Wrap Up for December 2022

Aging boomers are just one of the problems for inflation, right now.

Has the "long twentieth century" actually ended?

Most popular business starts, by country.

Perhaps more municipalities will realize that some homelessness is simply irrational and unnecessary. 

Countries are experiencing losses in human development value. 

Content moderation isn't as simple as it sometimes seems.

Noah Smith explains how macroeconomics is still in its infancy. Scott Sumner isn't quite convinced. Both posts are certainly worth reading.

"Local governments have been opposed to any maps that show an increasing risk."

What makes wage distribution different in the U.S. from Europe?

Australia has been concerned about the possibility of World War 3.

A 2022 economic review in 11 charts.

Jason Furman highlights five economics books for 2022.

Inflation expectations are declining.

Shale fields in the U.S. are already starting to age.

Greg Mankiw's completed version of a recent paper for Brookings re government debt and capital.

A visual graphic for inflation by country.

Alas, when the financial system is bailed out, it becomes more fragile.

Total factor productivity isn't what it used to be.

It turns out unemployment was higher than necessary for 25 years.

Noah Smith interviews Ezra Klein.

There's plenty of mixed signals in the economic data.

What are the biggest power sources?

Innovation rankings by country.

Perhaps fragmentation makes more sense.

Highlighting Social Security "replacement rates".

Doctors and their families don't always follow the prescribed medical guidelines. My thought: some may prefer healthy food options instead, options which are occasionally out of reach for lower income patients.

Four hypothesis regarding inflation.

What macro did we learn in the 2010s that is worth keeping?

"Since the recovery began, velocity has been climbing back to its stable level."

Demand-formation as a constant adjustment process.

An indicator for recent tenants captures more recent inflation changes.

What made the recent monetary expansion different from 2009?

Core inflation and headline inflation require different Fed responses. 

End of the year reflections on recent economic trends. From Heather Long, Ryan Avent, Cardiff Garcia and David Beckworth. 

Jon Steinsson considers Fed communication and more in this interview.

Kevin Erdmann in a recent post highlights when credit essentially dried up for lower income level groups. 

Three economic indicators, visualized.

Is wage inequality starting to reverse?

Wrap Up for November 2022

David Beckworth explains inflation and the monetary targeting approach that could make it easier to manage.

Workplace productivity is more of an issue in times of high inflation.

"Selection, Patience and the Interest Rate"

A tiny home village now helps ease homelessness in Austin.

Peter Ganong on economic dynamism and resiliency (with David Beckworth)

First, curb inflation, then focus on other challenges.

"How quickly will wage growth slow?"

Seven monetary policy mistakes in 2021-2022.

Inflation has been particularly hard on real wages.

Short-term interest rates will likely remain high for several years. Yet monetary policy is still more loose than it may seem.

Water system management will become increasingly important in the years to come.

"Men are struggling."  Especially since the nature of work has dramatically changed.

"Debt Revenue and the Sustainability of Public Debt" (Ricardo Reis)

Texas needs to stabilize its rural communities.

Macroeconomics is still quite young.

Americans increasingly live in multigenerational households.

Some tiny homes are particularly built with flexibility in mind.

A "soft landing" remains possible.

A visual chart of healthcare spending and life expectancy by country.

Even though people in the U.S. benefit from fixed 30 year mortgages, this contributes to global monetary tightening right now. My thought: Since housing is such a strong transmission mechanism, affordable non traditional housing could actually function as a plus at a global economic level.

Silicon Valley is changing.

Despite rising nominal rates, the real interest rate is still low by comparison.

Why are there so many employment discrepancies?

Which hospitals are more transparent with their prices?

A Brad Delong draft for grand narratives.

Low income groups often need to move elsewhere once housing prices rise.

Life satisfaction changes dramatically with age.

A slowing in household formation will affect housing costs.

Somehow the Phillips Curve has reemerged as a policy guide.

How might FAIT be improved?

"Why Isn't the Whole World Rich?"

Many doctors remain unwilling to work in rural areas.

Real wage growth is down alongside productivity.

Low income students tend towards more practical forms of education.

Some charted international income distributions.

Current inflation specifics for holiday retail.

