Point of Information: the Service Economy

How long will how many people need to be unemployed before we acknowledge that the whole service economy thing isn’t working out too well?

17 comments… add one
  • Chris Link

    I agree – there are simply more qualified people, at every level of the work force, than there are jobs to do. Globalization, while a good thing in many respects, has only exacerbated the problem, and I don’t think any political leaders or economists have looked at this problem right down the barrel.

    The logical follow-up question is, what can/should be done about it? Efforts to revitalize manufacturing? Taking the position that chronic unemployment (and underemployment) isn’t something we can change, and instituting a stronger, European-style safety net for those affected? Letting things stay as they are? Something else?

  • What else do you propose? Manufacturing world wide has been in decline for at least two decades. You yourself have noted the glut of production capacity in terms of manufacturing automobiles?

    I agree – there are simply more qualified people, at every level of the work force, than there are jobs to do. Globalization, while a good thing in many respects, has only exacerbated the problem, and I don’t think any political leaders or economists have looked at this problem right down the barrel.

    What problem? That technological advancement means that certain jobs go away? It isn’t globalization, that is just a distraction. It is technological innovation and advancement. When you have a robot doing the welding on a manufactured item and such you reduce the number of manufacturing jobs. Of course at the same time you might create a job or two. Somebody will likely have to service the robots. And what about people who write the software and monitor the system the operates the robot? Service?

    The logical follow-up question is, what can/should be done about it? Efforts to revitalize manufacturing?

    First we build a time machine and go back to the 1950’s…..

    Manufacturing employment world wide is declining. Sure one country might be increasing their share, but how? Via subsidies? Where is that money coming from? Thin air? Perpetual motion machines?

    The logical follow-up question is, what can/should be done about it? Efforts to revitalize manufacturing?

    Seriously, take for example the term computer. It wasn’t coined to describe the machine you two have used to put up the post and the comment. It was used to describe people, usually women, who sat around in rooms computing things like probability distributions, sine functions, and so forth. All those jobs have been destroyed by the object sitting on your desk at work and/or at home. Good thing? Bad thing? Both?

    Frankly, I’ve never understood the fetishization of manufacturing jobs. What is so special about having a mind numbing job where you work on things going by on an assemble line like…a robot?

    Taking the position that chronic unemployment (and underemployment) isn’t something we can change, and instituting a stronger, European-style safety net for those affected? Letting things stay as they are? Something else?

    Again, and pay for it how? And is there chronic unemployment? Yes we are in a recession, but ffs the sky isn’t falling.

  • First off, Steve, I’m not talking talking about a complete transition, just a minor course correction. A good start would be to level the playing field between manufacturing and services from a regulatory standpoint. Abolish the corporate income tax or, at least, allow current year expensing of all business purchases as every other OECD country does.

    There are dozens of other measures but they all boil down to that: just level the playing field.

  • Drew Link

    Work matters got in the way of an earlier post (Can you imagine that? Work before blogging??) So Steve beat me to many points…….

    First and foremost, what is the irrational fascination with manufacturing jobs?? Now understand, this is coming from 1) a guy originally trained in engineering who worked in one of the mothers of all manufacturing environments – the steel industry -, 2) a guy who now is a private equity investor in almost exclusively manufacturing companies. Why so cavalier??

    Because the truth be told there is very dynamic and fertile ground in manufacturing in the US. The BIG INDUSTRIES? No, not so much. Cars, Steel etc have been destroyed by the unions and poor management.

    But there is wonderful opportunity in smaller manufacturing……..if we focus on bringing capital, better management and abandoning excuse making and govt solution seeking. This is essentially what my firm does. Very successfully. Our firms grow, and employ more people.

    That said, just as an agronomy economy moved to manufacturing, so a manufacturing economy moves to service. So what? Why is this inherently bad? Is working the assembly line better than typing the computer? (And further, there is not a damned thing we can do about it that is not a self inflicting wound.)

    Dave – I’d abolish the corporate income tax tomorrow if I could. But I wish……

    On your expensing of capital expenditures…… I’m not sure I follow you here. I’m sure you know that GAAP standards attempt to correlate the true realization of revenue and expense. Hence, we depreciate (equipment) expenditures as the useful life of the investment is expended. I’m not sure I understand why accelerated depreciation is anything more than a subsidy.

