Inflation Relief Can't Address the Missing Market Divide

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

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

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

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

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

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

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

Some Considerations re Economic Stability

Already it is evident that pandemics don't provide easy answers, when it comes to maintaining economic stability. How to know, who or what could most benefit from assistance over extended periods? Appropriate fiscal policy is no easy feat, yet governments have few options to directly address workplace losses which have occurred practically overnight.

Granted, fiscal support for pressing healthcare needs will remain crucial in the immediate future. Access to testing and other vital services, will also play roles in the time it takes to regain normalcy. But while support for healthcare systems is paramount, some aspects of financial stabilization may not prove optimal in the months ahead.

Determining where financial stabilization could help most, is even more difficult in a time of growing budgetary pressures and extensive long term debt obligations. Hence two questions on many minds at state and local levels, basically come down to this: Which spending options are discretionary? Or, which spending is absolutely essentially for individuals, firms and organizations - regardless of what happens? It helps to recall that while fixed production costs are generally associated with private firms, individuals and families have relatively close equivalents, in many instances.

Washington has finally completed its deliberations for a massive stimulus package, yet this might only be the first. For example, James Pethokoukis expressed concern that the current round of fiscal stimulus may only address a months' worth of necessities.

Fiscal assistance for supply side losses is all the more challenging, since policy makers are tasked with taking the fixed costs of businesses and citizens alike, into consideration. Still, governments still have little choice but to pick favorites, with a fiscal policy approach. Even now, there are ways in which monetary policy functions more efficiently, to "get in the cracks" where fixed cost remedies can't be readily ascertained.

Nevertheless, monetary policy will face its own challenges, due to extensive supply side disruptions from millions of people staying at home. Given this reality, will central bankers remain willing, to preserve full monetary representation at present capacity? In particular, rising unemployment is going to be a real issue in coming months. A record 3.28 million workers filed for unemployment last week, and as the WSJ noted, "The long run of American job growth has ended." Gred Mankiw adds further perspective from data compiled on hourly employees. Already, "hours worked by hourly employees is down by more than 50 percent", and this is approximately 60% of the labour force.

Fortunately, there are improvements to unemployment claim processes in the stimulus package, which will provide additional access for small businesses and the self employed. With a little luck, once people start to return to their workplaces and the economy begins to improve, today's short term fiscal assistance can gradually transition to the broader stabilization methods of monetary policy.

Will monetary policy prove capable of restoring long term growth, once employment levels normalize? Hopefully, yes. Just the same, perhaps better methods are needed, which can take into account the non discretionary obligations which all citizens face, regardless of workplace participation levels. These non discretionary obligations are vital to general equilibrium dynamics, and the act of recognizing them, might better ensure that full monetary representation continues to take place. Non discretionary fixed costs in our daily lives, are an important focus of current fiscal policy. But hopefully, a broader range of non discretionary obligations will gain prominence in monetary policy, once fiscal remedies are no longer necessary.

Monetary Policy for a Dynamic Welfare Economy

Recently, Kai Weiss (for CapX) in "Can you really have free markets and a big welfare state?", asserted:

It is time to tackle the idea that only the state can provide welfare.

Weiss highlights a recent CapX post from Samuel Hammond, who suggested free markets and welfare states can coexist, and doesn't see why they can't be made more dynamic. For instance, Hammond suggests that social insurance could help free market processes "remain a positive sum game".

How to think about these arguments? In many respects, welfare economics largely reimburses time elements which are an integral part of final product. Presently, much of this activity takes place in dependent relationships which I've also described as secondary markets. Two examples include the compensation of government employees, and healthcare, which - in the U.S. - government now reimburses at least half the total costs.

While it's possible to create a more dynamic and less dependent welfare state, we would benefit from a new form of organizational capacity which allows time value to directly serve as an economic unit. A formal measure for time (labour or work preferences), would lend much needed validity to our societal participation. A basic time engagement standard that contributes to personal agency is all the more important, since today's digital automation possibilities could lead to more integrated workplace roles for all concerned.

An organizational realignment such as this, would allow our time value to play a more beneficial role as a form of primary market. Commodification of time use at a basic engagement level, would transform our time preferences and labour priorities into a wealth creation position - one similar to tradable sector commodities which have served as broader wealth representation means over the millennia.

When time value is indirectly tapped via asymmetric means, this process can eventually distort societal coordination for time based product. As these asymmetries grow, people come to expect money to do more heavy lifting than it can reasonably accomplish on its own as the sole economic unit. Excessive deficit spending is a prime example, of the fact we rely so much on the liquid and fungible nature of money, that the time value many of us hold, no longer fulfills our ongoing societal obligations. Consequently, excessive hopes pinned on money as the sole arbiter of economic value, now means that  - for instance - bondholders, taxpayers, and retirees who hope for full pensions, are beginning to discover how money can't always be all things to all people, in this representative exchange.

We also need for time value to play a larger role alongside monetary policy, in order for monetary policy to fully maintain stability for aggregate time value in the near future. Consider why this matters in light of arguments re labour representation for a nominal target. In particular, there's uncertainty about labour as means to full employment, when non tradable sector activity, which comprises such a large extent of economic activity in general, has been dominated by price making rather than price taking. When too many economic actors make prices which place excessive demands on general equilibrium, this also reduces the extent to which full employment is possible.

If a product is new, price making allows corporations to cover the costs of bringing product to market. However: When product is no longer new to the market, price making often leads to reduced market capacity and employment potential. Ultimately, monetary policy could be more effective and fully representative, if fewer corporations relied on excessive price making. If more companies were willing to adhere to an internal production norm of lower or at least constant price levels over time, the monetary policy result would be more accurate representation of time aggregates as well.

Hence the most beneficial new institutions for a dynamic welfare economy, could be those which also support the principle of a production norm, so that gains in standards of living remain possible. How might this be achieved? The equilibrium corporation would have a dual (tradable/non tradable sector) nature that makes a unique (or defined) local equilibrium feasible. Not only would it rely on internal price taking mechanisms for services generation, but also locally defined environments which generate relative price constants for a diverse range of physical infrastructure and building component options.

A tradable sector role would allow the equilibrium corporation to manage a full non tradable sector spectrum, via means that leave plenty of room for discretionary income potential which can make amends for time scarcities. What's more, this dual responsibility could present a possibility for managed convertibility of central bank representation of time arbitrage as a wealth origination role. Scott Sumner's recent post which highlighted Josh Hendrickson's Mercatus paper, encouraged me to think through some possibilities. The problem for direct convertibility is that it can't be directly applied to labour or in this instance, time value. But given the dual role of the equilibrium corporation, equity shares of infrastructure and building components - given their basic commodity representation - could provide means for central bankers to purchase shares on behalf of originating time value as a primary market.

In order for this to be a remotely reasonable proposition, the equilibrium corporation would have to make an important promise to central bankers and governments alike. How so? Unlike other forms of non tradable sector activity, these institutions would need to uphold a production norm for both time based activity, and the costs of community organization as a whole, via the tradable sector production of infrastructure and building components. Such a promise would be vitally important, given the disequilibrium and sticky markets which have resulted from extensive price making on the part of existing non tradable sector institutions. If standards of living are to continue rising for the foreseeable future, we need more dynamic versions, for what has been mostly structured as public goods provision.