When negative supply shocks trigger output losses, how does this affect monetary policy?

More GenX and Boomers live alone, if only today's housing could reflect this.

It's encouraging to come across an argument for local community based care in mental issues. Indeed, "task-shifting" or "task-sharing are essentially examples of time arbitrage.

Some research re the city to government connection.

Land value differences in U.S. states.

Baby boomers affect general equilibrium conditions as they move through life stages.

Incentives Matter for Time Arbitrage Potential

An important aspect of time arbitrage is the need to secure time based services, starting with those which aren't exactly top career choices. Plus, these tend to be poorly paid, particularly services for elderly assistance. And since people who work for the elderly may struggle with their own financial responsibilities, they aren't always trustworthy and reliable for the people most dependent on their care. 

Granted, it can seem the obvious solution is to ensure adequate pay for all employees, whatever job one happens to be responsible for! Unfortunately, societies have shown time and again that the notion of "livable wages" for all, isn't feasible, despite the tremendous need. My regular readers know that the fact money will continue to be insufficient incentive for such work, serves as a starting point for my own suggestions regarding markets for time value.

If we can't create markets which specifically reward time value, there may ultimately be cultural ramifications. For instance, as the costs of traditional healthcare and nursing homes continue to rise, societal expectations would increase for individuals to make undue sacrifices for their own family members. While it's understandable that existing institutions are less willing (or able) now to pay for time intensive services, we need new institutions which can do so in their stead.

When it comes to incentives for time based markets, one thing to consider is the need for autonomy, and how it revolves around ideas of fairness associated with shared responsibilities. Still, when we purposely spend time with others, those interactions often benefit from the undivided attention of both individuals involved. Indeed, this undivided attention can often be critical to services outcomes. 

Yet attention to details with its associated time related costs, is often more costly than what existing institutions can still provide. When institutions are willing to pay well for time based services, they may expect high skill knowledge providers to commit to such a degree, that burnout becomes inevitable. Even so, excessive time commitments can be burdensome whether one engages in simple skill sets or high skill activities. In time arbitrage, a full range of skill levels would be apportioned so as not to create undue time commitment burdens. A fuller sharing for all skill levels, could also bring respect to work which is now almost treated as a form of social "punishment" for those who struggle with traditional education. 

Here are just a few of the links I've come across lately which highlight the need for a better marketplace for time value. Occasionally I find myself overwhelmed at the extent of time based services needs which simply aren't being met at any skill level. Alas, as a society we have scarcely begun to address these concerns. How could anyone claim real economic progress, if societies keep trying to move forward without better means of coordination for applied knowledge and time based endeavour in general? The sooner we face the fact that money alone cannot accomplish these vital tasks, the sooner we can begin to create new free markets in time value.

How to think about better aligned incentives in this regard? We share a number of basic time commitment priorities in our lives which warrant consideration. One way to think about the processes involved is this: What services are specific individuals willing and capable of providing, so long as doing so doesn't interfere with or somehow impose on the other important facets of our lives? Recall that what anyone might be tolerant of providing in an hours time, is not the same thing as activities one prefers on a more regular basis. Yet markets which rely solely on monetary incentives, don't distinguish well for these differences in relative time preferences.  

More specifically, time arbitrage could take place in several ways. The basic form would be agreed upon time share agreements between two individuals. These commitments would  occur as close to the same time frame as possible. That said, it would not always be possible to benefit from time arbitrage on these terms. Fortunately there are also incentives that would compel individuals to commit time, for which one would hope to benefit at some point in the future.

For one, there are moments of spontaneity, in other words those occasions when people do something for others "just because". One way to think about this is "paying it forward", only this approach tends more toward monetary gifting than services. However, the voluntary actions of time arbitrage would be recorded in the same manner as other aspects of time arbitrage into a broader framework. In so doing, the initial voluntary action functions as partial economic unit which turns into a completed exchange (and its associated full economic value) once the provider accepts a voluntary action from someone which they don't need to reciprocate.  

