Low Income Wage Pressures in General Equilibrium

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

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

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

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

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

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

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

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

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

Don't Forget About Basic Resource Scarcities

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

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

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

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

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

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

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

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

"Political" Equilibrium is Not the Same as Natural Equilibrium

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

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

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

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

He continues:

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

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

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

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

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

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

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

Ownership and Output in Excess Nominal Claims

Excess nominal income claims are too common in local service markets which are not discretionary. Governments and special interests alike tend to limit these options, thereby reducing effective management for both our personal obligations and physical environments. If this unfortunate circumstance weren't enough, excess claims in these areas are starting to impact monetary policy as well.

Our potential for ownership and personal responsibility are sorely compromised, when too many markets for basic life needs are narrowly defined. The markets most affected are those involving human capital, skill potential and housing. Alas, these are now mostly intended for the use of higher income groups. What's left for ownership potential, includes traditional housing (with its legal benefits of family inheritance), financial markets for the traditional capital of wealth building, and the formal institutions which now link human capital to status and monetary gain. All of these are associated with equilibrium imbalance and excess nominal claims. 

How might one think about this? What's most affected includes the framing of artificial scarcity. Recently a gap has opened between aggregate nominal income and the output of GDP. Might this gap have been induced by purposeful reduced output (artificial scarcity), while maintaining similar levels of income expectations? And how does artificial scarcity contrast with natural scarcity for such correlations? After all, when income is derived from production via natural scarcities, existing output is more likely close to what is feasible and consistent with equilibrium or GDP potential. Perhaps due in part to the contributions of production via natural scarcities, nominal income has closely mirrored aggregate output for quite some time.

I'd like to think that production reform for non traditional housing and applied human capital, could help diminish the unexpected gap between aggregate income and GDP output. Non traditional housing options and horizontal alignment for services coordination, could lead to good deflation. Eventually such reform could lead to better equilibrium balance with other sources of wealth.

Indeed we've been fortunate that equilibrium imbalance can take centuries to become a macroeconomic problem. It's interesting how Adam Smith worried about equilibrium imbalance in his framing of"productive" and "unproductive" workers (Wealth of Nations), before the closely related Baumol effect became a legitimate concern. Perhaps the fact this process took so long to evolve, is what makes it difficult to relate to in the present.

Just the same, much is at stake. We need to recognize and respond to the burdens imposed by the expectations of our domestic services markets. Should we instead elect not to change anything, even the best NGDP monetary policy scenario would eventually lead to less applied knowledge for societies in the decades to come. Excess nominal claims with no other market options, would mean a gradual loss of our capacity to fulfill the challenges of a modern economy. It's time to consider building a future on more viable and sustainable terms.

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.

Too Many Market Claims on Nominal Income

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

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

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

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

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

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

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

Might Macroeconomic Theory Be Incomplete?

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

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

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

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

And continued: 

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

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

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

Tyler Cowen in turn responds to Noah Smith:

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

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

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

Does Internal Inflation Affect Market Outcomes?

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

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

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

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

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

Cowen also questioned the relative losses in nurse capacity:

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

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

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

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

Service Sectors and the Subsistence Factor

Even in a modern day economy, time based services still involve forms of scarcity subsistence which have macroeconomic effects. No matter the level of skill involved, when economic time value is the main component of final product, it lacks productivity in the sense of full augmentation via physical capital and technology. When providers of time based product generate revenue, if their organizational capacity is expressed as high cost quality environs, the lack of traditional output scale means taxpayers and many others will shoulder the revenue shortfalls. This lack of full resource reciprocity at the outset, has already created future generational burdens.

These long term societal obligations only become more evident, if and when any nation's GDP revenue is dominated by service sector activity. Since high skill services also require local tradable sector wealth in the same environs, it has become more difficult to utilize and disperse valuable knowledge in any place which lacks sufficient tradable sector wealth.

However, these organizational limits for well compensated time based product are partially obscured, given the productive economic complexity of prosperous nations. Not only have knowledge providers benefited from the ability of these nations to utilize national debt for services generation, but also the Baumol effect which accrues to these same prosperous regions -  particularly the wealth spillovers of local tradable sector activity.

