Growth, Output, and the Fiscal Control Factor

Recently, in "The Perennial Problem of Predicting Potential", John C. Williams of the San Francisco Fed wrote:

Potential output - the maximum amount an economy can produce over the long run - is an important indicator policy makers use to gauge a country's current economic health and expectations for future growth. However, potential growth can't be observed directly, and estimating it is difficult, even with modern, sophisticated methods. Modern policymakers are well advised to account for the perennial problems of uncertainty surrounding these estimates.

He adds:

Potential output depends on the supply side of the economy, that is, the number of willing and able workers and the amount that each can produce.

While this is true in a larger sense, regular readers are familiar with my arguments that primary or secondary marketplace positioning is also important for output and long term growth. Not only is too much secondary market positioning a long term threat, the Fed never accounted for the large drop in aggregate spending capacity at the onset of the Great Recession. What - specifically - about the supply side, might have contributed to the Fed's loss of faith in economic dynamism?

A considerable amount of growth potential is undermined because of fiscal control factors. Not only do these control elements ultimately show up as new Fed fiscal and monetary "tools", they also place further constraints on knowledge use and economic access. Meanwhile, citizens in developed nations are still being unnecessarily marginalized, due to constant revenue claims on output as it occurs. While some wealth "set asides" take place as government fiscal priorities and obligations, the existing revenue claims of the private sector are also extensive in two areas: high skill time based services, and finance.

Indeed: The recent dominance of time based services includes double uncertainties in this regard. Human capital investment is experiencing diminishing returns, as fiscal support of high skill product only enhances long term skill use differences, among citizens. Worse, policy makers attempt to hide who - and what - bears the greatest responsibility, for the human capital deemed "more capable" than the majority of the population as a whole.

Too much of the supply side now wants limits to growth, in the form of direct control over non tradable sector preferences for fiscal policy over monetary policy. Whereas monetary policy has the potential to contribute to reliable marketplace expansion and output gain, non tradable sector providers are sometimes uncomfortable with the dilution of marketplace domination which "easy" monetary policy may imply. In the past, some non tradable sector providers may have asked for fiscal assistance in part because such revenue was easier to control at local levels, than monies ("easy" monetary policy) which of course are not specifically directed towards special interests.

In all of this, what has often remained hidden, is the means by which fiscal policy has allowed some supply side participants to limit the marketplace growth they do not actually want. We need to move beyond the fiscal controls which stand in the way of long term growth and output gains. Fortunately, it would be possible to do so, by allowing high skill time based services to directly contribute to wealth creation. Even though aggregate time value as an economic unit would mean some loss of marketplace control on the part of special interests, it's worth taking the chance on renewed economic dynamism, if only to ease the political burdens of the present.

Musings on the Preservation of Knowledge Use

Given the vast dispersal of knowledge that became possible in the 20th century, it's paradoxical that many rights to the use of knowledge are associated with personal stamina. Today's formal education resembles a marathon race, which most individuals are expected to "run" while still young! In part, my own lack of physical stamina (not to mention fear of debt), stood in the way of completing a college degree in my twenties or thirties, since it was necessary to work full time.

Nevertheless, many baby boomers were able to complete their studies while carrying full time workloads. Who would have thought those earlier options for avoiding student debt, would become a sore spot for college students today? Not only does college now involve higher risk for human capital investment, a decade or more of student debt or extra years of study may be necessary. As one commenter noted at the linked Marketwatch article, once debt becomes a requirement for consumption, you're no longer working with a sustainable model.

But why is this the case? There's no simple answer, for there are many interconnected factors which have raised the bar not just for those who seek entry, but also for the institutions involved. For example, much as healthcare institutions in the U.S. have done, our educational institutions reach for revenue beyond national borders in ways that citizens increasingly question.

We are in need of broader economic platforms for knowledge use, which could provide more room for both practical and experiential endeavour. The current impasse is about more than excessive government control, since many knowledge use roadblocks come with the blessing of private interests, who have incentives to control the supply of knowledge based product.

Similar problems regarding knowledge limits occur with school curricula, which too often offer the same basic formats instead of a full array of learning options for individual challenges. How many valuable books have unnecessarily fallen by the wayside, as a result? In a recent blog post, Tyler Cowen noted that some of his "hidden" book influences weren't available through his formal school system. That was certainly true for me as well. When schools dismiss the value of books, authors find it more difficult to reach their intended audiences, and everyone finds it more difficult for learning to be shared and experienced with others over the course of a lifetime.

