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.

Time as Journey, Money as Destination

Why is economic time an important consideration, especially in terms of GDP measure? Recall that today's GDP is all about what transpires in the current year of our economic journeys. After all, few aspects of life capture this process more effectively than the time commitments we assume, in part to meet our financial obligations. For anyone who doubts the significance of time based participation as wealth creation, the close correlation of nominal income with aggregate spending is an apt example. 

Nevertheless, some of the more obvious forms of wealth end up as destinations such as buildings and other physical assets. Real estate in particular tends to be passive holdings that aren't closely associated with economic dynamism, once they are constructed. Despite their reliable qualities in terms of asset values, passive holdings are mostly indirect contributors to current economic circumstance, and their value fluctuates accordingly. 

Since money naturally flows toward real estate holdings, this passive tendency helps explain why monetary representation isn't completely straightforward in the measure of GDP. Meanwhile, much of our aggregate time value lacks monetary equivalence. Despite the importance of time participation in the measure of GDP, aggregate time value is so unevenly represented, that consumer inflation does not readily correlate with asset inflation in general equilibrium. 

If we are to achieve greater economic stability in the near future, more emphasis will be needed on the journey itself, and not just the destination. By no means is the measure of GDP unimportant in all this, for it is closely connected to how we go about our economic lives. Should economic time become a valid measure alongside money, not only would this increase the overall value of GDP measure, it could create additional market depth for the time value of all citizens. 

Our focus on economic journeys is especially needed for the long term preservation of applied knowledge. By far the most important aspect of economic time, is its ability to function as a vessel which carries experienced knowledge from person to person. Time is the vessel which gives societies the ability to carry forward applied knowledge in recognizable patterns. Even though money preserves activities for applied knowledge to some extent, money will always be better suited for ends than means. Alas, when money is the sole representative unit of economic value, so much of it eventually flows into passive economic destinations, that not enough remains for the actual journeys of our lives. 

Fortunately, time arbitrage patterns could supplement money by ensuring that more economic activity remains in active roles, instead of excessively flowing to passive destinations. Time arbitrage as a valid unit of economic measure, could help ensure that important knowledge flows can be maintained even in historical moments of budgetary and financial limitations. Hopefully, we will be able to create new means to sustain full levels of economic participation in the near future. Time as an economic unit of value alongside money, could bring better balance to the activities of our journeys and their eventual destinations.

What's the Point in Work With Limited Pay?

For some - regardless of past earnings - this question may appear to have a simple answer. There isn't! Yet plenty of work we perceive as either enticing or necessary, takes place via no monetary compensation to speak of. How to think about this reality?

What encourages us to choose the work we are willing to do, regardless of compensation? After all, much more is at stake than a "fat" paycheck. By way of example, voluntary work we deem desirable, may either contain the internal reward of intellectual challenge, or represent our sense of duty to others. For that matter, work of a seemingly mundane nature is worthwhile, since daily chores and routines play important roles in maintaining our connections to our environments. Some will likewise sacrifice reliable paychecks to work on autonomous terms, particularly since doing so makes it simpler to juggle competing responsibilities.

Nevertheless, we find most aspects of work more meaningful, if we aren't constantly having to worry about keeping a roof over our heads and food in our pantries. Should low pay work appear insufficient for meeting basic needs, some will refuse to work for others on those terms. And yet there's plenty of work needing to be done, which for the most part can only be paid poorly. Consequently, progressives and conservatives alike are discussing the possibility of creating either "living" wages, or else wage subsidies as government support for employees (via their employers).

Even though I'm pessimistic as to whether either approach is actually feasible, I'm an optimist about the possibility of creating local environments which better reflect low to mid range wage capacity. Supply side innovation for our non tradable sectors, could create greater personal security and stability, for those whose primary work only gains minimal monetary compensation.

So: Consider the range of work possibilities we might consider for ourselves if we don't also have to worry about keeping a roof over our head, and food in our pantry. Would relative financial stability change our mental framework as to what is possible?

Regardless of automation and AI, modern day economies are likely to need a full range of skills complexity in the near future. That said, a lot of employment options may not pay quite so handsomely as before. One problem in this regard is that existing municipal government budgets may become stretched to the breaking point - an event would lead to knock on effects elsewhere in the economy as well. Even though millions continue to seek high compensation for personal levels of high skill, the reality is many budgets will come up short for this human capital approach. Indeed, while lower skill work has been displaced to some degree by automation, AI is a more recent technological development which could impact high skill levels, especially if it becomes utilized in response to budgetary limitations.

Eventually, more cities and communities are going to need to redirect extensive resource capacity to basic elements of infrastructure maintenance. Hopefully, this will encourage the creation of infrastructure and services which don't cost so much to operate and maintain in the first place! Once we have more local settings which are easier to maintain, more individuals may ultimately find value in pursuing intellectual endeavour which does not necessarily come with a large paycheck, or a pension for that matter.

Another consideration, is that the twentieth century redefined how we perceive many non pecuniary obligations to others. These cultural shifts are quite substantial and are still having ramifications. One reason a marketplace for time value is needed, is to restore important forms of mutual assistance which have essentially fallen by the wayside. Also, the use of skills arbitrage for widespread employment, has contributed to increasing physical distance from friends and families as we age. Time arbitrage - given its encouragement of physical proximity for economic activity - could help restore mutual assistance in ways which allow us to rebuild trust locally.

Should people refuse to work for "peanuts", often there are good reasons why. Fortunately, we can create new forms of institutional means which make it more worthwhile to do so. One important aspect of these processes is greater economic security, via innovation for more affordable local environments. Plus, we commit to a restoration of personal workplace autonomy, for participating individuals. Why so? Only recall that one's ability to personally manage workplace circumstance, is a major reason why people are often willing to work for less money. And even though making room for the personal autonomy of others would include occasional inconveniences on our part, only recall how much we appreciate it, when others extend to us, the same privilege of personal autonomy.

Long Term Commitments Need Non Pecuniary Stability

Some non pecuniary settings are more beneficial than others. Regular readers know the ones I believe could prove most helpful: Simpler building and infrastructure choice sets, plus a wide array of services made possible via time value as an economic unit. Often, non pecuniary advantages tend to be random and otherwise ill defined. However, by clearly spelling out such options, defined equilibrium designations would highlight the advantages of real wage stability over elusive nominal wage gains.

During long economic periods when nominal wage growth is lacking for any reason, non pecuniary economic options could prove more valuable than they might first appear. Once costs of living are dramatically reduced, lower income levels can more readily achieve regularity in their daily routines and work patterns. Reliable economic patterns could certainly give these individuals greater courage to assume the risks of long term commitments, so they might lead normal and productive lives.

Only recall that all income levels need reliable economic patterns, before it is realistic to make emotional commitments with others in good faith. Investment potential for lower income levels, can be quite different from what higher income levels expect to assume. Further, even the best of relationships can become derailed, when life/business partners can't find suitable locations where the resources at their disposal are sufficient for building a good life. Why not create more locations which could thrive with minimal revenue requirements, to address the inequalities of our times?