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 Rationale for Time Value as Commodity

How did so many of us become convinced that gold standards are "bad"? Could it be they are simply outdated, or is something else at stake? In a thoughtful post, Josh Hendrickson concludes:

To assess whether the gold standard, or any monetary system, is "good" or "bad" requires careful consideration of the institutional characteristics of the system. A gold standard can work quite well within the right institutional structure. But the same could be said for a fiat regime. To argue that one or the other is inherently bad - or worse, claim that everyone agrees with you - is to do a disservice to those who want to learn about monetary economics.

Regular readers aren't surprised that I'd also like monetary economics to be expressed in ways which at least make basic sense to the public. For one thing, the more a given population understands about the basic workings of their monetary system, the more likely they may be inclined to trust their own governmental institutions.

One of the most useful aspects of today's fiat monetary systems, are their flexibility. As services have become more dominant components of developed economies, fiat monetary regimes help to streamline the process of incorporating time based services and knowledge use into a broader monetary framework. Why don't we tell simpler institutional stories which might encourage citizens to be more confident in these systems?

Meanwhile, the effects of services dominance on equilibrium conditions have yet to be broadly discussed, and even some economists and central bankers don't appear to be comfortable with the monetary claims of services generated wealth. Perhaps we would benefit from a closer look at how services sector dominance influences macroeconomic outcomes, particularly effects on long term growth and overall debt load structure.

Many have wondered why central bankers still use inflation targeting, instead of a more precise tool such as a level nominal target. It could be that inflation targeting serves as a foil for central bankers to dismiss the recent complications which today's services dominated economy present for overall macroeconomic structure. Just the same, avoidance such as this needs to be dealt with, especially since central bankers haven't been faithful to a full level of monetary representation, in terms of what is being produced by all concerned.

Real economy conditions have only become more important, for the maintenance of an appropriate monetary standard. Gold standards existed in a historical framing when not only was wealth more closely associated with commodity dominance, this wealth was easier to measure and ascertain. Indeed, some economists would still prefer a commodity standard in the present. Wikipedia explains that in a fiat standard, the value of currency is set by the federal government, and continues:

Not long ago, America's monetary system was built on a commodity standard, where the value of currency depended on a fixed exchange rate between money and a single good or a basket of goods.

Compared with a fiat monetary standard, a commodity standard was relatively simple. One could assemble a broad sampling of commodities and regularly manufactured product, and glean a reasonably good approximation regarding the dimensions of an equilibrium, in which both manufacturing and services sectors basically circulated revenue flows in balance with each other.

In spite of the flexibility they contribute to spontaneous coordination at a national level, fiat monetary systems tend to distort this circulatory balance in ways that many groups have reason not to completely trust. As governments switched to fiat monetary regimes and set about utilizing extensive debt formation for time based services, an element of uncertainty was introduced, regarding reliable equilibrium dimensions. While a nominal level target is best equipped to represent equilibrium dimension, central bankers may doubt the ability of their governments to maintain present conditions for time based services contribution, to wealth creation in general. In spite of this recalcitrance on the part of policy makers, it remains vital to get monetary representation right, for the wealth and economic activity that people seek to create.

Part of the problem, is that too much services generation and knowledge use have proven notoriously difficult to measure. How many other resources are expected to be redirected, for any given unit of time based service product?

Personal economic time value, as a wealth generating commodity unit, could eventually lend better measurement capacity for knowledge use and overall economic stability. How so? As an internally generated, non debt producing unit of commodity wealth which is accounted for at the outset, time arbitrage could contribute to reliable general equilibrium dimension in the same (primary market) capacity as traditional manufacture. Time based commodity units would eventually help to restore circulatory balance between primary market wealth creation, and secondary market wealth circulation.

Even though fiat monetary systems are reliable for the external compensation of knowledge use up to a point, these highly specific skill rewards aren't fully accountable at the outset. Consequently, fiscally compensated time based product contributes to a debt driven equilibrium which distorts the true capacity of monetary flow potential. Time arbitrage would be instrumental in returning to a status in which equilibrium capacity could be more readily determined.

While fiat monetary regimes are still quite useful in the present, they cannot simply continue as open checkbooks which don't determine the nature of ongoing debt formation in relation to overall resource capacity. By utilizing time value as a commonly held commodity, time based services generation could eventually place less demand on overall monetary representation, thereby generating more public trust in knowledge generation processes.

Musings on Markets and Models

Recently I indicated to my readers that I was attempting to "delay" some mental challenges re primary and secondary markets, to better organize previous material more closely related to unemployment issues. However, my mind has a "will" of its own, and now a growing backlog of notes needs to be dealt with. Hence a recent post from Arnold Kling, provides a good excuse to clear my desk somewhat. After attending a discussion about Ryan Avent's new book "The Wealth of Humans" (am awaiting my copy in the mail), Kling noted:

As the conversation jumped around, I found myself frequently thinking, "Show me the model". That is out of character for me, because I have spent a lot of the last few years criticizing economists' use of formal models. But as people tried to speculate about capital accumulation, wealth distribution, and productivity differentials, I found that I could not follow what was being said. I needed to think in terms of supply and demand curves crossing, income adding up to output, and output equal to labor input times output-per-worker.

For me, a fully functioning and dynamic model, would be one which has sufficient primary market formation, that additional secondary market formation also makes sufficient sense to all concerned. Alas, that is not the case right now, as central bankers attempt to dampen the secondary marketplaces of the present through arbitrary means.

There's also a recurring thought about models which continues to stump me, because simple though it seems, I'm still missing something. Coordination is valued according to equilibrium. Single price structures for time based services in particular, refuse to work the same way in (invariably unique) local non tradable settings, as for the price coordination of tradable sector commodities and goods at international levels. Equilibrium definition makes all the difference for supply, demand, output and growth, because of the ways in which its tradable and non tradable sectors interact and also, respond to already existing factors. How to think about this?

Growth and output depend on the relationships between full equilibrium settings versus partial equilibrium settings. Full (international) equilibrium and its corresponding coordination/pricing mechanisms are best represented by tradable sectors and their related primary markets, which serve as a scaffolding for world wealth. Each secondary market necessarily operates as a partial equilibrium, which due to its construction can only take limited resource sets into account.

Fiat monetary formation also served as a formal recognition (by policy makers) of secondary marketplace importance, in the 20th century. Nevertheless, the underlying reasons for this more flexible monetary policy structure, were never fully resolved or understood. For instance: If central bankers were conscientious to maintain nominal income or aggregate spending capacity, they would be doing a better job of stabilizing the relationships between primary and secondary markets, than is presently the case.

