More Money Chasing Fewer Goods...

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

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

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

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

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

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

Rent Seeking: "Baked" in the Costs of Economic Access

At a recent ASSA conference in Chicago, one of the panels included discussion regarding rent seeking. While this ProMarket article is worth reading in its entirety, I'll focus on some remarks from Angus Deaton:

To the very considerable extent that inequality is generated by rent seeking, we could sharply reduce inequality itself, if rent seeking were to be somehow reduced...I don't think that rent seeking, which is incredibly profitable, is very sensitive to taxes at all. I don't think taxes are a good way of stopping rent seeking. People should deal with rent seeking by stopping rent seeking, not by taxing the rich.

He also notes that healthcare - in particular - has been notorious in this regard. I agree with Deaton, that taxation is not a well suited approach for what is an important aspect of today's inequality. That said, there are hierarchical divisions for non tradable sector labor and compensation, which make it difficult to approach inequality as a rent seeking problem. How so?

Whereas abundance in tradable sector activity often consists of "windfalls" which contribute to endogenous resource flows, the revenue sources of non tradable sector organization has been defined quite differently. Understandably, these institutions are intended to provide long term employment security, but thus far they have sought to fulfill this purpose via exogenous monetary flows. Relying on these flows requires plenty of "proof" as to one's "worthiness" for knowledge use. If this were not reason enough for the high investment costs required to gain knowledge production rights, career stability is also included as part of the package.

Unlike the wealth of tradable sector activity, which still has a relative degree of freedom to respond to consumer choice and preference, healthcare as non tradable sector wealth, has become a specific component of general equilibrium valuation. Some of this rent seeking structure, is a holdover from days when information and knowledge weren't widely available. Extensive investment for educational costs was understandable, when critical knowledge was scarce. Even as budgetary constraints limit healthcare output, this skills investment structure will continue to require a significant portion of general equilibrium income.

Fortunately: even though it is impractical to "dismantle" the high costs of today's healthcare, there are means by which to (eventually) disperse valuable and practical knowledge on new sets of terms. Even though inequality is likely to remain problematic in the decades ahead, the bigger problem is unnecessarily low levels of labor force participation, which in turn limits the forms of knowledge and time based product that appear in the marketplace. Inequality can gradually be eased by tapping into the technological potential of the present, so that more individuals can participate in knowledge based activities once reserved for those with the highest skill levels.

There's nothing wrong with having some time value that is reimbursed on terms which go well beyond normal levels of skill and intellect. Still, we shouldn't expect a mostly meritocratic framework to be a "permanent" norm for knowledge use at all levels of society, as is presently the case. In many instances, knowledge use also needs to close the loop of reciprocity at local levels, so that more citizens can take part in the important activities which contribute to their own destinies.

Could "Futures Studies" Address Regional Decline?

Even though unemployment levels are (supposedly) no longer a concern, regional decline belies the "all is well" refrain, which economists and policy makers have been inclined to agree upon. While a certain degree of regional decline can be inevitable at times, this phenomenon is becoming too prominent a feature in the economic landscape, to ignore.

Reasons for regional decline are numerous, and yet one element defines them all: earlier forms of economic complexity have been displaced. Nevertheless, recent losses in the U.S. have also contributed to the gains of other regions and sectors, since the Great Recession. Indeed, today's positive aggregate indicators only add to the confusion, of sorting out economic problems which have not gone away since the Great Recession. According to The Atlantic:

The employment rate in rural areas was actually 2.9% lower in mid-2016 than it was in early 2007.

In all of this, there's a real possibility of eventual employment losses in prosperous regions as well, due to automation. Why, then, is public dialogue still caught in a preliminary position, regarding the "unlikelihood" of further significant losses in labor force participation?

Of course, as usual: I'm entering an area of discussion which is speculative. And many in the blogosphere, don't consider speculation particularly helpful. When the WSJ recently ran an article about "futurology", their paywall prompted me to do a bit more searching for related articles and posts. Sure enough, it was easier to locate negative reactions against futurology, than articles in support of this relatively new area of study.

