Inflation Relief Can't Address the Missing Market Divide

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

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

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

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

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

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

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

Upstream Nominal Claims Matter for Equilibrium Balance

Will the Fed successfully curtail inflation in the near future? Fortunately there have been encouraging signs of disinflation, even if the causes aren't obvious yet. However, while the Fed uses monetary policy to tame inflation, in certain respects this is a technical result. In other words, "pulling back" won't address supply side shortcomings such as the perennial inflation contributors in our secondary markets. Unfortunately, these local markets are woefully incomplete in basic respects, with housing and skilled services as the most egregious examples. Consequently, were the Fed were to pursue nominal stability and a stable growth level (as a market monetarist "best case" scenario), this would only be a partial answer - albeit the monetary one - for optimal equilibrium balance. 

Indeed, the Fed has often emphasized how its hands are tied in terms of supply side reform possibilities. Despite the recent pullback on traditional housing loan activity, Fed members must be wondering now, who in a decision making capacity is really paying attention and ready to take action? After all, we need incremental ownership options for flexible housing and land use, before many citizens can lead more productive lives. Without such options, millions still function in their own "recessionary" economy, even as others move on. For that matter, tiny homes, manufactured homes, and modular homes are already available, but few communities remain willing to make room for lower income options. Alas, there's a relative few sad exceptions for flood prone areas which are often long distances from employment opportunities. 

While there's a growing understanding of supply side issues, supply side reform means different things to different people. Consequently we aren't ready to address how local secondary market deficiencies contribute to equilibrium imbalance. In all this, upstream nominal claims tend to define production and consumption landscapes, plus such claims are more locally supported than it appears at first glance. Upstream nominal claims come not only from profit and non profit decision makers, for the Nimby impulses of local citizens lead to surging property taxes as well - taxes for rising asset values rather than local service gains! How can the Fed keep a decent reputation indefinitely, if the constraints of artificial housing scarcity remain enforced? Yet since these claims matter for skilled services, communities often refuse newcomers who lack discretionary income for additional service costs.

In a recent post I noted the structural shift of additional nominal claims from originating wealth sources. Fortunately, some of these pressures are starting to let up, which should make the Fed's job a little easier. That said, problems of excessive expectations will remain with us. Only consider how some of those expectations might have come about in the first place. Part of the high inflation of the sixties and seventies was due to the introduction of higher costs for healthcare in general across the board - costs which could have been rationalized by increased fossil fuel wealth in the U.S. during that period. Now, imagine what might happen to those expectations should that fossil fuel wealth shift into reverse! For that matter, once the Fed finally reduced those earlier high inflation levels, recall how our healthcare institutions enforced hard limits on physician supply. Chances are this nominal structural shift was more than a coincidence. 

It's hard to imagine secondary markets giving up much ground to primary markets in terms of monetary representation, or for that matter acknowledging their dependence on originating wealth sources. But that doesn't mean new market institutions aren't possible - markets that are more free yet don't present direct challenges to the old. New sets of expectations would not include the same excessive nominal demands as the old. Instead, new institutions would make room for flexible ownership and time value as wealth. Good deflation and skilled knowledge use in local markets, could be our best chance for greater market freedom and equilibrium balance in the near future.

Frozen Foods Brought Economic and Cultural Change

As it turns out, frozen foods came with unanticipated effects which are still relevant. Once electrification transformed factory production, it also made widespread refrigeration feasible, which ultimately led to frozen foods manufacture. A quick Google search further elaborates:

During the 1940s, the volume of frozen foods available to consumers boomed. It wasn't until the 1950s, though, that the first frozen ready meals hit the shelves in the United States.

Once frozen meals made their way into our homes, the production based expectations of our interpersonal relationships began to dramatically shift. Not only did time use patterns change among those primarily responsible for kitchen duties, but also other family members - particularly for families with limited incomes. Even now, frozen foods in the form of prepared meals, remain one of the simplest cost effective ways to "save time" in the course of a day. 

However one trade-off in these recent changes, is that many processed frozen foods aren't necessarily healthy! Even so, frozen foods are valuable production and consumption options, since they promote personal autonomy by freeing more time for daily routines. Further, the trade-off decisions involved for optimal health versus time saving convenience, are a reminder how personal health involves more time based commitments, than today's healthcare systems can readily provide. 

There was also a cultural trade-off, in terms of the ambivalence surrounding what women could accomplish with their newfound freedom from domestic responsibilities. How might gender relationships change, once women experienced new lifestyle options? 

What was perhaps not widely recognized, is that women were only a part of this changed cultural equation. For one, frozen foods manufacture has given real benefits to men insofar as their own preferences for meals. Equally important is how young, old, and disabled individuals became able to assume more central and often desired roles in kitchen responsibilities. Nevertheless, some of us still love to cook from scratch, even though due to market evolution, cooking is no longer highly valued as a practical skill. Basically that means we end up having to eat more of the leftovers ourselves!

Consider what these changed realities also suggest, regarding other domestic burdens many still face. In particular, some individuals with limited income, lack the stamina to fully maintain dwellings which have yet to benefit from new technology. Only imagine, how innovation in building design and manufacture, might one day alter this unfortunate reality. Once individuals with limited means become better able to take care of needed renovations, their non economic time value would also be improved. Granted, frozen foods manufacture reduced non economic time value for many women. Hopefully these individuals (and countless others) can one day regain value for their non economic time, so as to master their environments with less need of expensive services and other assistance.   

In all of this, technological advances have changed social expectations and there's no going back to earlier cultural realities. This is relevant for both the right and left. Indeed, consider how many individuals of both sexes come to prefer cooking for one, to the compromises involved in routinely sharing meals with others. Likewise, some forget that a truly healthy diet includes more hours in the kitchen than what might be possible. Perhaps these are moments when one can at least cut some fruit and cook some fresh vegetables on the stove, to go with that prepared frozen entree which only needs to be briefly heated in the microwave. 

When We Can't Always Get What We Want...

Somehow I find it fitting that Mick Jagger of Rolling Stones fame, studied economics before joining the group. Indeed, the song "You Can't Always Get What You Want", is an apt reminder how we seemingly forget to build vital need based markets. Yet if our domestic non tradable sector providers paid more attention to these areas, perhaps people would be less inclined to question the integrity of today's economic and political systems.

Granted, many producers face the temptation of raising the bar on product definitions where possible, so that product and services reflect consumer wants more closely than actual need. After all it can be quite profitable to do so. Unfortunately however, if too many non tradable sector producers choose this route, markets gradually become destabilized. What might be done? Again, cue what Mick Jagger and Keith Richards wrote:

But if you try sometimes you just might find

you get what you need

It's time to get serious about creating more accessible free markets in our non tradable sectors. We are confusing too many experiential wants with what is essentially necessary in order for citizens to thrive. For one thing, taxpayers face additional burdens, due to negative externalities caused by low income workers who lack sufficient income for even limited sets of non tradable sector costs. One indicator we have procrastinated too long in this regard, is that middle class citizens are beginning to seek "living" wages for non discretionary needs as well. Domestic protectionism might be out of control for instance, when a general lack of basic markets encourages politicians to mandate wage floors. And higher mandated wages only make it more difficult for employers to realize profits. We need to focus on production reform in markets where it matters most, to stop this destructive cycle.

