Gentrification is a General Equilibrium Constraint

In a Brookings article, "Will Opportunity Zones help distressed residents or be a tax cut for gentrification?" Adam Looney notes:

States are fast approaching a deadline set by the new tax law to designate low-income neighborhoods as "Opportunity Zones" - a designation that will unlock favorable capital gains treatment for investments in those areas.

And he continues:

In contrast to the new Opportunity Zones, the policy with the best proven record - Empowerment Zones - focused on people and local services not just capital investments. They encouraged hiring, subsidized up front investment in capital and equipment, offered loan guarantees, regulatory waivers, a partial exclusion of capital gains, and large grants to local government authorities for local services and infrastructure...But the program was expensive and intensive, costing approximately $850 per resident. As a result, only 11 neighborhood zones were ever designated under the original design.

Is there a better approach? Much was written about the potential of Empowerment Zones, so I was startled to discover only eleven were established. Nevertheless, regular readers won't be surprised that I consider gentrification to be a general equilibrium constraint, due to societal expectations re housing and infrastructure which don't necessarily align align well with life's realities. Once traditional housing and physical infrastructure age, their costs and maintenance requirements can become a burden on anyone with limited resources, especially the oft fixed incomes of retirement. What if gentrification also translates into too few places for older individuals with limited incomes to go? As Alana Semuels recently wrote for The Atlantic:

In America in 2016, nearly half of all single homeless adults were aged 50 and older, compared to 11 percent in 1990.

Fortunately, it's possible to overcome the societal expectations that are closely tied with general equilibrium constraints. We could create defined equilibrium (non tradable sector) settings, which more closely match the personal aspirations and resource capacity of groups who find common ground for living and working together. Presently, when many individuals with limited means exit gentrified locales, they often end up in other declining areas which pose greater risks than the places they left behind. If people had options for carefully considering how to start over with other individuals in similar circumstance, the pressures of relocation might not be so unsettling.

Instead of worrying about the places people sometimes need to leave behind due to gentrification, let's pay more attention to how the marginalized can build anew in environments which more closely match their potential. One reason so few solutions have been actively sought for lower income levels, is the fact we don't yet have zones which can experiment with less costly innovative building components and physical infrastructure.

Likewise, in the originally conceived Empowerment Zones, local services were probably framed as an ongoing external societal cost. In order to create long term solutions for limited wage capacity, local services need internal generation which allows them to become wealth creation instead of external costs. Such a strategy would greatly add to what participants could bring to the table, in terms of mutually shared responsibility. By allowing innovation to contribute to physical and social infrastructure, many who are now considered marginalized in some capacity, would finally get an honest chance to become more personally accountable - both for themselves, and for others.

Wrap Up for February 2018

Subsidies for the rich have made it impossible to tap universal catastrophic coverage as an option.

"Estimating Unequal Gains Across U.S. Consumers With Supplier Trade Data"

Zombie firms create problems for productivity.

James Pethokoukis for The Week, in "Death of the Debt Hawks":

Trump won the Republican primary and then the general election by disavowing GOP positions on spending and debt. That is a powerful real-world lesson for current politicians and future candidates.

David Wessel welcomes Janet Yellen to Brookings.

Will we survive elitism?

"The Economic Implications of Housing Supply"

Intangible capital is changing the nature of traditional banking.

Adam Ozimek muses on the stages of Trump acceptance:

"...about two-thirds of global investments is financed by firms themselves."

Even though some may not give much thought to the loss of international students, this is lost revenue for higher education - in particular smaller and less prestigious universities.

While I'm no longer an advocate of the use of wood for many building purposes (old homes in need of maintenance can be quite a headache in one's later years), an improved method for compressing wood may contribute to its strength and stability.

From the abstract:

The within-industry dispersion of TFP and output per worker has risen, while the marginal responsiveness of employment to business-level productivity has weakened.

David Andolfatto debates fiscal theories of the price level.

Matthew Kahn describes his new "limits to growth" class for non-economists as "a fair fight between Paul Ehrlich and Julian Simon".

The timing of this "piggy bank" raid was also noteworthy...

"...if we are all going to return to a happiness set-point after a period, why bother with policies trying to increase happiness?"