In a dialogue for Project Syndicate "Say More", Harold James touches on educational aspects of cultural fallout due to inequality:

A very important series of books and studies...have shown that in advanced societies, inequality is driven partly by marriage preferences and social bonding among the "elites" who pass on non-pecuniary advantages in education. The logical conclusion is that functioning families should not be a privilege reserved for an educated upper class. That is the path to social collapse.

Let's be careful, before drawing conclusions these problems somehow need to be resolved on pecuniary terms. Once substantial amounts of wealth accrue to the time value of human capital (relative to tradable sector output), it is no longer a simple matter of utilizing money for existing inequalities, or even getting things done communally in general equilibrium settings. Hence the better solution is to increase the value of all human capital, so that more of society's most important work can be done without the monetary expectations which now accrue to upper income levels.

Fortunately, we don't have to access the education, or even the wealth of the elite, in order to live good lives. We can approach learning and human capital investment differently, so that resource capacity is better aligned for all concerned. We can approach physical environment design differently also. These forms of production reform would do much to address the organizational deficiencies of our non tradable sector institutions. There's still time to avoid social collapse. Why not get started while it is still feasible to do so.

Have Monetary Foundations Lost Their Relevance?

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

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

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

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

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

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

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

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

Inclusive Economies Can't Be Built on Exclusive Pricing

What goes into the creation of a more inclusive economy? For one, there's plenty of additional participation whenever economies are in processes of expansion. While employment tends to be the main focus, expanding economies also correlate with provision of goods in an affordability range for most consumers. Given its association with oft affordable product, tradable sector activity is more beneficial of late (thus far) for greater inclusiveness, than non tradable sector activity. Yet it's probably the growth factor which helps to explain why - upon looking up inclusive economies - I was redirected to a brief explanation for inclusive growth from Wikipedia:

Inclusive growth is a concept that advances equitable opportunities for economic participants during economic growth with benefits incurred by every section of society. This concept expands upon traditional growth models to include focus on the equity of health, human capital, environmental quality, social protection and food security.

Sustainable economic growth requires inclusive growth...an emphasis on inclusiveness - especially equality of opportunity in terms of access to markets, resources, and an unbiased regulatory environment - is an essential part of successful growth. The inclusive growth approach takes a longer-term perspective, as the focus is on productive employment as a means of increasing the incomes of poor and excluded groups and raising their standards of living. 

Much of this is relevant. Where the problem lies, however, is that we are frequently encouraged to conceptualize economic access as mostly feasible through higher wages. Alas, the conditions of general equilibrium tell the story: Say everyone wants and gets a higher wage than they had before. What has really changed? Or, should the cycle of higher wages stop before each group gets on board, how do we frame the moral story of deserving groups which didn't make the cut?

For instance, the local news has been carrying a story of a fire department which demanded wages equal to those of the police department, but the city mayor (a Democrat) resisted. The measure was finally voted through just the same. Now, there's an uproar, as some of the fire department employees will have to give up their jobs to smooth out the consequent revenue problem. In all this, the push for higher wages didn't cause the city's budget to miraculously expand. Likewise, when higher wages are demanded in private sector firms, sometimes the money is there, and sometimes it is not.

Even if we could wave a magic wand so every deserving person, association, or group gets a better wage, it is doubtful this approach can make it simpler for everyone to more effectively coordinate their time based mutual obligations. As it turns out, this is a relatively new economic problem. The uncertainty these circumstance have caused is already making our political environments more fragile, in part because we lack the ability to use our time priorities as a fulcrum at a formal economic level.

Think about it. What we are actually trying to accomplish via time coordination with money as the only applicable fulcrum, is actually quite new, historically. For centuries money has functioned reasonably well in this role. After all, most time based services occurred on the sidelines in ways almost incidental to the revenue flows of general equilibrium, even though some acknowledged a "circular flow" between industrial production and services. For the most part, tradable sectors not only determined divisions of labour, but also the output which defined a mostly commodity based general equilibrium. However, once service sectors began to dominate economic activity and more citizens were brought into the formal economy; despite the recent introduction of fiat money, the Baumol effect is slowly making money less effective as the sole fulcrum between tradable and non tradable sector activity.

When I suggest symmetric time as a way to coordinate time based services, it's not because everyone's time value becomes "equal". In time arbitrage, since everyone would be free to choose who they wish to work with, the challenge is to make one's own time value (and skill sets) desirable to others, so as to make up for one's own time scarcity as much as possible. Doing so, makes it much more likely that - for those willing to put in the effort - it's feasible to maintain sufficient access to a wide array of time arbitrage options.

In other words, instead of functioning as an "equal" wage, symmetric time arbitrage makes it possible for most participants in a continuum group setting, to set up and clear mutual obligations in real time. Eventually, we will need to let go of the seemingly never ending struggle over nominal wages, so as to improve the effectiveness of real wages via production reform in non tradable sector activity. Perhaps we'll know we've arrived, should economic expansions become directly correlated with more inclusive pricing in non tradable sector activity, such as completely new options in home ownership.

A recent Brookings post also brought a new institute to my attention this morning. The "Opportunity and Inclusive Growth Institute" is associated with the Minneapolis Fed. I was encouraged to note they already have scholars working on employment possibilities for the formerly incarcerated - one of the few areas where there is still political agreement for greater inclusion, on the part of both Democrats and Republicans.

While putting this post together I also came across a recent book from Michael Tanner, The Inclusive Economy: How to Bring Wealth to America's Poor. From the Cato review:

Rather than engaging in yet another debate over which government programs should be increased or decreased by billions of dollars, Tanner calls for an end to policies that have continued to push people into poverty. Combining social justice with limited government, his plan includes reforming the criminal justice system and curtailing the War on Drugs, bringing down the cost of housing, reforming education to give more controls and choice to parents, and making it easier to bank, save, borrow and invest.

How to think about these useful suggestions? Perhaps the bad news, at least from a libertarian standpoint, is that no one can realistically expect limited government, anytime soon. For that matter, both political parties are seemingly consumed with taking control over governmental budgets and maximizing political spending to the fullest extent possible. At the very least, from the standpoint of bridge building between parties, positive reforms of the criminal justice system could be on the horizon, and the War on Drugs might finally be over soon. As for parents having more control over educational decisions, what really matters is that students are given more chances to take better control over their destinies from a young age. Perhaps this could also be approached in ways which reduce the fight over public versus private schooling.

The main problem we now face, is that what's rational for non tradable sector bottom lines in terms of exclusive product definitions, has been slowly - but surely - increasing the carrying costs of our markets, workplaces and personal lives across the entire economic spectrum. The best way to bring back a full level of economic participation and marketplace access, is to create more flexible settings for our mutual time priorities and physical infrastructure.