    Chris – please go do your homework about globalization. Its job creating effect has been truley incredible.

  • I don’t think it’s that weird, Drew. I’m not concerned about factory jobs, I’m concerned about engineering jobs. Engineering is going to go where the manufacturing is.

    We’re not creating a lot of new jobs for physicians. I think it’s fair to say that the financial sector won’t return to its former glories in the near future. We’re going to decrease the number of college professors if anything. New jobs in the service sectors and retailing are pretty likely to be of the minimum wage, dishwasher/bedpan changer sort.

    I think that manufacturing is among the better candidates for medium term growth, again not on the factory floor but designing the machines that make stuff and designing the products themselves. And as a matter of practical necessity those jobs will go whereever the factory floors do.

    Also, Drew, I don’t know if it’s still the case but I know for a fact that it used to be the case. All the other OECD countries allow year of purchase expensing of capital expenditures. They don’t require depreciation at all. It may be a subsidy but we’re the only ones not offering the subsidy.

  • Dave,

    The only way to achieve increases in manufacturing jobs is via subsidies and that is a negative sum game. You sound like you are but a few short steps away from advocating the policies during Japan’s lost decade (I hope I’m wrong). Lets build lots of useless shit just so that we can keep employment high and we’ll do it by promising ruinous taxes on future generations. Shall we let national debt rise to 200% of GDP?

    When people are unemployed it is a bad thing, but it is also an opportunity. Resources are unused, and finding a use for them is what entrepnuers do. Worrying about exactly what form those new jobs are going to be and if they fit some sort of pre-defined notion of what is good is likely going make things worse not better.

    This has always been the problem for those who favor market oriented solutions. We can’t say with certainty how things will get better, so for the worry warts that is ipso facto proof that things wont get better, let lose the powers of government. What happens when a class of jobs are off-shored? I don’t know, and that uncertainty scares lots of people. They want to feel secure and safe…like children tucked into bed. And the parent to tuck them into bed: Uncle Sam. Problem is we can’t go on forever doing that. Uncle Sam is no richer than the rest of the country and if the rest of the country is dependent on him, then in reality we have nothing.

    But there is wonderful opportunity in smaller manufacturing……..if we focus on bringing capital, better management and abandoning excuse making and govt solution seeking. This is essentially what my firm does. Very successfully. Our firms grow, and employ more people.

    Interesting. Reminds me of something I read in David Levine and Michele Boldrin’s book Against Intellectual Monopoly where they argue that young industries are often competitive and dynamic with rapid innovation and growth. Then comes in the intellecutal property and rent seeking (but I repeat myself) that limits all that and you get larger more staid even stagnant firms. I think we don’t more technocracy, but less. Unfortunately Obama is a technocrat who thinks by setting national policies just so we’ll have milk and honey.

  • My preference is for removing subsidies rather than for adding them. However, when you eliminate tariffs and restrict foreign competitors from offering services and tax capital investment (as we do in this country), you’re subsidizing service and retail over manufacturing.

    The key point, Steve, is that the market isn’t producing jobs. We’ve had zero job creation over the last decade except in government and its handmaiden industries of healthcare and education for the last ten years. I think we need to go to a more market based system. And the status quo isn’t a market based system. It’s one that’s tilted towards services and retail. So we get more services and retail.

  • Drew Link

    Once again, Mr Verdon has jumped me to some points. My observations…..

    Dave – Look, I’d love a magic bullet for US manufacturing. It could mean millions and millions in personal gain. Manufacturing today is tough. I could lobby Congress for regulatory advantage like the effing pigs do. But reality is that we have to provide value to our customers. Why? Because THEIR CUSTOMERS IN TURN DEMAND VALUE. The US consumer says they buy on service and quality. True to a point. But at the end of the day its price. You better be prepared……….or you die. Nothing trumps value long term. Manufacturing will do just fine if we stick to fundamentals: manufacturing excellence – cost, service, reliability. Please, please believe me. I live it.

    So is manufaturing the magic avenue to growth? Dave, I’m sorry, markets will answer that. Romantic views of engineering not so much. (I feel like a traitor.)

    As to expensing large expeditures, I’ve shot my wad. Maybe Steve V has a view. But it seems to me a straight subsidy. Period.

