Tuesday, March 15, 2016

The Services Growth Engine

I often hear people lament the decline of real production and wealth as our nation has evolved from agriculture and mining to things like manufacturing and then finally services. To these people there was something real and tangible to digging stuff out of the ground.  Even manufacturing seemed lame compared to endowments of real landed wealth. Imagine their thoughts about basing a nation’s economy on services. The definition of a service is something that disappears upon production! How can you base an economy on something that disappears and soon as it is delivered!

But let’s face it, some countries do quite well when it comes to surviving and growing without having natural resources and some do it today mostly with services. According to the CIA Factbook the services sectors comprise nearly 80% of national output in the USA and UK. Bermuda counts 92% of its GDP as created by services. In contrast, Afghanistan, Burma, Ethiopia, Somalia, and Togo were among the countries where agriculture represented more than 30% of total output. A quick look down the list of countries makes it pretty clear that most higher income countries live off services production. See the table below for recent US data on employment. 

What are these services? Some of the largest services providers in the USA include real estate sales, state and local government, finance, banking,  insurance, healthcare, retail trade, wholesale trade, entertainment, education, tourism, transportation, and more. In each of these cases, a service is provided to a customer. When the cruise ship kicks you off the boat, the only tangibles you possess are the selfies you took and those extra 10 pounds hanging over your alligator belt. Yet GDP was created, workers were paid, and importantly capital was created and retained.

People worry that since there is no land or metals involved, somehow economic power expressed within services can disappear as easily as it arrived. But that is not true of services alone. Locusts or other such things have destroyed land and its ability to produce crops. A good red tide can kill fish and other sea creatures in the millions. Tsunamis, earthquakes, tornadoes, and asteroids can easily undo the value of natural wealth. A new invention makes one commodity almost obsolete as it is replaced by another.  So it is no great advantage or staying power guaranteed by land and commodities.

Think about tourism. No good is produced when a travel agent sells you a trip to Sanibel Island. You consume touristic output as you travel to this lovely destination. But notice how much lasting capital gets created by this event -- not because you want to buy a Chevy – but because you want to spend a few days getting a sunburn and indigestion. Your vacation wouldn’t be much fun if you didn’t have at least a Trump Hut for shelter and a bevy of restaurants and bars to quench your thirsts. Why are those buildings that produce touristic services any less real, enduring, or impactful than a tomato farm's harvester or a shoe manufacturing's factory?

Some people argue that many services are very low price or low skill. They worry that a transition from manufacturing makes a country poorer. They see manufacturing replaced by, say, retail outlets. But let’s be honest – not all manufacturing is high value added and many of these same people have complained that manufacturing companies take advantage of US workers or worse yet ship the jobs abroad. We still have a lot of low wage low skills manufacturing jobs in the USA but how long will they last? So maybe this claim is a bit exaggerated. And of course, it is easier for foreign countries to entice these lower skill manufacturing companies from our shores. It is a little harder to do the same with the Macys store in Bloomington.

And what the above argument completely ignores is the existence and importance of very high skilled services. Not all services workers push brooms or wash cars. People who dream up convenience Aps for our phones sell no phones yet they provide a lot of employment. Medical research professionals are indispensable to high tech manufacturing companies who will use the inventions and innovations to support superior goods. Since high tech services (in finance, health, transportation, tourism, etc) rely on higher paid and highly educated professionals – growth in these areas take advantage of US prowess in education and training.

I get my telecom services from AT&T. My monthly combined bills for TV, phones, and Internet are sizable. I pay much more for those services than I paid for the phones, TV, and computer. Think of the range of employment offered to service workers at AT&T. Think of all the capital invested by AT&T to support these services. Maybe not all those jobs pay super-high wages, but most of them defy the usual stereotype of the broom pushing service-worker.

We have enough to argue about. Going back to an economy based on land, commodities or even manufacturing just doesn’t make sense for the USA. Services are here to stay. They produce jobs and they are supported by huge capital stocks. Let’s appreciate our US trade surplus in services. Let’s appreciate what we have today and build on it. There is no guilt in a services economy!