Doing so, would allow both for profit and not for profit endeavour to contemplate their own possibilities for sustainability - because of lower operational costs. What is sustainability, if not our own logical wish to survive in the world, however we happen to define ourselves? When it costs less to tend to the fabric of our lives, we all get the chance to breathe easier, and find renewed energy to meet our responsibilities and obligations. Again, when it comes to nominal approximations, what if we've been going about this "inclusive economy" process the wrong way?

Has GDP Measure Lost Its Practicality?

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

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

She continues:

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

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

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

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

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

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

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

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

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

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

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

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

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

Living Wage, or a Functional (Real) Wage?

Interestingly enough, one can think of mercantilist arguments - while still irrational from the standpoint of international trade - as political efforts to ensure a supply side version of a "living" wage, in the form of manufacturing jobs at home. Yet protectionism such as this misses the mark, since automation is responsible for far more lost manufacturing employment, than globalism. Paradoxically, however, technology and automation contributed to manufacturing output so much that - for a long time - they included higher levels of compensation for low skill workers, than what many service sector jobs can provide. Alas, service sector jobs, and their time based output constraints (which negatively impact nominal wage potential), have partially replaced the low skill manufacturing employment options of our recent past.

Of course, who doesn't want wages which cover basic expenses and costs of living? Once anyone experiences life on these terms; understandably, it can be difficult to imagine, or adjust to, other forms of existence. Even though progressives are more likely to advocate for living wage proposals from a nominal standpoint (which would increase service sector wages as well), there's some unexpected crossover of wishful thinking between these groups, regarding supply side versus nominal wage arguments.

As nations are faced with growing debts and revenue obligations, both protectionism and living wage arguments may appear as though a panacea. How does a government tax low skill income which is scarcely high enough to generate further revenue? Especially if that government already faces restrictions on the taxation of high skill income?

Yet both approaches are at best, little more than shifts in general equilibrium conditions, instead of general equilibrium improvements. In a recent CapX article, Tim Worstall decried the faulty rationale on the part of the Trades' Union Congress to create a million new manufacture jobs. While Worstall's reasoning is sound when he claims "More jobs in manufacturing is a terrible ambition for the British government", he nonetheless falls short with his first assertion:

The ultimate economic goal is not to create new jobs, but to destroy them.

How so? It's not the first time Worstall has made this claim. A brief digression might help. His argument has relevance for total factor productivity gains during periods of tradable sector dominance. Additional output gains in these conditions, can translate into more enterprise generating additional employment in new capacities. At the same time, these production gains benefit from decreasing internal labour hour requirements in the relevant "old" firms. The problem? Once non tradable sector dominance sets in, the earlier advantageous framework of tradable sector output gains becomes less certain, since more revenue in aggregate is being slated for non discretionary costs and non tradable sector requirements. Sectoral revenue imbalance means that employment opportunities become more responsive to political and financial realities, rather than fortuitous changes in general equilibrium output.

Present day non tradable sector dominance, is also a factor in the limited effectiveness of a living wage, insofar as its capacity for meeting societal expectation. Plus, higher minimum wage requirements increase workplace expectations and place a higher floor on employment opportunities. Perhaps what is needed, is the concept of a functional wage which serves to augment productivity options on the part of each economic participant. Such options would ultimately increase the value of a wage at a real level, instead of at a nominal level.

Nominal wage constructs tend to function as a passive response to general equilibrium conditions. One could envision a functional wage (compensation for personal time priorities as mass market commodity) as a more active approach. Rather than merely accepting the limits of a given wage, participants could ask: How might I alter, innovate or otherwise shift my local resource capacity so as to improve equilibrium conditions? Is it possible to place my wage capacity into the larger framework of total resource capacity and potential?

Granted, local rules and regulations in normal circumstance, greatly limit the degree to which such an approach is possible. However, in economic settings where the time value of local groups is compensated as a commodity (which allows everyone to take part in time based coordination), compensation for time would be functional in the sense that all would strive for gains in real wage capacity.

Until now, innovation has been possible in fits and starts, and mostly applied - despite loud complaints - wherever it was possible to do so. It is feasible to apply extensive innovation to both our services capacity and our physical environments. Even though individual participants would also be seeking gains for their own ends, they would (once again) often be able to do so in ways which expand general equilibrium potential.

For those willing to take part, ongoing innovation in a time/space continuum, could transform real wage capacity beyond present day horizons. The compounding interest of knowledge and skill in this continuum, could ultimately defuse the time constraint of services based output in many ways. While nominal wages of time arbitrage would appear quite minimal in contrast with present day minimum wage requirements, real wage gains could still outpace what a living wage could provide in many traditional economic settings. Despite the fact we have limited options for improving nominal wages, the potential for improving real wages via production reform is so vast, it boggles the imagination.

Time Product vs the Marginal Product of Labour

Is the marginal product of labour still a useful concept? It depends, especially since some labour translates into final product for individual consumers primarily due to individual providers. For all practical purposes, some forms of time based activity which translate into final product, have little to do with the marginal product of labour, even though such labour may benefit from augmentation in the form of supporting personnel and/or automation.

Marginal product of labour as concept, could certainly benefit from further discussion. All the more so, since attacks on this concept aren't necessarily grounded in a complete understanding of when the concept fully applies. Hence Scott Sumner provides a useful post for Econlog where he asks "Are workers paid their marginal product? Should they be?" He explains:

There is no obvious straightforward way to think about the marginal product of labor; it depends on many institutional factors.

Clearly, when it comes to different perceptions of fairness re wage distribution, this is an important point on Sumner's part. Yet he highlights the fact average wages have risen faster than median wages, which makes inequality more problematic than would be the case otherwise. Further, credentialing is another aspect of income polarization which obscures marginal product of labour as a valid concept. When wages, income and compensation are closely linked to IP rights, one's time value potential becomes even more complex.

Home ownership is another factor in these considerations, because housing asset valuations can be misconstrued as "excess" capital in relation to labour. Even though housing is representative of income, these aggregates are still a partial representation of wages and income which derive from the marginal product of labour. Hence part of what makes this capital appear excessive, is due to the growing factor of time based product compensation which does not derive from the marginal product of labour.

The marginal product of labour does exist in a relatively pure form, but in many respects it inhabits multiple points along a spectrum for derived economic value. While one end of the spectrum represents the marginal product of labour (traditional tradable sector activity and manufacture), the other end of the spectrum gives way to present day societal expectations for human capital investment. In a pure form, this is time value that is derived solely from product quality, rather than quantity.

Merit affects these distributions in different ways. Merit based skill can lead to both increased quality and output in tradable sector activity, which in turn creates additional revenue for employee distribution. However, merit based skill in non tradable time based product, tends to lack additional revenue based on quantity of output. Consequently, it relies on quality product definition to do the heavy lifting of covering expenses and creating compensation for human capital investment. Last but certainly not least, the middle of the spectrum contains high skill time value which is more likely to contribute to intangible forms of institutional product (both tradable and non tradable sectors), rather than the compensation of individual professionals.