    BTW – loved the radio show.

  • Thanks. I wanted to talk about regulatory failure highlighting the impending crisis at the FDIC but James vetoed that, sensibly, I think.

  • Chris Link

    Steve-

    What problem? That technological advancement means that certain jobs go away? It isn’t globalization, that is just a distraction.

    Well, no – I’m specifically thinking about US manufacturing jobs, which unquestionably have been hurt by globalization. That’s not to say that those jobs moving offshore wasn’t a net positive, especially for other countries, but there are tangible downsides to globalization, and domestic manufacturing’s downturn has been one of them.

    And it’s not just manufacturing that this applies to – there are plenty of higher-level jobs, such as radiology, software production and hardware design (VLSI designers, especially) that have been hit pretty hard by offshore labor. Again, you can make the argument that globalization has been a net benefit for the economy as a whole, but there’s unquestionably a higher level of competition for many jobs. And I haven’t seen substantive evidence that a comparable number of equally well-paying jobs have been created in other fields in the US, to make up for it.

    Again, and pay for it how? And is there chronic unemployment? Yes we are in a recession, but ffs the sky isn’t falling.

    Dave already pointed out what the jobs situation as been over the past decade – basically flat, except for government jobs. And we’re most likely no longer in a recession, but nobody seems to think that the recovery will be fast or particularly strong, so unless something truly unexpected occurs, I don’t see the employment picture changing anytime soon.

    As for how we pay for said safety net, it obviously won’t be cheap. The question is, what then happens to the relatively large number of chronically un- and under-employed people out there, who don’t have a great deal of money but do have a great deal of discontentment, and time to vote. In the long run, it may be far cheaper to provide relatively modest benefits now than deal with the cost from a Huey Long-style populist uprising in the future.

    Drew-

    Chris – please go do your homework about globalization. Its job creating effect has been truley incredible.

    Outside of the late 90’s, I haven’t seen much evidence that’s been true for the US. More specifically, I haven’t seen any proof that globalization’s domestic job production has been “truley incredible” from any source that wasn’t a consulting firm or other organization directly benefiting from globalization. If you have pointers to any such studies, however, I’d be happy to take a look.

  • Brett Link

    Aside from economic growth, there is another way to create jobs in a situation where you’ve got rapidly rising productivity and more people than positions that doesn’t involve living with 10% unemployment and a vast safety net: reduce the work-hours in a work-week again.

    That’s actually what has happened before, when you had a similar thing going on early in the twentieth century due to rapidly rising productivity gains, job loss, and so forth – there was strong pressure to reduce the work-week down to 40 hours. It happened, too; the work-week has dropped from 50-55 hours in 1900 to around 40 hours in 2003 (not sure where it is now).

  • Andy Link

    Dave,

    I see it in terms of demographic trends – populations are rising at the same time that efficiencies are making less labor necessary in many areas. Is this unsustainable? Will manufacturing become like agriculture – extremely productive with a minimal amount of labor? Can we continue to come up with new employment (especially middle-class employment) given these trends?

  • Chris,

    Globally speaking manufacturing jobs are on the decline. The idea that but for globalization there wouldn’t be a decline is to deny reality. I don’t know what else to say other than your view is not in line with the empirical facts. We can wring our hands and worry about our share of this decline form of employment, but that strikes me as not a very good strategy for long term prosperity.

    Your handwringing about off-shoring is silly to me. Are you suggesting that we pursue and isolationist policy? Why not institute it on a state level? Serious question there. We’ll repeal that part of the Consitution that prohibits restricting trade between states. If preventing off-shoring on a national level is good, why not on a state level as well? Trade, whether intra-state, inter-state or inter-national, is generally a positive sum game. If we limit it we hurt not just the other guy, but ourselves as well.

    The other thing is that a market economy is dynamic–i.e. it changes. Thus, while the U.S. may have been the top manufacturer several decades ago, things may have changed so that is no longer the case. What we don’t want to do is institute policies that will try to “freeze the economy in amber”. That will make the economy stagnant and less productive, IMO.

    Dave already pointed out what the jobs situation as been over the past decade – basically flat, except for government jobs. And we’re most likely no longer in a recession, but nobody seems to think that the recovery will be fast or particularly strong, so unless something truly unexpected occurs, I don’t see the employment picture changing anytime soon.