The intersection between formal education and the workplace has become so dysfunctional, that many have even become skeptical of those with a love for learning. Were we expected to sacrifice our passion for learning to the modern day czars of knowledge? Sure, it's one thing to be thankful at Thanksgiving that we don't have turkey czars. But most of us don't eat turkey very often, and yet our knowledge czars know that we imbibe knowledge in some capacity, every single day.

The (Platform) Future is What We Make It

According to Tim O'Reilly's new book, "WTF: What's the Future, and Why It's Up To Us", that future could either bring amazement or dismay, depending on how we respond. In his interview with James Pethokoukis of AEI, O'Reilly notes that - to some extent - platforms are "designed economies", then adds:

And we have been coming out of a period in which we kind of act as if the market is a natural phenomenon.

Platforms "optimize" for different purposes. For instance, O'Reilly explains:

We understand Google says optimize for relevance, Facebook says optimize for engagement, our financial markets - what do we tell them to optimize for? - optimize for corporate profits, that treat people as a cost, to be eliminated. So, are we surprised at what's happened in the economy? What if we made different rules for that algorithm? 

For one, I'd suggest that eliminating for unnecessary labour costs isn't necessarily as personal as his quote might be interpreted. After all: Labour costs are connected to organizational patterns in ways which go well beyond specific algorithms. What's more, these patterns are essential components for centuries of progress, in the tradable sectors where labour is recognizably secondary, to the ultimate or final product.

However, the dictates of our non tradable sectors need to be reexamined - particularly where time based (or centered) product is at stake. Is it possible to use knowledge in a context where we optimize for time value? Should we seek economic environments which need not subtract human capital due to budgetary constraints, we can do so by giving an economic dimension to the time value that matches our personal priorities and preferences. Since this time value would be defined via its own (mutually determined) resource capacity, it could generate a decentralized equilibrium that responds to the "different rules" O'Reilly suggests.

Time value that coordinates for time based product in relation to existing capacity, would also provide a new organizational algorithm - one that doesn't need to subtract labour costs for economic outcomes. Meanwhile, where skills capacity is deemed most important, those most likely to preserve their workplace participation in spite of costs, will be the ones with sufficient societal prominence so as to do so. And even these groups would only be able to preserve their skills capacity for a limited marketplace in terms of time based product.

How might one think about the creation of platforms that could generate new wealth via different means? Shane Parrish of Farnam Street, brought to my attention a Rolling Stone article including Elon Musk, and Parrish highlighted this quote:

In other words, if you want to create or innovate, start from a clean slate. Don't accept any ideas, practices, or standards just because everyone else is doing them. For instance, if you want to make a truck, then it must be able to reliably move cargo from one location to another, and you must follow existing laws of physics. Everything else is negotiable, including government regulations. As long as you remember that the goal isn't to reinvent the truck, but to create the best one, whether or not it's similar to other trucks.

Similar suggestions might apply for knowledge use system platforms, from their physical constructs to their digital dimensions. Again, it's not necessary to reinvent the practical or experiential use of knowledge, but to encourage new patterns that are more accessible, for those who are currently caught in the "do or die" circumstance of limited knowledge use access. Knowledge use organizational patterns which mostly select for the "best of the best", are scarcely enough for the wealth potential of human capital. The platform future is what we make it.

Democracy's Recipe: Consumption as a Privilege, Production as a Right

I decided to state the main point of this post upfront, to make certain it wouldn't be missed. Among the many concerns of this nation's founders, was the possibility that citizens' rights to produce basic necessities and services - which they were still free to provide - might eventually be undermined through legislation. Indeed, the ability of those early citizens to work directly with a wide range of resource capacity, was a major consideration, re why a (fledgling) democracy proved viable in the first place.

Many production rights have been lost so slowly and imperceptibly, that it's no simple matter to trace the histories of what has taken place in this regard. For that matter, many believe that regulations matter insofar as they affect the options of private industry, rather than the economic and social choices of private individuals. Nevertheless: The regulatory requirements of today's building codes - not to mention the extensive requirements for knowledge use - stand in the way of much that individuals could otherwise provide for themselves and others, since special interests now encourage local marketplaces which mostly cater to higher income levels.

Equally problematic: Many individual production rights were undermined in ways which can lead to an unfortunate rationale of lost consumption rights (think "rights" to healthcare). What's more, should anyone insist on rights to healthcare, others will view this as an unfair imposition on taxpayers as a whole. From here it's a quick slippery slope to arguments that democracy isn't a suitable form of government, as Will Wilkinson highlighted in "How Libertarian Democracy Skepticism Infected the American Right".