Once service sector activity dominates GDP revenue for extended periods, the lack of further market potential on similar terms, starts to become evident. The reason this matters is twofold: not only are service markets far from saturated, what high skill services do exist are creating uncertainties regarding future consumption at all income levels. Closely held knowledge use rights impose limits on productive agglomeration as a whole, as has become increasingly evident in rising real estate values.

Time based product needs to break free of its present dependent market status, in order to become a more direct source of wealth creation. Otherwise the scarcity of high skill time based product can only be augmented in value by extensive human capital investment. Yet this approach is proving too costly, for the knowledge which can still be dispersed for the gain of any society. Time is the best source of human capital investment we have. As such, not only does it need a stronger organizational role, but also a valid economic designation. Otherwise, it will remain difficult to generate the internal reciprocity which time based services could utilize as a source of wealth creation.

Likewise, the revenue limits of dependent service sector markets are responsible for the fact that today's productive agglomeration is increasingly situated in limited regions. Ken Rogoff expresses concerns re these limits in a Project Syndicate article about the rise of megacities. Part of what interested me about his article was a reference to the Lewis development curve in his Project Syndicate article. A Wikipedia article further explains the model:

The dual-sector model is a model in development economics. It is commonly known as the Lewis model after its inventor W. Arthur Lewis. It explains the growth of a developing economy in terms of a labour transition between the two sectors, the capitalist sector and the subsistence sector. 

While the Lewis dual-sector model was representative of historical mid fifties circumstance, some things haven't changed. Time based product, even with extensive human capital investment, faces scarcity restraints which affect the output potential of all nations, whatever their level of economic complexity happens to be. The best way to make time value really count, is to contribute as much skill potential to marketplace capacity as is humanly possible, without resorting to either redistribution or debt to do so.

The labour abundance which Arthur Lewis previously observed, has reemerged albeit in different form. Previously, tradable sector wealth meant that more time value could be augmented with the real wage gains of scale via manufactured product. Yet today, labour abundance has developed in a global capacity, as the labour of all nations is now correlated with tradable sector activity as a less dominant part of GDP revenue. When tradable sector activity requires smaller pools of labour, services are the obvious option. That said, if nations don't take care to generate scale in terms of human potential and aggregate knowledge gains, the subsistence factor of services could ultimately become as much a problem at high levels of skill, as it has posed for lower skill levels all along.

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.

Time and Fiscal Revenue as Scarce Commons

Our economic time is similar to the revenues which accrue to government, in that both are commons where the relevant groups need to effectively manage resource scarcity. Just the same, one often hears how government budgets aren't constrained like family budgets. This is true but only up to a point. Since governmental budgets are in reality a resource commons, competing demands often create substantial problems eventually. Especially if the actual nature of the commons capacity and its already existing claims, is not well understood.

Yet perversely, both progressives and conservatives have become less inclined in recent years to take deficits seriously. Perhaps this unfortunate circumstance explains the recent appearance of budgetary strategies such as MMT in national public debates. Even though some MMT adherents acknowledge the reality of fiscal limits, these natural constraints are mostly downplayed when MMT is explained for citizens who don't follow the dialogue closely.

Despite the financial and monetary tools made possible by the transition to fiat money in the 20th century; at the end of the day, government revenue still relies on taxation. And taxation is everyone's responsibility, however it may be structured. We do future generations a disservice if we ignore this, because taxation is closely linked with the realities of our own time scarcities for getting things done. No one can afford to forget that each of us has the same time available, whether to accomplish personal objectives or fulfill responsibilities to others. While taxes may increase, our time availability simply cannot.

Plus: When our institutions make more time demands than we actually have to give, our collectively held time commons starts to become overfished. It becomes more difficult for citizens to coordinate their activities, and represents even greater problems for individuals who lack the resources to pay someone else to carry out a portion of their responsibilities. Once too many societal demands accrue to our aggregate time potential, the process creates substantial problems across the entire spectrum.

An apt way to envision excess time demands in aggregate, are national budgetary debt levels which are not only substantial for every citizen, but often extend beyond their actual income generating capacity. While we benefit greatly from ongoing per capita productivity gains of recent centuries, national debt obligations still cancel out some of these gains. In order for total factor productivity to improve, we need to gradually decrease the amount of national debt which accrues to all citizens. It has been difficult to visualize this process occurring, yet debt loads continue to shift into the future where they pose additional burdens and obligations for future generations.