    Yes, I agree that jobs have mostly been created in the public sector and yes, that is probably going to be where future job growth comes from. If you really have a problem with that…why did you vote for Obama? He is not only in favor of the status quo on this front, but he intends to expand it. I find it rather ironic and risable that people complaining about this voted for the candidate that is likely going to make matters worse in this regard. He was a candidate and is now the president who sees salvation through the government not the market.

    As for how we pay for said safety net, it obviously won’t be cheap.

    Okay I’m going to explain this once.

    The U.S. government is only as rich as the rest of the country. That is it can only spend what the rest of the country already has in the way of resources and maybe a bit more via borrowing from other countries for awhile. Beyond that there is nothing. Problem is that doing this is a negative sum game. If the government were to take all resources divy them up and give it back to the people via some so called safety net it would end up giving back less than it took initially. Its called deadweight loss. Google it. Then there are the incentive problems along with it. If I’m going to have all my resources taken, why spend so much time working to aquire them? I’ll let you work hard and I’ll work less hard and enjoy more leisure time. You can’t have a “safety net” unless you have a robust, growing and dynamic economy. You don’t get that via government mandates and fiscal policy. It can have an effect, but it is not the main driver.

    Brett,

    Aside from economic growth, there is another way to create jobs in a situation where you’ve got rapidly rising productivity and more people than positions that doesn’t involve living with 10% unemployment and a vast safety net: reduce the work-hours in a work-week again.

    Yeah, we call that underemployment.

    By the way, productivity growth is linked to wage growth. Of course here in the U.S. that increase is soaked up by gorwth in health care benefits. And with wage growth you tend to get people wanting to take more leisure time…which can lead to less hours worked. We don’t need a government mandate.

    Andy,

    I see it in terms of demographic trends – populations are rising at the same time that efficiencies are making less labor necessary in many areas. Is this unsustainable? Will manufacturing become like agriculture – extremely productive with a minimal amount of labor? Can we continue to come up with new employment (especially middle-class employment) given these trends?

    It is entirely possible that we’ll see nothing but rising unemployment, but I doubt it. As you point out, the same thing happened with agriculture. Technological innovation and advancement destroys jobs, but it also tends to create new ones. What will they be? As I’ve already indicated I don’t know, my crystal ball is no better than anyone elses, and if it were I’d be filthy stinking rich and not commenting here. I base this on looking back over time and seeing that resources tend not to stay idle indefinitely. People see those idle resources and realize they can do something that makes everyone better off. We used to call these people entrepenuers, now we call them villians. Now everyone wants the government to protect their jobs which is nothing more than rent seeking, and rent seeking is a negative sum game. Your gain is someone else’s loss.

    As to expensing large expeditures, I’ve shot my wad. Maybe Steve V has a view. But it seems to me a straight subsidy. Period.

    How about this, Dave, weren’t you complaining that the pay structure for upper management in financial services was geared towards short term gains at the expense of long term sustainability? Wouldn’t this change in accounting possibly do just that? Provide an initial short term windfall and possibly result in too much investment in capital goods? And by the way, capitial isn’t labor…its machines. Machines that have that annoying tendency to displace labor in the production process.

  • Brett Link

    Yeah, we call that underemployment.

    *Shrugs* Are we under-employed at 40 hours compared to the 50+ hour work-week of 1900?

    By the way, productivity growth is linked to wage growth.

    It’s not one-to-one. You can have large stretches of productivity growth in which real wages stagnate.

    Of course here in the U.S. that increase is soaked up by gorwth in health care benefits. And with wage growth you tend to get people wanting to take more leisure time…which can lead to less hours worked. We don’t need a government mandate.

    That’s half the story. The other half is that there was significant pressure from the union sector and other groups to reduce the hours in the work-week back in the first half of the twentieth century, which succeeded in setting the max hours without overtime at 40 hours a week with some exceptions.

    Or do you think it’s just a coincidence that desired work hours among American workers just happen to spike heavily at 40 hours (or slightly under it)? There’s an institutional role in explaining that.

  • *Shrugs* Are we under-employed at 40 hours compared to the 50+ hour work-week of 1900?

    Depends, was it done by fiat or was it something due to rising productivity leading to rising wages and a desire for more leisure time?

