Incentives Matter for Continuous Procedural Maintenance

As economies gradually become more complex, basic structural maintenance grows more complicated also. Yet the maintenance of our lives, physical environments and knowledge structures is perceived as economic burden, and societies now lack sustainable market structure in crucial areas. During cycles of primary market dominance, societies come to rely on continuous procedural maintenance through monetary and non monetary means. Now however, some of what we've relied on for full maintenance capacity, has been lost. This is particularly true for the use of knowledge in society. 

Just the same, maintenance needs don't go away, and we need new thought processes which can recreate reliable continuance. Doing so means the transformation of our dependent (or secondary) markets, as these areas especially lack incentive to maintain societal stability through monetary compensation alone. In all this, governments are increasingly pressured to minimize fiscal burdens in the use of applied knowledge and skill. We have already seen how procedural maintenance is perceived as taxpayer burden, as political groups now seek to undo the institutions of knowledge and action with nothing sustainable to take their place.

Private enterprise also lacks incentive to make full use of applied knowledge, especially if doing so is perceived as a problem for profit maximization. This isn't good news for societies in the years ahead, since more effective use of knowledge is needed to overcome numerous obstacles to continued progress. These are just some of the reasons I've advocated for time arbitrage commitment as an economic unit of value, to supplement crucial maintenance where monetary compensation so often falls short.

Nevertheless, some reluctance on the part of governments and private enterprise, is understandable. After all, various interest groups have been notorious for creating maintenance "requirements" which are basically about profit making opportunities, instead of true systemic support. Despite the fact faux maintenance isn't often immediately obvious, it occurs routinely in the knowledge based demands of healthcare, education, finance and legal professions. As these additional costs accrue across the spectrum, it only gets more difficult for people, governments and businesses alike to preserve their efforts in society. 

Unproductive forms of economic complexity increasingly dominate our redistribution flows. If this weren't enough, the recent cultural battles leave more productive forms of economic complexity on shaky ground. Clearly, too many economic incentives haven't been well aligned for basic maintenance needs. Indeed, a major part of what makes it difficult to maintain productive economic complexity over long periods, is that societies tend to downplay the very activities which conserve valuable patterns of production. How might this be changed?

The Fragility of Economic Momentum

Why do societies tend to label certain activities as "unproductive"? Or perhaps said another way, what's so special about "productive" endeavour? These questions matter in part, because they closely relate to sectors of the economy specific to equilibrium balance.

Activities considered most productive, are those which encourage further momentum and additional monetary gains. Whereas activities labeled "unproductive", regularly require other existing wealth sources for social continuity on economic terms. While some aren't convinced regarding this causation, ultimately it matters for the ability of mature economies to maintain productive economic complexity. When too many things go wrong, even the strongest economies can start to become fragile. And how can anyone really know where such tipping points exist? I believe it can't be stressed enough, how right Adam Smith was centuries earlier, to worry about the fragile nature of economic momentum. Otherwise, he might not have felt the need to describe "unproductive" activities in ways which can still offend readers of Wealth of Nations today.

Nations have always experienced political struggles regarding fiscal activity, so whatever is viewed as productive or unproductive, depends on cultural framing as well. Still: When it comes to wealth creation, "low productivity" maintenance services are necessary to preserve what people, businesses and nations build in the first place. Importantly, Adam Smith believed in the value of "unproductive" labour. For that matter he noted its worthiness in what was also a description of economic momentum: 

A man grows rich by employing a multitude of manufacturers: he grows poor, by maintaining a multitude of menial servants. The labour of the latter, however, has its value, and deserves its reward as well as the former. But the labour of the manufacturer fixes and realizes itself in some particular subject or vendible commodity, which lasts for some time at least after that labour is past. It is, as it were, a certain quantity of labour stocked and stored up to be employed, if necessary, upon some other occasion. That subject, or what is the same thing, the price of that subject, can afterwards, if necessary, put in motion a quantity of labour equal to that which had originally produced it. The labour of the menial servant, on the contrary, does not fix or realize itself in any particular subject or vendible commodity. His services generally perish in the very instant of their performance, and seldom leaves any trace or value behind them, for which an equal quantity of service could afterwards be procured.

Productivity is a macroeconomic concern, because excess resource aggregation in areas which are not direct wealth creation, can eventually pull down areas which most contribute to economic momentum. Despite the fact societies aren't directly aware of such tipping points, much depends on how populations feel in this regard. When economic momentum slows, citizens begin to feel the difficulty of getting ahead and making the most of their lives. Plus, when free markets are held back for too long, people begin to assume it is also okay to take away the freedoms of their neighbors. 