How might someone with a utilitarian perspective respond to these realities? It's complicated. Nevertheless, when it comes to time based product (as one of the most sought after forms of employment of our time!), monetary aggregates can only go so far. Once price making reaches a certain point in the societal coordination of time based services, money loses its ability to fully represent the time value of all would be participants who struggle to gain access on these terms. In other words, money alone can't be expected do the entire job, of providing maximum utility for the benefit of all concerned. Is time based product a detractor, then, to total factor productivity, as contrast with the marginal product of labour? Again, Scott Sumner:

Furthermore, the marginal product of a worker who cooperates with many other workers and many other machines, doesn't necessarily match our intuition as to what the term "productivity" means. There's nothing in marginal product theory to prevent a scenario where one man owns all the capital and earns 99% of national income, and the other 1% is divided between 150 million workers on the basis of the MP of each worker. That's obviously not likely to occur, but it's not ruled out by the theory. 

When tradable sector activity was still dominant in advanced economies, the marginal product of labour was much more relevant for employment compensation. In contrast, a recent jobs report shows the prevalence of sectors with high representations of time based product (education, healthcare, professional and business services) as compared with lower employment figures for manufacture, construction and mining. Yet it's the latter, where the marginal product of labour is fairly simple to discern. If a decreasing percentage of employment is fully understandable in terms of output and revenue potential, how to remain certain of economic stability in the foreseeable future, given the power struggles taking place in today's non tradable sectors?

Alas, the intangibles of non tradable sector activity are contributing to the economic uncertainties which in turn exacerbate populism and nationalism. Let's focus on creating more tangible forms of services generation, so that aggregate time value can ultimately be recreated, for those who are afraid (or angry) they will only be left on the sidelines.

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.

Economic Perspectives: What's Still Missing?

If our present economic framework is "too narrow", where might the fault actually lie? The real measure of economic value, perhaps? Scott Sumner takes issue with a recent article from The Economist, "Economists focus too little on what people really care about", and highlights this quote:

The measuring rod itself often causes trouble. Not every dollar is of equal value, for instance. You might think that if two economists were forced to bid on an apple, the winner would desire the apple more and the auction would thereby have found the best, welfare-maximising use for the apple. But the evidence suggests that money has diminishing marginal value: The more you have, the less you value an extra dollar. The winner might therefore end up with the apple not because it will bring him more joy, but because his greater wealth means that his bid is less of a sacrifice. Economists are aware of this problem. It features, for example, in debates about the link between income and happiness across countries. But the profession is surprisingly casual about its potential implications: for example, that as inequality rises, the price mechanism may do a worse job of allocating resources.

Scott Sumner responds:

This is quite misleading, as it implies that the effectiveness of the price system depends on each person placing equal value on a dollar...That's not to say the price system is perfect; there are issues such as externalities and monopoly to consider. But the specific issue of diminishing marginal utility of income is not really a problem of the price system. A better argument would have been that the distribution of income that results from the price system might not be optimal. Then you could have an intelligent discussion of the pros and cons of redistribution of wealth.

Nevertheless, "optimal" in what sense? Part of the problem for pricing, is that discretionary income and non discretionary income are utilized for very different purposes at the outset. In particular, non tradable sector pricing has not only been more closely aligned with non discretionary price making, but also the time scarcity circumstance that result. If price making requirements leave little discretionary income, some individuals may view money as the only relevant measuring rod that matters for their decision making processes.

Perhaps a broader economic perspective would consider the dichotomy between non tradable sector activity and tradable sector activity, given how these sectors affect general equilibrium conditions. What makes the differences between tradable and non tradable sector activity, so important for price outcomes? While price aggregates may be more relevant for economic stability than monetary aggregates, the long term trajectory of a price level still needs to reflect whether the relationship between actual output and aggregate consumption capacity, might actually be shifting. These changing patterns are important, given how nominal income levels also reflect the degree of economic participation in both production and consumption processes. Importantly, non tradable sectors and tradable sectors continue to travel a very different trajectory, given the differences in their approach to output levels. This variance distorts the relationship between price aggregates and marketplace capacity.

Here's another way to think about price relationships as a measure of value: In recent centuries, the good deflation of tradable sector activity during this time has greatly increased the value of a given dollar for disposable income in general. Indeed, the good deflation of tradable sector production processes, has made some less inclined to view money as a measure of value. Consider George Selgin's response to Scott's post for instance: "Going somewhat further, I would say that the whole idea of money as a "measure of value" is a throwback to pre-subjective thinking that we'd be better off without."

However, the bad (internal) inflation of non tradable activity over time, has made these pricing aggregates less responsive to subjective valuations - especially for lower income levels. Hence the apple in the above discussion was a confusing example, as it is representative of good deflation processes and subjective value.

Interestingly enough, George Selgin's earlier emphasis on a production norm is relevant, here. How so? Locally defined production norms for non tradable sector activity, could generate decentralized environments that encourage good deflation in services, housing and physical infrastructure. These new consumption options would gradually increase the marketplace value of time, so that a larger portion of monetary representation could become discretionary. By bringing subjectivity and discretionary choice to non tradable sector activity, price levels could become a more reliable tool for monetary stability, and provide a better measuring rod for economic activity, as well.

Centralization or Decentralization? Scale is Important

When long term growth potential is discussed, differences in scale also matter. Is the economic activity in question, primarily centralized, or decentralized? For today's advanced economies, the reality of too much centralization, now means too many limits to growth as well.

It wasn't always this way. Tradable sector growth, due largely to its internal wealth generation, meant it included economic characteristics which were simultaneously exogenous (related to global commodity and product value) and decentralized, in relation to the nominal value and nature of a nation's general equilibrium. Still, the growth of tradable sector activity (in recent centuries) allowed advanced nations to substantially centralize economic frameworks, often in the form of secondary or general equilibrium dependent markets.

Once tradable sector activity finally experienced crowding (1981 was a tipping point) by the present organizational capacity of non tradable sector activity, it became more difficult to transmit gains from tradable sector wealth into more inclusive markets for the knowledge use of non tradable sectors. Part of the problem is that much of the latter can't presently scale, and asymmetric compensation for specific skill sets (skills arbitrage), only functions efficiently up to a point. This reality has not only posed issues for today's (knowledge product dependent) entitlement systems, but also democratic governance as a long term political framework.

Only consider how recent non tradable sector dominance also affects the density potential for productive agglomeration in desirable urban regions. When factories were a major component of urban activity in advanced nations, they contributed to endogenous output gains which translated into demand for more local employees. Urban employment demand on the part of private industry, further translated in local greater worker density, which was consequently reflected in real estate patterns that were formerly less inclined to place NIMBY limits on social mobility. Retail settings (and their associated employment levels) have provided an indirect, less reliable revenue source for maintenance of density patterns, by comparison.

