Services: The Elephant in the Economic Model

Sometimes it seems as though services are everywhere, except of course our basic economic models and expectations re how the economy is "supposed" to work. By way of example, Neil Irwin recently provided an apt explanation what Trump missed in his trade calculations:

You probably work in the service sector. This seems like a safe assertion, as 84% of private-sector jobs in the United States are in services.

By contrast, "goods-producing" jobs like logging, mining, construction and manufacturing accounted for only 20.5 million jobs last month, in a nation with 148 million total positions.

If we've guessed right about your occupation, the question for you and 105 million fellow service workers - a very broad category that includes retail clerks, truck drivers, architects, bankers, doctors and more - is whether the Trump administration cares about your economic fate. 

As it turns out, services are at the root of the discrepancy of the trade calculations between the U.S. and Canada. Why didn't Trump consider service sectors, especially given their overwhelming relevance for employment? Nevertheless he's hardly alone in this regard. Services have dramatically shifted the foundations of our economy in recent decades. Yet among the many "holes" in our understanding, are the fact that output disparities between service sector activity and tradable sector activity, have yet to be accounted for in the structure of our economic models. When might service sector considerations for aggregate output and employment, finally be taken seriously?

Alas, when we don't see the services elephant in the room, it can be easy to blame the wrong things. For instance: By no means is misplaced blame for "lost" manufacturing jobs just a conservative issue, since some progressives still pine for a "stakeholder" economy, whereby tech augmented production of "stuff" could bring back manufacturing employment "good old days". But something is quite different about much of today's digital innovation. How much does technology contribute to the value of high skill time use, rather than adding more recognizable product? In the digital era, time product becomes augmented, but time based product is not multiplied. What for many has been the most important definition of productivity - increased per capita income due to increased output, begins to break down in these circumstance. In "Is Technology Hurting Productivity"?, Jeffrey Frankel writes,

It is possible that new technologies are not just doing less to boost productivity than past innovations. They may actually have negative side effects that undermine productivity growth, and that reduce our wellbeing in other ways as well. 

Importantly, technology isn't "hurting" productivity in a strict sense. However - in high skill services - it is presently widening the gap between already existing income disparities. The reason this is important, is that technology has long been associated with widely dispersed income gains for populations as a whole. Which is just one reason I've suggested major innovations for our physical environments and the reality of our time scarcity, to better capture the real income gains of total factor productivity.

Even though there's been considerable focus on large corporations as problematic for income disparities and related antitrust issues, it could be that the more important driver of inequality, is the technological benefits which accrue mostly to small business professionals. Many professionals benefit not only from the compensation of hourly income, but many other forms of knowledge product and also - especially in healthcare - the technology which is utilized for diagnosis. All of which contributes as well, to the services product which is traded between nations.

Given the high costs per patient for much of today's computer aided diagnostics: If there were a form of technology ownership that could prove beneficial for the average citizen, healthcare diagnostics might be a good candidate. Plus, if healthcare technology could benefit from the skills sets of average citizens, these costs could be reduced in ways that would benefit both real income levels and by extension, governmental budgetary debt loads. If the marketplace for ownership and production of healthcare technology could be extended to ordinary citizens, we would also be a step closer in bringing healthcare to the many regions areas in the U.S. which need it most. Fortunately, the costs of healthcare technology are not completely caught in the imperatives of human capital investment which presently impact the supply side of today's healthcare.

Ownership potential for healthcare diagnostics is but one example, of the many ways by which we could recapture productivity gains for all income levels. Lower costs for computer aided diagnostics could translate into real income gains where consumers often need it most - whether or aggregate income as correlated with aggregate output, continues to rise in the near future. Since services have become such a dominant part of the economy, much as changed. Still: With a little luck, we can ultimately achieve total factor productivity gains which don't necessarily have to be correlated with strong gains in actual output.

Debt as a Factor in Output and Productivity

When does debt serve as an actual point of wealth origin, whereby it contributes to output, productivity gains, and long term growth? The answer often depends on whether debt instruments function by shifting (redistributing) wealth, or as direct means to increase output. For example, tradable sector activity provides more debt assisted wealth origin, than non tradable sector activity. Presently, debt as financial intermediation tends to inhibit long term growth, as much of it is utilized to shift ownership patterns instead of generating additional aggregate output.