Imagine collective or aggregate time potential as a fixed commons, and another relationship becomes evident. When individuals and firms in non tradable sectors engage in price making, their reliance on fiscal revenue allows price making to overfish the resource capacity, or fiscal revenue, which these groups hold in common. Conversely, price making in tradable sector activity is more marginal in its effects. Not only does tradable sector product tend to be of a discretionary nature, it is part of a much larger commons which accounts for the vast majority of global resource capacity.

There is also a skills arbitrage factor which affects the dynamics of time as a fixed commons. When specific skills sets that are basic in nature are claimed by certain groups, thereby increasingly their value, this process can gradually result in a loss of relative time value by groups which are restricted from the use of those skills sets. This is in fact what has occurred in our own time, as twentieth century skills arbitrage claims in the practice of healthcare, have gradually diminished the aggregate time value of millions of citizens by comparison. In fact, these losses are partially reflected in the levels of government budgetary debt as represented by every citizen.

Until recently, societies have done reasonably well in smoothing many aspects of time deficiencies via debt formation and insurance pools. However, both of these strategies are coming under increasing strain. For instance, health insurance is having to shift more of its prior responsibilities onto customers in the form of out of pocket expenses. And just as families are now making difficult choices to find alternative means to a wide array of healthcare expenditures, governments are increasingly having to make hard choices about budgetary particulars as well. In all of this, the U.S. will especially need to be careful to preserve its own fortunate monetary status, by just saying no to excess debt formation wherever possible.

No one expects quick exits from excessive use of debt and fiscal policy, after all these structural circumstance have taken a long time to develop. Still, nations could begin to experiment with debt free approaches to knowledge use and wealth creation, via alternate routes which better reflect the nature of our time scarcity and the constraints of our commonly held resources. Economic reciprocity in the form of symmetric time value is especially needed, to create new wealth and counter the effects of excessive debt and budgetary burdens. It's time to get started, so that no one need mandate debt jubilees in the near future, for debt which simply could have been avoided in the first place.

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.

Exogenous as Expansionary, Endogenous as Steady State

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

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

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

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

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

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

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

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

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

TFP Potential: Time Reduction, or Synchronization?

Is progress slowly being diminished? One reason it's difficult to know for certain, is that progress has also become more difficult to measure. In a recent Econtalk with Russ Roberts, Patrick Collison says he's agnostic as to whether possibilities for progress have actually been reduced. However, he is quite concerned about a measured productivity rate which is "declining very rapidly on a per-person, per-hour, or a per-dollar basis." Collison adds that "our per-person productivity seems much, much lower."

Roberts and Collison also note how total factor productivity is a useful framing for this problem. I would add that this still evolving circumstance could be a result of increased economic activity which doesn't readily scale. Since there are relatively more inputs for time based product than output, there is also less overall revenue potential. That doesn't mean we should cut back on time based services provision in order to achieve gains in output, but rather, think differently about the organizational factors involved. Thus far, in aggregate, there's too little time based services output, in relation to the input which is often required in high skill services generation.

Total factor productivity provides macroeconomic clues for envisioning aggregate output and long term growth potential. However, we still conceptualize productivity in linear terms, which means assuming it is always necessary to further reduce time and labour in relation to output. Indeed: One of the more pressing questions now, is how far will societies travel this path to productivity gains? After all, it's an approach which means eventually excluding larger percentages of the population from formal workplaces. Despite the productivity gains - even if some form of monetary redistribution were also involved - there would still be losses in terms of both output potential and consumer demand. Might some remain convinced it is better to sacrifice potential productivity gains, so as to keep citizens gainfully employed?

There are further complexities for how we think about present day productivity, as well. Even though some aspects of non tradable sector activity are notorious for their contribution to output losses, other valuable service activity has been generated which does not require time based product. Indeed, services which don't require someone's personal attention (or specific locations where that attention takes place) now contribute to substantial productivity gains. Fortunately, not all aspects of today's non tradable sector activity are problematic for continued progress and long term growth potential.

Nevertheless, if average citizens are to preserve vital economic roles in the near future, many could still benefit from a non linear perspective on wealth creation. Time arbitrage, or symmetric time matching, could synchronize many forms of time based product which people find valuable. Time synchronization could make if feasible for time based services to become recognized as a valid form of economic output, rather than societal obligation.