Below is a table I created with data I took from the Bureau of Labor Services of the US Government.

Employment in February of 2016 (bls.gov) Thousands of jobs
NonFarm Employment Total      139,343

Goods                                                19,042
Mining & Logging                    861
Construction                           5,962
Manufacturing                      12,219

Services                                             98,042                                
Wholesale Trade                     5,816
Retail Trade                          15,239
Trans and Warehousing          4,738
Utilities                                      552
Information                             2,729
Finance                                   8,016
Real Estate, Rental, Leasing   1,481
Professional and Bus Svs      19,137
Education                                3,591
Healthcare                             14,847
Social Assistance                    3,449
Leisure and Hospitality         14,374
Other Services                         5,555

Government                                       22,259
Federal government                 2,730
State government                     5,227
Local Government                 14,302


  1. Sorry but I live in a tourist metro area. Public service jobs account for 60% of the local GDP. The few manufacturers turn out digital devices and pay their people a little more.

    Financial services are clustered 5 major cities and digital technology service and quasi service ( software) are located in 10 metro areas. My question is about the turn of the dollar to actually stimulate growth in wealth in local economies. Yes the US has a disproportionate ratio and the economy is not growing. We also have a shrinking middle class and a small upper class. The wealth that the country earned over the past 200 years has been invested in a lot of different ventures, services and products. However those investments are global. So we are getting wealthy from other countries manufacturing and reselling in the US...some of which are packaging manufacturing operations.

    The best example I can think of is the ecosystem. Each layer of bacteria, plants, animals, water and air occur in chains where consumption from the lowest on up strikes a balance so that growth occurs but reaches a equilibrium ...We have changed the game and moved the equilibrium. The resources are extracted faster than they can be replaced in a closed system.

    1. So you are saying that a transition from land and manufacturing to services is causing no growth in the USA, a shrinking middle class, and Bernie Sanders? So what's your solution? Go back to manufacturing?

  2. Vote for whoever survives the R's deterioration.

  3. Forgive me Dr. Adler, but the primary objective of a business is to make money for the owner(s). The entrepreneur sees a need or, as did Steve Jobs and Bill Gates did, creates one...who needed an iPhone before Jobs created the it? A benefit of creating businesses, manufacturing or otherwise, is jobs...not Steve. Most people would agree that the greatest cost in any business is people. When that cost becomes excessive, the choices are kinda limited. You downsize, you find places with cheaper people (labor), or you close your doors. We've seen all of those things happen and will probably continue to see them happen particularly in manufacturing where overall costs seem to be the greatest. While the US of A probably has the greatest manufacturing base in the known universe, it probably will never be the manufacturing giant of yore. Our burdensome regulations from an alphabet of government bureaucracies (OSHA, EPA, FDA, etc) and the creasing cost of labor play a large part. As much as we conservatives hate to admit it, the economy is becoming more and more a global one. We'd better adapt to it or get left behind. We'll never go back to the manufacturing boom periods after WW 2. If we get close, we'll find more of the jobs...not Steve again...will be automated with a few humans to monitor the machines. I hate to think what will happen when AI becomes a major reality.

    1. Good one Fuzzy. Thanks. As for Adler, if he were around I think he would say that if there is no real need for a company's offering, then profits will not come. Of course you can fool some of the people some of the time, but....As for Apple and Microsoft I kinda think that history supports the idea that they met a real need -- whether it was expressed in the market place at first or not. By the way, Dr. Adler was the only prof I can remember who scared the crap out of me every time I went to class!

    2. He scared me, too. There was only one other prof who scared me as much. don't recall his name, but you could take his course on in your last quarter. He and Adler were devoted enemies as I remember it. I made the mistake of referencing Adler one day, and the class turned into an anti-Adler tirade. I may be fortunate that I passed.