Alas, even with fewer profits and businesses in operation, we can't always get what we want when it comes to "livable" wages for all employees. Yet today's workplace offerings are thought of as "meaningful" mostly when when abundant wages are part of the package. Perhaps it's not surprising that the most negative responses to my work thus far, have been due to my advocacy for good deflation in time based services income.

However, good deflation in time based services might be the only way to increase the use of workplace knowledge in more meaningful and accessible ways. Let's just admit it: Great wages are one of those societal wants which is impossible to fulfill for all citizens, via either fiscal means or private sector mandates. The sooner we face this reality, the sooner we can move towards a future of restored hope, as millions gain the right to inclusion in more productive organizational settings. For one thing, good deflation in time based services would do much more than simply address consumer "affordability". Good deflation in income and building requirements, would give us the legal and social grounds to share the work which people find most meaningful in life. 

One reason citizens expect so much from fiscal policy, is that governments are expected to be responsible for meeting many societal needs. The problem in this regard, is how governments and private interests raised regulatory and price bars on basic needs too many times. Each time these bars were raised, governments incrementally gave up their ability to influence or fiscally support citizens and economies, one unfortunate rule and regulation at a time. Now, many basic needs go unmet, as regulatory rules mostly accrue to the societal benefits (wants) of higher income levels. Among the sacrifices in this regard are the one time effectiveness of fiscal policy. Where once it held a valid role in addressing societal needs, now it is closely bound with specific political aims. 

Consider why this matters for inequality and applied knowledge preservation, as well. Fiscal policy now only holds a minor role in smoothing income differences. But more importantly, it is losing its ability to fulfill the role of spreading and supporting knowledge for the use of all citizens. To a large extent, these roles are diminished by the fact redistribution mostly augments the wants of specific high income groups. 

Which is also why I find it difficult to understand, the high hopes attached to fiscal policy "remedies" such as MMT. Even if political support for Modern Monetary Theory should turn into a policy option constant, what might its adherents hope to accomplish in any concrete sense? And that's not even considering the disparaging attacks MMT advocates tend to make on monetarist views. To me at least, Modern Monetary Theory advocates appear mostly concerned with middle class wants, rather than any need based structural issues faced by lower income levels. Granted, there is some good which can still be achieved via fiscal policy. However, we should let go of believing fiscal policy can actually address existing inequalities, let alone the productive use and preservation of knowledge in society. 

 

Hopefully, my readers won't get the impression I view wants as a societal negative. I absolutely believe that wants can be positive as well. However, let's be careful to ensure basic needs are actually met, first. What's more, do so without changing the goalposts so as to obscure basic needs once again. For instance, don't insist that smartphones or credit use are absolute necessities. I don't need either in order to thrive, plus opting for these things would reduce my spending capacity in other crucial respects. Indeed, once basic needs are met, and one finally gets to breathe easier, the occasional wants of a tradable sector (retail) splurge need not break the bank at all.

When societies forget what it actually takes for lower income levels to survive, they also lose track of the extent to which progress actually takes place for societies as a whole. At the very least, tradable sectors have given us excellent examples for full needs based markets, especially when luxury adaptations come from basic commodification structures. Whereas non tradable sector activity, due to the existing scarcities of time and space, tends to leapfrog need based offerings for what may appear as societal progress, but in certain respects is instead luxury mandates for low income levels which can ill afford such requirements. 

Profit is integral to businesses and sustainable economies in general, but profits should not be sought by needlessly obscuring the differences between want and need. Too much of society is presently paying the price for this approach. For one thing, it is a simpler matter to determine basic survival needs than some imagine. Once we become willing to highlight the real differences, innovations for our physical environments in particular, could proceed from this understanding.

Until we realize good deflation in time based services and building requirements, these areas of our lives will remain structurally fragile. As things currently stand, the domestic markets of our non tradable sectors demand too much in terms of debt levels and redistribution, for governments and citizens to successfully shoulder these burdens in the near future. Let's commit to innovation in need based markets. Even though societies can't fulfill every thing their hearts desire, we could still do a much better job of market creation which addresses actual needs.

Are There Really Too Many PhD's?

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

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

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

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

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

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

An Economic Alternative for the Baumol Effect

There are ways to counter the Baumol effect. But how badly do we want to? Indeed, to what extent are we aware that other options exist, in terms of productivity?  An article from Noah Millman, "How a productivity phenomenon explains the unraveling of America", highlights the seeming inevitability of the present conundrum which inhibits long term growth and prosperity. Perhaps it is not surprising that he frames the Baumol effect as a "chronic illness" which everyone will simply have to live with. Still, I am encouraged that a mainstream publication such as The Week, was willing to explore a concept which till recently was relatively obscure outside academic circles. 

In his article, Noah Millman is understandably concerned about the Baumol constraints of time based activity on education, healthcare and public safety, given the importance of "hands-on person to person interaction". He explains:

We can - and should - look for ways to make all three sectors more efficient. But we should also rationally expect them to get more expensive, and to consume an ever-increasing share of the national income, unless we're willing to let their quality deteriorate or put them out of reach for an increasing share of the population. 

Regular readers know how I feel about time based services consuming more national income than is already the case. We need local patterns of economic time reciprocity, so that broader services access becomes possible without additional budgetary obligations. Nevertheless, Millman continues:

If Baumol's Cost Disease is an important driver of costs in these sectors, then we should expect them to consume an ever-increasing share of the national income - but not only that. If we socialize those functions so as to provide equal services to the citizenry, taxes will have to increase every year just to keep quality steady. And if we don't raise taxes enough, then inequality will increase even as costs rise, leaving more and more of the population poorly provided for. And in either case in a world of tight budgets, these sectors will increasingly be competing with each other for the marginal public dollar, and devaluing competing sectors' contributions to the public good.

Ultimately, individuals who care about inequality, could utilize time arbitrage in participating groups so as to coordinate supply and demand of services, thereby making them more affordable for all concerned. Importantly, this decentralized economic option means a willingness to adjust one's own income expectations accordingly! However, accepting less income also means confronting the present necessity of monetary sacrifice for the human capital expenditure now required, for what is often simple mutual assistance. Even though it is no longer feasible to increase time based services via today's general equilibrium revenue, what impressed me about Millman's article was his recognition how the struggle for time based services affects today's political environment:

It's a recipe for perpetual revolt by both those who pay more into the system, who feel - rightly - like they're paying more and more for less and less, as well as by those who pay less into the system who feel - rightly - like services are getting less and less equitable even as they are getting economically squeezed harder and harder. And if "perpetual revolt" sounds a lot like America today - and it should - then sadly, because of Baumol's Cost Disease, satisfying the demands that fuel that revolt may not be possible.