Today, supply side scale limitation in non tradable sector activity, is reflected by limits in urban densities as a component of experiential product. Even though physical aspects of housing could readily scale if exposed to marketplace innovation, such potential still requires a geographic land use equivalent - such as decentralized non tradable sector productive agglomeration for instance - in order to gather economic momentum. One way to achieve decentralized productive agglomeration, would be walkable communities which internally design for shared non tradable sector coordination. This organizational capacity would tap into wealth creation via locally defined equilibrium, instead of the secondary market revenue dependence of general equilibrium.

Meanwhile, the revenue dependent status of today's non tradable sectors, has limited knowledge participation so as to boost income - a strategy reflected in the higher income limitations of building requirements in our most sought after urban regions. What's more, when central bankers get anxious to "reduce" high housing prices in closed access areas, they neglect the direct correlation of these housing prices with the high incomes that approximate the closed access of knowledge production participation, in general equilibrium conditions.

When knowledge and skill are mostly utilized as secondary markets in general equilibrium, time based production tends to take on rival characteristics, hence losing the ability to benefit from gains in scale. This, even as technology gains and tax structure continue to augment the professional income of time based product. Understandably, there's little incentive to increase the supply of secondary market non tradable sector knowledge production, given today's general equilibrium restraints. Given this circumstance, where do scale gains for the application of vital knowledge, actually exist?

Non rival knowledge use would require a decentralized form of organization, capable of building revenue in defined equilibrium settings instead of requiring the taxation or subsidies of general equilibrium. In other words, decentralization for high skill knowledge would not function as markets that are dependent on general equilibrium revenue.

Via a local equilibrium "blank slate" for time based product, there's two means of replication for scale gains: First, when time purchases symmetric time, the compensation process sets up a sustainable pattern, whereby non rival knowledge would disperse as one "lit torch" (individual) to the next. Second, there's the greater utilization of time aggregates as a whole, via recorded knowledge use memory structure. Time arbitrage, unlike skills arbitrage, need not depend on non rival status for economic sustainability.

A new institution for this process, the equilibrium corporation, would no longer remain compelled to "harvest" the best skills of today's formal education while abandoning the rest. Instead, a new corporate structure could (finally) generate an internal, informal education structure, which utilizes the multi skill capacity of all who take part. Only recall that the expectations and requirements of asymmetric compensation, all but force the signalling process which many now find so dispiriting.

Among the first rules of specialization in equilibrium corporate activity, would be to "spread around" not just the challenging skills utilization which so many seek, but also a wide array of "leftover" tasks and divisions of labour. Indeed, people too often face a lifetime of "leftover" economic activities, once the "good" (well compensated) activities are taken, should they somehow "fail" the requirements of today's formal educational settings. For instance, one may know how to cook a great meal, but get little appreciation for doing so unless they happen to operate a profitable restaurant! Just by integrating multiple skill levels for all participants, many of life's most basic tasks and duties, could finally regain some much deserved respect.

One reason economic dynamism is no longer a simple matter in advanced nations, is the fact that differences in scale are not well understood, either in terms of how they have affected workplace density or national budgets. Just the same, understanding how differences in scale affect long term growth is important. Doing so would make it simpler for nations to determine, when it is helpful to let go of micromanagement of economic activity, versus the economic activity that could still be profitably encouraged at national levels.

Again, it helps to remember that national government works best when it utilizes its resources to encourage what is capable of scaling up. Representative democracy functions well when citizens vote to influence broad and national infrastructure decisions. On the other hand, direct democracy works best when time "votes" (use) are utilized on symmetric terms. When time purchases time, it becomes possible to regain forms of scale which are intricately tied to human potential and aspiration. When time purchases time, technology is better able to align with what people want to do, instead of the other way around.

Presently, some national governments are still capable of tapping into revenue for strong infrastructure commitments which dwarf what advanced nations can now provide, given their already existing commitments to secondary markets. With a little luck, national governments of the future, will be better able to build their economies in ways which require less non tradable sector general equilibrium dependence at the outset.

Broad Tightening Ahead, and The Phillips Curve Problem

Is it a lack of faith in high labour force participation levels for the near future, which encourages central bankers to continue tightening monetary policy? Or - instead - are central bankers inclined to believe that employment for all who seek it, is strong and will remain so? Something about actual employment and cumulative output gains, isn't quite adding up. According to Bloomberg:

Wall Street economists are telling investors to brace for the biggest tightening of monetary policy in more than a decade.

And it isn't just Wall Street, because other central bankers will be following the lead of the U.S. in this regard. Much of the rationale for doing so, has been based on the Phillips curve as an indicator of an "overheating" economy. But what, exactly, is overheating? Plus: Given an undue emphasis on the Phillips curve - even though its reliability is dubious for mature economies with services dominance - central bankers are likely to continue tightening monetary conditions in the near future. They appear determined to do so, even though dependence on the Phillips curve relationship between employment and inflation, has become problematic.

What makes the Phillips curve an ill suited economic indicator? Among the possible reasons, is a strong institutional trend away from price taking toward price making, in recent decades. Price making occurs at so many levels of product formation, that it negatively impacts overall productivity and investment. In particular, the employment losses which accrue from price making, aren't just a problem for societal coordination. They also make it difficult, to correlate today's supposed "full" employment levels with inflation expectations.

When tradable sector activity was still dominant, so too was price taking, as a coordination factor among many firms. The once natural tendencies of price taking, also meant firms had more options for hiring, based on the optimal resource capacity at their disposal. But as non tradable sector activity came to the fore, its organizational capacity contained numerous incentives for price making, which meant a certain degree of employment potential would be left on the sidelines.

This lost employment potential is doubtless a factor, in the gradual (long term) decline of labour force participation. Unfortunately, the Fed is paying closer attention to recent employment statistics for decision making, instead of what has occurred to aggregate employment levels over time. Indeed, gradual employment losses are reminiscent of the nominal level target losses which were incurred in the onset of the Great Recession, even though those losses took place within a single time frame.

Some are well aware of what the Fed has not considered, regarding aggregate employment circumstance and the nominal income losses of the Great Recession which were never fully regained. Even though market growth presently appears strong, investors are not quite as bullish as economists, this time around. And perhaps for good reason.

Monetary Policy and the Politically Possible

Would temporary price targeting be an improvement for the Fed? At the very least, it could provide limited means by which central bankers are better able to manage problems at the zero bound. Even though "temporary" seems like so little, especially since prices aren't the most relevant consideration, temporary price targeting might be politically feasible. Hence Scott Sumner was encouraged at a recent conference, by a paper which Ben Bernanke presented (Here's an abbreviated version).

Granted, temporary price targeting is a long way from the level nominal targeting rule that would be preferred by many market monetarists. Nevertheless, this may be a step in the right direction. Of course, it's worth pondering: What is it about a nominal level target - especially one that takes nominal income into consideration - which appears politically unfeasible? Or, why is a broader commitment to the maintenance of total spending capacity, still being rejected?