Primary markets are most closely related to the exogenous measured wealth of nations, as opposed to the endogenous formation of (secondary market) credit and other facets of non tradable sector activity. Government backed economic activity and financial markets exist as the most substantial secondary markets, in part because of the extensive economic access and liquidity they make possible. The measured wealth of a nation also depends on its exposure to exogenous or worldwide wealth, which is reasonably captured by the measure of nominal income. For each central banker which accurately measures nominal income, it becomes easier for a nation to more closely reflect their own participation in exogenous wealth creation, alongside endogenous wealth.

While all of government subsidized activity can be considered as secondary markets (due to the partial equilibrium of revenue redistribution), many forms of financial product nonetheless fulfill roles as a point of market origination. Time and knowledge based services presently exist only in secondary marketplace roles, though they have the potential to function as (local tradable) primary markets as well. In the meantime, secondary market roles are not only quite important, they serve as what is sometimes the only means to coordinate time value, which otherwise doesn't readily correspond to general equilibrium market circumstance. Secondary financial markets are all the more important, since not enough of today's knowledge based activity exists in primary marketplace roles.

Perhaps most important for this post, is that secondary markets exist as partial equilibrium valuations which tend to quickly react to negative aggregate demand shocks, that particularly affect the broad valuation of tradable sectors. For instance, when excessive market tightening occurs, the commitments and investments of local high skill service providers can be threatened by slow - but nonetheless steady - disinflation strategy. Too few individuals realize that turning back the clock on globalization, could threaten the worldwide primary market scaffolding that supports today's general equilibrium revenue structure. Most - if not all - investment terms for high skill general equilibrium knowledge use, extensively rely on this framework.

Ultimately, more secondary markets need to be transformed into primary markets, so that the present backlash against globalization will ease. And given the present lack of (local) primary market roles for time value, it is all the more important for all concerned to understand how extensive investment commitments remain threatened by the "cold feet" of central bankers. These forms of knowledge preservation are all we presently have on formal economic terms, because time value does not yet clear (coordinate by price) in a complete marketplace context. Neither time value or knowledge preservation are understood in a complete framework, as a requisite necessary aggregate for human capital.

Given this reality, the fact credit does not recognize but a fraction of personal wealth potential, should make it obvious that credit only exists as a secondary market. Alas, many are fooled by the idea of interest as the price of money instead of credit, even though credit does not exist in a way which allows it to price or coordinate the general equilibrium broad wealth context it purports to represent. The fact credit markets are secondary, also accounts for the fact that inflation targeting is an inappropriate means to capture equilibrium wide dynamics for economic stability.

Consider more closely as well, why credit serves neither as a point of either monetary or economic origination. Credit is a claim on what is already existing economic time value, from previous wealth formation. Credit is an endogenous response, to wealth which is both exogenous and endogenous in nature. And it is only as tradable sector wealth leads to greater economic complexity, that credit can become part of the process.

When central bankers choose to protect asset and credit formation over a continuous level of aggregate spending capacity, they cannot provide a stable lever for the delicate balance that exists between the additional coordination roles which primary and secondary markets of necessity provide for one another. This balance and coordination between the two matters all the more, given the level of dependence which non tradable sectors will continue to have on the exogenous wealth of international tradable sectors, well into the future.

On the Vital Role of the Knowledge Donor

Put simply, a newly constructed equilibrium corporation wouldn't be possible without the assistance of knowledge donors, so this post also serves as an informal appeal to those who may eventually consider the offer. However, some readers might reasonably wonder: why am I discussing such an important subject in a blog post (i.e. digitally) instead of via the normal social circles?

There are several reasons. Health and related issues contribute to a present inability to travel on my part, and I can't be certain whether these circumstance will change. Also: without a college degree, I lack some of the qualifications to approach this matter with others at the level of, say, international summit settings where such issues are ideally addressed. I need to be clear as possible in the years ahead as to what this ongoing project would benefit from, so that others could fulfill similar functions in my stead, should they desire to do so.

On the other hand, I do hope to be able to take part in the organization of domestic summits, eventually. In these summits, other citizens such as myself would be involved who don't necessarily hold advanced degrees. Once my work is finally organized in a viable and understandable form, I'll begin efforts in earnest to reach out (digitally) and share it with others.

Either way, summits would bring individuals together from all walks of life, to explore the possibilities of a directly generated services and time based marketplace for the 21st century. For the participants of domestic summits, college degrees would not be necessary to participate, just as this form of institutional recognition would not be necessary for active participation in knowledge use communities, afterward.

However: in terms of setting up organizational capacity, knowledge use systems and the corporate structure they rely on, would greatly benefit from the personal attention of professional donors. My fondest hope is that this new structure can eventually provide a stronger link between a professional world which is increasingly burdened with society's hopes, and populations everywhere which seek to be a part of progress and prosperity.

While an equilibrium corporate structure would reach out to institutions of higher learning in multiple capacities, professionals are particularly needed to assist with some basic elements in three areas: economic, medical and legal. Many problems in these areas have become difficult to address through general equilibrium means - a factor which helps to explain the name of equilibrium corporation as an alternative equilibrium construct for broader economic access.

Today's healthcare professionals are overwhelmed as governments pressure them to expand their services, even though these professionals often don't have the resources (or backing) at the ready which would allow them to do so. Knowledge use systems could eventually relieve some of this pressure, by making it possible for medical professionals to preserve some of the most important facets of healthcare for broader use.

I mention healthcare first, because of its direct links to issues which so many nations now face. Among the reasons nations are compelled to turn back immigrants at the border, is the fact immigrants require healthcare which local citizens fear is already in short supply. And governments are facing new struggles in their efforts to support present healthcare obligations, as well. For instance, John Taylor reminded his readers that the CBO no longer reports U.S. debt levels higher than 250% of GDP, even though the upcoming fiscal projections are not substantially changed. Knowledge use systems would provide an option, for future generations who remain uncertain about the role of government entitlements for services generation.

Just as basic elements of healthcare would be built into the educational structure of knowledge use systems, so too an understanding of economics, as a basic educational component. Regular readers know that I'm particularly concerned about economic education which includes not only the vital role of money, but also the role of the individual as an integral part of supply and demand. It is the ongoing intersection of time value with resource value, which matters most for populations of all sizes in terms of economic outcome.

Tight money conditions since the Great Recession have led to a relative loss of tradable sector activity, in relation to that of non tradable sector activity. Even though this circumstance is difficult to address in general equilibrium conditions at national levels (especially without a nominal level target), an equilibrium corporation would approach non tradable sector activity through innovative means which gradually diminish its costs, as contrast with those of tradable sector activity.

Several aspects of the equilibrium corporate structure are unique in nature, hence would benefit from legal assistance. Local participants would contribute to a direct marketplace for time value, through a process of mutual employment for ongoing activities in services formation. Incremental forms of ownership make it possible to own building components and land components separately, and time value serves as means to accrue asset formation through mutual educational assistance from a young age. By creating the most flexible forms of ownership possible, the equilibrium corporation can quickly respond to changes, whether those shifts in conditions are environmentally induced such as global warming, or even of a political nature such as secession.

