Wrap Up for March 2017

With self driving vehicles on the way - even as twenty percent of males in the U.S. currently make a living driving vehicles - perhaps the coming automation deserves a more proactive approach.

On the impact of India's demonetization.

Three maps that show how U.S. metros are doing.

Healthcare groups were opposed as well.

James Alexander: Productivity is both obvious and a mystery.

Income, versus the superstar firm.

Mark Buchanan highlights the equilibrium coordination problem, which contains a degree of complexity the late Kenneth Arrow took into account. I also appreciate the "Out of Equilibrium" picture in this Bloomberg article. Occasionally I have that "out of equilibrium" sensation, while taking walks in an area where most people use motorized vehicles.

Marcus Nunes explains that too many still subscribe to the unemployment-inflation nexus.

"Going upstream" to better address the causes of poor health.

Why did the Fed start paying IOR?

From David Beckworth: Monetary Policy Analysis is Hard: Inflation Edition

Ricardo Hausmann reminds us how the use of knowledge does not disperse as readily as other aspects of wealth.

Timothy Taylor takes a look at the value of household production.

"The proportion of respondents who applied and were granted credit over the last 12 months continued to decline..."

A lack of self employment is likely associated with the decline in labour market mobility.

"...global authoritarianism is probably poisoning our political climate more than many people recognize."

Is "purple America" a thing of the past?

Complex systems could benefit from a new mathematics.

Another reminder, how valuable the Institute for Justice has been.

Scott Sumner started some conversations with "My Vision of Macro"

The automation challenge is only beginning.

The dangerous obsession of inflation.

Metrocosm nicely illustrates a history of U.S. government spending, revenue and debt.

The CBO report for The 2017 Long-Term Budget Outlook

When Coordination Becomes "Too" Efficient

Two posts from earlier today were otherwise different in nature, but I noticed an interesting connection between them in regard to this post title. One could say today's institutions are doing such a good job sorting for preferred characteristics, they pose further externalities which are gradually becoming more difficult for societies to manage, over time. Specifically, when those externalities are people.

First, Timothy Taylor in "How Between-Firm Inequality Drives Economic and Social Inequality", highlights quotes from an essay by Nicholas Bloom:

The real engine fueling rising income inequality is 'firm inequality'...the best educated and most skilled employees cluster inside the most successful companies, their incomes rising dramatically compared with those of outsiders. This corporate segregation is accelerated by the relentless outsourcing and automation of noncore activities and by growing investment in technology.

However, firms aren't alone, in their contributions to inequality through closer coordination for similarly aligned resource use. As it turns out, municipalities sometimes benefit from similar strategies. In "Restrict Supply, Subsidize Demand", Arnold Kling quotes the Los Angeles Times:

Home builders are not keeping up with demand for homes in California. 

Hence the proposed supply side "solution": subsidized demand. Again, from the Los Angeles Times:

a lot of local municipalities have first-time home buyer-assistance programs and people should look at those programs in their area. You also may be able to qualify for additional assistance as a first-time home buyer based on your occupation, for folks like teachers, firefighters and law enforcement. 

What's interesting is that the listed occupations are necessary components of any thriving community. Yet while private firms increasingly sort for high or low income levels, public sector incomes tend to be a moderate income range - one which ends up competing with lower income levels for an already limited market in "affordable" housing. So if local home prices are mostly well above a given national average, municipalities need to find ways to "make room" for important service functions. The subsidy mostly works as a sorting mechanism. Hence locals "solve" for the services coordination problem, but the result doesn't look like a free market solution.

Yet consider what local public and private interests are attempting to accomplish. Much local real estate becomes closely associated with the core elements (or "core" employee ownership) of today's prosperous firms. Nevertheless, many firms now outsource for non core employees. And the lower levels of compensation these employees receive, mean they'll be searching for affordable housing as well.

While between-firm inequality may not be "fair", or public employee housing preferences on the part of municipalities "free market", these dynamics are different from earlier forms of rent control. Public and private institutions likely resort to these methods because they find them necessary to fulfill their own societal obligations. If public and private interests find it simpler to maintain coordination structures within a similar income range of income, why not strive to broaden this approach so as to make more such clusters possible along a wide range of income potential. Without such efforts, too much knowledge would instead end up clustering along a higher income range, where it becomes increasingly difficult to reach a wide range of markets.

