Structural Reform: "Boring" If We Don't Need It!

Granted, this post title doesn't apply in every instance. But why be interested in structural reform for advanced economies, if one wouldn't also expect to benefit in some capacity? After all, the economy is mostly in good shape for the status quo. Given the extended recovery since the Great Recession (in spite of those left behind), most market observers find it difficult to think about potential status quo reforms. And those who remain left behind, still lack a sufficiently broad platform to offer their own suggestions and insights.

Complacency regarding economic outcomes, has once again become commonplace. Alas, structural reforms still seemed reasonable to many, in the early years of the Great Recession. Back then - alongside the professionals - many without economics degrees were also closely monitoring economic developments. Plenty of laypeople once expressed hope, that something constructive might evolve out of all the pain and confusion. But nothing really did. Why should the average person continue to express concern about structural reforms, if economists - whatever their ideological outlook - determined early on that no (real economy) structural changes would be necessary?

During the earlier years of my writing project, I had more opportunities to discuss my work with family members, friends and acquaintances. Today those opportunities don't come around very often. Yet I can understand why many citizens grew weary of an initially hopeful dialogue that finally dissolved in blame and recriminations. Once citizens realized how difficult it would be to take part in a constructive response to the heartache of the Great Recession, many simply returned to the defense of earlier outlooks and societal positions.

Fortunately - for me - the still unresolved economic challenges of our times, never became boring! Why should it matter, that I could also benefit from production reform, given the fact millions of others could benefit as well? If that's "greedy" on our part then so be it. While potential benefits are many, here's the first that invariably comes to mind: If knowledge use systems were already a societal option, precious few individuals would need to go into their later years all alone. People would be able to assist one another in their efforts to remain economically and socially connected, as long as humanly possible.

And those are just benefits that could accrue in the short run. Long term benefits would include a growing ability for populations to fully engage with more knowledge and skill overall, than is now feasible. I like to imagine that in such scenarios, bookstores would once again become popular, in many communities large and small.

Economic matters occupy my mind now, even more than they did when I began sustained work on this project in 2003. That's a real plus, and 2018 should allow me to step up the process on a series of writings that could further assist readers (eventually to be placed in the sidebar) with basic concepts organized so as to be easier to understand. New Years now seem to suggest a "resolution" of honing in more carefully on particular areas. 2016 turned out to be the year to organize the "uncommon" glossary, while 2017 has been a year for sorting material for the initial books of the series.

The most difficult part thus far, has been pulling myself away from online activities for a while, so that more material can be edited and completed. There's so much I want to keep up with online (and the learning process never stops), but there's only so much time in a day. In 2018, I hope to continue posting regularly, but there may be weeks when I can only post once or twice.

With a little luck, the next recession won't set us back unduly, and constructive dialogue might even reemerge. Yet there's much I need to get done before another recession is even a remote possibility. Thanks so much to all my readers - some who have been patient enough to keep up with almost five years of blogging. Here's wishing a Happy New Year to everyone.

GDP: What Welfare Needs to be Quantified?

As aggregate output has become more difficult to determine, due in large part to the nature of today's services sectors, GDP as a measure has increasingly been questioned as well. Might the changing nature of aggregate output, help to explain recent debates regarding potential human welfare considerations for GDP? If so, how could such an approach assist this vital measure in its core tasks - particularly given its underlying monetary representation?

Diane Coyle noted some of these issues in a recent podcast for the International Monetary Fund. She stressed the sizable gap between what is being measured, versus welfare effects which could be worthy of recognition. In particular, GDP is "less well suited to measure progress in today's digital economy."

Despite the importance of digital product for societal gain, the greatest need of the present, is careful attention to human welfare via levels of aggregate economic participation. In particular: How has the resource capacity of multiple income levels changed over time, in relation to what have become basic institutional requirements? We simply don't have a clear statistical picture, how these institutional expectations correlate with the resource capacity of a full range of citizenry. What's more, a better understanding of our existing non tradable sector requirements, might present a clearer picture of existing societal debt obligations as well.

Digital gains, on the other hand, largely accrue in a discretionary consumer context. Regular readers likely aren't surprised, that I find the non discretionary requirements of non tradable sector activity, to be one of the greatest obstacles standing in the way of human welfare. Nevertheless: Even though non tradable sectors have been less than forthcoming re quantifiable output, we could eventually develop new means of services generation which are more transparent at the outset. And doing so, could vastly improve the measure of GDP in the 21st century.