Before the current emphasis on cost containment in healthcare, many groups made efforts to increase marketplace capacity for all concerned, but these efforts mostly turned out to be additional resources for supply side capacity as it was already structured. These efforts also led to more firmly entrenched fiscal roles to subsidize healthcare - a burden which can only be (presently) relieved through gradual reductions in marketplace capacity.

It has been tempting for governments to make production rights a privilege for special interests, particularly since this also allows them to tap into the wealth capacity of these groups at local levels. However, government indebtedness for healthcare - in part because of retirement obligations - now means little room is left for discretionary responses in other circumstance.

While it could be tempting for some to do away with democracy, disallowing the poor to vote would hardly reduce the government debt loads which still lack long term budgetary solutions. Regular readers are already familiar with my suggestion for long term debt reduction: restore production rights to citizens. Not only could a supply side response remove the confusion about consumption rights, it would reduce the chances of debt becoming democracy's downfall.

Skills are Merely Subsets of Aggregate Time Value

Why should it matter? When we focus solely on specific skills, we miss the potential of aggregate time value as an adaptive response to the shifting economic circumstance of the present. And while specific skills tend to reflect specialization as well, non specific skill sets are more applicable to generalization, yet both can "exist on the same continuum". Indeed, the "generalized specialist" may be one practical approach.

Aggregate (or complete) time value - given the diverse options it suggests - contains the potential of adaptive responses for individuals and groups alike. The more flexibility we allow ourselves for personal time management, the less economic risk we ultimately face. Nevertheless, it's one thing to take on diverse monetary investments to reduce risk, and another to make diverse commitments for our time priorities. For more than a century, the majority of us have learned to dismiss skills and time use diversity as a reasonable option. But is it still rational to do so?

When we accept compensation for specific skills sets over a long duration, other valuable parts of our lives can slip away from us. Employment on these terms has never been as flexible - for instance - as the schedules of the farmer, the small business owner or CEO of a corporation, or even the varied routines of those who work from home. And when highly valued skills take precedence over a wide range of practical skills, the result is societal imbalance, between our most useful versus our most highly valued functions. As individuals and groups lose the ability to coordinate time based priorities, they eventually lose the ability to adapt and thrive, as well.

In the twentieth century, the opportunity costs were often minimal, when we gave up our personal time preferences for the skills priorities sought by our institutions. Nevertheless, this scenario is already changing, as automation and technology begin to substitute for what have often been extensive skill commitments on our part. Fortunately, defining the value of our time preferences in economic terms, is a good way to frame our personal priorities in a context not unlike employer priorities, as firms continue to replace labour with automation and technology.

Personally defined time value could also serve as a valuable economic unit. After all, it is much easier to quantify what we want to provide for others, and what we seek in terms of time commitments from others, than it is to quantify the actual interchange of skill capacity in a wide range of current service contexts. Even though it's difficult to define the level or value of skill we need from others in specific instances, we can readily quantify the time we exchange with others. Given the fact today's services have become so difficult to quantify in terms of output, a simple quantification of time commitments would be a considerable step forward. A better understanding of the true potential for services output, is no small matter.

When Signalling Becomes the Main Economic Option

Is education "overrated" as a social and economic signal? Even though college comes with a high cost, there's few other valid platforms for knowledge use, across a wide spectrum of economic activity. The fact so many choose the signal of a college degree, is also a reminder that not everyone can successfully opt for self employment, as well. One of the more unsettling aspects of economic stagnation, is that so many need to compete for what has become limited versions of a knowledge use platform in developed nations, especially given the monetary tightening that took hold with the onset of the Great Recession.

If more substantial economic options were already in place - options which could also make signalling less important - I wouldn't need to question the premise of Bryan Caplan's latest book, "The Case Against Education: Why the Education System is a Waste of Time and Money". The Amazon book review details "why we need to stop wasting public funds on education", and concludes:

Romantic notions about education being "good for the soul" must yield to careful research and common sense - The Case Against Education points the way.

Apparently his book is timely, if in fact some states are already contemplating dismantling their public universities. Given the fact Caplan supports free markets, however, his reasoning appears incomplete in a larger context. Has he considered the extent to which valuable human capital could be lost, without concerted efforts on the part of private industry to bring more knowledge and participants to 21st century workplaces?

And this is just a consideration of knowledge use in its most pragmatic forms. What about learning for the love of learning? Is not education which is "good for the soul", also good for our economic health - not to mention the real wealth of experiential product? By dismissing public education out of hand, Caplan must believe that economic progress would continue as before, only with less government support. Nevertheless, the best way to ensure continued economic dynamism, would be to generate better private means for economic access and participation. In other words, instead of taking something away, create something better. If private industry creates viable options which integrate informal education as part of their structure, populations would then have less reason to expect public education as a mandated requirement.