As more individuals find themselves on the short end of economic access, the burdens on those expected to remain responsible, only continue to grow. Today's economic and social issues exist at a level which no longer readily responds to reason or persuasion. Further, asymmetric compensation (through discretionary income and revenue) alone is insufficient for full employment in an automated age, and fiscal measures such as basic income are completely off the mark. As technology substitutes for many of the old work roles, it will take time to restore faith in a future with new marketplace challenges.

Even though symmetric compensation is hardly an ideal substitute for merit based compensation and ability in the workplace, it could nonetheless provide a way for many among the marginalized to regain their hope for a better future. Knowledge donors would provide a most valuable service, through helping to define the original framework where knowledge use systems can begin. At stake is the preservation of knowledge for the foreseeable future, and also, the preservation of time value for all citizens.

Disentangling the Components of Growth Potential

What "kills" growth potential? What encourages it? In some of my earliest blog posts, I emphasized the importance of getting monetary policy right as an initial step, before other courses of action can provide reliable long term gains. Once again, economic stagnation is tempting policy makers to downplay the central role of monetary policy. In much of the twentieth century, central bankers provided nominal stability by closely adhering to aggregate spending capacity. Since the Great Recession, however, they are gradually pulling back on the nominal spending which could maintain present marketplace conditions for the near future - let alone generate new growth. Recently Scott Sumner concluded a post by saying, "The world has forgotten how to grow".

When policy makers become disenchanted with long term growth potential, monetary policy is sometimes allowed to suffer the consequences. Central bankers are reluctant to commit to a level target, and indeed doing so would effectively create a regime change. Hence monetary policy advocates may be relegated to "fair weather friend" status, when policy discretion substitutes for the stable anchor of a nominal target. Worse, the growing focus on financial factors - alongside an inexplicable desire to downplay supply and demand in economic discourse - continue to weaken growth potential. When central bankers take a non monetary approach, people and the economies they attempt to uphold, suffer the consequence.

Does it matter that policy makers are beginning to experience populist resistance? Unfortunately, resistance as it exists now, is quite ill defined. Too much confusion exists all around, as to how faulty fiscal and monetary policy contribute to existing problems. Few citizens can scarcely discern the importance of accurate monetary representation. It doesn't help that some publicly argue that money is not even "real", even as money is required for the most central aspects of our lives. Where to begin? I decided to do a quick review of some common reference points, and compare them. The FT Lexicon describes the real economy as:

The part of the economy that is concerned with actually producing goods and services, as opposed to the part of the economy that is concerned with buying and selling on the financial markets.

First, note that even though the above description of a real economy includes both public and private enterprise, it is incomplete in the sense of measured real GDP (RGDP), which includes the ongoing activity of financial markets. That's quite a difference in interpretation, regarding what is real. When I next googled RGDP, Investopedia redirected me to GDP, as " a broad measurement of a nation's overall economic activity."

In all of this, it's not hard to see how the uninitiated could get a headache, trying to decipher a story line as to existing wealth and activity which could be considered the domain of governments, Main Street, or Wall Street. Even if the underlying stories existed in picture form, finance would act as a thick layer of paint which coats each canvas.

Among these already confusing components, one finds the supply side economics which previously held such promise for long term growth. While the term is used by advocates of private sector activity such as myself, plenty of government engagement is involved, nonetheless. From Wikipedia:

Supply side economics is a macroeconomic theory which argues that economic growth can be most effectively created by investing in capital and by lowering the barriers on the production of goods and services.

This opening sentence sounds quite promising. However, how long has it been since society elected to invest in human capital so as to lower barriers for services production? I'm reminded of a recent comment from Arnold Kling:

One of my fantasies is of a classroom in which a tenured professor at an accredited institution of higher learning says "We must have free trade", and a few students leap out of their chairs and shout "You first!"

Too many supply side policies support pro business (both public and private) intentions, instead of assisting pro market growth. Consequently, citizens are now less trusting of an approach which could have created positive results for all concerned. Even though I identify as a supply sider, I find myself frustrated by supply side policies which mostly rearrange already existing wealth, instead of creating a more accessible marketplace.

Last but certainly not least for this post, are structural concerns, which were addressed by Wikipedia with structural change.

In economics, structural change is a shift or change in the basic ways a market or economy functions or operates...Historically, structural change has not always been strictly for the better.

Regular readers are quite familiar with my attention to structural factors, which pose substantial challenges in terms of long term growth potential. Still, it would be easier to develop a simple story line about the present inadequacies of asymmetric compensation, were it not for the fact that central bankers are still compounding the economic pressures which nations already face. It's time for a regime change.

Economies Would Benefit From an Equilibrium Approach

Economic access is not simply a matter of "too much" or "too little" income or taxation. "Too much" or "too little" in relation to what, exactly? The interconnected nature of general equilibrium conditions, means any attempts to remedy specific parts will affect the whole to some degree. Hence general equilibrium problems would benefit from public dialogue which transcends the ongoing battles of relative wages, income and taxation.

When policy makers approach problems from partial equilibrium framing, often the result is greater equilibrium imbalance. An apt example for equilibrium perspective, is the recurring battles over gun control. Instead of imposing yet more rules and laws yet again, why not work together to redress equilibrium imbalance? Doing so, would ultimately mean that people have fewer incentives for using guns on one another in the first place.

General equilibrium settings can be envisioned as shared marketplace capacity, between tradable and non tradable sectors. The complex effects these sectors have on one another in terms of growth capacity, are not yet well understood. This is all the more problematic, given high level government involvement in non tradable sector activity. Even though government "crowds out" private sector activity, too much of this process occurs with the implicit "blessing" of the private sector - in spite of protestations that circumstance are otherwise.

Sometimes, government crowding out almost seems beside the point, as time based product is called into question because it is not generated through viable and sustainable means. Here, knowledge applications are questioned, because of the fact they take place on terms that are simply too open ended, in terms of shared resource capacity. In other instances, the wrong parties are continuously blamed for supply side deficiencies, in what have been deemed crucial areas for applied time based activity. It does not seem plausible, that the marginalized get the blame for seeking access to the forms of time based production which they have not been deemed capable of providing on their own.

How does a lack of equilibrium balance contribute to so many problems? Tradable sectors developed their share of wages and income in relation to actual resource capacity, i.e. that of currently existing revenue and capital. This setting also actively contributed to ongoing product formation and marketplace expansion. A balanced equilibrium would imply that non tradable sectors take a similar approach, but alas this was not the case. Rather, today's non tradable sector activity is a completely open ended structure, which also has not proven capable of gauging aggregate resource capacity in real market terms.

Non tradable sectors estimated the aggregates of wage and income, based largely on whether or not political factions were in their favor. As a result, this open ended structure - which did not lead to direct (i.e. time or resource backed) wealth creation - meant permanent dependence on tradable sector wealth, in aggregate. Had existing resource capacity for national tradable sector activity been taken into account (also in relation to similar international tradable sector activity), non tradable sectors would not face the current wage/income impasse which now contributes to worldwide productivity losses. As a result, hiring is either partially curtailed or continued at lower levels of compensation.