The present lack of services quantification, has made it difficult to understand the dilemma that lower income levels actually face. Even as citizens have experienced tradable sector abundance for decades, their ability to do so has gradually diminished, as vital elements of non tradable sector assets and participation have been made artificially scarce. Should additional measure of human welfare be taken into account for the purposes of GDP measure, one can only hope our actual participation in economic life, becomes easier to determine than is presently the case.

Lifetime Learning in Total Factor Productivity Context

There's a sort of "good news, bad news" aspect to a recent Barry Eichengreen article, "Two Myths About Automation". Here's the problem I found with (what appears to be) his conclusion: Are we reasonable in our confidence that automation won't necessary take our jobs, in part because total factor productivity remains lackluster?

After all, the bottom line regarding questionable productivity is some degree of relatively reduced output in aggregate. These difficult to identify output losses can continue, but aggregate output is still closely tied to further employment options. From the Project Syndicate article:

While many people believe that technological progress and job destruction are accelerating dramatically, there is no evidence of either trend. In reality, total factor productivity, the best summary measure of the pace of technological change, has been stagnating since 2005 in the US and across the advanced-country world.

He suggests there are two myths: that jobs are actually threatened, and that higher skill jobs in particular are at risk. After all, the reasoning goes, if productivity isn't all that great, how exactly are jobs supposed to be threatened? Nevertheless, he stresses the important of continued learning, so as to keep up with changes that automation will bring to the workplace.

Again, it helps to envision future employment potential based on potential output gains. Without measurable growth in actual output, one cannot expect additional employment capacity. Since a certain percentage of non tradable sector output is intentionally limited, existing employment presently depends on what the status quo is willing to allow. Most important for both healthcare and housing, however, are the quality requirements which most contribute to existing imbalances between aggregate input and output. The quality requirements of these sectors likely bears the most responsibility, for the conundrum that is today's productivity stagnation. Nevertheless, these sectors package their experiential product so as to make it difficult to determine - let alone measure - the aggregate output gains that would otherwise be possible.

Notice in particular, how Eichengreen's proposed response of lifetime learning to maintain employment options, ties into the productivity conundrum of non tradable sector quality product requirements. Alas, lifetime learning in a status quo context, is still part of a knowledge and skill acquisition process which continues to increase aggregate input (skill requirements) in relation to the aggregate output of total factor productivity. One might reasonably ask, given this circumstance: Might lifetime learning as a sort of human capital coping mechanism, actually reduce total factor productivity?

Presently, it depends on whether one assumes education over a lifetime as love of learning - that is, education as purely experiential product. On the other hand, might this be a strictly pragmatic purchase? Is the educational product a human capital investment, which needs a specific economic result in the form of reliable employment? If so, the pragmatic option also translates into employment as a component of knowledge and skill production, which in turn contributes to measured output in a sort of knowledge "factory" process. Basically, the pragmatic option is not "supposed" to become final product in the knowledge production cycle, hence would become an investment loss should this in fact occur.

On the other hand, treating formal education as experiential product (as I've typically done) may allow us to be satisfied with education as final product. In this instance we can be satisfied (hopefully!) with educational product as the ultimate completion of an aggregate input to output cycle. If education is sought out of love of learning, and doesn't offer economic reward, measurable output, or meaningful dialogue with others for that matter, one might assume the total factor productivity loss is relatively minimal. Yet making that assumption includes the reasoning that one's personal investments need not count, in the lives of others.

What of aggregate productivity if education is purchased not as a consumption function, but specifically for human capital investment? Potential employment risks in this instance are more obvious, both at a personal and societal level. The problem for lifetime learning at present, is the lack of economic connection between today's formal education as reliable input for knowledge based product.

Even though formal education as experiential product is important, one's personal efforts still need to be part of the larger dispersion of knowledge use in society. Fortunately, the same blockchain technology that presently contributes to digital monetary processes, has an important parallel in learning processes, in that peer to peer learning could serve as cumulative wealth connections. The cumulative factor for peer to peer learning, would allow each input of knowledge and skill to serve as a point of simultaneous output. Time arbitrage would eventually allow for substantial productivity gains, by making the measure of time based services a transparent process.