Yet how to know which services individuals especially value? Exploratory processes would allow people to decipher what forms of (voluntary) time based services are most meaningful, versus activities which are only tolerated. How "necessary" are the latter, for instance? Once the differences become apparent, societies could more readily measure what individuals hope to encourage and maintain. In all of this, the concept of time as a separate distinct product in its own right, helps tease out aspects of economic measure which matter at a broader level. To sum up, while it is possible to increase productivity via further reduction of time hours in relation to aggregate output, doing so would not necessarily increase output and demand. Time synchronicity could ultimately increase both.

Notes on the Economic Nature of (In)Equality

Even though structural economic contributions to inequality are far from clear, they ultimately hold more importance than moral rationale, due to how they inevitably impact social outcomes at some point. Increasingly in advanced nations, it is the assets and services which are scarce due to their direct links with time and place, which matter most for how inequality continues to play out for most citizens. We need a better understanding how our non tradable sector expectations and demands - especially when exacerbated well beyond necessity - affect the conditions of general equilibrium.

Nevertheless, much more is still being expressed about the purported morality of wealthy individuals or firms than structural contributions to inequality (and regular readers also know I believe structural matters go well beyond taxation and regulation). Recently, for instance, Greg Mankiw wondered, what if the prototypical rich person is actually moral? Taking an opposite tack, Branko Milanovic (for ProMarket) wrote that "Davos elites love to advocate for equality - so long as nothing gets done."

While it is sometimes understandable to focus on immorality in marketplace activity, we need to understand the long term equilibrium ramifications, when economic activity which is naturally scarce (in terms of time and place) dominates activities which could otherwise contribute to scale and marketplace expansion. In particular, as economic activity which also experiences artificial constraints begins to dominate, it greatly affects general equilibrium outcomes. After a certain point in this process, inequality becomes entrenched in ways which are often difficult to overcome.

Presently, there is little understanding how the natural scarcities of non tradable sectors affect existing inequalities. These sectors are disrupting the circles of sustainability which tradable sector activity has brought to society in recent centuries. Thus far, the natural scarcities of place and time are especially problematic for wide income variance among citizens in advanced nations, where non tradable sector activity has already dominated tradable sector activity for decades - especially since the former offers few viable economic options for low income levels. Worse, the central bank policy response thus far, has been to withhold sufficient monetary representation, given the dominance in advanced nations of activity which does not readily scale.

Fortunately, the positive part of the story is of course that tradable sector growth in emerging nations continues to lessen existing inequalities across the globe. Any time that activity dominates in which ability to scale is a major component, the proceeds are readily spread among more citizens and participants. In particular, the capitalist contribution to inequality is not necessarily as strong as some on the left have imagined. In Why Most Things Fail (2005), Paul Ormerod expressed concern there was no theoretical framework in which inequality could be understood. He consequently questioned the relevance of the general equilibrium theory (pages 50 and 51) and added:

the most relevant feature of general equilibrium theory is that it tells us nothing at all about the degree of inequality in a society.

However, Ormerod also noted that capitalism delivered to a far greater degree than Karl Marx would ever have expected. Re Marx's "iron law of wages" theory:

The theory has been refuted empirically. The share of wages in national income is considerable higher than it was a century ago, and the share of profits smaller. Workers have become better off relative to capitalists. Indeed, we can go even further than that, for most workers have become in part capitalists themselves. Pension schemes, for example, receive much of their income from dividends on equities, which are, of course, paid out of the profits generated by companies.

Again, consider how wage gains accrued over the last century. It is fair to say that in many instances, the majority of tradable sector activity has been a great contributor to equality. As more individuals were brought into traditional manufacture, there were more consumers for output, and output expansion also (gradually) translated into higher wages. Non tradable sector activity lacks opportunities to equalize or redistribute income, in part because of its existing scarcity constraints for both time and place based output. Of course this is a global reality, and a recent sentiment from Edmund Phelps applies to advanced nations in particular:

The West is in crisis - and so is economics. Rates of return on investment are meager.

Despite the fact so many of us have become capitalists - at least to some degree - it turns out that investment for human capital functions radically differently, if and when it directly links to economic processes which don't scale. Output which doesn't scale is even more problematic since much of it has been expected to occur in places where real estate experiences its highest costs. All too often, what investment gains there are in these circumstance, lack many of the positive cumulative effects which tradable sector wealth provides. While we can't negate the importance of product which doesn't scale, we still need to start thinking outside the box, re how to capture and preserve for long term gain, the wealth of human capital.