Just the same, non tradable sector formation is likely somewhere beyond the early stages of crowding out tradable sector marketplace capacity. Should this crowding out process be left unchecked with no marketplace alternative, central bankers may incrementally decrease the level of aggregate spending capacity which represents both sectors.

A recent post from Marcus Nunes, shows how this process has already been occurring for some time. There's a way to think about the gradual shift downwards, which puts additional pressure on both nominal and real growth levels. How so? In some time periods, non tradable sectors will claim a relative greater share of total resource capacity than tradable sectors. Their relative inflation, as contrast with the good deflation of tradable sectors, also decreases the tradable sector representation for that period, when a hard inflation cap is in place. Since this adjustment draws down total existing resource capacity from which non tradable sectors derive their revenue, inflation caps gradually draw aggregate spending capacity downward.

Is it possible to set non tradable sectors on more sustainable paths, which do not continue to draw down resource capacity for both tradable sector activity and combined activity overall? One reason for today's political gridlock, is the fact it's difficult to fight the multiple battles of equilibrium imbalance within the structure itself. UBI can be thought of as such an attempt to fight a problem at general equilibrium level, from within. In a recent post, Scott Sumner noted the lack of political feasibility for UBI, because of the political issues involved. How does one willingly "step away" from government promises such as Social Security and Medicare for instance, if there are not viable long term options to reduce risk?

Much as inflation targeting represents an arbitrary cut off point on the part of central bankers, governments also become inclined to throw up their hands and institute arbitrary cut off points such as UBI when general equilibrium issues have gone unaddressed for too long. Rather than everyone having to face arbitrarily cuts for entitlements in the near future, why not provide the choice of an alternative equilibrium approach in the present?

Today's government promises are risky, but the only thing more risky is relying on private enterprise which does not yet have a built in continuum option for previously applied time value. The best way to deal with risk in a manner that approaches a government promise, is to build an internal time continuum which links time based wages to asset and service formation. It's an approach which still leaves the participant free to gamble their resource/income equivalency if they wish, but in which one's time/wage equivalency can maintain the protection of both individuals and the participating group.

Alternative equilibrium is an equilibrium response which need not jeopardize existing equilibrium structure. No one set of economic rules should have to suffice for multiple differences in lifestyle preference and wage/income potential. Democracies only fall into disrepute when opposing tribes attempt to impose their beliefs on one another, as if there were no other choice but to do so.

Economics "Rescue"? More Pragmatism Needed

In a recent post at Bloomberg, Noah Smith expressed hope that academia, i.e. the "ivory tower", would gain a more relevant economic role in the near future. For Noah, the DSGE model is part of the problem. He summarizes the article with these thoughts:

When we understand the pieces of the economy better, we'll have a much better chance of grasping the whole. If this continues, maybe the ivory tower will have more relevance for the Fed, the financial industry and maybe even for our coffee house discussion.

Brad Delong enthusiastically backed Noah on the irrelevance of the DSGE model, while in response to the overall exchange, David Andolfatto explains for his students why he continues to find the model useful. Meanwhile, Narayana Kocherlakota took the discussion a step further:

Academic macroeconomics is specifically designed to be of limited use to policymakers like the FOMC.

Should Kocherlakota's statement be considered accurate: given the importance of the FOMC, since the Fed largely consists of academia, there seems to be quite a communication problem! Regular readers already know how I feel about the matter, which is summed up by this post title. Much of the problem stems from ideas about resource patterns that developed when human capital (in aggregate) seemed less important than other forms of capital. As a result, twentieth century economics was predicated on the assumption that individual economic actors weren't really all that important - either in a monetary or fiscal framework. Likewise, the importance of money's role was also downplayed in the twentieth century economic model.

One could say that the first rule of economic pragmatism should be to faithfully represent the aggregate spending capacity, of a nation's level growth trajectory. Commitment to a level nominal target, can also be thought of as the commitments which economic participants have already assumed for one another in the marketplace. When central bankers refuse to provide this basic level of monetary representation, productive capacity is all too easily lost. The only difference between today's ongoing loss of productive capacity - versus that of the Great Recession - is the fact supply side capacity continues to dwindle at a less obvious pace.

Also, one of the most concerning issues since the Great Recession, is that policy makers have yet to realize the importance of sustained labor force participation, as important for long term economic viability. Even so, the particulars of labor force participation are important for central bankers insofar as the latter provides accurate monetary representation, instead of being distracted by the needs of government and credit driven institutions.

The hard work of production reform, is not the responsibility of central bankers. Unfortunately, too many business interests have refused to acknowledge their role in ensuring broad marketplace participation and economic access for all concerned. When both public and private interests gradually hire fewer workers over time, the lack of economic participation means problems for the shared responsibilities of infrastructure, as well.

No new economic models would provide useful application, if they don't acknowledge the reality of the conditions which have gradually led to economic, hence social and political gridlock. All political parties now have limited options, due to the way that state and national budgets have been affected by countless earlier decisions - particularly those of "kicking the can down the road". Should political factions be unwilling to squarely face what has actually occurred, economic conditions will gradually decline, regardless of who is in power. For a long time, academic discourse happily remained beyond the political fray. Now, in order to remain relevant, academic discourse will need to dig deeper, to provide assistance in what has become a political, social and economic impasse.

Economic potential for the 21st century, resides in human capital. But governments cannot fulfill the roles of human capital which need to take place at local levels in the context of time based product. Meanwhile, governments have little choice but to short the human capital investment which has already occurred, in order to meet their budget requirements. How will policy makers respond to the growing gaps in marketplace representation that are already taking place? For instance: neither the public or private interests which negotiated Obamacare, were willing to acknowledge the need for human capital and time based product in terms of a truly free marketplace.

These knowledge and service based roles are precisely the ones which governments and special interests seek to control. However, it is this lack of willingness to allow true freedom for services provision and time based product, that makes long term austerity such a threat for many nations. The realities of supply side factors are important for any economic model, since growth and continued prosperity is not possible if they are ignored. The coffee house discussion which Noah Smith spoke of, also contributes to public understanding to some degree. But it is the other private and public interests he discussed which need a better understanding among themselves, if future economic models are to really matter.

Notes on Savings, Inequalities, and Global Arbitrage

How might anyone who needs to save for future expenses, do so when their wages and/or income are small? As individuals find themselves needing more money for retirement, overall investment gains have become less certain. In "Nudges Aren't Enough for Problems Like Retirement Savings", Eduardo Porter writes about a problem which is larger than government policy nudges:

But here is the reality check: We haven't yet nudged ourselves out of a retirement trap. Traditional defined benefit plans have all but disappeared in the private sector, but only 40 percent of American families in the bottom half of the income distribution have any form of private savings plan. And even those who have one, their savings total, on average, is just $40,000.

Regular readers would not be surprised that I find the retirement trap to be another general equilibrium problem in the U.S. Believe it or not, $40,000 may sound like a lot to some individuals on fixed incomes. Still, this limited amount can mean hard choices have to be made, in general equilibrium conditions.