In a recent Econtalk with Russ Roberts, Arnold Kling stresses the importance of financial intermediation in the economy, yet downplays the significance of macroeconomic theory (he describes financial intermediation as any institution which issues debt). While my readers won't be surprised that I consider macroeconomic theory the more important factor, Kling's argument provides an apt reminder of the importance of financial intermediation for macroeconomic outcomes. However, just as the complexities of finance don't negate macroeconomic theory, neither do intangible production factors (which he frequently highlights) negate the reality of aggregate supply and aggregate demand.

Financial intermediation serves as a point of wealth origin, only insofar as it increases aggregate output, rather than simply shifting the ownership of resource capacity. Indeed, one might have a more instinctive feel for aggregate supply and demand realities, if they could more readily discern when and where financial intermediation stalls aggregate output. Wealth claims are a non linear process, in which secondary markets can create a "nesting" effect which blurs the correlation between price levels and seemingly apparent productivity gains. Could this have some bearing on the fact that Arnold Kling has his doubts about the validity of aggregate supply and aggregate demand? Productivity can be deceptive, for - like inflation - while its particulars are discerned at the microeconomic level, its totality is measured at the macroeconomic level.

The processes by which financial intermediation rearrange wealth, are closely aligned with secondary market activity. Financial intermediation - while it is still capable of generating real progress - is too frequently utilized instead as claims on already existing output. Wikipedia notes other secondary market processes besides the resale of initial financial offerings, such as markets for used goods and assets. Ethanol production, for instance, is a useful way to think about secondary market goods or services which function as "nested" claims on already existing output. Also I've stressed how today's time based services function as secondary markets, since they make asymmetric claims on circulating revenue.

I should apologize if I've caused my readers any confusion re my description of government financial intermediation as secondary market activity, since the initial activity for government bonds is described as a primary market. That said, I can't help but feel the official description of a government bond as a primary market is misleading, for it encourages observers to envision government bonds as a point of wealth origin. Alas: Like other secondary market activity, government bonds more often shift resource capacity, instead of generating new output which is reciprocated at the outset. In terms of initial offerings as primary markets, I believe the primary market designation is accurate when financial intermediation applies to equity for output gains in tradable sector activity, or the one time output gains of new home mortgages.

Perhaps the most important question to ask re financial intermediation from a productivity perspective is this: Do debt instruments increase output, or do they make output claims which shift ownership patterns? While the latter circumstance is often benign, it still tells an important story about measurable economic progress - or not, of course. Presently, some official financial designations for primary market activity are confusing, for they encourage many observers to believe new wealth is being generated, when existing wealth is actually being shifted. It's too easy to forget that new government securities in particular, don't directly contribute to additional output gains in a real market capacity.

Why does it matter, whether financial intermediation serves to advance wealth, or to redistribute wealth? By discerning the difference, we gain important clues about changes in aggregate supply and demand, and more clarity re output and potential productivity gains. While redistribution of wealth is relatively benign up to a point, once economic stagnation sets in, prosperity could be lost, should redistribution take precedence over wealth creation. Ultimately, we need a better understanding whether - at a macroeconomic level - we are actively advancing wealth, or merely circulating already existing wealth.

Could the Preservation of Freedom be "Planned"?

Occasionally over the years, some have mistaken my emphasis on planning for better economic outcomes, as government meddling which leads to losses in freedom. But what if basic freedoms need more protection across the board - even if government permission in specific local settings is a necessary prerequisite? Is it possible to distinguish intentional paths for full economic participation, from excess rules which instead stifle growth and dynamism?

Unfortunately for libertarians who see little need to "plan" for anything market related, too many initiatives against freedom become absolute definitions, in the form of marketplace production rights. Even the high costs of governing encourages loss of freedom, since legislatures continue to sell rights of production for the "right" price.

Meanwhile, too many individuals who increasingly find it difficult to secure legal forms of economic participation, are becoming criminalized essentially because they are poor. Sometimes, the libertarian impulse to protect freedoms mostly for the ones who can afford them, means standing back afterward and letting the chips fall where they may. Alas, this hands off approach encourages more regulatory "protections" from the disenfranchised, on the part of progressives and conservatives alike. Less freedom for the poor, sometimes translates into less freedom for the rich as well.