By itself, an argument to cease governmental support for education is a closed argument, which would quickly result in a more stratified society than we are already experiencing. I believe that thinkers on the right would gain more positive traction with citizens, by arguing for new and better platforms of economic and social engagement, which could ultimately reduce the incentive to maintain expensive forms of economic access. After all: Just as it is better to have a job in place before leaving an old job, it is better for a society to have new economic plans in place, before assuming the old plans deserve a stick of dynamite.

Are Non Tradable Sectors Capable of Exponential Growth?

In a sense the answer is yes, if one takes into account the potential long term gains for knowledge use and asset ownership which are linked to time and place. Nevertheless, these growth possibilities aren't exponential in the direct (measurable output) sense of tradable sector activity, since some of these technological and organizational gains would not need to be expressed as monetary expansion. In any instance, non tradable sector growth potential, as contrast with more obvious output from tradable sector growth, is relative by comparison. It is also this relative nature that has allowed knowledge providers to obscure the amount of input that has been necessary thus far, to achieve final product or output.

Also important are the "unseen" technological gains that are currently discussed, although with insufficient emphasis on the sectors involved. These gains particularly matter insofar as their non monetary nature should not be rationalized to reduce monetary representation, given the actual responsibilities that economic participants hold. And the same rationale of economic growth from "unseen" technological gains in today's consumption, would hold for future production gains, once they are finally able to accrue to individual production choices. One could also emphasize that technological production gains for all potential producers, are more important (economically) than the current "quality of life" consumption gains for consumers.

Consider why this matters. Today's economy remains stagnant in part because technological support for production capacity is being held back, in relation to technological support for discretionary consumer gain. Yet it is discretionary production gains, which allow individuals to bear responsibility for their own economic participation and access.

The monetary aspect of these supply side circumstance is important as well. Just as we don't need to subtract monetary representation from GDP for the non monetary consumption which results from today's technological advances, neither would we want to add or subtract from GDP, the non monetary technological production gains which could potentially accrue to citizens. Why? Again, the primary stabilizing purpose of GDP is to express the full nature of our monetary commitments to one another. Those economic commitments are for the time and product we either produce or consume, which comes with a financial cost.

Now I need to get more specific, as I wanted to highlight some incremental growth possibilities for the near future. Housing potential is the best and also most accessible example. Even though mass production of housing components is an example of exponential growth possibility over the long term, component production would nonetheless be limited (relatively speaking) in the short term by the actual physical locations in which people can live and work. However, there are a number of ways in which flexible housing components could contribute to economic growth at a higher rate than ownership of traditional buildings.

Replacement capacity is a major source of potential marketplace expansion, because inexpensive flexible housing components would allow individuals with limited income potential to replace older components which no longer function properly. They could be constructed so as to easily snap together, and they would include basic central units which already contain mass produced electrical and plumbing. Building component innovation such as this, would make it much easier for individuals with limited income to replace poorly functioning component units during times in their life when their resource capacity is particularly limited.

Indeed, one of the main problems for traditional housing, is that the fixed and solid nature of houses makes it difficult - for many on fixed incomes - to replace plumbing and electrical elements which have outlived their usefulness. Only recall this occurs too often for many who have long owned their homes, but now rely on social security as a sole source of income.

Component flexibility is important to maintain dynamic and responsive retail or workplace settings as well. Much of today's capital risk involves decision making processes regarding consumer wants and needs, which have become more difficult to "pin down" in recent decades. All too often, business ownership involves unnecessarily high risks, due to the fixed nature of building requirements. Flexible building components would reduce ownership risks so that more aggregate income can remain in play for shifts in business and educational endeavour at local levels.

What about the growth potential of knowledge use? Technology's best long run potential for non tradable sectors, would be in the form of decentralized organizational patterns, where economic time value can overcome the normal constraints of supply side knowledge use capacity. By way of example, knowledge as value in use with time value as the primary economic unit, would allow young students to participate in educational platforms which are wealth building, instead of wealth demanding. Time arbitrage would allow students to turn learning experiences into sources of (gradual) economic stability and human capital investment.

As economies grow, non tradable sectors generally follow the equilibrium creating dynamics of tradable sector activity, which are the primary movers of exponential growth. Recently, however, tradable sector activity has not had the chance to build additional wealth capacity in developed nations. Non tradable sector activity - by using resource capacity to generate wealth directly - could provide the additional impetus to tradable sector capacity which would allow it to resume a stronger growth trajectory. By reducing dependence on tradable sector wealth as a source of revenue, non tradable sectors could eventually reverse the trend of economic stagnation which has been with us since the Great Recession.