For instance, consider someone with $40,000 (other than one's home) who has been retired a decade or so. No outstanding debt, but whose future expenses for (older) home, auto and of course health needs, are uncertain. Which home, auto or health cost concerns, might be reasonable without financial repercussions? With a little luck in the long run, perhaps two out of three maintenance costs will prove viable. One problem with maintenance needs is we don't always get to choose. As a result: for those who are married, substantial healthcare expenses may be an option for only one partner. This is just one of the reasons I advocate for new organizational patterns, re knowledge based services formation.

Decades earlier, higher interest rates provided more assistance in terms of lifetime savings. However, the long term decrease in the natural interest rate, is not something the Fed can remedy by attempting to maneuver a higher interest rate on its own, all the while hoping the economy will "fall in line" with the wishful thinking of policy makers. Broader monetary representation is needed in the form of sustained monetary support, before the natural interest rate can finally rise of its own accord. Timothy Taylor recently asked, "Will the causes of falling real interest rates unwind?", and noted:

Notice that the decline in interest rates is global, which suggests that global economic factors are the driving force rather than national-level economic factors or policy decisions.

I would add: the fact this circumstance is global, does not remove the onus from central bankers, in terms of their ongoing responsibility. Their overreaction to what is mostly imaginary inflation at national levels, is now beginning to damage tradable sector activity. Arbitrary inflation caps have already reduced GDP worldwide, which only leaves less room for employment and marketplace capacity in non tradable sectors, on fiscal terms.

As fiscal budgets become more limited, non tradable sectors are responding by emphasizing knowledge product as (supposedly) more important than the value of time based product. However, these losses of aggregate time value in the marketplace, are a hidden supply side contributor to insufficient aggregate demand. Knowledge product - as a substitute for compensated time value - affects broad variations in wage structure which limit marketplace formation. In all likelihood, a dearth of matched time investment (i.e. aggregate time investments versus aggregate employment options), contributes to a low natural (Wicksellian) interest rate.

However, changes are also needed in local and global investment patterns. How so? For lack of a better way to express imbalances in wealth holdings, today's methods for global arbitrage in financial structures are actually too efficient. Consequently, the global "game board" is set up so as to make it possible for the most skilled players to accrue much of its wealth. This is another factor for the lack of overall time value, in relation to other forms of resource capacity.

Rather than attempting to redistribute concentrated wealth - which is hardly easy to do under any circumstance, it would be best to move some game boards for financial activity to local levels. And while global financial structures for tradable goods are positive in that they generate a broader marketplace, the same does not hold always true for non tradable wealth, which needs to maintain strong links to nominal income and time value. Hence non tradable sectors are in need of local financial networks, which can generate internal monetary flows for asset and services formation.

By recreating non tradable sector investment at local levels, those who participate through small wage and income structures, could make their investment options really count. Another important consideration, is that internally held financial structures would provide more liquidity, than what has been possible for those whose savings exist mostly as housing stock.

Tradable Sectors are Doing the Heavy Lifting

Lately I've sought to pay more attention to "fine details". Is it just my imagination, or is the dialogue - which now includes the reality of negative interest rates - becoming more complex? Whatever the case, economic events around the world, are occurring at a fast and furious rate. It's a combination which has slowed down posting on my part!

In all of this, tradable sectors are expected to do the heavy lifting for the economy, in spite of reduced labor force participation (to buy these goods) and lower commodity prices due to tight monetary conditions. And even though negative interest rates could be likened to central bankers tossing a bone to tradable sectors, this isn't a very meaty bone. Tradable sectors may become quite thin if this is the only bone they can expect...

Tradable sectors should not have to shoulder the burden indefinitely, given present day restraints on long term growth. And table scraps from the government - should these sectors lose too many battles for aggregate demand - would be the worst Faustian bargain possible. In the meantime, how much "back door" liquidity would be provided on their behalf, through negative interest rates?  Only remember that front door liquidity remains closed, as the real central banker policy (IOR) contracts monetary policy by diverting much needed resources to asset stabilization. As Scott Sumner explained in a recent post, the issue is not that negative interest rates are "good" or "bad". Even so, they would certainly prove an inconvenience regardless of income category. Ah well you can't always get what you want.

As to the meaty bones of IOR - the ones which are being used in lieu of nominal income to stabilize non tradable sector assets, Bill Woolsey writes,

...make no mistake--the Fed's policy of paying interest to banks for holding reserves, is a policy aimed at keeping nominal interest rates up. 

Readers are well aware that I would rather see assets - and the natural interest rate - stabilized over time, with a nominal level target that would gradually restore marketplace potential. Few assets can remain secure until a level nominal target is maintained, so that income provides for asset stability at the outset. What is significant, is that the Fed finds present monetary reality a bit distasteful, even as central bankers try to disguise the fate they brought upon themselves.

Bill Woolsey also notes that for negative rates, interest rates are a price. It's not difficult to imagine the present price as reflecting the multitudes: patiently standing in line waiting their turn at life, due to imbalances between tradable and non tradable sectors which have gone untended for too long. While negative interest rates sometimes prove necessary, it is doubtful that many populations would be comfortable with them as a long term measure. This particularly concerns me, for too many recent Fed adjustments - when they do occur - are being treated as though permanent.

Regarding interest rate "pricing", Bill Woolsey also notes:

With interest rates, however, the relevant coordination is savings and investment. Saving is that part of income not spent on consumer goods and services. And investment is spending on capital goods. If the interest rate which results in saving and investment matching up is less than zero, then that is the right interest rate.

Even though investment is spoken of as high level (financial) activity, think how this perception is changing for the average individual. Today, some of the most heavily advertised "investments" include time and knowledge based services. These services, by extension, are "supposed" to provide the investment which leads to economic access - whether early in life such as higher education, or (possibly) later in life such as the "right" dental work. How much relevance still exists for the original rationale, given the fact investment is initially approached as personal improvements which might not pay off?

Hence the first set of investments needs real results, before the second investment group can be considered viable options. The problem for many is not that they aren't investing enough, but that initial personal investments don't open the door for "follow through" investment.

Yet the problem remains hidden, because this more recent set of investment expectations revolves around human capital. And human capital remains in the stranglehold of non tradable sectors. And since more seek economic access through investment in human capital than the marketplace can absorb, nations continue to move towards below zero interest rates. It's time to reverse this tragedy, with a marketplace for time value. Let's give the tradable sectors a break, and start the process of renewed growth.

Notes on Endogenous and Exogenous Growth Factors

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

When The Political Chickens Come Home to Roost

Perhaps - crazy as it seems - today's unsettled political climate has been a long time coming, given the amount of discord and refusal to cooperate in high places that has already occurred. Now, as governments are increasingly forced to spend less, Jim Geraghty of the National Review asks, "What if the American people don't want smaller government that spends less?"

Scott Sumner responds:

It's meaningless to talk about public opinion on "big government". The public doesn't even know what the term means...And since their views on taxes and spending are impossible to meet, in a very real sense they have no opinion.