While I've especially focused on the loss of freedom re rights of production, others are voicing concerns about workplace freedoms. In a post which (again) highlighted John Locke's work, "John Locke: The Purpose of Law is Freedom", Miles Kimball notes how libertarians don't take the intentional design of hierarchical control into consideration, and writes:

Freedom is not just doing what you want, it is other people not doing what you desperately want them not to do.

He continues:

Liberty is not for a few people to be able to do whatever they want, but for each individual to have a sphere in which she or he is the master.

And concludes:

...To me, the most interesting new idea is that to count as freedom, there must be enough rules to prevent any individual from being domineering. That is a tough standard for a society to meet, but a worthy goal.

At the very least, today's workplaces usually provide reasonable options to escape domineering bosses and peers. Even if the best way to do so, eventually leads to self employment or otherwise starting a new enterprise. Indeed, the increased demands of our bodies as we age (having to take too many bathroom breaks for example) can occasionally make it all but necessary to do so. But when society's professional associations assume a wide array of production rights, that profoundly affects our self employment possibilities, and local choices take greater precedence as we age. Sometimes there's little means left to escape marketplace domination, in terms of the remaining economic options we still have for mutual relationships with others.

In short, the societal losses of freedom of association for mutually shared economic time, are becoming extensive. It's time to reserve a place in local environments where true freedom of association might finally be restored. One can only hope that tomorrow's libertarians will begin to recognize time based services provision, as a new frontier for freedom and economic potential.

The Economic Potential of Time Value

Could one's time preferences assume the value in use functions that apply for commodities, in contrast with concentrated forms of value of exchange that contribute to final product? Skills arbitrage - along with its extensive human capital investment requirements and risks for instance - belong to the latter category. This, even though the institutional application of high skill arbitrage is sometimes described as intangible product.

Only recall how resource based commodities serve as a beginning point for all kinds of production cycles. By way of example, recent tariff issues for steel and aluminum remind us how commodity designations affect a wide range of ultimate production possibilities. Time arbitrage as a formal economic commodity, would allow personal time value to be envisioned as a resource which serves as an integral beginning point for other components of economic exchange. Such a conceptualization is all the more important, so that personal time options might form a reliable framework for the production cycles of knowledge based product in the 21st century.

How could time value as a formally defined economic commodity, contribute to societal gains? Among other benefits, it would provide opportunities for all participants in learning processes to generate measurable value in use, via their own personal participation. Most individuals would be able to take part in knowledge focused marketplaces and workplaces from a young age, thereby reducing the high risks and long wait periods for human capital investments to pay off as value in exchange.

Consider how basic commodities provide essential value in use functions, which greatly contrast with what high skill products and services are often designed to provide. Nevertheless, human capital investment intended to sell skills as value in exchange, now has a smaller window of opportunity in the workplace, than was the case in the twentieth century. One always invests in human capital with a certain degree of risk, given the evolving institutional needs for skills arbitrage in many workplaces.

One reason it's important to have time arbitrage as a basic commodity option: Rural areas particularly rely on commodity production for wealth creation, rather than the value in exchange which prosperous regions contribute to value added goods and services. Nevertheless, the technological gains of the 20th century meant fewer employment options for basic commodity production in rural areas. Meanwhile, it is only becoming more difficult for governments to redistribute wealth from other sources to rural areas, hence the latter need new options to create new wealth via their own means. Local services generation - via the basic commodity role of time arbitrage - should be an obvious choice.

Skills arbitrage - desirable though it is - remains mostly available to individuals who live in prosperous regions, since these forms of economic complexity are generally required before local institutions can fully compensate extensive human capital investment. Today's educational institutions in rural areas contribute to this problem, for they mostly prepare motivated students to relocate to more prosperous regions, rather than provide vital skills locally after high school graduation. If time value were designated on formal terms as a useful and basic commodity, rural citizens could finally engage in ongoing education which also enriches the lives of neighbors in their own communities.

Even though meritocratic skills arbitrage became the preferred goal of human capital investment, its potential for widespread use in the 21st century is diminishing, especially as present day corporations revert to an organizational core which minimizes full time employment. By structuring more time use as a basic commodity, it would be feasible to restore the level of employment that most individuals desire. And from here, it would finally be possible for all concerned to seek out new cultural frameworks, in terms of freely shared responsibility.

Humanities Could Become a Less Risky Investment

Why do humanities studies get such a bad rap as a formal educational goal? After all, humanities studies contain vast representations of what is rightly considered the progress of civilization. However, the fact more individuals seek work in these areas than is actually available, generates plenty of skepticism re present system costs for this form of human capital investment.