Granted, some continue to suggest imaginary scenarios which aren't much more than the usual refrains of doom and gloom. But what if positive actions could be taken, to counter the possibility of further negative outcomes? Wouldn't experimental plans of action be a better approach, than simply insisting no such preparations are necessary? In other words: what if it's actually a good idea, to craft viable responses to the pressures of economic uncertainty? Perhaps time spent preparing for a range of scenarios, could serve a productive purpose. Might futures studies help to reduce the possibility, of further regional decline?

 Wikipedia also provides detail, regarding futures studies:

Futures studies (also called futurology) is the study of postulating possible, probable, and preferable futures and the worldviews and myths that underlie them...Futures studies (colloquially called "futures" by many of the field's practitioners) seek to understand what is likely to continue and what could plausibly change. Part of the discipline thus seeks a systematic and pattern-based understanding of past and present, and to determine the likelihood of future events and trends. Unlike the physical sciences where a narrower , more specified system is studied, futures studies concern a much bigger and more complex world system. The methodology and knowledge are much less proven as compared to a natural science or even social science like sociology.

While this BuzzFeed article was written some years earlier, not everyone is familiar, with the work that people engaged in futures studies have already provided. From "What It's Like to Be a Corporate 'Futurist'":

They work for large companies, large energy companies and oil companies, they'll do work for the government and militaries definitely, and you'll have some product people. I know General Mills and Ford both have futurists as well as Proctor and Gamble...It's not hugely popular yet, but because of what capabilities technology has given us, we can have more and more.

Consider what today's employment uncertainties entail, and how these issues are not easy to capture in primary statistics. Presently, there are few reliable policy approaches, for what has become one of the greatest problems of our time. Too many individuals are well aware, that they may not gain the level of economic access which is necessary to fully function in today's economy. Will their numbers only continue to grow?

Fiscal Policy: Too Much of a Good Thing?

Oddly, it seems that fiscal arguments become an easier sell, when it's difficult to tell whether economic activity is actually in a strong position. Ed Dolan notes in a recent post that Republicans are anxious to once again ramp it up with fiscal policy. Should this in fact occur, would it be a "good thing"? Dolan responds:

Too much, in my opinion. Republicans like to portray themselves as the party of fiscal responsibility, but their record says otherwise. In practice, GOP budget policy so far this century has been consistently procyclical - expansionary when it should show constraint, contractionary when it should support a weak economy. All signs point to another procyclical episode in the making.

He provides a summary of recent fiscal policy, and adds:

Is the stage set now for the strongest dose of procyclical fiscal policy yet? That is a very real possibility. Tax cut fever is in the air. Despite the rhetoric of fiscal hawks, Congressional Republicans have, in the past, found it hard to resist demands to spend the revenue generated by economic expansion rather than using it to pay the debt. A bad record of fiscal policy may be about to turn ugly.

Should it all turn ugly as Dolan fears, how much procyclical fiscal policy might be due to an incoming president with an especially dominant personality? His post reminded me of an earlier dominant presidential personality, who allowed procyclical fiscal policy to become too much of a good thing, as well. Of LBJ, John Steele Gordon wrote in "An Empire of Wealth":

A decade older than Kennedy, Johnson was fully a son of the New Deal, one with deep faith that government could solve social and economic problems. He also possessed what were perhaps the most surpassing legislative skills of any American president. These skills had made him the most effective majority leader in the history of the Senate, and he was determined to use them to achieve what he saw as the completion of the New Deal of his political hero, FDR.

