Wednesday, September 13, 2017

Asset Ownership is Key for Base Velocity

In particular, stable levels of base velocity are necessary, for lower income levels to reliably participate in the economy. One might also distinguish this base velocity from low income discretionary spending, which is of a more random nature.

One way to generate stronger base velocity, is to support knowledge use as an ongoing economic learning process which begins in youth. Asset formation would take place alongside mutually held time commitments, while time arbitrage contributes to personal autonomy by allowing shared daily routines to function as incremental economic processes. In recent years, I've suggested incremental asset ownership for individuals who sometimes struggle to maintain a full plate of financial obligations. Simple and flexible building components, could encourage individuals to discover and maintain levels of ownership and participation which work best for them, at different points in their lives.

When ownership options such as these are lacking, many individuals tend to end up in solitude and dependence, who otherwise could have remained socially and economically engaged. It's a reality which creates problems in terms of both basic levels of economic velocity, and production potential. Since this lack of full economic participation has yet to be addressed, the fallout of lost access generates additional burdens for higher income levels - both in taxpayer obligations and the additional costs of social separation. In some instances, a dearth of productive economic environments, ultimately translates into indirect but real lost wage capacity, for higher income level groups.

Structural considerations such as these should be taken into account, in that they provide a broader framing for related concerns regarding future wage potential. The Hamilton Project is just one of the latest groups to convene and discuss "What can and should be done to promote the economic growth that will lead to higher earnings for more American workers?"

Without sufficient base velocity for lower income levels, there are general equilibrium effects which negatively impact both nominal and real wage potential. When supply is already restricted for non tradable sector product, wage increases do nothing to increase access to non tradable sector product. This is the supply side reality in basic amenities, which consequently impacts discretionary income for higher income levels. If supply remains restricted in basic housing assets or time based services, wage increases alone cannot contribute to marketplace formation.

Tyler Cowen noted an example of supply effects on general equilibrium in a recent post. He stressed that relatively lighter regulatory environments can create positive "unseen effects", which increases supply so as to reduce the pressure on the most expensive markets within the same general equilibrium.

What Cowen highlighted in terms of housing, has a similar general equilibrium equivalent in terms of taxpayer obligations for the negative externalities attributable to those who lack economic access. A better way to address wage issues, is through equilibrium growth potential where it is most clearly missing. Again, attempting to do so via the demand side is misleading, since government redistribution doesn't create additional supply for either housing assets or time based services formation. A more appropriate government role, would be to give a green light to new institutions which generate dynamic economic conditions for lower income levels.

Granted, higher income levels sometimes face wage constraints which impact discretionary income. But the main reason for this reality, are non tradable sector supply side limits on production requirements and economic participation. Even so, quality control requirements such as these should not prevent higher income levels from full economic participation. Whereas, when lower income levels lack economic access, they are less able to contribute either to non tradable sector activity via base velocity, or tradable sector activity via discretionary income velocity.

Kevin Erdmann continues to press for broader ownership of housing assets as well. Recently he wrote "This is your occasional reminder that the stagnation we are experiencing is housing." Nevertheless, this lack of housing for individuals and families alike, is matched by a lack of personal participation in services generation. Indeed, services capacity which is capable of creating new wealth, would likely contribute more than the 1 to 2 percent of additional GDP which Erdmann believes would be possible through better housing access.

No discussion re aggregate wage levels is realistic, so long as economic velocity remains too low to generate economic complexity for lower income levels. This loss of economic capacity affects income potential along the entire spectrum. Even though general equilibrium is too tightly defined to accommodate incremental growth, new growth is possible via defined equilibrium settings which would once again generate base velocity for lower income levels. Once lower income levels become better able to meet working and living requirements, these groups will gain new options for discretionary income. What's more, discretionary gains for lower income levels could eventually translate into positive effects for the discretionary income of higher income levels, as well.

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