Adam Smith lived when expanding economic momentum and free markets contributed to the hopeful expectations of citizens in his time. He observed that when people felt better about their own life options, they were more willing to give consideration and respect to other citizens. 

In other words, economic dynamism made people more civilized. Whether or not our own economic times have become more fragile, we already see how people have lost some of this consideration for one another. Perhaps we could give more credit where credit is due, for the earlier freedoms we've lost in full market representation. In particular, where some forms of work are deemed "unproductive", we can assign more economic value to our own time use potential, so that ultimately, less money is necessary for those activities to take place. If we work to regain free markets for all income levels, citizens might hope again for continued progress, prosperity, and personal freedoms.

Wrap Up for July 2022

What is really meant by the idea of "banning cars"?

Disinflation is finally getting started.

Jason Furman explains the subtleties of rising wages. Perhaps "wage-price persistence" is a better framing.

What might the future look like with energy superabundance?

Three miscalculations which sent NGDP too high. "Team transitory" certainly got it wrong.

Even if recession is avoided we could be in for a period of stagnation. Still, much depends on whether the Fed can keep NGDP on a "stable trend path".

The problem of conformity in medical practice.

Trepidation on the eve of the 4th.

What happens if globalization goes into reverse?

Horizontal alignment can create exponential gain in applied knowledge.

BIS takes a closer look at inflation.

"The era of sustainable construction has arrived."

It might be "now or never" for the supply side

Chris Blattman considers war options for Ukraine and Russia.

The immigration shortfall has already impacted labour. Plus, an interview with Leah Boustan on immigration.

Scott Sumner highlights the importance of monetarism.

"The Energy Crisis Will Deepen."

A new approach is needed for Canada's healthcare.

Sri Lanka is a textbook example how things can go wrong.

Politics is a lot of things but it it isn't very serious.

Mobile homes have been unpopular for a long time. Also, Part II.

Joseph Politano reviews sectoral shifts since the start of the pandemic. 

Few remember when coal was the "newfangled power source" that no one wanted.

Which countries consume the most energy per capita? Plus, a visual of energy transitions.

"How do you know if AD is too high?"

Randal Quarles discusses his time at the Federal Reserve.

Switzerland is moving ahead with a plan for underground freight.

What if bicyclists could reclaim the roads?

U.S. counties which have seen the most growth and decline.

Maintenance is a major part of our stories.

Can the ECB convince markets it is serious about closing spreads? 

"A year ago, Chevy dealer Paul Zimmermann had about 700 new cars for sale on his lot just outside of Detroit. Today he has about 25."

Is this a turning point in "the conservative age"?

How has manufacturing changed?

A simple definition of monetary policy.

Litigation is all too frequent in the nursing home industry.

Government regulation which limits ESG policies is distorting financial market outcomes.

Growth potential is more complicated than it may appear.

When Samuel Rumph made peaches market worthy, that was just the beginning.

Q & A for Branko Milanovic with James Pethokoukis.

"When the Levee Breaks" there'll be no place to stay.

Ownership and Output in Excess Nominal Claims

Excess nominal income claims are too common in local service markets which are not discretionary. Governments and special interests alike tend to limit these options, thereby reducing effective management for both our personal obligations and physical environments. If this unfortunate circumstance weren't enough, excess claims in these areas are starting to impact monetary policy as well.

Our potential for ownership and personal responsibility are sorely compromised, when too many markets for basic life needs are narrowly defined. The markets most affected are those involving human capital, skill potential and housing. Alas, these are now mostly intended for the use of higher income groups. What's left for ownership potential, includes traditional housing (with its legal benefits of family inheritance), financial markets for the traditional capital of wealth building, and the formal institutions which now link human capital to status and monetary gain. All of these are associated with equilibrium imbalance and excess nominal claims. 

How might one think about this? What's most affected includes the framing of artificial scarcity. Recently a gap has opened between aggregate nominal income and the output of GDP. Might this gap have been induced by purposeful reduced output (artificial scarcity), while maintaining similar levels of income expectations? And how does artificial scarcity contrast with natural scarcity for such correlations? After all, when income is derived from production via natural scarcities, existing output is more likely close to what is feasible and consistent with equilibrium or GDP potential. Perhaps due in part to the contributions of production via natural scarcities, nominal income has closely mirrored aggregate output for quite some time.

I'd like to think that production reform for non traditional housing and applied human capital, could help diminish the unexpected gap between aggregate income and GDP output. Non traditional housing options and horizontal alignment for services coordination, could lead to good deflation. Eventually such reform could lead to better equilibrium balance with other sources of wealth.

Indeed we've been fortunate that equilibrium imbalance can take centuries to become a macroeconomic problem. It's interesting how Adam Smith worried about equilibrium imbalance in his framing of"productive" and "unproductive" workers (Wealth of Nations), before the closely related Baumol effect became a legitimate concern. Perhaps the fact this process took so long to evolve, is what makes it difficult to relate to in the present.