In many respects, a services based economy is different from the spontaneous mobility of an earlier period when it was simpler for a wide range of income groups to live and work in close proximity to one another. Much of this was due to the greater flexibility of tradable sector activity, in which both output and marketplace definition was often subject to continual change in definition. The earlier prominence of tradable sector activity was not only more conducive for physical mobility across regions, but also the mobility of differing income levels among local groups.

That mobility is particularly missed now, as society slowly adjusts to different patterns of wealth creation. It is no longer a simple matter of redistributing wealth or knowledge based skill, from tradable sector output. However, with a little luck, redistribution can take place via time value, and its associated potential for knowledge dispersal. Greater mobility might once again become a possibility. Even better, coordination would no longer be "too efficient". After all, time value could once again pick up the thread that was dropped, when employment in relation to an ever expanding output, finally completed its logical course.

The "New Normal" as Exclusive Territory

What's wrong with the "new normal", especially as central bankers prepare to pull back further on quantitative easing? Even though some central bankers are still easing monetary conditions, it won't be long before they reverse course, and follow the contrarian lead of the U.S. However, policy makers risk creating new problems, if they give the impression they've done all that's necessary, for economic stability.

James Pethokoukis recently posted his own concerns that the "new normal" could be here to stay, "unless we do something about it". He points out what is a most telling graph, in a recent paper from Brookings. This graph highlights not only a gradually declining labour force participation rate, but also reductions in aggregate output.

And how to think about further rounds of monetary tightening, given losses in discretionary spending which populations continue to face? More income is being allocated for basic life necessities. Without sufficient monetary representation for all concerned, there's even less room to support the productive sectors which have been responsible for centuries of progress. Given these circumstance, declining monetary representation implies less discretionary spending over time, on the part of more households in the future. Will the majority of economic activity, eventually become associated with exclusive territory? Regarding the problems of discretionary income, Arnold Kling wrote:

There is a significant portion of the population with above-medium income and close to zero saving. I think it is hard to tell a story that explains that in terms of rational behavior. Remember we are talking about a lot of people, not just a few random exceptions.

As loans continue to mature, central bankers will gradually unwind their large balance sheets. There's a good chance that debt formation will play a less significant role, in the near future. However this likelihood is more problematic than it may appear. After all, new alternatives for wealth creation which go beyond further debt formation, are not yet on the horizon. Consequently, many who still lack economic access, are less likely to change their circumstance for the better, any time soon.

Perhaps the fact that debt formation has become less associated with wealth creation, and more associated with economic access (such as student loans and home mortgages) is an apt indicator of a mature equilibrium in need of redefinition. Even though new templates for economic participation would be difficult in the heart of general equilibrium, that shouldn't stop the creation of alternative options for economic participation along the margins. Otherwise, the new normal may begin to look more and more like exclusive territory, intended mostly for the best and the brightest.

Much debt which central bankers have become so anxious to unwind, originated from those who sought economic access on society's expected terms. New terms of economic engagement need to be actively pursued and already in motion, before any new normal can be considered valid. Wealth creation needs stronger structural foundations, which requires less debt formation to begin with. Otherwise, the new normal would mostly represent a closed door, to those presently deemed unnecessary for a 21st century economy.

Are Reasoned Arguments Still (Publicly) Useful?

Perhaps not as much as one might assume. Political discussions in particular have become more polarized, even as professionals attempt to do the "hard" thinking on behalf of the average citizen. How much uncertainty regarding long term prosperity, can be traced back to a failure of economics, for instance? One can only wonder.

Even though reasoned arguments can still be found in national discussion, statistics are often expected to perform much of the "heavy lifting". Narratives increasingly fill the role of persuasion as well, even though they are sometimes presented in a biased fashion. Narratives and statistics may substitute for reasoned argument, especially if subject matter becomes so complicated no one has time to take more complex factors of discussion into account.