Alas, we can't fully compensate all who want to provide skills arbitrage on monetary terms, once economies become dominated by non tradable sector activity. But we can think differently, how to achieve defined equilibrium gains when general equilibrium has exhausted its primary means of continued economic expansion. It's important to do so, given the fact inequality increasingly means an inability for many to participate in the present demands which non tradable sectors have imposed on general equilibrium settings.

Might the Fed Be "Purposely" Holding Back Growth?

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

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

Juicing? He adds:

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

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

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

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

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

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

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

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

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

Notes on Money-Income Causality and Sticky Wages

The initial impetus for this post came from David Henderson's helpful encyclopedia entry for Christopher Sims. I found the money-income causality argument particularly interesting:

One of Sim's earliest famous contributions was his work on money-income causality, which was cited by the Nobel committee. Money and income move together, but which causes which? Milton Friedman argued that changes in the money supply caused changes in income, noting that the supply of money often rises before income rises. Keynesians such as James Tobin argued that changes in income caused changes in the amount of money. Money seems to move first, but causality, said Tobin and others, goes the other way: people hold more money when they expect income to rise in the future. 

Which view makes more sense? Upon applying Clive Granger's econometric test of causality, Sims concluded:

The hypothesis that causality is unidirectional from money to income [Friedman's view] agrees with the postwar U.S. data, whereas the hypothesis that causality is unidirectional from income to money [Tobin's view] is rejected.

Regular readers won't be surprised, that I also consider money-income causality effects in terms of tradable sector and non tradable sector contributions to general equilibrium outcome. Even as causality mostly originates via money to income, additional money supply (non inflationary) still originates in positive output changes. As always, real economy growth - or the lack of it - is the long run deciding factor.

While output growth is relatively transparent in tradable sectors, the lack of actual output transparency in (some forms of) non tradable sector activity, makes for too easy assumptions that causality may flow from income to money. Importantly, the income to money causality rationale can prove dangerous as well if carried too far. However, today's knowledge production dependency, which I've referred to as a form of secondary market, is so integral to economic activity that oft extensive price making in these areas isn't easy to discern. Price making in non tradable sector knowledge production can be all the more problematic, since it further impacts supply and demand for all markets in unpredictable ways.

Even though non tradable sector time based product depends on general equilibrium dimensions, once a nation's high skill professionals gain confidence in their country's resource capacity and market definition, wage or income demand becomes resistant to change, hence is "sticky downwards". Chances are, downward stickiness also provides rationale for the appearance of income to money causality, because a nation state will take extensive monetary and fiscal measures to maintain a given general equilibrium level, especially after general equilibrium conditions begin to suffer from too few ares of growth (wealth) origination.

Wage stickiness in tradable sector activity is generally less of a problem. These points of wealth origination are often quick to respond to changes in supply and demand, in that output levels which directly contribute (internally) to nominal income aggregates, can be readily shifted. On the other hand, professional time based product in non tradable sector activity, where compensation is externally derived from existing monetary flows, lacks the flexibility to quickly respond to market changes. Hence the activity of the latter imposes restraints on general equilibrium conditions which may not be easy to recognize. In a recent follow up of an earlier popular post re sticky wages, David Glasner observes:

Market-clearing equilibrium requires not merely isolated price and wage cuts by individual suppliers of inputs and final outputs that will be consistent with market clearing, but a convergence of expectations about the prices of inputs and outputs. And there is no market mechanism that achieves that convergence of expectations.

Consider why this matters, for what have become the required societal inputs which ultimately result in a "final" form of high skill time based product. Presently, the costs of human capital - due to societal expectations - are resistant to the recent ability of digital potential to contribute to learning by doing processes which could greatly reduce these initial cost burdens. Nevertheless, not only does the asymmetric compensation of secondary market knowledge application provide immense skills flexibility, it is integral to the very framework in which much of today's wealth takes place. Sticky markets indeed!