No one really seems to know how to "connect the dots", for positive action which is actually feasible. Take just one issue of the (earlier) small government agenda: entitlement reform (since audits of Defense weren't likely...). Even though such reforms are needed, they pose real threats to those who maintain solid access to general equilibrium conditions. Democrats and Republicans alike, strive to uphold the promise that these more prominent forms of access will not be lost. Territorial grabs wouldn't be so problematic, were it not for the fact their revenue conditions are increasingly built on economic exclusion.

For those who are concerned about the economic access which has already has been lost: should nothing be done, today's reduced labor force participation is but a sample of what could occur in the near future, without a marketplace for time value. But where to begin? At what point in a given equilibrium, can one begin to make the structural adjustments which would also mean dramatic improvements in monetary policy?

It's complicated. For one, no broad based structural changes should be imposed on any entire public, given the different circumstance with which so many live out their lives. This helps to explain why "one size fits all" government attempts in recent years have gone nowhere. Only consider earlier discussions re phasing out social security, and how difficult it was to agree upon cutoff points or potential replacements.  And, the fact that the U.S debt situation is looking about as good as will be the case for the foreseeable future (according to James Pethokoukis) is another indicator that the chickens are coming home to roost. There's still time to act. But these issues need to be addressed now.

Smaller governments are needed. But they are needed on terms which can gradually fold services capacity - and people - back into the marketplace, as direct contributors to wealth formation and economic activity. Until this occurs, everyone will remain uncertain how governments can reasonably apportion services capacity to the "deserving", and voters will be asked at the polls to make increasingly harsh judgments in this regard.

Why haven't economists been able to address these circumstance, already? Twelve years earlier when I started this project, I was still in awe of economists, in that I believed they were capable of rising above the social and political fray. Consequently, I believed (and still do) that potential solutions for world issues can be found in economic ideas.

Since then, I've slowly had to learn that economists don't particularly relish the role of system wide confrontation, which in retrospect makes sense. Why would economists want to jeopardize their standing with the special interests which also have considerable bearing on their livelihood? To what extent does ideology stand in the way of broader growth potential? However, it isn't so necessary for economists to be able to forecast every recession, as to do a better job of indicating when economies become too fragile because of access issues. These issues also lie at the heart of nominal income representation.

In fairness to economists - perhaps - it has not been easy to suggest solutions in general equilibrium, because doing so means pointing out supply side circumstance that occasionally run counter to a need to maintain flexible wages and overall access. Hence it's often easier for economists to suggest partial adaptations (specific to individual circumstance), instead of taking overlapping effects into consideration.

Minimum wage discussions are an example. It makes good sense to argue against minimum wages and I've done so plenty of times. Why, then, has the public (and increasingly more economists) moved instead towards support of a "living wage"? This is not the solution it seems, because wages need to be considered in equilibrium context. However, the focus tends to swing back towards "living wages" when general equilibrium has too little means to adjust for income potential.

Instead of forever "chasing" small wages with government subsidies or mandated employer dictates, income potential needs environments which are conducive to the actual sources of revenue that they represent. In order to make this possible, individuals need more say, in defining the primary non tradable consumption components of their lives. Everyone needs valid roles in the production of their own environments. But who has really been able to suggest equilibrium level strategies?

Otherwise, even though the great majority of tradable goods can be had by low wages, much of the non tradable sectors are not accessible to lower income levels. It is the lack of inclusive reforms in these areas, which now makes it difficult to find logic or reasoning in the political sphere. I believe that political solutions could be sought at the margin, through alternative equilibrium where it is possible for people to create more accessible services and asset structures.

Even though this post touches (once again) on long term growth issues, the U.S. growth trajectory is still in doubt, due to the seeming insistence on the part of the FOMC of undercutting nominal stability. In a post entitled "The Sky Is Not Falling...Yet", David Glasner notes:

The 2008 financial crisis ensured the election of Barak Obama as President. I shudder to think of who might be elected if we have another crisis this year.

Indeed. Will the Fed continue to overreact to - hence magnify existing problems in structural issues? Let's hope not.

Reverse the Decline: Just Do It

Perhaps the good news, is that economic decline is not inevitable. However, few monetary or structural means (to reverse decline) have been actively considered, and NIMBYs of all stripes are still "winning the day". The Fed has not addressed its own mistakes which greatly contributed to the Great Recession, nor have central bankers in the U.S. proposed the option of a level nominal target. And in spite of ongoing contractionary effects, the Fed is doubling down on the harsh tool that is interest on reserves. These monetary policy actions - alongside the premature process of rising interest rates - could lower economic output for the foreseeable future.

Why have policy makers been so determined to continue monetary tightening in a sluggish economy? One way to address this unfortunate circumstance, would be to make loan origination unnecessary for the economic activities of local corporations. Monetary origination in these instances would begin with mutually backed services endeavor, which in turn would also be utilized for local investment in infrastructure and asset generation.

Since banks have seemingly grown "weary" of making loans, it is time to consider new forms of wealth creation which do not require loan formation. While loan processes will always be needed for high volume activity and major economic players, the participants who reside in areas which lack sufficient economic complexity, are ready for new sets of monetary and economic options.

This is one reason I've suggested time backed money, in order to create a broader, more stable foundation for wealth through knowledge based services. Time backed money would provide long term mutual coordination for services needs, which consequently would not need to rely on other forms of existing wealth. Since this approach would also generate further services growth on monetary terms, knowledge use systems would prove capable of assisting governments with long term budgetary issues.

Supply side conditions are such that many market participants have painted themselves into a corner. How many recognize the fact that since central bankers have chosen to limit monetary formation, someone is being shorted? One reason Fed language has become so obscured, is that straight answers re what is occurring, would not be pretty. Indeed, an honest assessment might be deciphered as such: "We can no longer back all of your existing obligations to one another, even if we can't tell you so, directly."

As a result, everyone's existing output and total resource capacity are at stake. Indeed, how could central bankers, who are themselves accountable to supply side interests, have been expected to explain to various interests that they needed to reconstruct their own organizational capacity on more productive terms? Since too few individuals had the professional audacity to promote innovative reform, central bankers are now instead refusing to honor the manner in which non tradable sector costs are routinely presented to the public - even while populations are reassured regarding benefits from widespread good deflation!

Had good deflation occurred to the degree suggested, no central banker would now feel the need to "draw the line" on actual compensation for spending and expenditures, in private. Because of the way this situation is playing out, there's a chance that bad deflation will generate further losses which cannot be regained. It was not my intention to come across as inflammatory with this post. Still, I needed to search for some form of rationale, in order to make sense of what has become broken logic in the political sphere, all around. As Scott Sumner recently noted,

After 2003 the GOP took some increasingly silly positions on a wide range of issues. They became widely viewed as the "stupid party".

If Republicans unexpectedly refused to focus on growth and economic concerns, Democrats would have done so in their stead, were it possible. That's just the problem. As services continue to remain dependent on traditional production, both services and traditional production are held back, since services wealth thus far has not gained the organizational capacity to strike out on its own. Perhaps in the years ahead, knowledge use can remain a stable factor not just for fiscal goals, but monetary goals as well. Let's reverse the decline, and begin the process of envisioning new services formation on monetary terms.