Should time based services become organized as cumulative wealth generation, lifetime learning would readily contribute to total factor productivity. Personal learning efforts would no longer pose extensive risks of one's money and time, because individual learning would translate into mutual employment potential. In all of this, the ratio of inputs to outputs is important, for how society could ultimately expect the use of knowledge to contribute to progress and long term growth.

Wealth Creation and Capture Have Macro Effects

Why don't our current economic models take the general equilibrium effects of wealth creation, versus wealth claims, into account? Especially since factors such as consumer debt, government subsidies and other forms of redistribution all diminish the natural Wicksellian interest rate? While some advanced economy debt still contributes to wealth origination, our prevalent consumer debt patterns (for instance) are mostly claims on what today's existing wealth and income can provide in the future. Even though aggregate spending capacity greatly depends on what is monetarily allowed in the immediate present.

Had I not allowed myself to be sidelined from math in high school (and then waited too many years to try again), I would have sought to build a model which could highlight the general equilibrium effects of wealth origination alongside claims on future wealth. Such claims could be discerned, through the identification of primary wealth origination and today's revenue dependent secondary markets, such as today's healthcare.

The macroeconomic effects of wealth creation and capture are important for many reasons, not the least of which public and private designations are not the identifiers of wealth origination. Even though governments routinely engage in wealth capture instead of wealth creation, private industry does the same, particularly during periods of non tradable sector dominance. Only consider how today's government associated multipliers work poorly, since a large percentage of fiscal activity is ultimately earmarked for wealth capture. Yet it's easy to forget that government multipliers hold some positive relevance during periods of tradable sector dominance, when governments are more likely to contribute to new tradable sector formation. On the other hand, government subsidies for existing tradable sector activity, are more often another example of cronyism in the form of shared wealth capture.

Fortunately, not all wealth capture is negative in nature. When non tradable sectors aren't subjected to extensive artificial constraints, secondary market activity can often contribute to economic dynamism and monetary velocity. In emerging economies, secondary market financial activity and redistribution for high skill knowledge use, can sometimes lend stability and dynamism for new points of wealth origin. What's important, however, is recognizing when the tipping point of secondary market dominance over primary market formation, begins to affect macroeconomic outcomes. By no means is this danger limited to economies that successfully mature. By paying closer attention to the aggregates of tradable sector and non tradable sector activity, societies would also find it easier to understand when a nation's debt accumulation, begins to present problems for economic stability and dynamism.

Sometimes a critical perspective from others, makes it easier to reconsider the fundamentals. That was certainly the case for me after reading a post (HT Miles Kimball) that not only questioned DSGE models, but today's limited options to DSGE thought as well. Of course it's all too easy to be critical of DSGE models, but what's interesting is that so many are skeptical for entirely different reasons! There's a wide range of viewpoints involved, by no means limited to economists, as to why DSGE models aren't effective in the real world.

Today's general equilibrium perspectives - especially when simplified - don't square well with structural real economy factors. The authors of the above linked post, note that for Freshwater people, "government has no effect". And "Saltwater variants add in the Calvo fairy to make up for the fact not all prices respond to shifts in equilibrium."

It's interesting, that only a few basic concepts of equilibrium are up for broad discussion. Yet consider how a Calvo fairy could matter. Secondary markets, as they they moved towards equilibrium dominance, were also more likely to establish inflexible prices (price making). Walrasian equilibrium at least held more validity, during the earlier dominance of tradable sector activity which relied more on price taking - hence simpler forms of equilibrium coordination.

Too much price and wage stickiness exist now, for a real semblance of the early equilibrium to be reclaimed. After all, the first perceptions of equilibrium evolved in times of tradable sector dominance. By no means does that suggest the DSGE model is more useful. Remember that DSGE evolved as governments were consolidating their share of the wealth gains, from still expanding tradable sector dominance. That economic circumstance is part of our economic past and has been for decades, even though there has been little response to this reality, thus far.

In other words, changing sectoral conditions, and their long term effects on general equilibrium growth potential, have yet to be accounted for. Unfortunately, earlier sectoral patterns which suggested equilibrium structure during their turn, have shifted beyond recognition. Meanwhile, the wealth capture effects of secondary market activity are being hardened with regulations and rules from special interests that remain determined to secure reliable monetary flows. Needless to say, these flows will remain "reliable", until - finally - they no longer are.