How did the pursuit of a wide array of intellectual challenges, became so misaligned with our economic realities? It wasn't always this way. During the centuries when tradable sector activities were the dominant employment opportunities, humanities students - especially in developed nations - could generally find work in areas not related to their studies. For a long time, one could often reconcile their natural tendencies with the kinds of work that were actually on offer.

For instance, my father's bachelor's degree in English (after WWII), which meant far more to him personally than to the marketplace, didn't reduce the practicality of the carpenter's skills he employed in petroleum refining, afterward. Today, however, human capital investment in humanities is far more chancy, especially since most corporations rely on more specific skills than what my father utilized. As much as I wanted to complete a bachelor's degree in music: After the problematic logistics of an hours long campus commute, and a series of financial setbacks, I finally realized degree completion would have meant more to me personally, than what the less signal driven marketplace of the seventies actually required.

Can humanities studies be salvaged as a form of valid human capital investment? These studies not only represent civilizational progress, they impart valued qualities to the (human capital) production and consumption of societal discourse. However, if humanities studies are to be preserved and actively maintained during periods of economic stagnation, they'll need viable economic platforms which address the risks of human capital investment, while simultaneously preserving the tremendous value of personal intellectual challenges. In a chapter on investment in Basic Economics (Fifth Edition) Thomas Sowell writes:

If the return on investment is not enough to make it worthwhile, fewer people will make that particular investment in the future, and future consumers will therefore be denied the use of the goods and services that would otherwise have been produced. No one is under any obligation to make all investments pay off, and to what extent is determined by how many consumers value the benefits of other people's investments, and to what extent.

We are particularly concerned about humanities as a more viable form of human capital, of which Sowell notes:

While human capital can take many forms, there is a tendency of some to equate it with formal education. However, not only may many other valuable forms of human capital be overlooked this way, the value of formal schooling may be exaggerated and its counterproductive consequences not understood...From an economic standpoint, some education has no value and some can even have a negative value.

Yikes. Let's briefly consider why humanities studies nonetheless contributed to broad employment opportunities for decades, in the U.S. After WWII, most regions were experiencing productive economic gains via the widespread dispersal of tradable sector activity. Consequently (until more recently), standards of living rose all across the country. Another aspect of humanities studies as a strong secondary (revenue dependent) marketplace, was the nature of a financial system which worked as a reliable transmission mechanism from points of wealth origin, to the active circulation of strong service sector activity.

Of course, today these circumstance are changing, especially as monetary transmission is becoming more closely aligned with other vital aspects of the economy. Again, it helps to reflect on what's at stake. We know that we assign real value to both humanities production and consumption. What might be done about the fact humanities studies as human capital investment, lack viable economic value?

It's possible to assign formal economic value, to a broader dispersal of informal learning processes. Fortunately, many communities could make the production of humanities a more integral part of their economic activity, via the direct wealth creating processes of time arbitrage. Formal means of mutual engagement in these activities, would generate mutually shared costs which don't pose high risks for the personal time and resources involved. Time arbitrage would provide means to connect humanities studies to wealth creation, thereby greatly reducing the costs of human capital investment.

The direct services input to output relationship of time arbitrage, could transform personal commitments to humanities studies. Like minded individuals would take part in endeavour which - while also experiential in nature - has the imminently pragmatic component of natural personal inclination. Commodification of time, via measured time units, would create a value in use function for human discourse which can be readily distinguished from the uncertainties of humanities value in exchange, given the latter's inevitable "inequality" of globally aligned compensation.

Educationally oriented time units as mutually compensated activity, could greatly reduce the risks involved in a diverse range of human capital investment. Thankfully, it's not necessary to diminish human capital as a formal investment option. By realigning skills acquisition to wealth creation patterns, our time value could ultimately assume a central role, in the organizational processes of knowledge use.

Knowledge Use Doesn't Have to Be "Totalitarian"

Are the recent societal impulses towards "creeping" authoritarianism, inevitable? For instance, one can only hope that 21st century knowledge use might eventually break free of its present rigid modes. Otherwise, the arbitrary limits to knowledge use which translate into limits to growth, could mean a return to the limits of closed societies as well.