Gordon continues:

With the help of an overwhelming electoral victory in November that year, Johnson prodded Congress to pass bill after bill...Had the economy been underperforming as it had been in the 1930s, the result of all this new spending would have been stimulating. But the economy in the mid-1960s was near full employment, so the inevitable result was that inflation began to increase. A vicious circle quickly developed. Increased inflation caused interest rates to rise as lenders wanted protection from the inflation. But the Federal Reserve, operating on a Keynesian model, was afraid that increased interest rates would cause economic growth to end, and so it expanded the money supply to keep interest rates low. An increased money supply, relative to the goods and services the money could buy, ineluctably caused further inflation.

One has to wonder, if the Federal Reserve were as worried about potential for stalled growth in Lyndon Johnson's time, as Gordon assumed. Nevertheless the Fed doesn't appear particularly worried about stalled growth now. After all, it has announced intentions to raise interest rates several times this year, apparently, irrespective of how Trump might affect economic conditions.

Perhaps the inflation question is also difficult to answer, since fiscal approaches are subject to wide variance in outcome. For one, government efforts this time around may prove more likely to benefit business interests, than demographic groups. That said, inflation could be more extensive, should infrastructure investment turn out to be mostly additional options to what the intended recipients already rely on. Yet growth and greater productivity is more likely to occur, if fiscal policy benefits groups who consequently gain more economic access, than they had prior to fiscal stimulus. Might the Fed also doubt the ability of fiscal stimulus to translate into real economic gains? A quote from a recent Atlantic article, could provide a clue:

Policy is much better at redistributing money to individuals than it is at revitalizing regions.

Moving Time Value Towards Recognizable Wealth

Knowledge use became a major economic component in the twentieth century. Even so: in many instances, it wasn't sufficiently clear, how knowledge and skill actually contributed to discernible progress. All too often, specific forms of knowledge use have become a judgement call, which governments attempt to provide on behalf of their citizens. Yet the process mostly makes populations less certain over time, what they've actually gained. Perhaps it would be easier to convince societies the worth of knowledge, should its use become more closely connected to personal time value. After all, a direct time/knowledge economic connection, would allow the use of knowledge to be measured - hence accounted for - in increments of reciprocal time.

Granted, it's easier on a number of levels, for institutions to make note of time use patterns after the fact. Which also allows everyone to gradually sort out the bill, well after the dealing's done. But this approach - flexible though it is - gradually plays havoc with long term budgets, the services needs of lower income levels and finally, populations as a whole. And given what we know about Adam Smith's attitudes toward wealth creation, chances are he would not have considered these open ended and knowledge based service patterns, capable of moving society forward. This is no small matter, given the dominance of time based service formation as a part of today's economies.

Fortunately, knowledge use in conjunction with tradable product, gains measurable value through recognizable output which is accounted for at the source. Whereas non tradable sector time product often expects citizens to take on faith, the ways knowledge are monetarily compensated in the process. Even though non tradable sector private institutions may be more accountable than their public counterparts: if the knowledge they utilize is purposely limited at the outset, even responsible accounting can't detract from the diminished monetary velocity - however small - which is likely to result from captured wealth. In other words, both public and private approaches to the coordination of time based product, can gradually subtract from incremental and reliable wealth creation.

The dominant sectors of our most complex economies, are heavily dependent on time based product - much of which is secondary market activity. In the last year or so, I began to more closely consider how the dependence of secondary markets on primary markets, affects overall equilibrium structure. As secondary markets continue to crowd primary markets, political pressure grows to dismiss knowledge based activity, where possible. If some of this pressure appears indiscriminate, it's reached a point where political constituents aren't necessarily rational about the process. Yet people are right to worry about slashed budgets, when many normal means of knowledge use preservation are also being threatened. By way of example, is this recent announcement of layoffs at M.D. Anderson, indicative of what might become a growing trend?

Ultimately, secondary market activity should not have to be diminished, in relation to what already exists in this regard. Instead, it would be better to supplement secondary markets with a greater degree of primary market activity for knowledge use. Even though Obamacare may soon be a thing of the past, the fact neither public or private interests are prepared to preserve valuable marketplace output, could nonetheless mean further difficulties for hospital budgets. By bringing more knowledge use into primary market roles, one might also hope for fewer hospital layoffs in the future.

