Where is the Potential for Services Growth?

Tyler Cowen linked to a Christopher Balding post which is most helpful for me, because it explains an important concept in economist language that I've yet to do justice for in layman's terms. Hence I will include a fair amount of what Balding discusses in this post, with some additional thoughts and comments. While he wrote about the Chinese services sector, these dynamics apply to economies in general - which he also notes.

We are fortunate to have the speeded up circumstance of China joining other developed nations, because their broad and complex story is being captured in real time - even if still somewhat "misunderstood". Consequently, China's economic story exposes elements which can sometimes be missed when shifting resource use patterns evolve over decades, instead of years. Here's Balding, who notes the connection of the services sector to real estate and related financial services, and adds:

Financial services are widely recognized as a service but there are two important factors which imply we should at least recognize the unique nature of arguing for a healthy economy due to service sector expansion. First, financial services still derive the vast majority of employment, assets, and revenue from the major SOE commercial banks. Second, these banks give out the large majority of their loans, by some measures almost 90% to old industry firms that are facing large declines in revenue.

Regarding the overall slowdown in growth around the world: at the very least, there is some understanding that limits in real estate formation are arbitrary in the sense such limits are hardly necessary. Indeed, Kevin Erdmann's "decade long depression-level behavior of housing starts" is matched by what has already been a 15 year real decline in knowledge backed services formation and its associated income. These unnecessary limits to both services production and housing formation are finally affecting the outlook of old industry firms, because an insufficient amount of time aggregates (on the part of populations) are involved in present day production processes. This is something governments of all stripes need to come to grips with - sooner, rather than later.

Balding continues:

...if we strip out financial sectors from the tertiary sector, services have actually declined since 2000 and relatively significantly by probably at least 5% of GDP. Even if we look at other services, service sector contribution to GDP excluding finance is near all time lows. In other words, any rebalancing has come from the service sector feeding capital to old industry declining firms not from the growth of new firms or organic growth in services. 

Given the degree to which traditional housing and credit formation has been allowed - relative to government avoidance of time aggregate production potential - small wonder housing can statistically appear as though a boom, instead of the bust that has actually occurred. Even though aggregate spending capacity patterns show the nature of these overall declines (such as the U.S. has experienced), many onlookers still do not take the overall spending context into account. Here is the remainder of Balding's post:

The numbers bear this out. While listed A-share operating revenue for financial services and real estate has grown 17% and 31% annually for the last three years, wholesale and retail operating revenue grew at a mediocre 4% annually over the same time period. That is the complete opposite of rebalancing. 

I want to strongly re-emphasize that there is nothing here out of the ordinary in how things are classified officially. What does need to be recognized are what exactly is considered a service sector industry and their dependence on old declining industries. If we account for that, the picture looks decidedly different.

His emphasis on service industry reliance on old industries, also ties in with my explanations why it is not possible for government fiscal activity to supersede the potential growth capacity of monetarily based activity - despite the fact governments gained the additional wealth benefits of financial assets in the twentieth century. While governments might have had little choice but to rely on old industry to fund services formation in the past, that does not mean services formation should be expected to solely continue on these limited terms in the future. If long term growth is to be maintained, more production capacity needs to be extended to all citizens if for no other reason than making certain traditional production value is not lost.

Even though services growth slowed - due to its reliance on other wealth - new service patterns can be generated through local and direct wealth creation. What's more, the process can take place alongside flexible real estate patterns which do not require credit formation. Local corporations would provide what could be considered an alternative production to services equilibrium. Local knowledge use systems would exist alongside internal services and real estate formation.

These in turn would utilize time backed money to augment the fiat monetary systems of the present, so nations can regain confidence regarding nominal income (and aggregate time value) alongside capital formation. Potential for services growth still exists. Just the same, governmental reliance on meritocratic knowledge use may eventually become associated with the elite, as others seek to grow services systems directly through local and inclusive means.