Hence what is now needed, is a digitally enhanced supply side structure for knowledge production, which can generate new wealth capacity to restore a growth frontier along the margins of today's NIMBY general equilibrium. A symmetrically aligned organizational structure creates internal reciprocity, which in turn makes internal coordination a viable economic option. After all, as Glasner rightly explained, it can be all but impossible to achieve the coordination of labour markets at a general equilibrium level. Fortunately, it's still feasible to create defined equilibrium settings at local levels, where the time value of our labour might once again contribute to overall growth and productivity.

Why Isn't Recent Price Making "Excess" Inflation?

Given today's extensive price making activity - particularly in non tradable sectors - why aren't there more problems for inflation, broadly speaking? While price making (in contrast with the resource coordination of price taking) could theoretically still contribute to aggregate inflation, for the most part this potential occurrence has been internally controlled, by both supply side participants and policy makers for quite some time.

Recall that inflation is one possible result, when reciprocity for given sets of time based activities is deferred to uncertain points in the future. Granted, fiscal activity was once notorious for high inflation outcomes. But more recently, despite a high degree of fiscal dependence, non tradable sectors have become more likely to take aggregate redistribution capacity into account at the outset. Imagine for instance, how many members of a conservative healthcare administration might adamantly oppose general inflation, which of course translates into "keeping a lid" on supply side demand as well. Alas, a supply side increase in this instance could either lead to external (general) inflation, if not the relative price taking of diluted wage capacity.

On the other hand, tradable sector supply side limits occur for reasons which aren't closely related to ongoing efforts to suppress inflation. Even though families may face discretionary income limits for tradable sector product, these processes lack the stigma associated with government budgetary limits. Likewise, tradable sector activity responds more to stimulus efforts, since much of this production is easier to ramp up or down as needed. Meanwhile, a growing reluctance to ramp up non tradable sector activity, currently translates into a low growth environment, despite our historical time frame of services dominance.

Despite the recent decades of low inflation environments, there's plenty of reflexive reaction regarding potential inflation, even though actual inflation has scarcely been problematic for advanced nations since the Great Inflation. Yet during the sixties and seventies, monetary policy struggled with various levels of structural fallout, as non tradable sector dominance began to supplant a longstanding dominance of tradable sector activity. In this not so distant past, price making contributed not only to the internal inflation dynamics of newly dominant non tradable sector activity, but also the external inflation of nations, albeit in retrospect for a relatively brief moment in time. Still, plenty of multi sector jostling for space ensued, before central bankers determined the necessity of imposing limits.

Towards the end of the twentieth century, what had been a long held consensus of globally coordinated price taking, started to suffer the effects of locally derived price making patterns and their demands on disposable income. And once overall resource utilization became less capable of spontaneous coordination, capitalism was also increasingly called into question. Not only did sectoral shifts reduce production potential, but also the market capacity which knowledge and skill could otherwise contribute in a 21st century economy. Too many people were needlessly being left on the sidelines. In spite of what were often extensive investments in human capital, many workplaces were unable to capture more than a fraction of the potential their employees were actually capable of.

Since the desire to maintain low inflation levels still runs strong, this will continue to affect what the existing supply side for time based services can realistically provide. One important aspect of this development is the likelihood of minimal healthcare supply side response for retiring Baby Boomers, in the years to come. Any substantial expansion on current price making terms, would only add to fiscal burdens which are already quickly multiplying for other reasons.

To sum up, recent decades of the growing practice of price making, hasn't significantly contributed to general equilibrium inflation. There's an understandable preference to suppress aggregate demand in (general equilibrium dependent) secondary service markets, to prevent this occurrence. Again, the current structure of healthcare in the U.S. also puts additional pressure on the Fed, for it is compelled to acknowledge numerous constituents which are unwilling to face additional inflation.

Paradoxically, even as populations seek more time and knowledge centric services in the near future, they recoil at the additional inflation potential of this price making structure. Yet the time value of services generation, still deserves a valid price taking context. We need new forms of organizational capacity which allow resources to be reciprocated at the outset. Immediate reciprocity for time based services would generate wealth on terms that not only contribute to greater productivity, but also provide a real economy gain that safely generates monetary expansion without undue inflation.

Musings on Strategy, Tactics, and the LFPR

Much of today's economic confusion, concerns individuals who aren't certain how they might expect to be meaningfully employed in the near future. Yet much of this particular discussion has been derailed, given the positive statistics which suggest we're in a good place economically. Many are convinced that societies can ultimately adjust to increasing automation without substantive unemployment issues, just as has occurred in the past. After all, why would discussions about unemployment be relevant, if corporations are having problems finding suitably skilled employees?