Their preferred explanation is that the economy has "returned to normal", however I do not feel the present structural circumstance are a normal that can be maintained. What's more, the Fed played a role in the downward shift of growth capacity that they did not openly acknowledge: http://ngdp-advisers.com/2018/02/15/just-one-things/

Gallup notes a significant decline in well being.

"...the question of how networks work in reality isn't a simple one."

"The US rate of homeownership was about average by international standards 20-25 years ago, but now is below the average."

Angela Rachidi discusses "the state of the safety net".
Ed Dolan also addresses potential safety net reforms.

What determines value capture and value creation?

Some economist opinions on the "mismeasure of output".

Geography affects basic needs.

Intangible capital as the "most important firm-level determinant of corporate cash holdings".

Given the backlash against mental health considerations re school shootings, it's good to see a public poll that backs those concerns.

Scott Alexander reviews pieces of the unemployment puzzle.

Inequality is not a simple matter of technological progress.

Government safety nets are no longer intended for recessionary shocks.

"71 percent of young Americans between 17 and 24 are ineligible to serve in the United States military."

The Fed needs to commit to stabilizing the long-run growth rate of spending.
"The truth is that poor Fed policy has contributed to the weakness of the expansion. But the Fed has erred by keeping money too tight, not too loose."

A review of factors re the decline in the employment to population ratio

The current healthcare system is a source of social tension between the working middle class and the poor.

A comparison of Japan's Lost Decade with the Great Recession in the U.S.

One's ability to recite facts - for instance - isn't well suited to competition with AI.

This supposed "consensus" that "Financial Plumbing most to blame for 2008 crisis" not only makes it difficult to remember the unfortunate monetary withdrawal on the part of the Fed (that was never completely remedied), but also the structural real economy factors that play a large role in macroeconomic effects.

One of my bigger concerns re an "excessive U.S. focus", is that a wide range of infrastructure options discussed in other countries, don't gain the full audience they deserve.

How does income inequality affect aggregate output?

Even though this rationale may sound odd to the ear: "building capital needs a shorter life", temporary building components that can be assembled and reassembled, would allow much needed societal flexibility and reduction of capital risk. And as Matthew Kahn stressed in his blog post, it would also allow building and infrastructure design to remain up to date.

The divisions between rural and urban life can literally separate families (China)

Does Jerome Powell believe the economy is "overheating"?

A graph which highlights the costs of economic access (housing and transportation)

Sometimes a crisis can happen in good times as well.

A former med student voices his concerns to Bryan Caplan re medical education.

"Starting with the 1980s, each decade has had a lower average than the previous decade."

Time as a Repository for Intangible Value

Why is it confusing to determine how human capital contributes to wealth creation? Not only is today's intangible wealth difficult to measure, so far it's notoriously difficult to translate into a wide range of economic settings as well. Unlike the tangible product of tradable sector wealth - which potentially originates from all corners of the world - intangible value is more closely related to specific human capital outcomes in favored regions. This has put an undue focus on "special" cities and areas to utilize highly concentrated skill sets, with the rest of the world's population seemingly on the back burner, indefinitely.

Intangible value as a partial representation of skill aggregates, has temporarily devalued human potential. Asymmetric skills arbitrage leaves too much human capital out of what could be self regenerating processes for wealth creation. When human capital as product is purposefully separated from production cycles which include human capital as investment, much of its monetary representation accrues to specific income sets, rather than continuous networks of working capital. Ultimately, substantial income becomes caught in passive asset holdings where it is separated from further human capital utilization. More specifically, too many organizational patterns for non tradable sector time based product, aren't allowing human capital utilization to spontaneously self generate. Instead, these patterns - more than anything - contribute to the passive holdings of real estate. One can think of real estate as a sort of final repository for far too much compensated human activity, as a result.

Alas, this circumstance poses real problems for long term economic dynamism. Too much of the aggregate value of GDP is being caught in passive asset holdings, where it sidelines much of what could be complete levels of economic participation. When real estate is allowed to absorb excessive value from current and past skill sets, its passive nature can be likened to layers of sediment in a river, which slows the more active components of our economic lives.