Another important economic incentive is the natural concern for our own well being, should we become temporarily or even permanently dependent on others in some capacity. This of course also ties back to the concerns of elderly citizens mentioned above. Toward this end, time arbitrage functions as a form of social time based insurance. It's an example of partial matches we can initiate in the here and now which might not be reciprocated for a long time. Such matches could prove especially helpful during periods when we fall short on more immediate time matches with others, for instance. What particularly distinguishes social insurance from monetary insurance is its direct nature, in terms of mirroring the kinds of attention we would seek from others should we become more dependent on them. One way to broaden the potential of time arbitrage for purposes of social insurance, is to seek matches not just for one's personal needs, but also in terms of home maintenance and/or care for family members. 

There's one more consideration as well. When it comes to personal incentives, what are our greater aspirations in life? How might those aspirations change over time? Local community coordination would not be complete, if participating groups didn't make room for everyone to discover challenging work which suits their own motivations and long term goals. Recall as well, how this is the part of time arbitrage which has the potential to contribute to applied knowledge in its more complex forms. What's different in this regard, is the time arbitrage approach to knowledge sharing. 

Wrap Up for October 2022

Three takeaways from the UK market meltdown.

Some observations on David Ricardo's letters.

Fiscal dominance, or financial dominance?

Considering the downsides of divisions of labour.

An explanation how QE communication broke down at the BoE.

Tim Harford explains what we keep getting wrong about inflation.

Roger Farmer reflects on the life of Axel Leijonhufvud.

How can the U.S. economy be worse and better at the same time?

NGDP would be a simpler way to do monetary policy.

When it comes to cutting the costs of expensive skill sets, some cutbacks are more dangerous than others.

This year's Nobel explains why banks exist in their present form.

Edible cities are planting fruit trees and vegetable gardens in their public places.

What if the Fed hasn't even tightened yet?

Scott Sumner reflects on Slouching Towards Utopia.

Ordinary workers hold little importance in the health and progress of today's economy.

Michael Mandel discusses productivity (and more) with James Pethokoukis.

The Fed's battle with inflation is far from over.

Where Britain led the U.S. is likely to follow.

Michael Spence notes a changing global equilibrium.

"We can't afford the state we want and voters don't want the alternative."

Some takeaways from the September CPI report.

Perhaps the Fed's FAIT framework could be salvaged.

Greg Mankiw thinks the fed might be overdoing monetary tightening.

"Classical liberalism vs. the New Right"

Many medications were reclassified as OTC because of the wealth of information consumers now have at their fingertips.

American debt-ceiling standoffs may become more risky now.

Wages have risen at the bottom in the last decade.

Some economics history book ideas for the holidays.

Noah Smith feels that a "critical point has been reached." And, Chris Blattman is worried about the chances of WWIII with China.

The global natural interest rate may have fallen from 1.9 percentage points between 1985 and 2015. Plus, it's the least tangible capital that tend to the lowest productivity levels.

Hospital policies should also "do no harm".

In some respects political violence is all too familiar.

Might Good Deflation Counter Excess Monetary Demand?

What makes good deflation so desirable? It all starts when increased output is possible with fewer resources overall. Once price reductions per unit come into play, they in turn lead to real wage gains and higher productivity levels. I believe that good deflation could become a services sector response to counteract high inflation and rising interest rates. Given the many positives of good deflation, what accounts for such resistance to its potential in housing and time based services?

Even though both areas must deal with the natural scarcities of time and place, much of the bias against good deflation potential is inadvertent and political in nature. Not only are such biases protectionist, they discourage adaptive evolution in time and place based product - evolution which could otherwise augment their capacity despite their natural limitations. While time based skill and land as real estate are certainly not exponential in nature, they could still add additional output through flexible coordination of knowledge and land use potential.

Bias characteristics also differ depending on the markets and sectors in question. For instance, progressives and conservatives increasingly prefer a restoration of local manufacturing over global free trade. Fortunately - even though this anti free market bias will increase manufacturing costs to some degree - globalized manufacture should continue benefiting nations in the foreseeable future. At the very least, it's reasonable to expect good deflation to ultimately be restored in global markets. Once tradable sector resource access is more stable and predictable, it should become more cost effective as well.  