Labour force participation "facts" often depend on where one is actually standing, and yet these logistical issues are part of a larger structural story which is not yet well understood. One can almost imagine an economy which "cries out" for more dynamic markets that actually serve as sources for wealth origination. In spite of all the statistical "good news", we could all breathe easier if there were even one plan B waiting in the wings, as protection for unforeseen economic problems.

All too often, societies lack adequate means to respond when substantive economic issues come to the fore, and such moments are often notorious for quickly changed economic circumstance as well. Once real problems do arise and become evident to all, it's difficult at this point to "think straight" in terms of a well considered response. Given the fact we need strategies that are macroeconomic in nature, far more is involved than simply the logistics of time and place. This is a historical moment when we need to take a closer look at what we actually consider to be wealth, which is why monetary policy is also such an important part of the process. Almost the entire twentieth century served as a preparatory phase for the kinds of work many individuals imagined was actually possible to achieve.

A recent post from Farnam Street, "Strategy vs Tactics: What's the Difference and Why Does it Matter?", triggered my own musings. Shane Parrish writes:

In order to do anything meaningful, you have to know where you are going...Strategy is overarching plan or set of goals. Changing strategies is like trying to turn around an aircraft carrier - it can be done but not quickly. Tactics are the specific actions or steps you undertake to accomplish your strategy.

He continues:

Whatever we are trying to do, we would do well to understand how strategy and tactics work, the distinction, and how we can fit the two together. Without a strategy, we run the risk of ambling through life, uncertain and confused about if we are making progress toward what we want. Without tactics, we are destined for a lifetime of wishful thinking or chronic dissatisfaction.

Strategy revisions become necessary, once a given path is no longer straightforward. However, thus far re economic uncertainties, we've mostly discussed a range of policy tactics (such as UBI and public assistance as an option for the already employed) which not only contradict one another politically, but lack any coherent long term strategy. Again, Parrish:

To achieve anything we need a view of the micro and the macro, the forest and the trees - and how both perspectives slot together. Strategy and tactics are complementary. Neither works well without the other. Sun Tzu recognized this two and a half millennia ago when he stated, "Strategy without tactics is the slowest route to victory. Tactics without strategy are the noise before defeat." We need to take a long-term view and think ahead, while choosing short-term steps to take now for the sake of what we want later.

Let's hope that tactics presently being bandied about by governments in general, won't just be the "noise before defeat". Meanwhile, in the U.S. we're mostly left with the usual suspects arguments how government can alleviate low labour force participation via policies discouraging economic dependence, while others continue to hope governments will be able to reimburse those who lack sufficient economic access.

Parrish also mentioned Richard Rumelt ("Good Strategy, Bad Strategy") who wrote, "A good strategy doesn't just draw on existing strength, it creates strength". When thinking about economic uncertainty, Rumelt's insight also helps to explain why new forms of wealth creation are so important - not just to generate a rising labour force participation level, but also to reduce our long run fiscal burdens. The connection between fiscal realities slowly spiraling out of control, and the fact many of us go too long in our lives without meaningful economic connections, has become too important to miss.

Perhaps we're also left without any coherent strategy, since so many of us became worn down from competing theories and mountains of "war chest" statistics after the Great Recession. Like others, I became overwhelmed by statistics in particular - so much so that it finally became difficult to think about employment issues on those terms. Even authors who spoke so eloquently about the need for broad strategies, such as Charles Handy in "The Hungry Spirit" and Ryan Avent in "The Wealth of Humans", weren't able to generate a sustained public dialogue. Not only have many observers long since "moved on" from these discussions, our growing fiscal burdens didn't became a constructive part of the debates. Perhaps it's the fact no coherent long term strategies were created, that we've ended up with political leaders ready to claim victory from tactics which are just protectionist enough to add to the cost burdens of general equilibrium. Let's hope those additional costs for getting things done, aren't mistaken for renewed economic dynamism.

It's perfectly understandable that people grew weary of debating long term economic strategies. At times I've felt just as overwhelmed, as anyone. That said, the political climate is increasingly in tatters, since we gave up on the process in the very years when everyone still had the impetus to take constructive action.