He sums up: "Sadly, Baumol's Cost Disease is incurable. All we can do is learn to live with it as a chronic condition". If only we could! Alas, this structural issue can't be neglected any longer, for the level of political discord has already ratcheted up to an extreme level. We can no longer assume or hope for a benign outcome, if our political turmoil is not addressed via specific and decentralized economic means. Without a productive response, not only is our nation increasingly likely to deteriorate from within, it might also lose its ability to positively influence other nations. Sadly, many nations are not presently well positioned to address existing inequalities. But individuals still could, so long as they are able to secure and maintain the production rights which make it possible to do so.

Millman thought through his arguments carefully, and for good reason I agree with his summation in certain respects. In a similar vein, already existing debt and budgetary burdens should not be used as excuses for austerity, especially if the relevant supply side chains allow service markets to collapse, or the "wrong" party happens to be in power. However, expectations for the supply and demand of skill and knowledge provision will continue to exacerbate cultural battles, should economic access be sought solely through this form of organizational capacity. Stated another way, my disagreements with Millman are not based on moral grounds, but on what I believe overall monetary revenue to be capable of in the foreseeable future.

We can build supply side alternatives which better align supply and demand for time based services, before modern economies are completely undone by financial repression and/or unwanted austerity. However, we need to get started now, if we are to build a structural response to the Baumol effect. Fortunately, when our economic time commitments are symmetrically aligned, we gain the ability to create services based wealth which is not subject to total factor productivity losses. Even though nations will still need the economic option of paying for applied knowledge on asymmetric terms, symmetric time alignment allows us to productively respond to the Baumol effect.

Three Basic Ingredients for Economic Stability

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

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

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

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

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

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

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

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

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

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

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

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

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

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

State Capacity, Endogenous Design, and Exogenous Wealth

What is state capacity still capable of contributing to modern economies? In some important respects, state capacity is no simple matter. Yet there is plenty of wishful thinking on both sides of the political aisle, as to what governments "should" be able to accomplish for long term growth and prosperity.

Not so long ago, the governments of advanced nations were better positioned, for fiscal policy to function as an active component of economic dynamism. However, as commitments to special interests and citizens in general have grown, fiscal policy has gradually become better suited as an economic stabilizer, than for additional growth prospects.

Perhaps this is a reasonable outcome, for national governments which have long depended on endogenous monetary design. Much of this capacity exists quite separately, from the vast exogenous monetary wealth that extends well beyond national borders. Yet the more tangible nature of the latter is largely due to tradable sector activity as our primary source of wealth origins. Consider how crucial are the roles of exogenous monetary wealth. Should any global calamity reduce this capacity, the ability of national governments to function normally via fiscal policy would be immediately compromised. Despite the supporting role of governmental endogenous design, exogenous wealth generation is still central to long term economic stability.

Nevertheless, the relationship between endogenous and exogenous sources of wealth has become so complex, one can be forgiven for imagining monetary realities as solely endogenous in nature. The main problem with endogenous monetary creation, is that populations can become too dependent on future forms of resource reciprocity, making individuals less inclined to seek direct reciprocity with others in the present. Even though future commitments in the form of monetary wealth can be quite versatile, they should not be be relied on to such an extent that people forget how to apportion time and skill for mutual reciprocity in the here and now.

Too much reliance on endogenous future wealth to fund today's services, may lead to excess passive monetary holdings in the GDP of nations. The dynamics of general equilibrium are essentially defined by interactions between the primary markets and the secondary services markets of future obligations. When expectations become too rigid in secondary market flows, sectoral balance is gradually disturbed. Today, there are rigid expectations in housing and time based services, which have contributed in turn to outsized expectations elsewhere in the economy - for instance levels of income supposedly now "necessary" to live normal lives.

Any efforts to expand on state capacity in the present, are going to run headlong into these expectations which have led to extensive budgetary obligations and social commitments. Producers and consumers alike are heavily vested in these particular alignments, which largely define how domestic wealth is constructed. In a post which reflects on state capacity, Scott Sumner explains:

...one aspect of state capacity is the ability of countries to act in a way that is seen as desirable by a consensus of people who don't have a special interest to inhibit change. A government that is able to "do the right thing" has more state capacity than one that does not, even if somewhere between 1% and 40% of the time the "right thing" turns out to be wrong.

Once societies rely on inefficient centralized coordination patterns, citizens move further away from a consensus on how those patterns should function - all the more so when millions of citizens are involved. Scott Sumner has often noted his own belief that a nation's democratic potential to achieve the "right thing", is likely only feasible in decentralized settings.

However, part of the problem for decentralized decision making in the use of knowledge and skill, is that special interests in the 20th century sought out national protection for how skills and knowledge could be utilized at local levels. Consequently, the U.S. may not be able to devolve important skills and knowledge use decisions to local levels in the near future, in a general equilibrium capacity. For this reason, I've suggested defined equilibrium settings which could create more accessible environments for human capital potential.

Time arbitrage would make it feasible for local citizens to gradually build stronger forms of democratic governance. Possibly the greatest benefit of time as symmetric wealth value, is that it would allow time to function as an exogenous or original source of wealth. Ultimately, time arbitrage could build upon decentralized settings in ways reminiscent of the organizational capacity of tradable sectors.

The knowledge use systems of time arbitrage, would make it possible for participating groups to bring aggregate time value into better balance with other forms of exogenous monetary wealth. Once time units become capable of purchasing other time units, the resulting new commodity standard would allow time to function as a reliable wealth source. Time as direct resource reciprocity would place (gently guided) mutual assistance into tangible and primary market forms. As an exogenous wealth source, time arbitrage could gradually help to reduce the political pressures and expectations that state capacity now faces.

Decentralization For The Greatest Good

When many rules have centralized origins - especially in large populous nations such as the U.S. - governments struggle to achieve the greatest good for the greatest number of citizens via taxation. The fact that utilitarian outcomes aren't easy to come by for diverse populations, helps explain why policy makers of opposing parties have become less willing to compromise. So why do we insist on imposing the same sets of requisite rules and standards on everyone? Why can't our economic freedoms be more closely associated with the possibilities of economic diversity, so that all citizens might live in settings where they can create good lives for themselves and others around them?

Nevertheless, one may take comfort, in the fact rigid expectations are nothing new. People have attempted to impose one size fits all regulations and social requirements on one another for a long time. For instance, even though Walden was published in 1854, Henry David Thoreau details how the social expectations around housing, contributed to the impoverishment of many in his time:

Most men appear never to have considered what a house is, and are actually though needlessly poor all their lives because they think that they must have such a one as their neighbors have. As if one were to wear any sort of coat which the tailor might cut out for him, or, gradually leaving off palmleaf hat or cap of woodchuck skin, complain of hard times because he could not afford to buy him a crown! It is possible to invent a house still more convenient and luxurious than we have, which yet all would admit that man could not afford to pay for. Shall we always study to obtain more of these things, and not sometimes to be content with less? Shall the respectable citizen thus gravely teach, by precept and example, the necessity of the young man's providing a certain number of superfluous glowshoes, and umbrellas, and empty guest chambers for empty guests, before he dies? 