How might a restoration of knowledge based wealth, take place on primary market terms? Time value can be organized to function much as any other valuable commodity in primary markets. In order to do so, a time continuum would be internally generated for a broad range of time linked services and knowledge use. What allows for recognizable wealth to be formed at the outset, are coordinated services patterns which allow matched reciprocity to become immediately possible, instead of at some point in an undefinable - hence not always accountable - future.

Wealth creation at the outset, would result from matched time value with individuals who already live and work in close proximity with one another. In a sense this process can appear as bartered time, which has been reasoned away because "it's hard". But barter did not take place in a coordinated time use continuum. Thankfully, we have money to provide the coordination roles which supplanted earlier forms of barter, especially for the tradable goods which existed well beyond local resource capacity. Nevertheless, money works best, as a signal for product which is separate from time. As a coordination signal for time based product, money begins to suffer distortions early in the process, because time is a fixed scarcity, in relation to the random scarcities of other resource capacity.

Consequently, government efforts to assist the coordination of time based product, have carried substantial trade offs. Even though government debt for fiscal transmission is reasonably secure (government debt represents someone's asset), each declared asset is subject to countervailing forces. Consequently, fiscal transmission cannot always contribute to a full range of knowledge use preservation.

While a time based continuum for organizational capacity includes trade offs much as anything else, the equal starting value this approach utilizes, makes it possible for local groups to eventually provide reliable signals for the production and consumption of desired services. Since these groups organize for internal reciprocity and immediate time based wealth, they don't have to wait - and hope - for broader sets of equilibrium factors to give a green light to their productive pursuits.

Establishing new productive routines and habits, of course includes inevitable adjustments for the changing wants, needs and challenges of participating groups. Yet the real value consists in being able to maintain normal economic routines which are not constantly broken down, just because some product formations are only temporary for the participants involved.

"They're Not Like Us": Redistribution Problems

In a time of growing inequality, some nations are beginning to experiment with direct payments of various forms - albeit to a limited number of citizens. Finland is the latest for instance, to implement an experimental universal basic income program. Among the incentives for this approach, are uncertainties regarding the long term effects of automation, on employment. Others view such payments as potential means to simplify the confusion, of too many overlapping welfare systems.

While direct payments are an understandable response, the "not like us" rationale may nonetheless undermine some of these efforts. Recently, Chris Blattman highlighted an article which noted how British taxpayers were supposedly "doling out" money for Pakistani families. It's an unfortunate reaction, given the efficiency and effectiveness which might have been gained from the policy approach. And Blattman's post title illustrates the broader meaning of the problem faced by economists and policy makers alike: "This is why politicians fear cash transfer programs."

So long as economies are dynamic and (seemingly) reliable, populations are far less likely to complain about many forms of government redistribution. But when the economic pie is scarcely growing, various constituents become more intent on taking action, should they discover that money is going to the "wrong people", whoever they might be. While Blattman's example exemplifies problems for foreign aid and developmental policy, domestic policy may well be the larger struggle in this regard.

How to think about redistribution problems, especially when they appear as though magnified with economic stagnation? Or, what's the "worse" trade off:  so called "deadbeats" who live off the taxes of others, or individuals who make a living "unfairly" from utilizing knowledge which already "belongs" to others? It's a valid question, since the use of knowledge has become central to economic vitality. Even those who invest in knowledge based skills, may still lack economic access to some extent.

Granted, unemployment issues aren't often framed in these terms. But doing so, might help to think about differences in the trade offs involved, between money and/or knowledge use as redistribution. Especially since the latter has the potential to expand the economic pie as a whole. Ultimately, the question really comes down to: would we rather pay people for doing nothing, or would we rather pay people for becoming more willing to assist one another? And even here, the framing for the latter is actually better than the choice implies. Because people could organize their time in ways that allow mutual self assistance to also become new wealth.

