bad. The good deflation doesn't come from monetary policy, and so the central bank doesn't really have a reason to target it.

I mulled over her comment for a couple of days, and wasn't quite able to categorize it in my mind. Fortunately, Selgin's response to Sadowski (who had approached an earlier argument from Bonnie's point of view) took care of that:

A non-sequitur, Mark. Of course the CB cannot target productivity itself; but it can have an NGDP target such as would allow for good deflation. It's just a question of setting the NGDP growth-rate target at the trend rate of growth of weighted factor input. I made this recommendation and offer reasons in its favor in my 1997 pamphlet. The point of a "productivity norm", and indeed of any NGDP targeting scheme to some extent, is precisely that CB's should_refrain_from attempting to maintain a stable inflation rate in the face of productivity growth-rate innovation.

Perhaps not quite the non-sequitur Selgin imagined, for politics has a way of piling on layers of silt in seemingly easy points of navigation. Speaking of rough and muddy slogs, there is a swamp of economese in his quote which may present a few problems for some of my readers - indeed I had a little trouble as well. Still, swamps are fascinating places as anyone who has explored them (hopefully with groups) knows, alligators and all. So let's grab some poles, and take a brief excursion - just look to where the sun is shining through the trees...

When I returned to Scott's post (with Selgin and Sadowski comments) to link for this one, I was struck at the degree to which some of Thomas Sargent's (a Nobel winner) quotes are reminiscent of Plosser. Egad! Anyway, as Scott noted afterward in the comment thread, it wasn't really clear whether Sadowski and Selgin had any disagreement. But inquiring minds such as my own want to know: what about that "simple" question of setting the NGDP growth-rate target at the trend rate of growth of weighted factor input? I think sometimes that when economists are talking amongst one another, they don't always recognize the moments when the rest of the audience goes "Wait! Hold on! Can you really explain that to me in English?"

What it basically boils down to for us laypeople is this: are the indices in place completely adequate for the task at hand? And - if not - how can we help to provide indices which are more useful? In other words, are current measurements capable of showing whether good deflation can be measured, so that the impediments for its growth can be loosed? Especially in the face of bad deflation which would knock down the most productive and innovative processes, given the chance.

For we need this capacity, if in fact incomes are to be optimized for even those who rely on the least income of all. Whether or not such indices would realistically be taken into account, was of course duly noted by Bonnie Carr - and that's no small matter. After all it's difficult enough to get the most important elements of measurement right - let alone deal with the willing obfuscation of those who would just as soon it not happen.

Bad Deflation is Not Creative Destruction

Whodathunkit? Or...the other title I wanted for this post was Creative Destruction For You, But Not For Me (so many good post titles, so little time). If the blogosphere seemed a bit sleepy or disoriented recently, nothing like an outrageous BIS report to wake it up again! (Boo Hiss it's BIS - okay I promise I'll stop, I'm killing myself here) It's probably a good thing that there's too many links for me to realistically list, but I have to mention Simon Wren-Lewis. Lest anyone think that the economy can "dog paddle" into the indefinite future with a teensy cap on "everything as usual", good luck with that (WSJ are you listening?). Eventually, refusal to budge off of a status quo that now means significant unemployment, likely means that resistance to change turns into bad deflation, somewhere down the line. This is no time for all the economic players to sit at the table and simply pray that theirs is not the bad hand.

Without a doubt some of my readers must be confused by now, because on regular occasion I sing the praises of authors who have been most happily adapted (adopted?) into Austrian thought processes. Therefore, the word austerian is most helpful, because it gives me a chance to readily distinguish certain areas of discourse from Austrian writers who inspire me and who I believe to be imminently respectable. Austerian is also a great word because it's not so much meant for Internet Austrians (again, not quite the same as Austrian) who are but a small subset of this group, but actually indicative of people from many walks of life, moneyed and not-so-much so, who have inadvertently painted themselves into a corner by their own expectations of themselves and others around them.

The primary difference between this far flung group and others who wish to limit money printing is that austerians tend to see money primarily as representative of hard assets and assorted real estate rather than services, even though these areas of life generally play out in local economies as two sides of the same coin. Unfortunately, if services disappear in significant ways, the very ones who dissed said services tend to follow, in spite of what they felt or thought about them.