Sometimes, societies impose such standards as a way to exclude others who they believe cannot adequately contribute to the needs of given communities. The problem however, is that more communities aren't created with infrastructure which accurately reflects what many individuals could contribute to the well being of all concerned, given the chance. Where, exactly, are excluded individuals and groups expected to go, especially when there are few domestic markets competing via product innovation, to enrich the production potential of lower income levels? And why haven't such individuals already gained the economic freedom to create anew for themselves, what many institutions have proven reluctant to provide?

Social expectations around housing requirements in particular, have proven especially harmful for the bottom 50% of working adults in the U.S. without sufficient income to live where reliable work can readily be found Even though lower income levels have been losing real wage capacity for decades, we have scarcely begun to discuss supply side approaches which could lead to more positive outcomes.

Alas, no one can realistically pretend that trends for low pay work will be reversed soon. We need economic options which allow us to bypass the sticky markets of today's extensive non tradable sector requirements, so that low wages will go much further than is presently feasible. Decentralized local settings which more accurately reflect what small incomes are capable of, could give millions new hope. Such settings would have far more ability than any centralized government, to create the greatest good for the greatest number of citizens. Defined equilibrium for housing, infrastructure and services would also make use of limited regulatory patterns, for groups which find mutual assistance a way to improve the well being of all concerned.

Consider as well that when it comes to housing, one need not classify Thoreau's housing sentiments as anti-materialistic. It's one thing to disavow material possessions in order to seek other time use options, yet altogether another to disavow certain forms of consumption which many individuals can't realistically afford in the first place. Life is much easier when we can accept such realities and move on, instead of having to constantly struggle with income differences in the face of one size fits all regulatory absurdities. People should be able to make low cost choices where desired, yet still have plenty of local economic options to lead meaningful and respectable lives.

A supply side approach would allow us to take the focus off struggles concerning aggregate demand and government "solutions". Doing so is all the more important, since governments hold considerable responsibility for the centralized consumption regulatory barriers which impact the lives of low income groups. Let's build decentralized settings where non discretionary costs might finally come within reach, of millions who seek to make the most of the resources they actually have available.

Some Productivity "Mysteries" Are Solvable

One often hears, "To what extent does technology contribute to productivity?" But an equally important question is, "What else may be closely involved?" For instance, when do societal expectations of what comprises quality product, get in the way? Are those expectations creating additional burdens for our already scarce time use options?

If quality product expectations (such as housing and services) keep requiring ever more of our scarce economic time, more citizens will end up excluded from basic market processes in the years ahead. Essentially, this means aggregate productivity is also being lost, despite productivity gains which may still accrue at upper income levels. Markets aren't as beneficial as they seem, if the costs of basic life necessities leave little room for discretionary spending options for millions of people. On the other hand, free markets are a major boon for all concerned, if they offer accessible basic products and services for all income levels - thereby creating a base of sustainability. Should this in fact take place in the near future, some of our production mysteries will also have been solved.

Certain features of our non tradable sector activity have been reducing aggregate productivity gains for quite a while. Nevertheless, there's good news, for we have the ability to simplify some of the current confusion as to potential productivity gains. How so? One of the most basic elements of productivity gains which still holds, is how such gains accrue to our advantage when they give us additional time options, monetary options, or both. Importantly, even though we now inhabit a services dominant economy, this is as true as it ever was.

Productivity gains, when they do occur, tend to take place in more than just a single dimension. An apt 20th century example for productivity benefits at multiple levels, were washing machines which entered our homes around mid century. Not only did we realize wealth gains from increased aggregate output (and output scale created a positive wage benefit), washing machines freed up lots of time for other activities as well.

Only imagine how easily we could realize similar production gains today, by adopting lightweight yet strong materials for a broad range of building functions. Indeed, many building components could combine to create relatively small structures (compared to today's square footage requirements), simple enough in form to require a mere fraction of the maintenance and renovation which is now necessary. These new living/working options would restore millions to a sustenance level of activity at the very least. In other words, far more individuals would remain closely attached to wealth creation processes, than if they were dependent on others for shelter. Any society that forces undue dependence through excessive living costs, will also tend to create less overall output or wealth. Whereas greater independence in living and working arrangements, leads to more personal choice for countless other market options, hence greater output and productivity gains.

Let's reduce the production mysteries in our dialogue, by addressing how arbitrary product definitions and social expectations impact our time commitments and ability to freely choose. We could reasonably ask of products or services: Can they free up our time for activities we might prefer over present activities? If not, then why not? When we don't take this kind of approach, we inadvertently allow "quality" product requirements to reduce the larger possibilities of our lives. Even worse, we allow those arbitrary product definitions to reverse a centuries long process, of the productivity gains which added so much to real wealth and societal progress.

As Diane Coyle notes in a recent Project Syndicate post, we could all benefit from a more nuanced understanding, as to what makes productivity relevant for our lives. She stresses how already in OECD countries, four out of every five dollars "purchases services or intangible goods". Coyle is spot on, in suggesting we need to think in broader terms about productivity measures and how they may affect overall well being. Otherwise, without a better approach to measured services output (and I suggest time arbitrage), it will only become more difficult, to determine whether societies can keep moving forward as before. Let's stop our struggles over how government demand among citizens is apportioned, and pay more attention to the supply side circumstance which matter most for everyone. Many of us have a good chance of thriving, if we can regain our former rights to select for size. Being able to do so, is what economic freedom is really about.

Can Structural Dialogue Transcend Its Limitations?

Even though structural arguments have been getting some airing of late, they aren't being discussed in ways which really get at the root issues. Consequently, dialogue about the potential for progress can come across as superficial, which certainly isn't what the participants are intending. Or worse, entire debates about our economic realities get reduced to the language and struggles of identity politics.

In some respects, it's not hard to understand why this is happening. Since we live in an economy which has had ample time to mature, general equilibrium conditions are so well developed (entrenched?), that structural experimentation is best approached outside these boundaries. Still, it hasn't been easy to imagine decentralized settings for structural reform. For instance, how to create new service markets via internal means, when so many time based services rely on the redistribution of centralized states? How do we create new forms of building manufacture and infrastructure, and expect institutions which rely on traditional buildings and infrastructure, to make room for them? It's not always possible to do so, which is why new communities are needed which are more likely to embrace structural innovation.

One reason structural dialogue gets undermined, is that additional redistribution remains the expected norm in most instances. Yet redistribution is - and has been - an unrealistic approach for some time. Not only would it would reduce a needed emphasis on new wealth building potential, general equilibrium revenue would make it more difficult for defined equilibrium settings to contribute to economic potential via their own terms of engagement.

Another problem which inhibits productive dialogue, are arguments which accomplish little because they occur at such an abstract level. One notorious offender is whether capitalism bears the "blame" for our most pressing economic problems. We can't afford to continue vague arguments which do little more than assign blame. Rather, we need to determine where capitalism does actually come up short, and respond to that reality. Specifically: What if there are not enough markets, instead of too many? What if the supply side of our modern economies is completely MIA, in communities too numerous to name?