While in the process of rereading "Thinking Like Your Editor", I was reminded that many serious non fiction writers do not find argumentation as useful, as did previous generations. For instance, Susan Rabiner writes of her younger authors:

...many say they associate argument in writing with a type of discourse long gone out of fashion - the deductively reasoned essay. Argument, I am often told, is what authors from another time employed to win over readers to the validity of their analysis in the absence of data to prove it. As one author put it, today one's data is one's argument.

"Thinking Like Your Editor" is a pure pleasure to read. Even though - speaking as a former bookseller - this writer's guide also serves as an apt reminder, how much our world has already changed. I especially agree with her response to the above author:

Let me put this misconception to rest. While good argument is most effective when built on solid research, a piling on of facts does not an argument make. Absent an intellectual process that carefully marshals and positions these facts in support of a point, even the most thorough accumulation of data will come off as a boring recitation of all the author knows about the subject. 

In fairness to those who still enjoy reading serious nonfiction, there's only so much time to delve into the particulars of fields outside one's main interests. Hence books which rely more on narrative than argument, can tempt readers to sample what they might otherwise pass by. Like statistics, narrative can "persuade" in ways which require fewer demands on a reader's thought processes, than complex reasoning. In one sense, research results serve as a form of shorthand for the informed citizen, who has little remaining time for the more difficult demands of reasoned argument.

Reasoned argument has also suffered, from too many crude applications of the term. How many believe arguments to be little more than personal disagreement with others, for instance? Even so, argument is the best means by which a writer can pull together the various strands of their thought processes into a cohesive whole. Again, from "Thinking Like Your Editor":

Yet argument is more than a set of expository or rhetorical skills. Like art itself, a successful piece of argument communicates somewhat more than it says explicitly. It stimulates readers to think in new ways not only about the author's topic but about other aspects of their lives as well.

A Macroeconomic Dimension for Productivity

Is it possible to think about productivity in terms of aggregate (supply side) output potential, alongside the microeconomic terms in which productivity are generally expressed? One reason this is important: the macro effects which accrue to sector divisions can sometimes act as equilibrium constraints, as is occurring now. I'm concerned these equilibrium constraints have not been fully taken into account, in the productivity discussions of the present.

Yet the macroeconomic dimension of productivity was touched on centuries earlier by Adam Smith, well before economics became recognized as a individual field of study - let alone micro and macro. Even though Adam Smith recognized labour divisions as either "productive" or "unproductive" (a macro concept), his divisions of labour terminology and its associated microeconomic context are most frequently referenced in the present. For instance, the site "Economics Help" highlights an Adam Smith quote as a human capital reference:

The greatest improvement in the productive powers of labour...seem to have been the effects of the division of labour.

Smith's above quote is microeconomic in nature, for it illustrates internal institutional coordination. Yet his broader labeling of labour divisions, holds an important macroeconomic dimension. In a "Wealth of Nations" chapter entitled "Of the Accumulation of Capital, or of Productive and Unproductive Labour, Adam Smith begins:

There is one sort of labour which adds to the value of the subject upon which it is bestowed: there is another which has no such effect. The former, as it produces a value, may be called productive; the latter, unproductive labour...the labour of some of the most respectable orders in the society is, like that of menial servants, unproductive of any value, and does not fix or realize itself in any permanent subject, or vendible commodity, which endures after that labour is past, and for which an equal quantity of labour could afterwards be procured. The sovereign, for example...are unproductive labourers.

In part, Smith's concern appeared to be that "unproductive" labour did not contain the seeds of its own self replicating processes. Productivity ultimately comes down to output, and time based product thus far has been organized in ways that output is constrained at the outset. On the other hand, the capital investment of tradable sector activity is self replicating, because it takes place as a closed system in which investment is directly aligned with output. Adam Smith spoke extensively of the fortuitous wealth creation circumstance of this closed system.

Whereas the output of non tradable time based product, takes place in a general equilibrium construct (or open system) which depends on system wide resource capacity to define total non tradable sector output, instead of internal coordination elements. The result is time based product which has no means by which to directly align human capital investment with total output gains, or by extension, greater productivity.

What occurs instead, are continuous efforts to improve aggregate quality gains. While this human capital improvement/investment approach is effective in the closed loop of tradable sectors; in non tradable sector time based product, the process of seeking productivity gains becomes like a dog chasing its own tail. How so? Due to reliance on an open system to coordinate human capital in relation to output, quality gains often result in human capital investment which is more extensive than the system output of time based product, over time. This process also results in greater debt formation and the Baumol effect.