What about the normal and upbeat rationale one normally hears as to wealth creation: where does it go in times like this? Why the sudden slamming on the brakes - that is, dropping NGDP off a cliff in such a way that made the Great Recession inevitable? Indeed it doesn't make sense how central bankers could have convinced themselves that letting this happen was the right thing to do, and the fact that they did means the public is no longer so quick to trust them as before. If central bankers had believed in their previous methodology, why would negative expectations cause them to back off so quickly? How did they think that wouldn't send the wrong message to the world?

And - as for those who got "cold feet" about their own course of action - think how that runs counter to what so much free trade literature actually extolls. When we read about the progress of production efficiencies and technology in the twentieth century, there's not so many praises sung about the primary forms of wealth (building construction) we actually came to rely on in the present. And even though some really serious people decided to pull the "emergency brake", no one ever bothered to explain why, even though there were plenty of discussions as to who was really to blame. So when we hear how we need to "sit back" (a couple of decades, maybe) and wait for creative destruction to do its magic, what exactly are people referring to, and why isn't anyone actually starting the process now? For something that sounds so active and positive, there's a lot of passive resistance and defensiveness going on...and I for one will not be happy if "creative destruction" is just a copout phrase or excuse for war.

And even now, we know that many forms of new innovation, production efficiencies and free markets (in some respects anyway) finally helped to pull us out of the Great Depression. BUT...not before a lot of people were killed, and a tremendous amount of wealth was destroyed first, in far too many nations. No one was particularly interested in innovation for a couple of decades, it seemed, until a lot of potential economic players were knocked off the field, both literally and figuratively.

In other words, creative destruction seems to be great so long as the ones in power are not the ones having to deal with it. How would governments large and small pay for services, if it weren't for their citizens running like hamsters on the mortgage treadmills? Oh, it's easy to praise creative destruction from afar, especially when it involves wealth creation which doesn't threaten one's own particular piece of pie in the first place. In a sense, the present day output gap in NGDP represents a vivid crisis of imagination. Which perhaps would not be so bad, were it not for the fact that the output gap also represents a massive loss on the part of those who would have gained work and a decent life, from those forbidden wealth generation processes. The scary part is that a government which refuses to lift  regulations against innovative construction, is a government that ultimately courts bad deflation destruction.

What's more, the central bankers knew all along that the crisis of imagination on the part of proud austerians was behind the problem, which is probably why the Economist had this oddball article heading the other day: "I'm a Central Banker, Get Me Out Of Here". The worst part? The central bankers finally - when it was too late - knew they were going to get the blame for bankrolling whatever the austerians wanted in the first place (mindless growth with practically zero innovation and technological gain), until everyone actually lost their nerve. A nominal targeting rule would have at least stopped the process before it went too far along and sucked up too much future income, but who wants a reasonable rule when it's not necessary?!

Fortunately, there is actually a simple way to express the lack of coordination which has led to the stalemate between central bankers, governments and citizens. While central bankers and citizens would happily blame one another till doomsday, the regulations of local economies are in fact the real culprit. The only reason it is not readily apparent that the outdated laws, regulations and zoning are the actual source of the problem is that no one in power has a single thing to gain by speaking out against a broken status quo. No wonder Buckminster Fuller must have seemed like a bit of a dingbat, to some.

A big part of what appears as business cycles is just the effort to put too many citizens into outdated forms of construction which are not well suited to their income, and thus, financial needs. Yet municipalities have been reluctant to update construction methodology for fear of losing construction jobs and the outsized tax base that became available for services. But the need for everyone to have income for that outdated housing only made the problem worse over time. Bad deflation can be overcome by giving construction over to innovation, and by creating more sustainable forms of services which do not need to rely on yesterday's representations of building and construction in order to happen. When that happens, a lot of finger pointing and wealth destruction will no longer be necessary.

Truly Free Markets Don't Just "Happen" - Greece Austerity Edition

In some ways the blogosphere has "moved on" from the intensity of the Greece austerity debate, which is probably a good thing at least in terms of the unfortunate gloating that happened, as to Greece getting its "just desserts". As Simon Wren-Lewis indicated, Greece definitely made its share of fiscal mistakes (his post How a Greek Drama Became A Global Tragedy). Wren-Lewis adds, "As most reasonable people now recognize that the global move to austerity was a terrible mistake, understanding what went wrong in Greece is important." He pointed out how the Eurozone, along with the IMF, helped turn a Greek crisis into a Eurozone crises as well.