Just the same, much is at stake. We need to recognize and respond to the burdens imposed by the expectations of our domestic services markets. Should we instead elect not to change anything, even the best NGDP monetary policy scenario would eventually lead to less applied knowledge for societies in the decades to come. Excess nominal claims with no other market options, would mean a gradual loss of our capacity to fulfill the challenges of a modern economy. It's time to consider building a future on more viable and sustainable terms.

Upstream Nominal Claims Matter for Equilibrium Balance

Will the Fed successfully curtail inflation in the near future? Fortunately there have been encouraging signs of disinflation, even if the causes aren't obvious yet. However, while the Fed uses monetary policy to tame inflation, in certain respects this is a technical result. In other words, "pulling back" won't address supply side shortcomings such as the perennial inflation contributors in our secondary markets. Unfortunately, these local markets are woefully incomplete in basic respects, with housing and skilled services as the most egregious examples. Consequently, were the Fed were to pursue nominal stability and a stable growth level (as a market monetarist "best case" scenario), this would only be a partial answer - albeit the monetary one - for optimal equilibrium balance. 

Indeed, the Fed has often emphasized how its hands are tied in terms of supply side reform possibilities. Despite the recent pullback on traditional housing loan activity, Fed members must be wondering now, who in a decision making capacity is really paying attention and ready to take action? After all, we need incremental ownership options for flexible housing and land use, before many citizens can lead more productive lives. Without such options, millions still function in their own "recessionary" economy, even as others move on. For that matter, tiny homes, manufactured homes, and modular homes are already available, but few communities remain willing to make room for lower income options. Alas, there's a relative few sad exceptions for flood prone areas which are often long distances from employment opportunities. 

While there's a growing understanding of supply side issues, supply side reform means different things to different people. Consequently we aren't ready to address how local secondary market deficiencies contribute to equilibrium imbalance. In all this, upstream nominal claims tend to define production and consumption landscapes, plus such claims are more locally supported than it appears at first glance. Upstream nominal claims come not only from profit and non profit decision makers, for the Nimby impulses of local citizens lead to surging property taxes as well - taxes for rising asset values rather than local service gains! How can the Fed keep a decent reputation indefinitely, if the constraints of artificial housing scarcity remain enforced? Yet since these claims matter for skilled services, communities often refuse newcomers who lack discretionary income for additional service costs.

In a recent post I noted the structural shift of additional nominal claims from originating wealth sources. Fortunately, some of these pressures are starting to let up, which should make the Fed's job a little easier. That said, problems of excessive expectations will remain with us. Only consider how some of those expectations might have come about in the first place. Part of the high inflation of the sixties and seventies was due to the introduction of higher costs for healthcare in general across the board - costs which could have been rationalized by increased fossil fuel wealth in the U.S. during that period. Now, imagine what might happen to those expectations should that fossil fuel wealth shift into reverse! For that matter, once the Fed finally reduced those earlier high inflation levels, recall how our healthcare institutions enforced hard limits on physician supply. Chances are this nominal structural shift was more than a coincidence. 

It's hard to imagine secondary markets giving up much ground to primary markets in terms of monetary representation, or for that matter acknowledging their dependence on originating wealth sources. But that doesn't mean new market institutions aren't possible - markets that are more free yet don't present direct challenges to the old. New sets of expectations would not include the same excessive nominal demands as the old. Instead, new institutions would make room for flexible ownership and time value as wealth. Good deflation and skilled knowledge use in local markets, could be our best chance for greater market freedom and equilibrium balance in the near future.

Wrap Up for June 2022

Does fiscal policy create better distributional effects?

Poor life prospects as a contributor to political violence.

Colorado sets an example for housing reform.

"Solving the Housing Crisis will Require Fighting Monopolies in Construction." Alex Tabarrok provides additional references and comments.

Shinzo Abe was good for Japan.

What happens when low income men lose their health insurance coverage?

"Friend-Shoring" isn't as desirable as it may seem.

Low income groups are more vulnerable to climate change.

The land rent associated with mobile home ownership, has destabilized. Even as the cost of mobile homes on these properties has skyrocketed. I would add that until better land use options are available, traditional housing (with its extensive maintenance costs) is still the only real ownership choice for the majority of us. Which in turn limits many lifestyle and social mobility options.

A visual representation of U.S. exports.

Land based aquaculture is now producing healthier fish.

College enrollment is still down.

More job openings than unemployed as the new normal.

David Beckworth reflects on the Fed's recent obstacles.

Some basic patterns for human capital.