The open ended macroeconomic problem of time based product, or the "unproductive" labour of Adam Smith's time, is one reason I've suggested symmetric compensation and coordination, which could align human capital directly with output in ways that don't allow the costs of human capital investment to outweigh total output benefits, over time. Instead, quality gains in time use would accrue from individual to group efforts capable of internalizing a wide range of time use potential which otherwise is not readily captured.

This internal coordination and time quantified process would also exist - like tradable sector activity - as a first mover position, capable of generating new economic growth. Best, the process would eventually provide new product without the burdens of increased human capital investment costs, in relation to total output. One could also say that the macroeconomic dimension of this process, is the capture of internal resource use flows that eventually restore balance to the tradable and non tradable sectoral problems which presently inhibit long term growth.

Symmetric Compensation as an Economic Option

In other words: I don't suggest symmetric compensation as a repudiation of the status quo, but as a counterpart to equilibrium conditions which are more tightly defined than generally realized. Symmetric compensation would allow individuals within specific groups, to coordinate time value in ways that allow an additional level of economic access. Best: the process for doing so, would take place as new wealth generation.

Symmetric compensation includes room enough for meaningful coordination of multiple skills levels. This could prove particularly helpful, if the asymmetric compensation which individuals seek on merit based terms is in short supply, for whatever reason. The equilibrium constraints of asymmetric compensation are a major concern for me. Yet I'm still trying to develop a simpler language, for those who aren't economically inclined, why I believe purposeful economic responses are so vitally important in the first place.

It's imperative that I learn to do so, for this project might eventually fizzle out if I don't gain sufficient clarity for the average layperson who comes across my work. Books such as "Thinking Like Your Editor" (2002) by Susan Rabiner and Alred Fortunato, are apt reminders of what is at stake. The authors stress the importance, of knowing who your audience consists of. And just because something is compelling to authors, is not necessarily enough to make it compelling to others.

Some may recall that last year I began organizing material more closely, for a series which will eventually be located on the sidebar of the blog. Since the beginning of this blog I've worked on material that is actually intended for several audiences. Hopefully, the divisions for (eventual) book material will help with those designations.

One conversation last year in regard to audience considerations, essentially came down to this: why did I believe it was so difficult to access important services? After all, if I was willing to take the effort, plenty of marketplace options were already available. Those same options for time based services were also available to others, as well. Why was I making economic access, appear to be such a difficult process?

To the extent services can be available (at least in some areas), my challengers were right. If I wanted or needed something enough to go the extra mile, chances were I could find a way to make it happen. Indeed, a similar rationale applies for one's personal efforts in securing work. If one wants employment "badly" enough, the determination to do so, can be apparent to others. Hence the different economic approach I've suggested, sometimes appears as though an affront to systems already in place.

Yet it is not my intent at all, to deride or dismiss what exists now. When I envision existing work and service options as a constrained equilibrium, my framing doesn't quite make sense, to those who live and work in these demanding environments on a daily basis. One mostly finds the clues of constrained equilibrium, in governments whose citizens are becoming less inclined to share either jobs or services with anyone they perceive to be "outsiders" in some important respect. Consequently, the political framing often becomes construed as politicians who "don't have enough humanity", to maintain even the basic sets of knowledge use one expects to find in a civil society.

I don't disparage the fact that gaining success and "the good things in life" takes tremendous effort. Personal diligence and stamina are most deserving of societal reward, and we celebrate those who are successful for good reason. Nevertheless, people can be quick to assume that those who fall behind, just didn't want success enough to really try. Sometimes that's true. But how often does this assumption arbitrarily condemn those who don't make the cut?

After all, the result may not be one of isolation for a day or a year, but possibly a lifetime. Basic income, even if it should one day prove feasible for large nations, would be a lousy consolation prize for those who would have preferred real connections to life challenges. Indeed, basic income would come to symbolize a door permanently closed, because it became too difficult to envision economic opportunity for a full range of aptitude and skill potential..