  4. Dear LSD. Your ‘splaination of why the shift from ag/mining/manufacturing to service isn’t such a bad thing should be picked up the major biz media outlets and shared with the public. Easy to read/unnerstand. But I still have my head wrapped around the concept that value can only be created by converting basic materials/natural resources via labor to something consumable. If all services vanished and we had to start over I imagine we’d have to revert back to depending on the conversion of natural resources to consumables. It seems services add value only when there is sufficient currency derived from producing/selling/buying converted natural resources and basic materials that allow for the purchase of those services. In other words, value and wealth must first be created from the ground and then made available to buy services; the volume/velocity of service transactions then add to GDP.

    OK, so I’m over my guilt in the shift to services. Though you didn’t intend to make this point, it seems to hang there like PepĂ© Le Pew in a closet—that the shift to services will do nothing to restore the wages lost by the middle class or close the earnings/wealth gap. Shure, some services are more valuable than others, but there are too many insufficiently edukated and motivated folks today to strive for those better-paying service yobs. I agwee with Mr. Gibson’s solution to pull the R lever, but I also agwee with you that it won’t be that easy. I also agwee with the Fuzzmeister that even should manufacturing rebound the labor-intensity will be gone and robots will be taking mass transit to work rather than humans. My hope is to find a suitable robot to change my diapers when I’m unable.

    1. Tuna,

      It must hurt when you wrap your head around things. Ouch.

      If it helps I am not supporting an economy with zero natural or man-made resources. But I am saying that so long as there is a durable demand/want for services -- and they get supplied, then there isn't much difference tomatoes and tomato restaurants. Also, notice how services can actually create the demand for capital. A restaurant wants to serve you and in doing so builds a building and orders tables and chairs.

      The other point is trickier. Think of a large part of the world economy that suddenly changes and wants to be in the world economy. They have a lot of underpriced labor and other resources compared to the US economy. The drop a huge load of supply on the world, including the USA. That's a huge supply shift that lowers prices and generates a big quantity of output. Before all this happened the US thought it was in some sort of great equilibrium with high output and high wages. Then boom the change hits and our workers and output are redundant.

      Before the shock we thought we were in equilibrium. But after the shock can we ever get back to where we were? I doubt it. It was nice while it lasted. The world supply is permanently bigger and promises to get even bigger.

      You once had bulging biceps. The US used to have a large middle class and high wages. I doubt we will ever get back to that point again. But we can do better than we are doing now and we should try. Whew. I am working too hard. I thought I was retired.

    2. One other point I wanted to make. The future is very hard to know. Imagine being in 1950 and trying to predict US growth in the next 50 years. An economist named Hanson thought we would re-enter the Great Depression once WWII was over. I feel somewhat comfortable thinking that both manufacturing and services will have a lot of surprises for us in the next 50 years. So maybe services productivity will be much higher than we can imagine today? I don't know but I wouldn't totally discount that. Glass half-full, eh.

    3. Dear LSD. Whew-w-w-w-w, yer gitting too good at ‘splain’n things: “Wirld supply (of goods AND services) exceeds demand and therefore the U.S. can never (or unlikely) return to being the main supplier” . . . or something like that . . . . and enjoying the wages/prices it once used to git. Hey, I guess that’s why yer the PhD.

      My biceps fell to my waist . . . . my head still hurts, my feet stink, and the mirror doesn't lie. Chug-a-lug chug-a-lug, the glass is now empty.

    4. ...and tomorrow is St. Paddy's Day! Gulp on dear Tuna! I'm right behind you.

  5. The velocity (turns) of the dollar is important to maintain ....service or not. Without it the local economy slowly shrinks in value. Neither R or D can prevent this because it cannot be legislated. Lower value means less investment in that economy. Manufacturing may come back someday but like everyone says....it will be mostly computer drive with sensors and robots. Sensors, GPS and other spying means are even reducing the police force....good news is that there are a lot more data reader jobs and managing data centers.....kind of boring.