What could be done to address this problem? Time arbitrage could secure additional economic value in what would essentially be constant economic interaction. New time value would be generated, as individuals build life work patterns among networked time groupings which have a legal life not unlike that of corporate structure. Time units as the commodity in common, provide the active wealth building component for services generation. By placing matched time units in a primary market position (mutual employment), the broken connections between human capital utilization and investment would also be repaired.

Equally important: Since time units would hold storage characteristics in common with monetary characteristics, measured time value would make the use of knowledge and skill more tangible. Recorded and otherwise stored time units would function as a repository for economic value, and give human capital a stronger anchor than the passive holdings of real estate. Not only would skills sets and knowledge use be recorded according to actual use in specific instances (rather than skills classifications), the time continuum would allow the torch of knowledge and skills dispersal to be passed from each participant to the next. Since time value would maintain a constant active function, less time value overall would be lost to real estate value as a cost of economic access. And with more economic value retained in knowledge use networks, manufacturers would have additional incentive to create low cost forms of flexible housing components, which would in turn reflect lower group income/transaction costs for services of all kinds.

Why is Economic Stagnation Still Problematic?

Even though there's been encouraging signs of growth recently, context matters. After all, the limited growth trajectory which originated in the Great Recession, has not changed. Further, since recent income gains have largely accrued to upper income levels, many individuals (and regions) have yet to recover from at least a decade of economic stagnation.

Nevertheless, for many who prosper, the all too recent economic crisis is already forgotten. Hence renewed calls to further tighten monetary policy, and the collective wish to simply move on. The world economy has "never been better", right? Authors from quite different backgrounds also find it tempting to ride the optimist bandwagon. Such rationale provides much needed encouragement for the average reader, especially given today's political instability. Yet the still growing prosperity of developing nations, makes it easier to ignore the fact that something has gone wrong, in terms of the shared prosperity of today's developed nations.

Of course, who really wants more growth, or believes it could make a positive difference? How could more growth lead to shared prosperity if it hasn't done so already? Haven't people grown weary of a "material world"? As Diane Coyle writes in a recent post:

It's tempting to accept that growth is so over, given how much stronger the sustainability concerns are now than in the 1960s. But I don't think it's so simple.

Indeed. I would add that the sustainability of knowledge also depends on the continued momentum of economic integration and inclusion. Which is precisely what today's equilibrium dependent knowledge based economy can't provide.There's two problems with today's non tradable sector dominance, especially in nations such as the U.S. with large populations:

1) Today's most critical forms of knowledge use tend to rely on the monetary flows made possible by wealth in which resource capacity was settled at the outset (no debt or redistribution as the activity base). The reason this issue has become so important, is the extent of economic activity which now takes place in conditions which lack direct resource reciprocity. What's difficult to directly observe, is that resource matching at the outset creates the general equilibrium dimensions which can readily be tapped at any given moment, by all economic actors. And presently, more of us are seeking to tap into wealth which already exists, than are actually adding to wealth creation via resource reciprocity at the outset.

2) When vital forms of knowledge use are structured as secondary markets, these organizational patterns are dependent on an essentially fixed pool of existing resource capacity during times of economic stagnation. Most supply side reform efforts run headlong into the fact that present providers consequently can't expand their marketplace capacity, unless they're willing to dilute the income they already claim. Hence attempts to increase supply for healthcare practitioners, and building density of areas with desirable employment characteristics, are not well aligned with the realities of those who own real estate or practice high skills trades in prosperous regions. In a sense, recent calls for supply side reform in non tradable sectors - sensible though such calls appear - aren't always essentially different from what progressives have sought, via taxation.

Consequently, today's non tradable sector dominance, in which private sectors are heavily dependent on government largess and closely held production rights, has led to political stalemate. Small wonder for instance that the U.S. has "hit a wall", which seemingly demands the building of a wall, as if doing so could somehow address the underlying domestic supply side issues at stake.

We need defined equilibrium options that won't dilute the income or real estate value which residents of prosperous regions have already claimed. By building defined equilibrium capacity via immediate resource reciprocity, we wouldn't have to plead with special interests to dilute their income or asset values, to create additional economic access.