Some Thoughts on Economic Stability

Recently, Scott Sumner asked, "Is the free market economy stable?" While there are a number of ways to think about this question, economic stability begins with accurate monetary representation. Even though supply side factors can contribute to overall uncertainty, some components of economic stability have been the sole responsibility of central bankers, for the past century.

What has been problematic since the Great Recession, is that the Fed has not openly acknowledged the centrality of the monetary role, for economic stability. Instead, policy makers have allowed important monetary considerations to be derailed by other issues in FOMC debates. In the above linked post, Sumner notes:

Friedman, Hetzel and I all share the view that the private economy is basically stable, unless disturbed by monetary shocks.

I believe that the Fed contributes best to stability, through faithful representation of what the supply side seeks to accomplish. While the supply side can be notorious for contributing to gradual (long term) economic instability, central bankers remain responsible for maintaining monetary conditions for existing general equilibrium in the short and medium term.

So long as supply side conditions do not dramatically change, accurate representation on the part of central bankers (NGDPLT) can maintain stability for both monetary policy and real economic conditions. However, part of the present difficulty is fiscal overreach, in areas where the marketplace could benefit most from additional growth. As a result, too much time investment in knowledge product, has had little opportunity for practical application in the marketplace.

As it became more difficult to generate revenue (from traditional manufacture) for knowledge based services, governments resorted to increased consumer obligations (particularly asset formation), to make up the difference. Unfortunately, central bankers moved to tighten monetary conditions on those same asset formations, even as they moved to stabilize this source for banking interests. If alternate means for services and asset formation are not generated in the near future, long term growth will suffer. Too much knowledge based product is still defined on fiscal terms, which makes it difficult to completely escape the threat of the zero bound in the near future.

Even though central bankers could commit to a level nominal target, they need additional growth capacity - which means real assistance on supply side terms - in order to return to the earlier growth trajectory. Without that help, ongoing deflation is possible. Only remember the zero bound conditions of the Great Depression, and the fact nations can find it easier to resort to war with other nations, instead of "looking inward" to address the economic fallout which results from intractable non tradable sectors.

Long term deflation is always a possibility, when there is an insufficient degree of time aggregate value, to balance other forms of resource capacity. While negative interest rate territory could be a short term solution, the possibility remains that this form of economic maneuever may make little sense to populations as a whole. For long term growth, it is better to bring time value back into balance with other forms of resource value, in order to ensure economic stability.

Time Value: A Measure of Economic Freedom and Stability

Today the Fed finally raised its rates. While I've managed to misplace the source of one pertinent quote on today's news, it probably wasn't the only one to imply that monetary policy had been loose, ever since the Great Recession. How could monetary policy have possibly been loose, when it was only covering existing obligations, after many obligations had already been cut off at the knees?

If some "unexpected" degree of money needed to be printed which seemed as though "too much", that is only because in aggregate, more obligations existed which in turn needed to be honored. Just the same, central bankers have not been clear with the public that populations are routinely getting shorted, in a historical time frame when few are willing to accept the actual expenditures that everyone is creating. Like Marcus Nunes I am concerned that the decision to finally go ahead with the (long awaited) interest rate rise, is not going to end well.

For me, these circumstance also indicate that too few policy makers are convinced of time value as representative of economic outcomes. In order to imagine monetary policy as loose since the devastating losses of the Great Recession, one also needs conviction that personal participation in the economy can simply be replaced by other resource capacity. I don't think this is possible, without causing real problems for both economic stability and continued growth.

It's also difficult to understand how some believe that today's interest rate increase, is "the way to rising wages and higher consumer spending power", when the Fed's move could remove much needed resource capacity from the marketplace. Economic freedom - and long term monetary stability - are both at stake. Why do policy makers continue to scrap the hard won monetary policy lessons of the Great Depression? How long will it take policy makers to discover that a successful economy is not likely, when ever fewer individuals are expected to participate in the outcome!

Throughout the twentieth century, knowledge use contributed to wealth creation, because it was broadly applied for overall institutional capacity. Today, knowledge use potential is being sidelined, as productivity mostly takes place on asymmetric compensatory terms. When time value can't be matched with the time value and intention of others, knowledge use eventually becomes a minor component of other resource capacity. Small wonder that the broader purpose of education is now being questioned.

Without a specially designated marketplace for time value, economic freedom could eventually be lost as many forms of labor are gradually replaced by technology. Few have stopped to consider how in these circumstance, societies might revert to cultural atrocities which seemed as though abandoned. For me, economic time value is the most important measure of economic freedom. But first: product as an idea or concept, needs to once again embrace the potential value, of time.

In a post entitled "Measuring and Markets", Diane Coyle notes:

For instance, part of the debate about productivity is about what it measures, but also partly about what it defines.What is productivity when products play a minority role in economic activity?

A primary mistake has been the discounting of product "purpose" in the marketplace, as somehow less important than it once was. Only stop to consider what has occurred. When it seems as though there is no purpose for product, people forget how to maneuver relationships in productive ways. In particular, interaction with resources and the consequential exchange of product, gave individuals the chance to learn how to negotiate and reciprocate with one another. This in turn, gave greater meaning and freedom to their personal relationships. Policy makers are mistaken to think that the bulk of human exchange can somehow be handed over to technology and government, all the while expecting individuals to remember how exactly they came to be civil and respectful to one another in the first place.

Rather, it is skills capacity and the ability to meaningfully relate through exchange, which makes freedom possible in group context. Before anyone can remain responsible, they often need more options than just finding work through others who are still able to arbitrage gains. When people lose too many means of direct interaction on economic terms, they become dependent on others in ways which is helpful for no one.

As traditional manufacture makes it possible for many forms of product to take place without human assistance, there is plenty of room for knowledge based services product. Time value needs better definition, as a valid component of economic measure. Productivity gains could come into sharp focus, when populations gain the chance to mold knowledge sets in relation to one another at local levels.

When personal and economic options are lost in the marketplace, something happens which is difficult to convey through historical stories alone. In other words, it's not always easy to decipher how people end up in unfortunate circumstance, either at individual or group levels. All too often, societies aren't able to avoid the recurrence of negative events, just because those earlier events appear culturally "impossible" or at least undesirable. Even though root causes need to be deciphered on multiple levels, sometimes there are conflicting incentives which prevent this from occurring.

Likewise, the economic base of historical troubles is often not evident. Granted, policy makers do not have sufficient reason to stress the importance of economic sustainability, because it can be too tempting to bottle up production potential for limited gains. Too often, it is assumed that specific institutions and groups will remain benevolent with the resulting wealth, hence distribute the largess fairly. At this point it would not matter how benevolent any leader wants to be, because too much marketplace potential has been short circuited.

One can only hope the new phase of monetary tightening on the part of the FOMC will be temporary. In the years ahead, time value needs to be restored in the marketplace, as a completely valid form of service. Through such means, the earlier growth trajectory which existed prior to the Great Recession, could eventually be restored.