Perhaps the nature of the dominant services economy is part of the problem. Unlike the readily quantitative output of tradable sector activity, much of what takes place in non tradable sector activity - particularly time based services - tells few stories about output that are recognizable in terms of aggregate resource capacity.

However, there's another aspect of this problem as well, which might help to explain some of the ambivalence central bankers appear to have, regarding the stability of aggregate spending capacity. How much nominal income - in aggregate - actually derives from price taking, as contrast with price making? The reason this question is important, is that price taking is a more reliable means of coordinating resource capacity according to broader resource realities.

Whereas price making in terms of nominal income, derives from personal positioning and power in the marketplace. So long as tradable sector activity was dominant, more nominal income derived from price taking for wages and income. It's far simpler to achieve the price taking mechanisms of broad resource coordination, when commodity use definitions for final product are not tied to specific time and place. But with the increased dominance of non tradable sector activity, more nominal income - particularly that of high skill knowledge use - is presently in a position to require demands on resources which don't necessarily reflect aggregate resource capacity. Indeed, the recent income dominance of high skill time based service providers as price makers, could also be amplified by tax law changes.

Only consider that some of the conversation in FOMC minutes in the lead up to the Great Recession, seemed absolutely outrageous. How could policy makers actually laugh, for instance, over the predicament of healthcare practitioners who, due to monetary tightening, were losing customers for elective procedures that were dependent on disposable income? It's hardly irrational, to question whether nominal income demands on general equilibrium in the form of price making, are part of what make central bankers reluctant to consider nominal income as a reliable component of monetary stability.

General Equilibrium Capacity: Rising, or Falling?

Might general equilibrium capacity be lost within a relatively short period of time, in the U.S.? Let's hope not, especially if Kevin Warsh is chosen to chair the Fed. And even if we are fortunate enough to gain someone who understands the danger of excessive monetary tightening: Without a level nominal target in place, supply side shocks could still mean more inappropriate responses from central bankers that may negatively impact equilibrium potential.

However, supply shocks are somewhat different, from the real economy effects of tradable and non tradable sector dynamics. While supply side shocks often lead to short term economic effects, the dynamics of sector formation are more likely to contribute to long term effects. And the present organizational structure of non tradable sector activity, includes a crowding out effect which - if not addressed - could eventually lead to equilibrium loss.

General equilibrium capacity can be expected to rise, as has been the case in recent centuries, so long as tradable sector activity continues to expand. Even though much tradable sector activity has moved well beyond its earlier beginnings in today's advanced economies, national income is greatly supplemented through direct investment links with tradable sector capacity around the world.

Nevertheless, the extent of general equilibrium capacity at a national level can be difficult to discern, for much of it is supplemented with the time based product of non tradable sector activity - especially through redistribution and governmental debt structure. A nation's asset formation in particular, can reflect the equilibrium circumstance of multiple nations. Since the Great Recession, general equilibrium capacity in advanced nations has been somewhat reduced, since central bankers shifted nominal income to lower growth trajectories. Even though the process is occurring in slow motion, general equilibrium capacity continues to be reduced in advanced economies.

The growth potential of service based economies can be misleading, since today's time based services lack a resource based point of wealth origin. Fortunately, it is not necessary for entire service structures to be supported via debt and fiscal means which lack the ability to contribute to real economy growth. If rising equilibrium capacity is on the horizon, we need a better approach to aggregate skills potential. In the meantime, our institutions continue to cherry pick from vast quantities of skills potential, in ways that would only deplete general equilibrium dynamics in the long run.

Time value could also become a point of resource and monetary origination, in the form of a recognizable commodity. This process would actually allow time value to function as a locally tradable good, which is why time arbitrage would become a direct contributor to equilibrium capacity. By allowing time based units to function as vessels for the storage and activity of knowledge and skill, advanced nations could gradually regain equilibrium capacity, via the active use of human capital. Indeed, the sooner the process can begin, the better, so we can finally return to the long term growth trajectory which - prior to the Great Recession - was our monetary means for a more inclusive society.

Non Tradable Sector Dominance Has Economic Effects

More specifically, this historically recent sectoral dominance, includes dramatic effects on wage structure and long term growth potential, which have yet to be addressed. A recent Brookings article, "Thirteen Facts About Wage Growth", provides useful framing in this blog post for what continues to transpire, particularly since the turn of the century. From the article:

Fact 1: The share of economic output workers receive has generally fallen over the past few decades.

While this is true, there's a contextual issue in the above statement, which - if not taken into account - can obscure missing clues re both wage structure and economic stagnation. Due to imbalances (human capital requirements) in required inputs as contrast with outputs, the relative output potential of non tradable sector activity, is dramatically less than tradable sector output. Consequently, less output takes place which could otherwise accrue to either nominal wage aggregates or real wage benefits. That said, contextual framing for missing output is important not just because of its implications for wages, but also the renewed expectations of Washington, for increased revenue through legislative tax cuts.

In the centuries when tradable sector activity remained dominant, for instance, innovation often led directly to consequent gains in both wage growth and actual marketplace dimensions. Yet innovation that corresponds with non tradable sector time based product, tends to be more important for the relief of budgetary burdens, then the support of wage aggregates or marketplace capacity.

Since the structural dominance of input intensive activity leads to less output overall, entire economies bear the additional costs. Even though central bankers clumsily attempt to reduce non tradable sector internal inflation, via less than complete monetary representation, the main effect is instead a slow but steady reduction of a society's total economic commitments. Thus the central banker response to non tradable sector crowding, unfortuantely intensifies the initial crowding effect. Meanwhile, the lack of flexible income options for time based services, has made it difficult for lower income levels to fully participate in non tradable sector activity, in spite of its present dominance.

Fact one required a long response, since the lost potential output of non tradable sector activity is by far the most important consideration, for either lost consumption capacity or sufficient revenue sources for governmental needs. However, I also want to touch on some of the other points raised by Brookings:

Fact 2: Wages have risen for those in the top of the distribution but stagnated for those in the bottom and middle.

When tradable sector formation was dominant, more revenue was composed of income which derived from total output. Management shared this revenue with workers, for workers shared in the creation of the product. Whereas in non tradable sector activity, it is simpler for business owners to assume ultimate responsibility, for the knowledge based product they represent. Given these conditions, today's time based service providers are under no obligation to share output revenue with employees, and may choose to compensate employees according to other criteria.

Consequently, much of today's non tradable sector knowledge based work has wide income variance by system design. While skills variance among employers and employers may not be as wide as income variance implies, there's little room for skills egalitarianism, given the revenue streams which these forms of organizational capacity rely upon. Likewise, much of today's dominant pass through businesses, derive income from non tradable sector activity, which in turn limits potential growth gains from tax cuts.  Again, from the initial Brookings article:

Fact 3: The education wage premium rose sharply until about 2000, contributing to rising wage inequality.