What, then, does the increasingly fragile nature of secondary market domination, suggest for future wealth potential? Regular readers know that I am no liquidationist, for I believe extensive use of knowledge can be recreated, on primary market terms in which no debt or redistribution is needed. My main concern is that if present systems break down from secondary market dominance, so too will an extensive portion of today's knowledge use and economic participation. So far as that goes, any economist who suggests that today's political polarization is not linked to macroeconomic outcomes (and some have of late), might want to reconsider. If we don't craft a better understanding of macroeconomics before too much political fallout occurs, there's no guarantee we'll get the chance to preserve prosperity, should we wait too long.

Many continue to believe that the spending of nations can somehow derive from future debt obligations. Still, every nation reaches a point when nominal spending capacity must be maintained from the wealth that is currently being generated, rather than the wealth that is being claimed. True, it's difficult to give up the idea that wealth can somehow derive from what is already claimed, in part because this allows special interests to control the ways in which economic activity takes place. Societies find it desirable to control how wealth generation and capture occur, and so they can - again, up to a point. Once the process goes on too long, and too much wealth creation is stalled, equilibrium expansion through wealth capture is no longer possible. Do we have the collective courage to allow new points of wealth origination and general equilibrium growth, on the part of individuals outside the purview of special interests? Only time will tell.

Technology Will Affect Skills Compensation

In a recent McKinsey Institute report, "What the future of work will mean for jobs, skills, and wages", the authors write:

Our key finding is that while there may be enough work to maintain full employment to 2030 under most scenarios, the transitions will be very challenging - matching or even exceeding the scale of shifts out of agriculture and manufacturing we have seen in the past.

They highlight in particular that "Automation will have a far reaching impact on the global workforce." It also helps to consider what is being defined as "full employment" in this context, which is recent statistics and employment gains. Nevertheless, current employment levels don't account for what have been gradual losses in labour force participation, which were exacerbated by the downward monetary adjustments of the Great Recession. In other words, the oft stated challenge is mostly to maintain, what are already less than ideal levels of labour force participation.

Until recently, technology - more often than not - gradually led to increased output which meant further employment opportunities. But non tradable sectors tend to apply technology somewhat differently. Over time, intangible forms of input and product measure have become sheltered from general public view - perhaps for political and other reasons. As a result, it's difficult to ascertain how a wide range of resources are being measured and utilized, or how compensation is actually taking place. And when the relationship between aggregate input and output for services production becomes murky, human capital investment for specific skills use is less certain as well.

Fortunately, even though the extent of future skills compensation is in doubt, we can respond by assigning greater economic value to the use of our mutually held time priorities. Despite the uncertainties of technological change, our personal time preferences for getting things done, are important to us and for others as well. While it would be slow going at first - learning to measure and ascertain mutual time preferences - the eventual result would be organizational work patterns that are more spontaneous and transparent, than the institutional skills use patterns of the twentieth century.

Indeed, the subjective values of our work challenges and other personal commitments, would play out quite differently from the time commitments of institutional skill requirements. When we focus on time value and priorities, time management includes not just the higher skill levels our institutions seek, but also the full range of skill levels which we seek to coordinate with others in multiple aspects of our lives. And unlike the skills that our institutions sought - yet technology is now able to replace - we can still prioritize our time preferences, even as the skills we utilize, are more likely to be those ones we deem most important.

A marketplace for time value, would give voice to our time priorities. Another benefit of time arbitrage: By utilizing the time that individuals and groups actually have at their disposal, the price taking mechanisms which prevailed during times of tradable sector dominance (when resource use was more transparent), once again become possible. When individuals coordinate the time they actually have for daily activities, each hour in aggregate functions as a pricing mechanism for local group settings. Even though our time is rival (one cannot be in two places at once), the rival time/place limits of various skills functions would gradually become evident, allowing individuals to plan for what is already being provided, versus what might still be added to the overall mix of service generation.

