Wrap Up for January 2023

2022 was "supposed to be the year that we returned to normal."

Has inequality become less of a problem?

When institutions "try to preserve the problem to which they are the solution."

Wars have often gone hand in hand with high inflation.

Why is employment being viewed as a lagging indicator when it comes to recession?

Chatbots are already good at answering common medical questions.

Countries have started paying residents to move to lower population density regions.

Real wages can fall when capital becomes the constraint on supply. Still, some of the inflation run up was perceived as fiscal necessity.

Might pigeons be able to properly discern medical images?

Employment growth rates and NGDP are highly correlated in the short run.

Noah Smith highlights some recent economics news.

Highlighting those who no longer work as many hours as before.

Some new insights on Roman concrete. Still, there are good reasons for today's concrete to be built via reinforcement.

"A new model for mobile home buyouts."

Ideally, the Fed could achieve its macroeconomic objectives with a much smaller balance sheet. Meanwhile as Scott Sumner noted, QE seems to be the lesser of evils.

On the importance of central bank independence. 

"Biggest sources of electricity by state and province."

Robert Hetzel's proposal for a soft landing.

Happiness is turning out to be rather subjective for precise economic measurements. I'm still convinced that the optimal economic indicator, calculates how our economic time contributes to general welfare.

Core CPI remains higher than expected. The price of services continues to rise.

There's no macroeconomic models which actually predict recessions.

The Eurozone continues to face more supply side constraints than the U.S.

The decades-long decline in construction sector productivity.

Has macro lost some of its relevance in economics education?

Technological innovations can take longer when higher levels of human capital are involved.

Victoria Guida discusses financial regulation and other Federal Reserve developments.

If the U.S. political system continues to malfunction, (think debt default), the dollar becomes more risky to hold around the world. Which would in turn greatly impact our way of life. This argument is just part of what is an important Macro Musings conversation.

The Fed is also paying close attention to core services other than housing.

Arthur Burns is not a good candidate for a revisionist explanation re 1966-1981 inflation.

Noah Smith reviews three recent technology books.

De-dollarisation? Not yet.

Global auto production still struggles with supply side issues.

Doubts regarding U.S. healthcare existed well before the pandemic.

"rent dispersion has increased far less than price dispersion"

"3.5% today is not the same thing as 3.5% unemployment in early 2020." 

Despite other issues, Japan's housing policies have encouraged overall economic growth.

Can we build the institutions that would be necessary for a more inclusive capitalism?

"Why the goods trade ratio declined"

Lael Brainard explains that the Fed needs to stay the course on inflation.

How will the ECB deal with inflation in 2023?

Inflation in the U.S. should continue its decline in the months ahead.

There's been plenty of inflation which wasn't even associated with supply side shocks.

This highlighted climate change statistic made me smile.

Are we still faced with secular stagnation?

The conditions that suggest a "soft landing" are possible in housing markets.

Don't Forget About Basic Resource Scarcities

Not long ago, some became convinced society's main problem was finding better ways to share resource abundance! But it didn't take long for a global pandemic and the vicissitudes of war, to remind everyone once again that resource scarcities are still part of the equation. For mature economies in particular, resource scarcities in the utilization of time and place are starting to impact how the Fed manages inflation. Limited markets in time based services are evident in high skill human capital, but this phenomenon is also emerging in simpler forms of (highly sought after) personal attention. Meanwhile, place based scarcity is reflected in the high costs of housing relative to actual incomes. 

Still, it's easy to forget how these imbalanced markets affect current underlying inflationary levels. Instead, macroeconomic discussions tend to alternate between employment issues or irresponsibility on the part of fiscal and monetary policy. At the very least, some of our supply side resource scarcities should resolve in 2023 via resource substitution, which can in turn help ease inflation. Unfortunately though, time and place based resources need to be framed in more understandable context, before the Fed benefits from supply side assistance towards monetary stability. In the meantime, the Fed is reduced to inadequate measures such as reducing traditional housing starts, when what is really needed is more accessible non traditional housing production!

One way to think about the natural scarcities of economic time and place, is determining how we created too many additional layers of artificial scarcity to the real scarcities we already face. It could also help to respect the rationale that existing institutions initially used for additional limits to market access, then move forward to create new beginnings from this understanding.

Respect for existing institutions which work with resources involving time and place based product, means fewer attempts to dismantle them, and more attempts to evolve production processes where these institutions are actually growing fragile. Consider for instance what it actually means when builders cannot afford to build affordable homes for low to middle income consumers! Recall as well the fragile nature of healthcare institutions which can ill afford to function in many areas which don't benefit from vast wealth holdings. Both of these are institutional fragility. New institutional efforts would do well to create alternative means of social support to address where older institutions can no longer easily function. 

Indeed, by not attacking existing institutions directly, we can still respect how they evolved to address different sets of social realities and historical contexts. For instance, Nimby based zoning allowed people to at least partially manage their personal fears around living close to others they didn't know enough to trust. Likewise, skills use limitations were a way to address people's fears about what might happen if they paid for services which turned out poorly. And enforced professional limits in human capital, also made it possible for professionals to live among others who already benefited from higher and more directly derived incomes.

Nevertheless, regulatory moves which increase artificial scarcity now mean basic non discretionary markets beyond reach of average consumers. Such markets also require a level of monetary representation which makes the job of central bankers more difficult. What's more, these domestic market income sources - not to mention their corresponding housing representation - contribute to an NGDP growth level which is currently too high to maintain economic stability. Clearly, more is now at stake than missing markets for lower income consumers, as this aspect of market dominance could compel central bankers to impose additional reductions in aggregate demand. Alas, doing so would further reduce the output potential of discretionary markets in more direct wealth origination sources as well. 

Should new institutions arise to create broader domestic market options, they would nonetheless need to acknowledge the main reason consumers tolerated earlier forms of market dominance for so long despite lack of access: trust. Many countless regulations arose in environments where social trust had been eroded at least to some extent. Hence people became willing to pay dearly (when and if they could) for specific quality promises in time based services and housing options. New institutions need to build much more than just greater economic access, for they would need to restore societal trust through time value which doesn't require the same level of monetary compensation as in decades past.

At the very least, we've been quite fortunate our current services sectors functioned as long and as well as they have. Nevertheless, we appear to have entered an era in which today's services sectors could impart undue burdens for inflation, should new domestic markets not materialize. For this reason I might add that when it comes to Fed inflation management, I would probably understand if they maintain a "hawkish" stance in response to continued supply side inaction. Especially should NGDP levels remain as high as is currently the case. 

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.