Cancer research makes a big step forward.

At least now, societies have a better idea what inflation is.

A visual chart for renewable energies. Also, a portable nuclear reactor is in the works. Nuclear power is changing.

The hardest thing to reshore is tacit knowledge for production line specifics.

3D printers are being utilized for Ukraine's war efforts.

How long will the Fed continue to be the "only game in town?"

When it comes to inflation, energy is just part of the problem.

Which countries beckon to millionaires, and which countries are they leaving?

How does wealth just "disappear"?

Is state capacity still a viable option with higher interest rates?

Both sides could be getting it wrong, when it comes to global warming.

Supply factors continue to dominate contributors to inflation.

Four inflation mistakes made by the Fed.

Europe turns to new sources for natural gas.

Measurement has practical purposes, yet also underlies societal expectations.

Chances are, no new refineries will be built.

Adam Tooze details the "polycrisis" with help from the BIS.

Is a fast growing economy inflationary?

Divisions between red and blue states only continue to grow.

Noah Smith interviews Olivier Blanchard.

Which inflation expectations really count?

Healthcare companies outspent everyone else on lobbying. I would note they may have the most to lose in governmental support, once crowding out effects from additional oil costs start to set in. Especially since OPEC may not actually be capable of increased production.

"Job cuts are rolling in."

"33 Problems With Media in One Chart"

Too Many Market Claims on Nominal Income

I've been anxious to start writing again regularly. However, much has come to pass since posts here were frequent, and not all of it has been good. Unfortunately, our political and social circumstance have continued to deteriorate. How will I proceed? How might others proceed? 

For now I'll need to focus less on how I feel things could be improved, and more on structural explanations why our unfortunate economic reality has come about. At the very least, a better understanding what led to this impasse, might encourage warring factions to lighten up on the destructive cultural wars. Nevertheless I've lost confidence that a cultural/political peace can be achieved during the course of my own lifetime. We simply waited too long to make supply side improvements at local levels, and the consequent fighting over scarce resources - even though many were artificially induced - won't be easily eradicated.

Meanwhile, we are in danger of losing more personal, market, and political freedoms in the years to come. While a relative few still defend free markets, the majority of these seek solutions along the margins. Alas, this approach mostly accrues to those who already benefited from recent sources of prosperity. Yet societies struggle to remain free, when economic progress doesn't occur in ways which lead to gains for all of society - not just those who have already won. 

In particular, the winners have all but cancelled the game for many participants, by making too many claims on nominal income. One reason this matters, is that the Fed learned the hard way decades earlier, what would happen once it allowed too many winners to insist on their excess claims! Yet the Fed monetary policy tool is a blunt tool. Meaning, the Fed can't choose who wins and loses once the monetary limits are drawn. For that matter, governments shouldn't have to choose, either. Instead, economic inclusion and the good deflation which encourages it, should be the responsibility of millions who participate in supply side activities. Yet many supply side decision makers have instead stood by, while societies lay blame - or excess expectations - in places where they really don't belong. 

Both the pandemic and the unexpected circumstance of primary market (originating wealth) turmoil, has meant hard lessons for this writer. Like many, I had taken "efficiency" aspects of primary markets for granted. What I never realized, was the fact such efficiency can take decades to achieve, in times of general equilibrium change. Plus, oil production is so central to how our most recent equilibrium became defined, in the first place. I should have understood well before now, that primary markets would need more nominal income space as absolute necessity, for wealth origin activity to continue as before. This, in contrast to the nominal income which secondary market participants demanded, in some instances for no better reason than knowledge providers were morally worthy of the sacrifice populations "should" make. 

As it turns out, our most direct sources of wealth have little choice but to make additional claims on nominal income, instead. Until now I'd believed secondary markets would try to keep pushing originating wealth sources out of their way, for Fed handouts. Instead, cutbacks in applied knowledge as it is currently utilized, are already underway. What recently happened to some of our most important markets, is also a reminder how peak oil finally arrived, despite recent fracking gains. Yep, we worried about peak oil decades too soon. 

Going forward, I will continue to focus on the lack of overall balance in general equilibrium conditions. For now, the Fed needs to make space for primary market evolution, but that doesn't mean citizens can't find ways to further evolve the human capital of secondary markets. Recall also that housing is a bridge between primary and secondary markets, for its monetary value represents both originating wealth and services generation. The paradox of traditional housing is that too many claims on nominal income now exist, while millions continue to need housing. Yet the Fed had little choice but to pull back early, well before existing need could be met. It's time for housing to further evolve. Due to its very nature as a bridge between primary and secondary markets, housing is paramount in equilibrium balance. Housing and its associated ownership frameworks must change into more realistic forms, or societies will continue to suffer.