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