How so? Consider how non tradable sectors have essentially ignored millions of individuals, among the two thirds of the U.S. population who lack college degrees. Sometimes it seems these sectors only care to compete for the high income levels among us, or they simply aren't interested. And much of what is produced in these sectors is also non discretionary. Given the importance of this product, how, exactly, are people without college degrees expected to live normal lives? Where are the options they can feel good about, for housing, infrastructure and a full range of high skill services? Even though we understandably celebrate how tradable sector activity has reached out to low income groups in recent centuries, no one can realistically "rest their case" on the achievements of tradable sector representation for all income levels. Alas, tradable goods are discretionary, hence this isn't enough.

What about the vast market potential for human capital, which has yet to be tapped? Even though human capital is responsible for much of a modern services economy, how our institutions have utilized human capital thus far, is not necessarily a good fit for millions who seek inclusion. If structural dialogue is to break free of its restricting boundaries, human capital has to be taken more seriously, as an integral factor of knowledge based production.

The real potential of human capital is not solely the province of the best and the brightest. It is more about the aspirations of the millions who aren't yet successful, but are doing the best they they can to build a good life for themselves. When we conceptualize further progress and long term economic growth, what makes us imagine the best and brightest among us are going to be the ones convinced this is the way to go? Why should the most successful among us, be the ones who desire more growth and progress, when they are flourishing and fully vested in the world that already is?

All too often, when we think about progress, our minds dance along the "cutting edge" of prosperity, where we imagine well to do groups flourishing even more as the latest and the greatest is introduced. But what is prosperity, if it contains too few means to positively impact the entire landscape of human possibility? If we don't think the potential of applied knowledge holds real promise for those still left behind, chances are we aren't equating the masses of humanity, with what we believe progress to actually consist of. Yet it cuts to the core, when we forget that long term growth and prosperity, is really about creating economic means for all who seek to grow and flourish. We cannot forget that the ones most likely to embrace innovation and change, are precisely the ones who have yet to be vested, who consequently are most likely to invest and advocate for, the places where experimentation is just beginning.

Have Monetary Foundations Lost Their Relevance?

Since the Great Recession, perceptions as to the importance of monetary policy, have changed considerably. But how stable is this new reality? Indeed, what happens not if, but when a new consensus is pushed too far? Harold James gives voice to some of these concerns in the concluding paragraphs of a recent Project Syndicate article:

The new narrative that has emerged is ideal for populists. It holds that the financial crisis discredited traditional economics, and that "neoliberialism" was a dangerous illusion. The neoliberal insight that came in for the greatest criticism after the crisis was that fiscal restraint is a virtue and rewards adherents with lower interest rates, cheaper credit, and enhanced consumer spending. According to the critics, government spending is not only free, but also an unalloyed good.

In this brave new economy, no one seems to be able to say authoritatively how much debt is dangerous. But that doesn't mean there isn't some level of debt that could trigger a dramatic reversal. If depositors and investors become nervous, debt could become expensive again, making the existing debt stock unsustainable. Only then will the populist magic stop working.

Those who want to restore conventional politics and the old rules find themselves in an unenviable position. Although they do not wish for an end to prosperity, they sound like they do when standing next to populists. Nobody wants to vote for Cassandra when Pollyanna is on the ballot. By the time Cassandra's warnings are borne out, it is always already too late.

His article was also an apt reminder, how important are some elements of what has come to be called neoliberalism, for continued prosperity and economic stability. I've long hoped that new forms of wealth might be built alongside existing wealth without excess disruption of earlier patterns. Now, however, I occasionally find myself wondering whether extensive wealth might instead be lost, before societies learn to create wealth via new and sustainable means.

Instead of disregarding the vital connections of monetary representation with prosperity, a broader understanding is needed for how monetary processes correlate with aggregate output and real economy conditions. Without sufficient focus on these quantitative aspects, central bankers sometimes protest that monetary policy can't be expected to accomplish everything. Which only leads to a further disregard of the quantitative nature of money, and what monetary policy can accomplish. Nevertheless, fiscal policy simply can't do the heavy lifting. Only real economy adjustments and accurate nominal representation will suffice for long term growth prospects and continued prosperity. It is becoming more important by the day, to explore how monetary connections relate to ongoing changes in aggregate output and real economy circumstance.

In all likelihood, I probably come across as one the Cassandras referenced in the above article. Alas, why continually remind people about accumulating debt burdens? Or the fact future wages can't rise to the extent enjoyed in an era of tradable sector dominance, with its ever expanding output? Or that traditional housing and infrastructure is beyond reach of many near future incomes?  Who wants to be told that important and useful services could be in jeopardy for millions, once governmental budgetary burdens get out of control?

Nevertheless, I emphasize these things because I believe they can be productively addressed in the long run - even if the short run mostly holds out hope of decentralized experimentation in new community. A few years earlier, I realized it felt important to stress some of what could be done, before going more fully into the whys of what happened in the first place. Hence the real "Cassandra" portion of my story, otherwise known as book two, became sandwiched between segments of potential responses. Once I complete the first portion of the book project (for the blog sidebar), which - not surprisingly - is a little behind schedule, I anticipate a return to concentrating on the whys of this economic dilemma. With a little luck I can get there before the end of this year.

GDP and the Reciprocal Volunteerism Factor

Volunteer activities are important for any community. Yet many take forms which make them impractical to designate as formal transactions that include monetary compensation as a part of GDP.

That said, there are important exceptions which might gain validation in the near future. From a wealth creation perspective, the greatest economic significance of social interchange is due to specific voluntary transactions between individuals which can be directly reciprocated. After all, these activities may contribute to the personal welfare of both participants, since both are included in the identity enhancement process of voluntary provision.

The most beneficial social exchange for economic purposes, consists of two participating sides in specific and timely transactions. By way of example: While the positive nature of "pay it forward" processes could be loosely considered a two sided voluntary exchange, its tendency in groups is infrequent in nature, while providers and recipients are not directly reciprocal. This helps explain as well another name for paying it forward: "random acts of kindness". Consequently, paying it forward may not occur frequently enough to strengthen trust or group cohesion. What's needed are regular and ongoing patterns of reciprocal volunteerism, for mutual assistance to become a replicative and spontaneous process.

Many who have felt powerless at some point in their lives, instinctively understand the value of mutually agreed upon negotiation for the supply and demand of time based services. Well designed platforms for services supply and demand, could help individuals go beyond efforts they might normally expend for their own families and friends. People especially need such patterns when they lack employment which encourages negotiation and social interchange in the workplace. Yet too much of this activity has been assigned to rigidly formal patterns in present day institutions. When specialists and professionals do most of the negotiating on behalf of the average individual, there are few remaining possibilities for voluntary reciprocity, or the identity reinforcing nature of mutual assistance which keeps us civil and humane.