Just the same, no one should be expected to rely solely on symmetric compensation, if such methods prove inadequate for personal aspiration. Everyone deserves the chance at a merit based asymmetric income, wherever such an approach is possible. Rather: the bigger concern is one of a lack of economic choice outside the constraints of a too narrowly defined equilibrium. A lack of economic options, could become associated with permanent societal divergence in intellect and ability. That's one "natural experiment" we can only hope will not play out, for much longer.

And it could, if tomorrow's automation taps mostly the highest skilled individuals, while abandoning others to low skill "leftover" jobs. There's no reason for such a dystopian reality, if knowledge can remain integrated across all levels of skill and ability. This is what symmetric compensation could make possible, so that patterns in knowledge use do not diverge any wider than necessary, in the long run.

Notes on Productivity Considerations

In a recent Brookings article re productivity, the authors wrote:

Improving workers' productivity increases their value in the labor market. It is the main mechanism by which they are able to command higher wages and improve their well being...it will be very hard for incomes to rise without increases in productivity.

Alas, we've been trying to improve worker productivity for a long time, as the costs of human capital investment now attest. Yet human capital investment costs fly in the face of sluggish wage realities. What is the real underlying issue?

Since wages have scarcely risen for decades, it helps to remember why wages were able to rise for so long. Wages rose because output was steadily rising, in relation to other production factors. It's difficult to stress this enough, especially given the level of today's ongoing human capital investment.

There's further rationale for sluggish wages besides a diminished long term growth trajectory. The dominance of today's non tradable sectors are nonetheless dependent on other revenue streams. This is why - instead of being an active contributor to additional growth - these areas maintain a relatively stationary level of output.

Whereas formerly, when tradable sector activity was dominant in developed nations, increased output meant new growth, increased profits and rising wages for a larger percentage of the workforce. In recent centuries, this form of organizational capacity proved a reliable route to rising wages. As time based service sectors gradually expanded in relation to the earlier structure, productivity in terms of potential output, fell at the same time.

What is important, however, is not that high skill (or other) time based services are "unproductive". Rather, they are productive in ways which - while still valuable wealth contributors - don't readily translate into higher wages for more than a limited segment of any population. Consequently, time based services generation would greatly benefit from a new understanding of productivity. Labour abundance and its associated lower wages is something to be reckoned with for the foreseeable future. Hence it's time for a new institution: one capable of turning this unforeseen event towards a broader societal gain.

How might such an institution respond? Imagine a local and decentralized equilibrium, in which the initial product on offer is time based services. These services would generate new wealth, as each individual purchases time units on offer from others. Each matched set of time value would serve as paid "mini loans", to generate active use of knowledge, skill and other focused endeavour. Each set would be backed by asset value and a "safety net" framework of mutually desired activity.

In this setting, the nominal representation of wealth is relative, as contrast with the output that is sought. Even though one's time value might be compared to a small wage, an entire basket of services provides matching possibilities for one's own skills capacity. This time based output could prove quantifiable and easier to account for, than the asymmetrically compensated skills sets which are often buried deep within other institutional functions. And since technology is integral to the process, previous worries about wide variations in skills, would be easier to address.

For tradable sector activity, productivity is a result of output gains from the gradual reduction of labour hours. Even though the time arbitrage described above is a stationary level of time (or labour) output, the gains accrue in terms of time quality and group costs for services which otherwise require the additional factor of extensive human capital investment. In time arbitrage, the investment process accrues gradually, with each individual an active part of skills building and knowledge utilization.

Best: more service product would eventually become available for less cost, than what is presently necessary to achieve a productive outcome. What's different is how the organizational capacity arrives at this result. Lower costs for time based service formation, allow an altogether unique level of nominal income and asset formation, from what is often expected in general equilibrium conditions.

To sum up: output for time based product is a fixed quantity, which makes it different from the often capital intensive structures which so contributed to productivity in the past. Human capital of all kinds exists at an internal level, which has yet to be fully acknowledged in the marketplace. Today's changing output structure need not be a threat, if this new pattern can be harnessed so as to eventually bring the costs of knowledge use within the reach of entire populations. Just as tradable sectors continue to bring a wide variety of goods within the reach of small incomes, the same could also be accomplished for services. A new way to envision service productivity, could more than compensate for a future which includes the lower wages of abundant labour.