    It’s not one-to-one. You can have large stretches of productivity growth in which real wages stagnate.

    Real wages (hourly wage + benefits) have not been stagnant. From the employers perspective that is the true measure, should be from the employess stand point as well, but since you can’t spend health care benefits on a big screen television or a Hawaiian vacation, it tends to get over looked.

    That’s half the story. The other half is that there was significant pressure from the union sector and other groups to reduce the hours in the work-week back in the first half of the twentieth century, which succeeded in setting the max hours without overtime at 40 hours a week with some exceptions.

    Let me see…I’m talking about the last 20 years or so and you want to go back over almost 60 years ago…one thing is not like the other.

    Or do you think it’s just a coincidence that desired work hours among American workers just happen to spike heavily at 40 hours (or slightly under it)? There’s an institutional role in explaining that.

    Sure there is, but I don’t think the recent stagnation of the wage component of total compensation is related to what the unions did 50-60 years ago.

  • Chris Link

    Steve-

    Globally speaking manufacturing jobs are on the decline. The idea that but for globalization there wouldn’t be a decline is to deny reality. I don’t know what else to say other than your view is not in line with the empirical facts. We can wring our hands and worry about our share of this decline form of employment, but that strikes me as not a very good strategy for long term prosperity.

    Steve, you’re repeatedly attributing views to me that I haven’t actually made – I didn’t say three wouldn’t be a decline but for globalization, I said globalization has made the decline worse than it would have otherwise been. I also repeatedly said there were other positive factors associated with globalization, but that there were definite downsides, such as a hit on at least some aspects of domestic employment. For you to repeatedly whine about me pointing out what any economist or basic textbook would tell you about free trade is silly.

    As for “wringing our hands and worrying about our share of unemployment,” that’s exactly what the gist of Dave’s post was. More importantly, I see recognizing the situation we’re in as a starting point for discussing strategies for long term prosperity, not a substitute for it.

    Yes, I agree that jobs have mostly been created in the public sector and yes, that is probably going to be where future job growth comes from. If you really have a problem with that…why did you vote for Obama? He is not only in favor of the status quo on this front, but he intends to expand it. I find it rather ironic and risable that people complaining about this voted for the candidate that is likely going to make matters worse in this regard. He was a candidate and is now the president who sees salvation through the government not the market.

    Ok, this statement simply a mess of straw man attacks. First, I don’t think Obama has ever said that he’s in favor of growing employment primarily through government jobs. You can argue that he’s more government friendly than Republican administrations have been or would be, and that more government jobs would inevitably flow from that… but then, the big growth we’ve seen in government jobs has already occurred, under the watch of a president who at least nominally was strongly in favor of the free market. Likewise, our last big jump in private sector employment happened under Bill Clinton, another Democratic president who Republicans would have argued was only in favor of growing government, not private enterprise… so I don’t think it’s at all a slam dunk that Obama favors, or will only pursue, policies that increase government employment over private sector employment.

    Okay I’m going to explain this once.

    Please don’t – I’ve already had my share of basic economic theory classes, I’m more than familiar with the somewhat simplistic spin conservatives place on basic economic theory, and I don’t need a condescending refresher course from you. Suffice to say, while there’s a broad trend between higher taxes and reduced productivity, nobody’s successfully proved that the curve is as steep as conservatives would have us believe, nor that deadweight loss universally occurs. (In fact, there are obviously some situations where it doesn’t, such as taxes that go towards basic infrastructure such as roads.)

    More importantly, even if everything you say is completely and unimpeachably true, it still sidesteps my argument, which was essentially political, not economic in nature: regardless of whether it’s wise or not, there is a constituency for some kind of safety net, and the longer we go with a relatively weak one, especially in tough economic times, the stronger the public sentiment for strengthening it becomes. In the long run, it might be good political gamesmanship to embrace merely strong programs now rather than cripplingly overbearingly strong programs down the line.

    And, short of you actually engaging with the arguments I’m really making, instead of the arguments you assume I’m making, I think I’m done here, Steve.

  • Steve, you’re repeatedly attributing views to me that I haven’t actually made – I didn’t say three wouldn’t be a decline but for globalization, I said globalization has made the decline worse than it would have otherwise been.