Societies are fortunate indeed, that tradable sector activity is often managed for full production efficiencies. Still, during times of high inflation, we're reminded of the dangers of taking good deflation in tradable sectors for granted. Indeed, relying on the serendipity of long term good deflation (along with the more recent low inflation pattern) made it easy to disregard the long term inefficiencies of non tradable sectors. These inefficiencies remain in place due to countless quality requirements, many of which have been exacerbated by government subsidies. 

Recall however, that these requirements end up as ever more inputs in relation to aggregate output. Even when quality gains are worth additional costs for some, other groups suffer efficiency losses which in turn require additional personal labour for non discretionary needs. Consequently when it comes to quality of life, some income groups are actually moving backwards. Again, constant calls for higher wages occur because lower income groups need to work more hours than is sometimes feasible to meet their financial responsibilities.

Fortunately there are already better production methods which could establish disinflation in housing - methods which could eventually lead to good deflation as well. Just the same, a considerable amount of social and political bias has prevented the majority of flexible housing options. In this restrictive environment, progressives tend to focus on time based constraints for meeting financial obligations. Whereas conservatives are more concerned about place based constraints, such as immigrants who are seen as competing for already scarce housing. 

Despite the protectionism that stands in the way of production reform, housing is still a simpler issue to solve than markets based on time and personal skill. Hence countering excess monetary demand could begin with more flexible interpretations of housing for all income levels. Otherwise, many individuals will remain subject to the first mover problem of providing valuable services for others by more accessible means, only to be locked out of the housing necessary for this to happen. For that matter, one of the main reasons wages recently increased for the lowest income levels, is that employers were faced with the fact no housing existed nearby which their employees could afford. 

Societies need to focus on non tradable sector production issues, since they are at the heart of recent inflation which is proving difficult to eradicate. However, there's something else important about productivity expectations which needs to be noted here. When productivity involves final product which is independent of personal labour, these areas do have capacity for exponential output. Since our economic time is not exponential, it often demands a higher price as a fixed quantity. In these instances, people rely on investments in knowledge and skill to increase their time value. Alas, institutions then tend to respond by substituting away from time based input, in order to meet their financial obligations! Despite the obvious drawbacks of this effect, our current understanding of productivity gains makes it a rational approach, especially if institutional budgets are already in jeopardy. 

How, then, could good deflation be achieved in skills use without having to substitute away from time based input? One way is to make mutual time commitments, or time arbitrage, a valid and measurable economic unit. Skill sets would be voluntarily chosen and independent of monetary value. However, group effort would also utilize monetary compensation as a base to keep the process in motion. Time arbitrage might help societies maintain and preserve what they build and create, plus the knowledge and skills involved would be simultaneously measured as cumulative gains. Time as an economic unit of value is also one way to overcome the Baumol effect and ultimately, achieve good deflation in time based services. Again, production gains would transpire on completely different terms in these settings. Once housing production reform begins in earnest, economic validity for mutual time commitments would be the logical next step.

Use Markets to Help the Marginalized (Before It's Too Late)

In a time of rising inflation and interest rates, governments have to come to terms not only with fiscal limitations, but also limits on their ability to assist the marginalized - at least through monetary means. As national budgets become ever more unwieldy, many protective roles for lower income groups might ultimately have to be set aside.

Some would argue, isn't this a positive, since governmental support often tends to cause more harm than good? It depends on whether the domestic markets of housing and services can evolve for a full range of income levels. In the meantime, consider the harsh realities faced by low income groups when it comes to living normal lives. These circumstance are largely due to environments which were put in place by public and private interests alike. As governments increasingly find their hands tied in terms of public assistance, will private sectors become more willing to live up to promises about free market potential? Or will private interests - along with the political left and right - instead pretend that economic and social freedoms are no longer possible?

Questions such as this are in need of valid answers, not vague posturing and excuses. In particular, when people struggle to maintain their financial responsibilities, they become ever more vulnerable to government overreach. It has seldom been difficult to correlate poorly functioning markets with authoritative and restrictive governments. Worse, it's as if societies have forgotten what market freedoms consist of. For one thing, inclusive markets are certainly not a matter of coercing lower prices from existing markets. Rather, market freedoms are about encouraging the design of new patterns and production systems which function alongside what already exists, but with simpler resource requirements and system inputs. Indeed, previously existing markets could in many instances just be recognized as market participants with preferences for serving higher income levels, for whatever reasons. 