What about forms of volunteerism which continue to function best informally - especially insofar as GDP is concerned? When we volunteer to help someone without a request on their part, we also (generally) don't expect them to reciprocate. While our assistance may still have positive results, random services supply without expectations on the part of recipients, can make it difficult to discern whether group social circumstance are positively evolving over time.

Also, domestic responsibilities in the home tend not to be the best candidates for the measure of GDP. Indeed, much of this activity revolves around personal preferences for spending time in one's own home environment. In other words, while work is certainly involved, it is generally of a much freer nature than most workplace norms, even to the extent of functioning as a form of positive experiential product. Fortunately, home for most individuals, at least during many stages of life, continues to be the main place where people actually have the most freedom to do as one wishes. The better part of home obligations today are choices, rather than absolute necessities.

Nevertheless: As more aspects of production continue to shift towards automation and technological support, societies will need to reconsider the relatively informal terms by which neighbors might provide voluntary services for one another. For that matter, the more that mutual assistance is spread among as many participants as possible, the less likely that anyone ends up taken for granted in such exchanges. It's easier for everyone concerned, when maintaining one's self respect is feasible in services exchange. Only recall that when individuals lack social norms re reciprocating for assistance, many will refuse to ask or accept - sometimes even if they are in dire need.

Another factor in terms of potential reciprocity, involves economic options such as guaranteed jobs or a basic income. Guaranteed jobs present problems in terms of external decision making as to what "needs" to be done, or what is "worthy" of being done. Without adequate input and negotiation on the part of all participants, guaranteed jobs miss the point. For instance, when external decision making determines the jobs provided, few are going to be willing to give up their own meaningful work, just so that others might have employment.

Likewise, some assume that a basic income could allow recipients to "do their own thing". Alas, while this approach could help in the short term for unexpected emergencies, long term it would be little more than an existential path to despair. Being expected to "do "one's own thing" indefinitely, is still social isolation, with little hope of returning to meaningful interaction with others. Indeed, the basic income approach would mean the least amount of group alignment among all possible economic options, in terms of local supply and demand for mutual assistance.

Granted, it would take considerable effort to decipher the supply and demand possibilities which individuals might seek to voluntarily provide one another. But once such processes are set into motion, the rewards could eventually prove worth the effort, for it would give individuals the chance to rediscover their natural inclinations for mutual exchange.

Does Price Making Lead to a Zero Sum Economy?

Normally, price making in aggregate should not lead to this result. However, price making may imply not just a lack of resource coordination among private firms, but also economic activity which benefits from taxpayer support. Ultimately, much depends on the relevant sectors.

Likewise, economic dynamism may be reversed when societies overreact to perceptions of "ill gotten" gains. Venezuela provides one of the strongest warnings of our time, as to what might occur when citizens and governments overreact to existing prosperity by breaking up firms. All too often, such intentional destruction does little to preserve markets, for the products supplied up to this point. There is danger in placing excessive blame on the dominant tech firms of our time. Should these firms be broken up, it could lead to the loss of valuable product, especially for those who lack sufficient access to other platforms for knowledge and information dispersal. Whatever weariness or disillusion society may have with social media, it would be far better to create new economic patterns and systems for face to face interaction, instead of holding social media accountable for problems which in many instances it only bears partial responsibility.

Why do so many believe we are living with a zero sum economy? For one, non tradable sector dominance tends to lack the level of output that occurs during periods of tradable sector dominance. Unfortunately, price making as a way to reimburse extensive overhead costs (in lieu of limited output), can negatively impact aggregate output if practiced to excess over long periods.

Of course, economists and others regularly remind us there is no such thing as a zero sum economy in the long term, in aggregate. One observer put it this way:

In a capitalistic economy, in aggregate, there will always be more winners than losers. This is because the economy is growing in the long run and both parties benefit from an exchange.

Let's keep the faith in long run positives as best we can, since the short run has plenty of uncertainty. Even small examples of protectionism and zero sum thinking can cause further problems. Recently, zero sum thinking on President Trump's part, prompted him to impose a 17.5% tariff on tomatoes from Mexico. Many of us in Texas have already faced rising prices on fresh tomatoes for months, as it has gradually become more difficult for deliveries to cross the border in timely fashion. And given the lengthy wait those truck drivers face, by no means are tomatoes the only fresh produce being affected.

Is the supposed "product dumping" on Mexico's part a form of price making? Even if it was, low prices for commodities such as these, lead to a positive sum circumstance. There's more fresh food consumption than would otherwise be the case for lower income levels, more income for growers and workers and also retailers. Affordable produce for all income levels means more economic dynamism, not to mention health benefits. Seriously, is anyone really being hurt by tomatoes from across the border? After all, many tomatoes grown commercially in the U.S. are already slated for canning and other processing, instead of grocery store produce sections.

The price making that causes a structural possibility of zero sum circumstance, is when price making occurs in ways which pose clear limits for supply side potential. All the more so, when the production processes correlate with product linked to space and time, which only sets up additional negative ripple effects. However, the best way to ensure as much economic dynamism as possible, is to respond to price making by ensuring that price taking is also possible in the same markets that already contain natural scarcities. In other words, continue to provide real economic options, instead of destroying what continues to function in the here and now.

After all, creative destruction is not due to purposeful destruction. It's about the potential for societies to make new choices, not just in terms of both consumption, but also production.The best way to make certain we don't end up with zero sum outcomes, is to always leave room for the full coordination and market enhancement of price taking. All the more so, when product and services are already subject to the natural scarcities of space and time.

Build New Realities That Reflect Where We Are

And by extension, what society already has, not to mention previous accomplishments on the part of individuals and groups alike. Continued economic prosperity need not be as difficult as some are inclined to make it out to be.

Ultimately, our economic settings are about much more than participation and contributions at the cutting edge of applied knowledge. For that matter, the biggest part of our working lives is composed of what we've already learned and done - albeit in new contexts. How might we ensure that the profits from the the cutting edge don't always have to be redirected for the ongoing maintenance of utilitarian knowledge and skill? If shared workplace activities are to be sustained wherever people choose to live, those activities need to contribute more directly to wealth creation. New organizational methods which combine workplaces in more accessible settings, could help ensure we remain able to pursue our life objectives and intellectual challenges well into the future.

Alongside the new knowledge of cutting edge endeavour, we also all have the good fortune to be "standing on the shoulders of giants". It's this wealth of preexisting knowledge and skill, which could revitalize so many communities that lack the ability to contribute at the level our most prosperous regions now experience. The earlier efforts of untold millions who came before us, hold plenty of relevance for what we continue to pursue in the here and now.

What's more, much of what we've already accomplished as individuals, could often be useful to others as they pursue their own paths in life. How might we make our own self improvement efforts more relevant to others on economic terms? Economic inclusion is not about forcing everyone to certain forms of skill and ability which present institutions may not even need, it's about exploring the possibilities of what we already have. Further investments in human capital for what we assume workplaces might need, aren't necessarily the human capital others would seek from us in a better aligned economic framework.