Non tradable sector activity dominance was just beginning to make its full effects known, at the turn of the century. One notes - for instance - when some of the initial losses took place in marketplace share, for a wide range of tradable sector product. Among these were tradable product as represented in my own workplace (at that time), for alternative healthcare OTC remedies.  As revenue claims for non tradable sector time based product began to displace the market share of tradable sector product, less overall output was the result. In aggregate, this also meant that fewer individuals would gain full monetary compensation from either tradable sector or non tradable sector employment.

Fact 7 from Brookings, also warrants a mention:

Workers have become less likely to move to a different state or to a different job, reducing wage growth.

Mobility is more closely associated with tradable sector activity, in large part because its organizational capacity and product definition, is dynamic and still evolving. Whereas, too much of today's non tradable sector activity - especially time/knowledge based product and housing - are rigidly defined. This lack of flexibility only adds to the perception of non tradable sector product as lacking in mobility, rooted in geographic preferences and too closely tied to specific revenue flows.

While most points made in the first Brookings article have relevance, some are more important for economic outcomes than others. However, the second Brookings article (re pass through businesses) reminded me how non tradable sector dominance would reduce growth potential from recently proposed tax reductions. When economies were still tradable sector dominant, reductions in taxes were far more capable of contributing to economic vitality via additional capital to increase output. Today, additional income gains from tax reductions, are relatively more likely to accrue to what is already well compensated skills capacity. The problem? Time based product - regardless of compensation - cannot multiply itself to create additional output and marketplace capacity.

Does Money Still Function Well as "Half of Every Exchange"?

So long as money is mostly representative of tradable sector activity, prices serve as a fairly good measure of societal coordination. However, when time is arbitraged in the marketplace with no direct relationship to its existing aggregates, and time based services become more prominent in relation to tradable goods, total societal coordination eventually becomes less effective.

While listening to a podcast between David Beckworth and Steve Horwitz re monetary disequilibrium, I was reminded of some of the implications, when Horwitz stated that money is "half of every exchange". Even though this representation is perfectly suited for tradable sector activity; alas, it has only proven a partial solution for the introduction (and consequent dispersal) of knowledge use in the marketplace. A different set of dynamics comes into play, for money as representative of the non random nature, of economic time.

Since human capital investment makes additional claims on (all) existing resource capacity, the result in total factor productivity terms, has been additional input requirements in relation to aggregate output. These demand requirements translate into additional claims on existing revenue, such as what also occurs in recessions. As a result, monetary disequilibrium is no longer limited to recognizable recessionary conditions.

Which means today's increased dominance of time based service activity, includes disequilibrium effects which extend beyond the recession conditions Horwitz referred to in his podcast with David Beckworth. Recent recessions are increasingly a result of monetary tightening on the part of central bankers. This almost imperceptible tightening, may also represent an attempt to manage a gap which continues to grow, between the monetary value of finite time, versus that of "infinite" resource capacity. Presently, monetary tightening continues at an almost imperceptible level, even though economies may appear as normal or in recovery.

Inflation targeting in particular, is a blunt tool for central bankers to respond to the Baumol effect, which adjusts the value of time based services to to tradable sector income, in prosperous areas. The Baumol effect helps to explain the difficulties of adopting a productivity norm (as explained by George Selgin), which could take the good deflation of tradable sector activity, into account. The inability to do so, helps to explain the constituencies which oppose today's fiat monetary systems.

Yet interestingly enough, consider why the Baumol effect is actually a natural outcome, of the fact that money has functioned as half of every economic exchange! Since money has to coordinate for both "infinite" resource capacity and "finite" or limited time, policy makers are increasingly faced with a need to adjust nominal income as if time aggregates could somehow remain in a constant relationship with other resource aggregates. Yet this is not possible in general equilibrium settings. Fortunately, however, it is possible to account for time constraints in relation to other resource capacity, in alternative equilibrium scenarios.

Decades earlier, the monetary expectations of non tradable sectors, weren't so problematic. After all, tradable sector dominance included a domestic (national) monetary framework which was easier to understand. For centuries, time based product demands could readily be coordinated via the expanding revenues of tradable sector output. Whereas now, the production norm which would have worked well for a tradable sector dominant economy, is difficult to implement at general equilibrium levels, given the revenue requirements of non tradable sector dominant economies.

Meanwhile, aggregate output as measured by all resource capacity, continues to pull away from the finite limits of time aggregates - not to mention their representative asset formation, as banks become anxious to unwind balance sheets. When money has no choice but to "stand in" for more direct forms of coordination for time based product, the random and growing nature of total resource capacity, introduces elements of political and social uncertainty, for the continuation of knowledge use throughout the marketplace.

Even though spontaneous coordination of time based product (at national levels) remains desirable, limits to growth in this form of knowledge use dispersal, are becoming evident. It's important to maintain fiat money for spontaneous national coordination of time and knowledge value, but with a caveat: make room for local coordination of time based product, in which a unit of time functions as half of every time based exchange.To make this possible, a new institution would allow money to further back these transactions, as newly generated commodity wealth. Time value would finally receive the formal recognition that it deserves, as a basic economic activity.

Indeed, time arbitrage could gradually contribute to a productivity norm for time based services at equilibrium margin. Margin equilibrium adjustments would gradually decrease total factor productivity imbalances. This would allow the gap to grow - undisturbed by monetary tightening - between the valuations of total resource capacity, versus aggregate time value.

By allowing money to reinforce time value in relation to itself as a commodity good, no policy maker need be compelled to shorten (or tighten) the gap between time aggregates and other resource aggregates, in order to fight the Baumol effect. Doing so, is only unnecessary constraints on long term growth. Instead of attempting to manage the distance between finite time value and "infinite" resource value, it would be more conducive to allow money to assume an additional function, as commodity wealth for economic time value.

William Baumol and Equilibrium Imbalance

Among the more notable economists from the 20th century, William Baumol is at the top of the list. It's a shame Baumol didn't win a Nobel prize, and he will be greatly missed. In recent years, I've come to realize how the "cost disease" which bears his name, is important for my own "work path", as well. Could purposeful activity along the margins of general equilibrium, help to overcome economic stagnation?

Yet perhaps it is fitting, how Baumol's confidence in the present day economy, prevented him from dwelling too extensively on this "unsolvable" problem. He highlighted the intractable nature of the cost disease fifty years ago, in Macroeconomics of Unbalanced Growth: The Anatomy of Urban Crisis. Here, I'll borrow Dietrich Vollrath's version of a quote from Baumol's paper, as it neatly condenses some of what I wish to emphasize:

If productivity per man hour rises cumulatively in one sector relative to its rate of growth elsewhere in the economy, while wages rise commensurately in all areas, then relative costs in the nonprogressive sectors must inevitably rise, and these costs will rise cumulatively and without limit...Thus, the very progress of the technologically progressive sectors inevitably adds to the costs of the technologically unchanging sectors of the economy, unless somehow the labor markets in these areas can be sealed off and wages held absolutely constant, a most unlikely possibility. We then see that costs in many sectors of the economy will rise relentlessly, and do so for reasons that are for all practical purposes beyond the control of those involved...If their relative outputs are maintained, an ever increasingly proportion of the labor force must be channeled into these activities and the rate of growth must be slowed correspondingly.