Economic Inclusion is a Decentralized Option

Florian Ranft in "How can we spread the benefits of the digital economy?", expresses concern about an emerging economic model "where value creation is driven by intangible assets and investments", and notes:

Given these dramatic changes, policy makers need to update their economic thinking of work in society and find policy solutions that better reflect the unfolding changes of big tech and innovation that includes shifting the debate on digital from micro to macro and rethinking how the distribution of the economic benefits of digitalisation can be translated into an inclusive growth model.

However, addressing the economic uncertainties of a digital era is becoming more difficult, for centralized economies in which both time based service product and housing costs representative of time and place, have gained a dominant structural position. These forms of product often don't benefit from additional output in ways that naturally stimulate additional revenue for wages, taxation, or other societal needs. In other words, the response to "Where is the path?" (for greater inclusion) in these circumstance, might be "you can't get there from here"!

Alas, it could occasionally become necessary to "start the trip" from somewhere else. At the very least, decentralized options for new employment and infrastructure potential, could make it possible to create stronger marketplace integration and vitality. Sometimes - just as Diane Coyle seemed to suggest in a recent post re work in digital times - it's not enough to simply hope for more inclusive economic conditions and expect a meaningful response. Just the same, this changed structural circumstance has few obvious fixes that readily translate into policy objectives. Hence policy makers may instead opt to give a green light to a new institutional context, in which decentralized possibilities for economic engagement could be explored.

Only consider how intangible forms of production have created a backlash of relatively tight monetary policy, partly due to the increased difficulty of redistributing either wages or providing support for existing infrastructure via centralized means. By way of example, how to think about this argument from Florian Ranft?

A straightforward solution would be to simply readjust the tax burden between capital and wage income. As machines become better at substituting human labour, sustaining a high level of taxes on worker's income may not be a good idea, potentially driving unemployment and inequality. 

Unfortunately, "one size fits all" taxation models worked better when when more tangible forms of tradable sector production - for instance - could be further sourced for revenue and redistribution. Whereas today's machines and automation frameworks may instead augment professional income hours which bear little connection to output gains. Capital enhancing machinery was certainly easier to tax, when it held direct responsibility for aggregate output gains. And 21st century human capital - in relation to earlier capital frameworks - has essentially become a taxation boondoggle.

Meanwhile, lower income level taxation is also where citizens have few means of access to the legal workarounds that are enjoyed by professionals and corporations alike. What much of this boils down to, is the fact less tax revenue will be available than governments now expect to access in the near future. As more residents become responsible for the infrastructure of their own environments, they will need to be able to assume greater roles in the simplification and design of local infrastructure. It's past time, to explore new avenues for building components and infrastructure which allow communities to better represent a full range of income levels.

In all likelihood, the most effective decentralization models of the near future, will be those which - instead of relying on random taxation measures to tend to ongoing needs - instead find ways to generate more marketplace diversity for local infrastructure, building components and time centered services, on direct terms. This would include integrating available revenue for community obligations into local ownership patterns. By making all local participants owners and co-creators, economic inclusion would indeed become a viable option. Nevertheless, the process will likely become somewhat different from the taxation and redistribution expectations of the present.

Granted, it's easy to think of approaches such as tax simplification as ways for individuals with high income levels to escape "undue" governmental burdens. But the reality is that a more carefully thought through approach, would bring a full range of economic activity within reach of all income levels, many of which experience little gain from the governmental taxation they're presently expected to bear. Done right, the tradable sector activity which scales in tangible ways could serve well into the future as supportive of centralized power. Still: It's the intangibles which can be the undoing of advanced economies over time, if and when citizens lack means to more carefully manage the resources they actually have at their disposal.

Ranft, in the above linked CapX article, also mentioned the possibility of "plural ownership models".  Here, the most important question for such endeavour might be "Does the product in question already have the capacity to scale up?"

If it does, there may be little need for communities to organize cooperative settings around these products and goods. Future governments should maintain some leeway in the redistribution of revenue derived from tradable sector output gains, so long as open global trade remains actively encouraged. It's product which isn't readily amenable to scale, that occasionally benefits from the assistance of local cooperative effort. Ultimately, we would all benefit from a better understanding when local economic coordination can assist both citizens and aggregate output, versus the traditional economic framing in which spontaneous coordination for production, will fortunately suffice.