    I really don’t see the logic behind this. Sure one country might lose part of its “share”, but that means another country gains. You offer no explanation as to how it would be worse. I’ll offer an explanation of how it might be better with globalization. Not all countries are as advanced technologically. So if a country is going to increase its share of manufacturing labor it might do so via the wage differential and employ more people in manufacturing than if such “off-shoring” was not possible. Now, its just a hypothesis, but it is more than you have.

    As for “wringing our hands and worrying about our share of unemployment,” that’s exactly what the gist of Dave’s post was. More importantly, I see recognizing the situation we’re in as a starting point for discussing strategies for long term prosperity, not a substitute for it.

    That’s fine, but the implication of the post is we need to get those jobs back. This strikes me as being no different that saying we need to get back the agricultural jobs of the mid to late 1800’s! It is almost like you are saying, “I don’t want firms to minimize costs so that we can maintain a certain life style standard for a certain catagory of workers.” And if that is what you are thinking then you will also likely need to implement complete global isolation. Because other firms in other countries are unlikely to follow that strategy and domestic firms will lose market share to foreign firms. Thus destroying the very jobs you are seeking to protect. But here’s the rub for people like you, protectionism doesn’t do what you claim it does. Wages don’t rise, profits do. Prices rise making the very workers you are seeking to help worse off. And having less options on the market also tends to make consumers worse off. It is a move towards the monopoly end of the spectrum and that is almost always a bad thing.

    I see no serious attempts to rebut these problems by anyone in this thread, its all a bunch of economic gobbldygook.

    Ok, this statement simply a mess of straw man attacks. First, I don’t think Obama has ever said that he’s in favor of growing employment primarily through government jobs.

    Of course he hasn’t said it explicitly STFW? He is continuing many of the policies of President Bush. He isn’t doing anything wildly different, in fact he is working towards expanding the size of government via health care.

    You can argue that he’s more government friendly than Republican administrations have been or would be, and that more government jobs would inevitably flow from that… but then, the big growth we’ve seen in government jobs has already occurred, under the watch of a president who at least nominally was strongly in favor of the free market.

    Talk about a strawman! Trot on over to Outside the Beltway and read my posts on how I see Bush as a Big Government conservative who’s only distinguishing trait from liberals is his social conservativism. You missed this one by not just one country mile, but more like 5.

    Likewise, our last big jump in private sector employment happened under Bill Clinton, another Democratic president who Republicans would have argued was only in favor of growing government, not private enterprise… so I don’t think it’s at all a slam dunk that Obama favors, or will only pursue, policies that increase government employment over private sector employment.

    Again you are missing by several country miles. On my old blog (no defunct) I had a post that looked at a curious quote by Bill Clinton. Clinton had noted that sometimes government wasn’t the solution and that government could take a bad situation and make it worse, and that it is important to know the difference. In fact, there have been comments by me around the interwebs about how I miss Bill Clinton’s presidency where once he realized that health care he was proposing was a dead duck he got down to doing some good work.

    BTW here’s a hint: I’m not a Republican.

    Please don’t – I’ve already had my share of basic economic theory classes, I’m more than familiar with the somewhat simplistic spin conservatives place on basic economic theory, and I don’t need a condescending refresher course from you.

    Really, did you fail them?

    Suffice to say, while there’s a broad trend between higher taxes and reduced productivity, nobody’s successfully proved that the curve is as steep as conservatives would have us believe, nor that deadweight loss universally occurs. (In fact, there are obviously some situations where it doesn’t, such as taxes that go towards basic infrastructure such as roads.)

    I said nothing about productivity, I was talking about the concept of deadweight loss, a completely uncontroversial aspect of microeconomic theory and public finance.

    More importantly, even if everything you say is completely and unimpeachably true, it still sidesteps my argument, which was essentially political, not economic in nature: regardless of whether it’s wise or not, there is a constituency for some kind of safety net, and the longer we go with a relatively weak one, especially in tough economic times, the stronger the public sentiment for strengthening it becomes.

    Okay, just admit you didn’t fully read my comment. You seem to have completely missed my point that to have a safety net of any type you’ll have to have a growing economy, not a stagnant economy dependent on government handouts. But feel free to continue thinking there is a pony in there somewhere.

Leave a Comment