In the centuries when tradable sector activity was dominant, perhaps it was still reasonable for non tradable sector activity to be organized solely as dependent or secondary markets, where individuals could also benefit from the Baumol effect. But given the present day dominance of non tradable sector activity, it's time for these sectors to make room for resource capacity which is utilized at the outset without debt or redistribution. Fortunately, non tradable sector activity can be organized as primary markets capable of generating new wealth. Just as tradable sectors have done, all along.

Knowledge Production as a Monetary Constraint

One characteristic of today's non tradable sector activity - particularly given the structural shifts which have occurred since the Great Recession - is the nature of intentional constraints for knowledge use which translate into wealth capture. Only consider the income gains presently accruing to high skill services management, which doubtless contribute to the divergence between productivity and the typical workers pay as a "relatively recent phenomenon" described by Lawrence Summers and Anne Stansbury. Already, these recent high level income gains are leading to calls to pull back on monetary policy representation, as well.

Knowledge use constraints especially affect a nation's long term growth potential, and the marketplace limits they impose could help to explain some of the recent losses in national well being. While many continue to be concerned about the implications for lost middle income compensation, I've stressed how hierarchical services sector dominance affects marketplace suppression at the margins. These arbitrary limits to production and consumption, help to explain at least some of the lost aggregate spending capacity that originated in the Great Recession. Indeed, the extensive drop in nominal representation was never fully recovered, or otherwise sufficiently accounted for by the Fed.

Limits to production and consumption in knowledge based services, are also reflected in limits to housing ownership. All the more so, since there are few mass produced housing components or infrastructure options that represent the full range of income levels in the U.S. And while aggregate income gains are normally associated with greater growth and output, the fact recent income gains are linked to sectors which intentionally limit total output, likely contributes to calls from many quarters to pare back monetary representation. Even though the idea of a possibly overheating economy seems preposterous - given today's low levels of labour force participation - this is an important part of our structural reality which has yet to be addressed.

The real challenge is not to break up the dominance of today's knowledge gatekeepers, but to encourage them to support organizational patterns that would contribute to broader participation in the production and consumption of time based services. After all, until more people participate in these activities, the limits of knowledge production will act as constraints on aggregate levels of tradable sector production as well.

Wealth capture is an understandable impulse, and occasionally it can occur in relatively benign ways. But presently, extensive limits to active knowledge use have destroyed any illusions about benign outcomes, and not just in the U.S. Hopefully, some of our knowledge gatekeepers will become more open to renewed prosperity that does not arbitrarily exclude human capital potential at the outset.

Notes on Reciprocity and Economic Complexity

Why does mutual reciprocity feel so awkward in the present, compared with forms of social reciprocity that earlier generations took for granted?

Perhaps the economic complexity of our times has contributed to this problem. Productive economic complexity, with its extensive monetary exchange and specialization, has gradually shifted how we experience our time and get things done. These changes have dramatically affected our cultural expectations. Whereas once we shared similar tastes, activities, and resources in common, today's seemingly infinite range of product, has also led to great variance in habits and personal preferences.

Scarcely anyone goes about their normal routines in quite the same way, which can lead to problematic relationship issues as well. The fact we produce and consume so differently, encouraged us to depend on market pricing mechanisms, instead of trying to decipher the wants and needs of others. And since friends and family tend to be geographically scattered, brief moments of shared time with loved ones may revolve around special consumption choices, instead of ongoing daily concerns. Consequently, for some of us, our daily routines would benefit from useful patterns for societal reciprocity.

Many with sufficient income who live in prosperous regions can take advantage of highly specialized services production. These desirable market mechanisms reduce some of the uncertainties of personal negotiation and transaction. However, service options in prosperous regions have hardly replaced the social cues that people need for reciprocal assistance and time based coordination, elsewhere. At a personal level, today's market mechanisms often fall short. Just the same: Arguments that the free market doesn't work well for personal needs, miss the point. That doesn't mean societies would want to return to how services were addressed in the past, because too much cultural regression would be the likely result. We need to rethink services by closely examining where the use of our time holds the most meaning. Then, we can better align our own aspirations to the dreams and aspirations that others hold.

How might time arbitrage address these issues?  Since we lack recognizable patterns to negotiate for services, mutual reciprocity will take plenty of practice before it feels comfortable. But that's okay. We've had to negotiate with hierarchical service institutions for so long, that communicating face to face with others will doubtless take some getting used to.