First, it's probably a good idea to note some variations in language use. Baumol refers to services (which include time as final product) as nonprogressive sectors, versus the labour included in tradable sectors as progressive sectors. Recall that Adam Smith, for instance, simply referred to the labour output of services (with no tangible product) as unproductive labour, as opposed to the productive labour of tradable product. However, common designations in these discussions, tend to focus on tradable sector versus non tradable sector outcomes, rather than emphasizing aspects of labour such as quantity or purpose. Regarding tradable and non tradable sector activity in this context, Dietrich Vollrath noted in (the above linked) "Understanding the Cost Disease of Services", the Balassa/Samuelson effect, where he writes:

For my money, the biggest insight Baumol had was to notice the differential in how labor matters to production in goods and services. The subsequent logic, by itself, is not a major breakthrough. The Balassa/Samuelson effect - developed by those authors in articles published in 1964 - is the same idea. They distinguish between tradable and non-tradable goods, rather than goods and services per se, and they are thinking about a cross-sectional comparison of countries, rather than one country in time, but the outcome is identical. Countries that are very productive in tradable goods will tend to have high aggregate price levels (an empirical regularity known as the "Penn effect"), as that productivity drives up costs in their non tradable sectors.

Vollrath added that labels matter, because after all, Baumol's cost disease is a result of incredible affluence. He reasons that given this reality, affluence as such doesn't need a "cure". So far as labels are concerned, it also helps to distinguish the aspects of non tradable sector activity which are more closely correlated with time based product. To this end, I've included primary and secondary market categories, by which to further distinguish labour functions in their wealth creation roles. Among the reasons this distinction helps me, is that real estate as a "nonproductive" feature, occurs for different reasons and includes different sets of dynamics, than the time based productivity issues of healthcare and education.

Real estate in the form of land and housing, tends to capture the nominal income of both tradable and non tradable sectors. Indeed, real estate (as a primary cost of economic access) likely bears considerable responsibility for the diffusion of productive tradable sector income across other categories. In this sense, housing and land provide a strong correlation for nominal income, even though they are not its entire representation. Today, central bankers are reluctant to encourage additional growth in nominal income, and equilibrium imbalance might be one of the reasons. This is one reason why I've experimented with an alternative equilibrium scenario, which could provide a representation between local income, real estate and land use which need not depend on the standard wage requirements of general equilibrium conditions.

Reading Baumol's paper from 50 years earlier, one is struck by what has changed, and what remains the same. While he was particularly concerned with imbalances at local levels and the problems they posed for municipalities, those imbalances have gradually become more problematic for nations as well. Doubtless, some of this is related to misguided efforts to coordinate time based healthcare product via centralized and national terms, particularly in the U.S. Nevertheless, Baumol fully understood the eventual possibility of economic stagnation - even then - for he writes:

Our model tells us that manufactures are likely to decline in relative cost and, unless the income elasticity of demand for manufactured goods is very large, they may absorb an ever smaller proportion of the labor force, which if it transpires, may make it more difficult for our economy to maintain its overall rate of output growth.

Notes on Productivity Considerations

In a recent Brookings article re productivity, the authors wrote:

Improving workers' productivity increases their value in the labor market. It is the main mechanism by which they are able to command higher wages and improve their well being...it will be very hard for incomes to rise without increases in productivity.

Alas, we've been trying to improve worker productivity for a long time, as the costs of human capital investment now attest. Yet human capital investment costs fly in the face of sluggish wage realities. What is the real underlying issue?

Since wages have scarcely risen for decades, it helps to remember why wages were able to rise for so long. Wages rose because output was steadily rising, in relation to other production factors. It's difficult to stress this enough, especially given the level of today's ongoing human capital investment.

There's further rationale for sluggish wages besides a diminished long term growth trajectory. The dominance of today's non tradable sectors are nonetheless dependent on other revenue streams. This is why - instead of being an active contributor to additional growth - these areas maintain a relatively stationary level of output.

Whereas formerly, when tradable sector activity was dominant in developed nations, increased output meant new growth, increased profits and rising wages for a larger percentage of the workforce. In recent centuries, this form of organizational capacity proved a reliable route to rising wages. As time based service sectors gradually expanded in relation to the earlier structure, productivity in terms of potential output, fell at the same time.

What is important, however, is not that high skill (or other) time based services are "unproductive". Rather, they are productive in ways which - while still valuable wealth contributors - don't readily translate into higher wages for more than a limited segment of any population. Consequently, time based services generation would greatly benefit from a new understanding of productivity. Labour abundance and its associated lower wages is something to be reckoned with for the foreseeable future. Hence it's time for a new institution: one capable of turning this unforeseen event towards a broader societal gain.

How might such an institution respond? Imagine a local and decentralized equilibrium, in which the initial product on offer is time based services. These services would generate new wealth, as each individual purchases time units on offer from others. Each matched set of time value would serve as paid "mini loans", to generate active use of knowledge, skill and other focused endeavour. Each set would be backed by asset value and a "safety net" framework of mutually desired activity.

In this setting, the nominal representation of wealth is relative, as contrast with the output that is sought. Even though one's time value might be compared to a small wage, an entire basket of services provides matching possibilities for one's own skills capacity. This time based output could prove quantifiable and easier to account for, than the asymmetrically compensated skills sets which are often buried deep within other institutional functions. And since technology is integral to the process, previous worries about wide variations in skills, would be easier to address.

For tradable sector activity, productivity is a result of output gains from the gradual reduction of labour hours. Even though the time arbitrage described above is a stationary level of time (or labour) output, the gains accrue in terms of time quality and group costs for services which otherwise require the additional factor of extensive human capital investment. In time arbitrage, the investment process accrues gradually, with each individual an active part of skills building and knowledge utilization.

Best: more service product would eventually become available for less cost, than what is presently necessary to achieve a productive outcome. What's different is how the organizational capacity arrives at this result. Lower costs for time based service formation, allow an altogether unique level of nominal income and asset formation, from what is often expected in general equilibrium conditions.

To sum up: output for time based product is a fixed quantity, which makes it different from the often capital intensive structures which so contributed to productivity in the past. Human capital of all kinds exists at an internal level, which has yet to be fully acknowledged in the marketplace. Today's changing output structure need not be a threat, if this new pattern can be harnessed so as to eventually bring the costs of knowledge use within the reach of entire populations. Just as tradable sectors continue to bring a wide variety of goods within the reach of small incomes, the same could also be accomplished for services. A new way to envision service productivity, could more than compensate for a future which includes the lower wages of abundant labour.