When money is the sole form of redistribution, people can't buy services (simultaneously) that don't actually exist.  When important forms of knowledge use remain off limits to large segments of the population, less wealth in aggregate is possible, and hard choices have to be made. In such circumstance, it is also difficult for nations to provide important time based services for all would be comers. Only consider that Medicaid in the U.S. for example, is almost 20% of all healthcare spending - a factor which particularly stands in the way of finding effective means to replace Obamacare. More than 70 million enrollees have too few means, by which to fully reciprocate, for the health based services they may actually need.

If little is done in terms of supply reform, restrictions on the use of knowledge might increasingly mean more closed societies in the near future. Whereas an ability to utilize knowledge to build new wealth capacity, could help preserve open societies and relations between nations. A greater supply of knowledge based services activity, would mean fewer individuals appear as though "takers" of the wealth of others. Until vital knowledge use becomes a more important part of the economy, too many will appear as "outsiders", as populations organize to trim their budgets by excluding those who are "not like us".

Long Term Growth and the Debt Factor

Is debt something that we should not even be worrying about, in terms of economic stability? Some are concerned about Mick Mulvaney's nomination to the Office of Management and Budget. Kerry Pechter writes:

Mulvaney has said...that one of the greatest dangers we face as Americans is the annual budget deficit and the $20 trillion national debt. This notion is an effective political weapon, but it's dangerously untrue. If it were true, the country would have failed long ago.

Pechter is right that the budget deficit can all too often be an effective political weapon. Sometimes budget rationale only comes into the picture, as means to arbitrarily limit economic activity. He continues:

Debunking this canard should be a priority for anybody who cares about retirement security. As long as we believe in the debt bogeyman, we can't productively solve the Social Security and Medicaid funding problems, or defend the tax expenditure for retirement savings, or even create a non-deflationary annual federal budget. Everything will look unaffordable.

Unfortunately, some things have become unaffordable (beyond a certain general equilibrium limit), given the way they are currently structured, and the position they may hold as an aggregate medium of account function. The relationship of aggregate debt over time (in relation to output and growth trajectories), is important, However, I definitely agree with Pechter's conviction, that it is important to preserve valuable economic complexity. Not everyone who expresses concern about debt or budget obligations, does so with a corresponding intent to preserve valuable knowledge use or skill, in the marketplace. Budget obligations should not be a convenient fall back position, for political coalitions which would undermine economic potential - mostly with intent to protect the supply side limits of special interests.

That said, debt cannot cannot continue to grow indefinitely, in relation to output which is clearly measured and ascertained as it is created. Oddly enough, the more that a society is willing to internally account for the measure of wealth when it is generated (via primary market means), the more debt that populations and policy makers are likely to remain comfortable with, as well.

Once, it was quite logical to fund knowledge via open ended (and secondary market) means, when the use of knowledge remained (somewhat) minimal in relation to manufacture and agriculture. Indeed: so long as primary markets maintain a healthy balance with secondary markets, it remains safe to fund for knowledge, via the open ended means of debt and further budget obligations.

Today, however, everything has changed in this regard. Secondary markets are presently too dominant in relation to primary markets, which in turn negatively impacts the nature of budget obligations. And as knowledge and information has became ubiquitous in the marketplace, knowledge is fast becoming underutilized (insufficient practical dispersal), because too little of it is being generated via reciprocal and direct means. The present lack of economic reciprocity patterns for knowledge use, means many who prepare for knowledge based work are deemed "excess" labor capacity.

We need more means to solve for economic reciprocity at the outset. Any time value or product which has to be politically approved in order to occur, will always be subject to political forces that use budgets to bludgeon such endeavour out of existence. By closing the circle of reciprocity in terms of knowledge use formation, it becomes possible to preserve economic complexity at multiple levels of society. Solving for economic reciprocity at the outset, means less debt over time is needed. And the more economic complexity that can be generated as primary market activity, the less anyone needs to worry, about the debts and demanding budgets, that remain.