Nevertheless, time arbitrage could give us new ways to think about how services specialization can be maintained, especially for small communities. In particular, it has been more inconvenient than some realize, for residents of small towns to run to large cities every time they experience technological or medical problems. All citizens need better means to take part in an economically complex world, where they already live.

Time as Commodity: Taking "Redundancy" out of Knowledge Use

A quote from Jane Jacobs provided the inspiration for this post:

Redundancy is expensive but indispensable.

As things currently stand, though, it's becoming more difficult to maintain many vital components of knowledge based work, during a time of growing budgetary debts. Indeed, many important knowledge sets become imperiled when special interests limit their marketplace capacity, as well. Ironically, knowledge hoarding as a stand in for knowledge preservation, is being funded via exorbitant taxpayer expense.

And while various groups believe in certain "indispensable" knowledge, it comes down to the knowledge sets in question. Consequently, knowledge does not necessarily function as a reliable continuum among system networks. And when vital knowledge sets are held in a politically centralized capacity, the party in power is becoming more likely to discard what they don't consider useful, even as they remain willing to create more taxpayer burdens for the knowledge use means they prefer. Today's asymmetrically compensated knowledge is increasingly endangered, by current political realities.

In all of this, the paradox is that knowledge use "redundancies" are how we rely on the dispersal of knowledge through society, for progress and economic stability. What can be done, when important forms of knowledge become too expensive to preserve and maintain? Especially since no one is particularly fond of government redundancies?

There's two considerations at work here:

1) Jobs are a cost. Fortunately for tradable sector activity, costs can be settled at the outset via reciprocal resource measures (coordination) which leave no residual debt or societal burden. Even though each job is an additional cost, decision making processes need not be held up for hiring, because the responsibility for job costs is internal. Hence it's a simpler process, for tradable sectors to maintain a long term continuum for knowledge advancement and maintenance.

2) On the other hand, when time based (non tradable) product has to rely on existing revenue flows, general equilibrium capacity acts as a relative constant on the knowledge generation that can take place via secondary market terms. The problem of job as cost becomes externalized, which means permission for non tradable sector knowledge use can be both sporadic and uncertain.

This is all the more problematic, given the desires of today's knowledge based non tradable sectors to serve as reliable repositories for knowledge preservation and dispersal. Since budgetary burdens have begun to skyrocket, the political maintenance of vital aspects of knowledge use has become less certain. Citizens are ironically finding themselves ever more reluctant as taxpayers, to fund the very time centered activities that some groups consider vitally important.

Time arbitrage could gradually reverse this cycle of diminished knowledge maintenance, by allowing knowledge to more readily function in a direct or primary market context. With time unit value as a single price commodity (time purchases time) there would be no debt residual. Since the groups involved would be creating wealth at the outset and internally accounting for costs, this organizational capacity need not wait for uncertain political "permissions" processes. All individuals, not just professionals and the elite, would be able to take part in the origination and preservation of knowledge in an ongoing continuum.

When knowledge and time function as wealth origination, knowledge and human capital no longer appear as though redundancies which society can ill afford. Finally, the average citizen would be able to take part in the knowledge based economies of the 21st century. Only consider how different this would feel for so many, to be a part of the game. Especially since so many of us have been on the outside looking in, at the prosperous economy which our taxpayer dollars made possible. Even though our present institutions can't afford the costs of hiring us all, we can readily afford what would be the limited costs of mutual employment.

Mutual employment would handily take the "redundancy" out of knowledge use. Just think. By utilizing knowledge on wealth creating terms, our knowledge preferences would no longer have to suffer the brutality of polarizing debate. As tradable sector commodities, apples and oranges never had to wait for expert or taxpayer approval! Fortunately they will keep right on producing on their own accord, whether or not moral debate ensues as to whether they have a right to exist. If no moral debate is needed for the choice of apples or oranges, why do we demean those who "foolishly" invest in experiential knowledge, rather than practical knowledge?  One can only hope that - given a stronger link to wealth creation - knowledge in all its variety and abundance, would finally be freed from the harsh judgments it is constantly exposed to, in its organizational capacity as a dependent marketplace.