All too often, the austerity debate gets framed too simply: "Just let free markets work." Sadly, it has become apparent that the kinds of free markets many libertarians would want, don't simply "materialize" just because government services get "knocked out" and budgets reduced. Or...has such a realization even taken place? Yes there are certainly ways in which private monies "fill in" when public money becomes less of a factor. But the bigger question remains: how are the things that people actually need being brought about, as a result? What are the kinds of restrictions that prevent the free market we imagine from materializing, even when government budgets are cut? Chances are, the free markets - which we want - have already been stopped in their tracks, by the favors that government has already handed out in regulations, restrictions and product definitions, to practically everyone who had the money to go to Washington and just ask.

What, then, might we take away from what Greece has had to endure? How has their situation resembled that of other nations, which could eventually suffer a similar fate? Even when no words are spoken, the very image of their current circumstance tears any pure argument for unthinking austerity to shreds, as its youth now look for departures, on the heels of a largely departed business class. In terms of wealth creation and loss, people are discovering it's not so much a matter of who holds the wealth when others cannot, but how wealth - which sometimes "unexpectedly" turns cold - is envisioned in the first place. Yes of course, some of their services also needed to evolve as well, instead of taking a stubborn last stand...

How about the markets that do work - that is - the tradable goods which are widely available and well in the range of affordability for many citizens? This is the aspect of the marketplace which makes the "free markets work" argument extremely plausible. The problems materialize when non-tradable goods at local levels do not utilize free markets in the same way, yet still use the idea of a free market as a "cover" for what is a purposely limited (thus protected) good in some context: health care by knowledge use limitations, and construction by highly specific low tech requirements. These are not free markets, but the fact that they use the name of free markets in their defense unfortunately causes people to doubt free markets and capitalism, because of those who use both to perpetuate non competitive economic scenarios. What's more, they use government to do so, and yet some among them denigrate the inefficiencies of government so that others will not realize how they used government to their own ends in the first place!

So it is that many outdated ideas of wealth creation need to evolve. Wherever local economies continue to hold their wealth in protectionist ways, the idea of protectionism only continues to grow - just as it so often does when economic access becomes further limited. Hand in hand with the local protectionism that finally goes global, is the struggle to keep new immigrants out. Nations don't realize that protectionism isn't going to help them in the long run, and could save themselves a lot of war and strife, if only they realized that when local power tightly defines the economic activity which is allowed to takes place, the process only escalates beyond borders if such power is unchecked. While the ultimate journey to gridlock may be slow, we still see definite signs of it in the present, especially in developed nations.

There's just not a lot of point in gloating when government bureaucracies fail, let alone when in fact a populace has not stopped to consider what might more reasonably take their place. Even as more cuts are debated in Washington now, for instance, little of substance has materialized for services restructure...just talk of privatization. People reason that we have still have plenty of time and resources, so there is little need to worry about the future.  But if we don't begin the process of changing course now, such reassurances don't mean much in the long run. When a nation goes too long to decide how it can evolve, bad deflation is sometimes the result, in that people cannot readily hold on to traditional, more solid forms of wealth when the social structures around that wealth disappear. What's more, when austerity takes hold, the chains that bind together services and the solid assets of local wealth are often forgotten - or at the very least, scaled back to such a degree that services may become mostly for the rich.

Some think that it's just a matter of time before disruptive technologies make a difference for developed nations. In fact, some of the battle lines are being drawn to some degree for the digital realm, as people struggle to make technology a bigger part of wealth capture. However, one important aspect of disruptive technology remains untouched: countless forms of local protectionism, which have seen to it that almost no technological disruption has occurred in the structures we live and work in, or the infrastructures that we rely upon. Free marketers who gain protection by counting on government to perpetuate their restrictions and outdated expectations only do everyone a disservice in the long run, as people lose faith in free markets to provide their needs.

More than anything else, this kind of protectionism continues to threaten global stability, not just in the monetary policy problems this creates through ongoing unnecessary risks, but the unemployment that nations struggle with as a result. As long as services are mandated to take place in highly limited, high cost, low technology environments, only a fraction of any public can expect to partake of those services in the long run, or in the employment for that such services could provide for that matter.

This bloated definition of low tech wealth and its associated limitations on service wealth are what hold us back - like the Fleetwood Mac song, they are the chains that keep us "running in the shadows" with forms of finance that should not even be necessary for the incremental growth of the future. Greece should be the example that prompts those of us in the U.S. to take heed, for their irresponsibility mostly reflects the same irresponsibility too many of us still mistakenly follow, of protecting the powers that be. Truly free markets need to be loosed of such restrictions on economic access of every kind, so that economic growth can once again see the light of day,