Formal aspects of human capital investment in particular are being questioned, as the bar for social and economic inclusion continues to be pushed ever upward. Today's definitions of quality product tend to come with assumptions that our already existing attributes are somehow "never enough" to take part in society as we are now. Still, when our time value is only allowed as exclusive quality product, even the most routine of services based activities are expected to transpire on these terms. In the process, societies end up budgeting for these forms of quality product in ways that further exclude those who don't meet the qualifications as they presently exist.

For these reasons and more, I sometimes find myself overwhelmed by posts and articles which call for higher wages as supposedly the most important guarantor of continued prosperity. Granted, substantial wage increases have been with us for a long time. But how much of these wage increases were actually derived from the output gains which resulted from centuries of tradable sector dominance? Is it not time to design environments which more accurately reflect the forms of resource capacity we presently hold? Because much of that capacity is now more closely aligned with the experiential nature of scarce time based product, instead of the output gains associated with tradable sector activity.

What prompted this post was an article from Daron Acemoglu for Project Syndicate, which left me somewhat deflated. In "Where Do Good Jobs Come From?", he writes:

Historically, no known human society has created shared prosperity purely through redistribution. Prosperity comes from creating jobs that pay decent wages. And it is good jobs, not redistribution, that provide people with purpose and meaning. 

Articles such as this seem to come with underlying assumptions. One would expect that wages "must" go ever higher for all concerned, so that we as taxpayers might continue covering the ever increasing costs of our governments and maintenance of our environments. It won't be easy to dissuade these high cost expectations for the sum total of our living and working environments, even though ever higher wages are only feasible up to a point, especially now. Plus, these expectations stemmed from centuries of tradable sector dominance which made extensive and costly forms of building capacity/infrastructure possible in the first place.

How can we build more flexible environments which are more responsive and better suited to changes in output scale, during times of non tradable sector dominance? Today, continued progress depends on a better alignment of overhead costs and gains from scale in applied time, alongside what money can contribute in terms of ongoing output. Much of this process means creating physical infrastructure and building components on more lightweight and flexible terms. By way of example, walkable communities will definitely need to include building elements for living and working needs which are transportable by means other than automobiles and trucks.

Fortunately, it is also within our ability to create good work with meaning, even when such work does not come with well compensated salaries. Importantly, however, meaning is subjective. What is fulfilling to one person might just be an aggravation to the next, and selection processes need to be more closely aligned with individual preferences. Time arbitrage in particular, should always be a voluntary process for flexible forms of work association.

In his article, Daron Acemoglu noted that "no known human society has created shared prosperity purely through redistribution". I would add that redistribution isn't just about money, because we can't redistribute applied knowledge from those whose time based product is among our most scarce resources. The only way that knowledge can be increased in society is through active dispersal via time increments - not just via education but in terms of actual use and economic validity. As to the latter, increased participation is necessary, if it is to happen.

Economic inclusion means less judgement as to what is "supposed" to take place in time based experiential product. Indeed, if we can come to terms with this possibility, there could consequently be less emphasis on lifetime education as means to survive a demanding society, and more emphasis on lifetime learning as one of many ways to meaningfully live in a society. With a little luck, this approach could lead to communities which accept widely diverse levels of knowledge and skill as valid paths to economic participation. Let's build stronger economic realities based on what we have already become.

Does Real Estate Contribute to Baumol's Disease?

Is real estate a source of Baumol's disease? Like the chicken and the egg, it's difficult to tease out which comes first - local income averages or local real estate cost averages. And regardless of productivity (or lack thereof) in relation to income, people from all walks of life often need to come together to get things done. Hence income smoothing for social and economic coordination - all the more so at local levels. Still, there are additional burdens from the Baumol effect which dramatically affect overhead costs for a wide range of activity. This in turn can ultimately impact the dynamism of both tradable and non tradable sectors.

Tradable sectors have long employed whatever means they could dream up, to escape the burdensome nature of real estate overhead. Non tradable sectors don't often take this route, and since their product tends to be linked to time and place, they also lack incentive to do so. But why? For one, they tend to conceptualize real estate "exclusivity" as a signal of quality product. Of course this form of quality product carries additional costs for everyone, since much of it is non discretionary. The more impressive and "solid" each building where time based services are provided, the greater the problem for total factor productivity in general.

Real estate expectations such as these can lead to disequilibrium, once non tradable sectors dominate tradable sectors. In this historical instance, non tradable sector dominance is placing too much money in a passive position with limited potential for investment. Plus: Currently, all economic activity is designated solely as money. One issue is that when money represents all formal activity, aggregate revenue ultimately flows to real estate. Alas, non tradable sector dominance can hasten the process. For instance, we currently see it playing out as landlords "capturing the wealth" of prosperous regions. Once a certain amount of real estate becomes associated with services consumption instead of tradable sector production, substantial monetary flows get "parked" on the sidelines.

Nevertheless: The main problem for Baumol's disease in relation to real estate, is that governments won't be able to maintain adequate taxpayer revenue much longer, since the cost signal for quality product is repeated over and over throughout the entire applied knowledge (supply side) chain. Unfortunately, quality signal costs are borne by all individuals and institutions. More than anything, this is precisely what stands in the way of sustainability for applied knowledge in the 21st century.

One way to address the problem is a new approach to ownership - one which not only promotes greater flexibility and incremental options for citizens, but places less emphasis on real estate as a quality signal for time based product. Plus, by making time value a viable economic unit in its own right, less economic value would flow to real estate as a final resting place. Alongside the flows which money creates in real estate, would be a time flow continuum which culminates in greater use of applied knowledge and skill, and greater economic participation by all concerned.

To sum up: Once service sectors begin to dominate, they generate a different macroeconomic reality than what exists during tradable sector dominance. Still, should systems be negatively impacted (making them appear as though "full"), time value could prove a vital economic unit for additional wealth creation, alongside money. Otherwise, too much human potential can end up parked on the sidelines or on the other side of borders. Economic time value could capture knowledge and skills in ways which make them a constant component of economic dynamism. It could help reduce the Baumol effect, and the problem of landlords passively capturing the sum total of wealth value. Indeed: Perhaps Baumol's disease really is linked with what have become unnecessary real estate costs.

Some Broader Considerations re MMT Logic

As the MMT debates continue, James Galbraith recently weighed in as well with a less technical perspective. Even though I cringed a little while reading the article, his "nothing to hide" approach makes it easier for laypeople such as myself, to reflect on what's at stake. From the Boston Globe:

MMT is built on the work of John Maynard Keynes and Hyman Minsky. A core insight is that money in "modern states" - meaning, as Keynes wrote, for the past four thousand years at least" - is defined by government. Money is created (mostly) by public spending and bank loans. Money is not something "out there" that the government must borrow from the public in order to function. It is created as government functions; only afterward, those who take payment may then trade the cash for a bond.  