When I think about production reform possibilities which have yet to see the light of day, sometimes I can't help but be angry such options never got the chance. If there had been good deflation in our domestic markets here in the U.S. we could have been better prepared for the extreme uncertainties of a transitioning global economy. In the past nine and a half years of this blog I've often highlighted people who've touched on these issues. Just the same, it's not easy to find individuals who are willing to commit to adaptive market evolution. Meanwhile I often find myself unable to tolerate the hypocrisy of left and right thinkers who always pretend someone else bears responsibility for what we've lost.

Instead of being cognizant of their own responsibility for free market evolution, many libertarians have stepped away from adaptive market patterns to take part in cultural battles. Small wonder that few really expect this to change anytime soon. Is it already too late to use markets to help the marginalized? Will libertarians stay focused on divisive rows and/or inconsequential details in the years to come? Why and how did we imagine libertarianism to have a ghost of a chance, if it was only about free markets for society's most powerful? As much as I wish for a better ending to this unfolding reality, alas, there are days I fear there might not be one. 

"Political" Equilibrium is Not the Same as Natural Equilibrium

When might politically motivated budgets create too much confusion for general equilibrium conditions? Even though there's no clear answer, economic dynamism and long term growth potential may depend on how these matters are ultimately approached. It's now apparent that the fiscal dominance of today's service centered economies, could hinder progress in the near future.

Until recently, ultra-low interest rates were becoming taken for granted as inevitable. And not only did this prompt national governments to borrow in excess of earlier norms, it discouraged a rational general equilibrium framing as output driven. This loss of a quantitative understanding, has made it even more difficult to create productivity improvements in domestic markets. Instead, the fiscal "freedoms" of late are fueling the ambitions of multiple political parties. Alas, the results aren't encouraging, since fiscal policies tend to reward specific group preferences instead of positive market outcomes.

However, does fiscal irresponsibility account for a rising equilibrium rate, and might this impact equilibrium stability? Scott Sumner considers equilibrium effects, and notes: 

The "natural" or equilibrium interest rate also has multiple meanings, but generally refers to the interest rate that provides for some sort of macroeconomics equilibrium, such as stable prices. Throughout most of the world, the equilibrium interest rate has been trending lower since the early 1980s. Until now...

He continues:

A more complete model of the equilibrium interest rate might also account for the political economy of fiscal policy. Suppose that the natural interest rate falls so low that politicians become tempted to run larger budget deficits. Eventually, the deficits become so large that the equilibrium interest rate begins rising again. 

In retrospect, the new UK Prime Minister also went too far with the extensive tax cuts of her fiscal package.

All of this makes me wonder whether ultra-low interest rates are not a stable equilibrium, at least in most places. I still believe that low rates are a technically feasible equilibrium, but perhaps it is inevitable that politicians in many countries will abuse the privilege of almost costless borrowing - right up to the point where that privilege is removed.

Indeed, the Washington Post notes the new Prime Minister's predicament and adds

Across the supposedly advanced economies, the return of inflation has magnified the riskiness of extravagant political gestures. For the most part, however, politicians have not gotten the message.

How to think about all this? For one thing, I'm inclined to believe that fiscal policy (rather than monetary and supply side circumstance) would not be responsible for a rising natural interest rate, whether or not a government "crosses the line" in this regard. Especially since fiscal policy correlates with credit dominant outcomes which substantially differ from the time correlated aggregate output of natural equilibrium. 

In terms of aggregate output potential, total hours worked are an important part of the equation. Specifically, when considering equilibrium potential, one might ask: How much aggregate output is defined by exponential representation, versus the linear representation of (naturally scarce) time and place dominated output? Especially since fiscal dominance could eventually be undermined by expectations in the secondary markets of applied knowledge. And if service sector output doesn't presently appear linear, it's because areas of exponential gain are not being adequately defined in relation to the scarce resources of time and place defined product. In all of this, the fiscal dominance of political equilibrium is not well suited for the creation of a better defined and stable general equilibrium.