Even though technology will continue changing the structure of present day workplaces, we all have more options for the work that matters most to us, than is currently recognized. Some of this work is complex, and some of it is simple. What's most important, is that all the work we find worthwhile, has value. A marketplace for time value, could also restore the value of our own personal priorities, in relation to others. Even though technology will affect skills compensation, it need not get in the way of the patterns we ultimately choose for out time commitments, in terms of mutual responsibilities and aspirations. Technology may pose a threat to today's skills arbitrage status quo, but it need not pose a threat to the potential of time arbitrage.

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.

Can General Equilibrium Wealth Become "Overfished"?

Oddly enough, yes. Over time, non tradable sectors which are secondary markets (because of their wealth or revenue dependence), can pose problems at a macroeconomic level in a mature equilibrium. Even though equilibrium imbalance is exacerbated by government subsidies, secondary market dominance can also affect the structural patterns of tradable sector activity, in ways which extend well beyond government debt obligations.

Nevertheless, secondary market dependencies on general equilibrium wealth, are presently believed to be benign, in terms of equilibrium growth capacity. Meanwhile some continue to debate whether a certain amount of government debt is reasonable, but secondary market dominance makes debt stability a moving target. When secondary markets are dominant, they continue to crowd the sectors which generate wealth as points of origination (and function like natural fish stock regeneration in the oceans). This process - in turn - further lowers the amount of government debt which could be sustainable over the long run.

Even though sectoral interdependence contributes to economic strength and complexity during periods of tradable sector dominance, this dynamic can go into reverse, once tradable sectors no longer dominate. So long as general equilibrium continues to recognizably expand output, the "common resource" of its wealth is generally available to those who participate. In these circumstance, more "fish" (points of completed wealth origination or reciprocity) are being born, than are being pulled from the oceans. But once secondary market wealth claims reach a certain point, the common resource of general equilibrium revenue becomes "overfished", and aggregate coordination begins to falter.

High skill providers of (non tradable) time based product in particular, are like "fishermen" who compete to draw from the same "ocean" of general equilibrium, or point of origin wealth. While it's problematic enough when governments become compelled to reduce their "catch", it's even more problematic when central bankers try to do so by arbitrarily reducing the size of the ocean's monetary representation. I found the image of an overfished commons helpful, for it provides clues how sectoral imbalances can affect macroeconomic outcomes. In " Natural Fisheries Overtaken by Aquaculture", Timothy Taylor writes:

Fisheries are a standard example for economists of the "tragedy of the commons". For any individual fisherman, it makes sense to catch as many fish as possible. However, if all fishermen act in this way and if the number of fisherman grows steadily over time, the underlying common resource can become depleted and unable to renew itself. In fact, this scenario has actually taken place with the world's natural fisheries, where production peaked a couple of decades ago and has been stagnant or declining since then...

There are two ways out of this box. One way is to figure out a method of limiting what fishermen catch, which would over time allow natural fishing stocks to rebuild so that the total catch could be greater in the medium- and long-run...The obvious difficulty is while it would be in the broad interest of a fishing industry to have limits on what can be caught, the practical issues of determining who should be allowed to catch how much and enforcing such decisions can be difficult.

The other approach is to have the fish-production migrate away from wild catch, and move toward "aquaculture", in which a certain body of water is no longer a common resource, but instead is owned by a fish producer. Aquaculture appears to be on its way to surpassing natural catch.

When services are generated via redistribution from other sources, for any product that is still directly connected to time value, its providers must still "fish" from the common "ocean". Hence recent healthcare mergers, while they may be able to contain costs to a certain extent, would not be able to expand the marketplace, except for where they do so without labour as a part of final product.

We could also have knowledge use production which preserves labour, yet does so by migrating away from the spontaneous "wild catch" that is increasingly limited to higher income levels and causing many groups to doubt the efficacy of formal education. Time arbitrage, since it would generate new resource capacity from within, could be likened to aquaculture in the above example. Where one's time can purchase the time of others, the process is equivalent to setting up new "pools" from which the use of knowledge and valuable skill can emerge.

Indeed, such a system would be similar to the conceptual gains of aquaculture settings, for knowledge, research and mutually valued employment. With time value as a reciprocal measure, knowledge use could be organized on wealth creating terms. And like the aquaculture example, which (hopefully) replenishes ocean capacity over time, so too, the defined equilibrium which could work to stabilize the greater capacity of general equilibrium.