Like Scott Sumner, I'm of an age when many of us took for granted the intellectual gains which resulted from the wars and struggles of the twentieth century. How many of those gains are being lost? Life already feels quite different than it did at the turn of the century. In a recent Econlog post, Sumner highlighted an article from The Economist which explores "agency" as a contributor to today's growing nationalism. From the article:

The new nationalism does not just insist on the difference between countries, it also thrives on the anger within them...Men and women lacking in, or deprived of, agency look to nationalism to assure them that, in their own way, they are as good as everyone else--better, even. It is just that the world does not give them the respect they deserve. They are quick to identify with those they see as on their side and to show contempt for others...At the same time they are obsessed by how others see them.

One only need consider the environments of our schools, which due to the limits of knowledge use in society, can inadvertently designate students as winners and losers in terms of the economic access which matters most. And the schools of our youth are only the beginning of this process. Presently, too few individuals are expected to work with vital aspects of knowledge in their communities - oftentimes, knowledge which determines much of the quality of life for everyone else.

Knowledge use can become totalitarian, when specific skills sets are assigned to certain individuals and denied to others. When we permit a full range of skill application solely according to meritocracy, eventually those who are fortunate enough to be included end up in a bubble, surrounded by millions who have been left out of so many vital economic processes, they are no longer able to fully function or assist one another. When we allow our governments to legislate away the freedom of knowledge use, thereby limiting employment possibilities at home, citizens inevitably become less inclined to keep an open mind re the free markets of tradable sector activities between nations.

It is not necessary to keep using knowledge as societal means to separate the "winners" from the "losers". We have important reasons not to do so, since automation now produces so many of our goods. After all, services options are the logical next step for 21st workplaces, but we have yet to build local environments which would even make mutual coordination possible, for services generation. Meanwhile, knowledge use as mostly hierarchical systems, needlessly grinds human initiative into the dust. Let's find means by which the use of knowledge need not be totalitarian, so that the political and social uncertainties of our time can finally be addressed.

When Governments Enforce Limits to Growth

Why is it so difficult to understand, how protectionism and favoritism can negatively impact economic outcomes? Nevertheless, the latest example is obvious to observers far and wide, at least beyond the confines of the White House. Which makes it all the more frustrating, that 10 percent tariffs on imported aluminum and 25 percent on imported steel, will actually be implemented. As Gregory Mankiw noted, Trump even managed to unite a polarized country: "How often do Jeffrey Sachs and the Wall Street Journal agree?" And Mickey Levy of E21 wrote:

The economic effects of these tariffs on the macroeconomic environment will depend critically on whether they damage business and household confidence...the danger is if these tariffs adversely jar confidence - perhaps fueled by foreign retaliation - heightened uncertainties would lead businesses to tone back their expansion plans and the trajectory of consumer spending would be softer.

Supposedly the tariffs would be "helpful" for reasons of national security. But where do the majority of these imports come from? James Pethokoukis explains:

That reasoning is pretty much ridiculous, unless the Pentagon has given Trump reason to think it's possible that the 1st Armored Division might one day be racing toward Toronto, or Army Rangers parachuting into Rio de Janeiro. The top two suppliers of steel imports to the U.S. are Canada and Brazil.

He adds, in spite of a report from the Commerce Department that metals imports eroded weapon making ability, the Defense Department only needs 3 percent of total U.S. steel, or 70% of the U.S. market. And the economic argument is at least as bad, since Trump is possibly hurting the many, just to help the few, by increasing the price of "commodities used to make a vast array of products for businesses and consumers."

According to Politico, Trump's tariff decision spurred retaliatory threats from close allies as well. Both Australia and China expressed concerns that other countries would follow the U.S. lead, and retaliate. Indeed, the EU could target $3.5 billion of U.S. imports at the outset.

It's astonishing no one could convince Donald Trump that tariffs are generally a bad deal for everyone concerned, instead of making a stronger economy more likely. Of course, other limits to growth due to political favoritism have been in place for well over a century - even if these limits don't have obvious implications re employment outcomes. Presently, the degree to which knowledge use limits affect employment potential, no one really knows.

Washington's focus on supposedly retrievable twentieth century jobs is off the mark. Especially since technology and automation impel us to reconsider, what work and wealth creation in the 21st century is all about. However, it's difficult to start a dialogue about this reality, when existing wealth is being jeopardized by an insistent focus on the past. Hopefully in the years to come, this unfortunate circumstance can be changed.