MMT is about the way the world actually works. It explains why big deficits do not drive up interest rates or "crowd out" private investment, and why big governments in big countries don't go bankrupt. Such countries can support big public debts if they have to. Contrary to mainstream wisdom, there is no "threshold" beyond which public debts produce financial disaster.

Like many who have been influenced by market monetarism, I believe MMT logic puts the cart before the horse, so to speak. It takes for granted what have at times been fortunate sequences of events from market outcomes, but does so without a closer consideration of real economy sources for productive economic complexity. Despite the impressive spectrum of achievements which governments have been able to achieve via fiscal policy; by no means is the present scenario, one that today's successful governments should expect to be able to maintain over the long term. There are simply too many demands on fiscal policy today, for even a portion of those demands to be successfully juggled in the decades to come.

Government redistribution in the U.S. for instance is quite recent. It's easy to forget that national income taxes were only established a century ago. Before this level of taxation became reasonable for most citizens, they needed sufficient exposure to income which could benefit from gains in scale. What guarantee does anyone have that most individuals will have jobs in the near future, which can tap those gains in scale to a degree that governments have sufficient revenue to redistribute at their desired levels? Only consider for instance that services are approximately 80 percent of the economy, and a substantial amount of service activity does not benefit from traditional scale.

Even though governments were once directly engaged in tradable sector activities which generate output on traditional terms, advanced economies have become closely aligned with time and place based activities that scale in terms of individual participation. Yet citizen participation in these areas has been minimized, so that governments and private interests alike could capture additional gains. Since much of government redistribution has been rerouted to the support of high skill endeavour, nations are becoming ever more dependent on debt to fund applied knowledge, and much of this accumulated debt will be rolled over for future generations. What comprises today's safety nets is structured in ways which create long term problems beyond what already exists. If it had already seemed that no one wanted to address the structural realities which contributed to the Great Recession, MMT is a further extension of the wishful thinking that all is well and nothing needs to be done.

While MMT is currently promoted by Democrats in the United States, by no means is this a single party reference point. Alas, both parties stand to gain in the short run from an MMT approach as it makes their policy preferences appear more reasonable. Much of the earlier concern regarding government budgetary burdens has receded into the background, since the Great Recession. There could be a stronger alignment between conservatives and progressives for an MMT framed fiscal policy than is generally recognized, since both groups maintain strong vested interests in how governmental redistribution takes place.

One difference for conservatives, however, is the fact they have more incentive to preserve non tradable sector strongholds at local and state levels, in contrast with a more national framing favoured by progressives. Perhaps this helps to explain why some conservatives are having a negative reaction to "The Third Pillar" by Raghuram Rajan. After all, Rajan's advocacy of greater local community control for economic outcomes, runs counter to the local control which conservatives have exercised with plenty of reinforcement from Washington. Indeed, my own advocacy for new wealth creation in local communities, would exist as an economic alternative which individual states could either allow or disallow.

MMT is another means to claim control over a pie which - even if not shrinking - is no longer growing as in the recent past. For instance, David Wessel in a recent Brookings email, cited a paper from Robert Gorden and Hassan Sayed, and noted that

long term declines in productivity growth in Europe and United States look very similar in terms of size, industries affected, and source of the decline. The common cause, they say, is a decline in the pace of innovation. The authors show that industry composition and drivers of the productivity slowdown have shifted in the last decade in both places. While the slowdown was concentrated in goods rather than service industries until 2005, since that time it has been observed across both sets of industries. And where lack of innovation used to be the dominant driver of low productivity growth in the U.S. and Europe, they show that since 2005 low investment has played an equally important role. This indicates that common factors across industries and countries are now reducing global productivity gains.

Note particularly that despite the growing prominence of services formation (especially in the last half century), its expansion in relation to tradable sector activity is now essentially at a standstill. For that matter, central bankers are still scrambling to manage the fallout. This, even though millions of citizens do not participate fully in these aspects of the economy at local levels, whether via supply side production or consumer demand. How can anyone reflect on this circumstance and assume there's nothing wrong?

Possibly my biggest concern about MMT, is what appears as an implicit assumption that it's okay to create and maintain permanent divisions of skill levels in populations. Chances are the "guaranteed jobs" of MMT advocates would be little more than workplace leftovers which no one with meaningful work would even accept. If that weren't enough, arbitrary skills divisions would be funded by long term debt which becomes rolled over so extensively, future generations inexplicably bear responsible for the lucky ones and "good life" of the present. This is no way to create a sustainable and hopeful future. Do we really want to close the door on full economic participation, especially for the intellectual challenges of our time? We can do better.

Some Thoughts re Mankiw's Textbook Essay

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

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

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

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

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

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

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

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

What Really Preserves the Labour Theory of Value?

Who still believes in the labour theory of value, rather than the more recent subjective version? Or, perhaps there's actually a more relevant consideration: How much personal belief in a labour theory of value manifests unconsciously, instead of at an ideological level? Chances are, unconscious attributions for labour value are a stronger contributor to economic outcomes than what is often debated. One might envision the general equilibrium result as power relationships in skills arbitrage, for that matter.

Indeed, underlying assumptions regarding labour value, greatly affect how high skill human capital has been conceptualized, especially since the workplace transitions of the twentieth century. Professional groups often rely on a non tradable sector structural framework which allows human capital inputs to take precedence over the aggregate outputs of time based product.

In this instance, it turns out that subjectivity cuts both ways. Consider how a subjective theory of value in terms of product, previously benefited from direct correlation with good deflation and recognizable gains in standards of living. It made sense to emphasize the subjective reality of product value regardless of labour contribution, when progress could be largely attributed to tradable sector productivity gains. But more recently, subjectivity has become associated with societal expectations as to what quality product represents. The consequent emphasis away from baseline utility, has muddied the waters for product subjectivity, especially for potential labour value contributions. Alas, quality time based product often includes excessive inputs at multiple institutional stages, before the product output intended for consumers actually takes place.

While my impressions re subjectivity dovetail somewhat with those of the Austrian school, many such discussions feel more relevant for historical periods of tradable sector dominace. Madson Pirie reflects on Carl Menger's many contributions to subjective value, and notes:

He founded what is now called the Austrian school. His crucial insight was to recognize that price is not based on what it costs to produce goods, as traditional economists had supposed, giving rise to the labour theory of value on which the edifice of Marxism is built, but on what the demand is for them.

He adds:

...value does not reside in the object, deriving from its input, but resides instead in the mind of the observer, representing his or her estimation of its worth. 

Even if arbitrary definitions for quality standards reduced the impact of good deflation for tradable product, at the very least many forms of tradable sector product provide standard utility which can be readily discerned. Alas this hasn't proven the case in non tradable sectors, where a reasonable baseline for product utility has long been abandoned in favor of requirements which - among other things - have muddied the waters of true productivity gains.

Given the subjectivity of economic outcomes, a better utility baseline is needed for non tradable sector product in general. A better definition of basic non tradable sector utility - especially for housing and time based product options - could clear some of the present fog as to how aggregate productivity, hence potential economic gains, might once again be measured with confidence.