A surfeit of services.

My yearly sojourns to the US provide a regular opportunity to garner a snapshot of the state of the union, at least from my limited perspective. This year I returned to my old stomping grounds in the desert southwest and to the home away from home in South Florida. After a wet monsoon season the desert was lush and the 360 degree skies saturated with cumulus, cirrus and stratus cloud. It was great to hear Norteno music and Spanglish spoken in the street.

My son joined my partner and I for a trip to the old mining town of Bisbee, where we stayed at the haunted Copper Queen (est. circa 1880) and had a long night on the town that ended up in some biker/metalhead dive bar. It was great. I highly recommend the Arizona desert to New Zealanders interested in a dramatic contrast in landscapes and Western cultures.

South Florida has been less pleasant. There is a palpable tension in the air marked by hostile attitudes and unbelievably aggressive, to the point of criminally reckless, driving. The region is known for its fast pace and shallow materialism, but in this trip there is something darker about it. Some of this can be attributed to the election campaign, in which some of the local attack ads are truly astounding in their ferocity and disregard for decency (the issue is large: one-third of the US Senate, the entire US House of Representatives, and most local offices are in play). There is a buffoon Republican named Alan West running for the US Senate, and his ads make the Swiftboat and Willie Horton attack ads look tame. He says nothing about what he proposes and spends most of his time defaming his Democrat opponent. Seeing that Romney is set to lose the presidential race, the right wing talkback and television outlets have ratcheted up the hysteria and vitriol to the point that even John Stewart or Stephen Colbert cannot parody them adequately. In a word, the place is nuts.

This condition of political anomie may be compounding the sense of frustration and anger felt by an increasingly divided–the word “polarized” does not do justice to the chasm between the US right and left–polity that more than anything else is diffident in its regard for politics. Both the Republican and Democratic conventions were not as well attended and not as widely viewed by TV audiences as in previous years, and it appears that the election abstention rate is going to be very high this year. People appear to be cynical, bitter and lacking in hope for the future regardless of who wins in November. All in all, this is the sorriest state of mind I have found the US to be in since my move to NZ fifteen years ago.

That is the backdrop to the subject of this post. As readers will know, the focus of the 2012 US election begins and ends with the economy. Platitudes are proffered and panaceas are prescribed. Words like “competitiveness” and “innovation” are bandied about like lollies. But there seems to be a fundamental misunderstanding of a root cause of the American economic malaise: its reliance on services.

The US is a country dominated by the service sector rather than true productive enterprise. Think of the variety of services now on offer: wealth and asset managers; financial advisors; PR and other “communications strategists;” personal trainers; life coaches (of which there are half a million in the US); pain management specialists (aka pill doctors); landscapers; floral designers; escorts; private alarm and security companies; fishing, hunting and tour guides; real estate agents; internet and in-store movie suppliers; credit card purveyors; nail and hair “artists;” wedding planners; a zillion types of mental health counselors and ambulance chasing lawyers; insurers; car, cat and dog groomers; dog walkers; bird, cat, dog and horse whisperers; DJs; car valets; (for-profit) drug and alcohol rehabbers; tennis instructors; beauty consultants; fashion stylists; liposuction specialists; motivational speakers; management and risk consultants; self-help gurus; personal assistants and agents, accountants; home delivery services; website designers–the list is as varied as it is endless. While one might argue that all retail sales are a service, my point is that in the US the extent of service provision is on its way to infinite, and this infinite progression dominates its economy.

The basic problem of reliance on services as the core of economic activity is that making money through facilitation is not equivalent to being productive. Nor is working hard synonymous with productivity. Americans work the longest hours and take the shortest vacations of all OECD countries. By that standard they should be light-years ahead of the democratic capitalist world in terms of real productivity. But they are not. That is because hard work and income earned in services does not, in the larger scheme of things, add real value to productivity. It may make the national quality of life better, but it does not advance the overall condition of the productive apparatus. It is the economic equivalent of silver–it is nice and attractive, very malleable, easy to buy, wear and replace, but is no substitute for the economic iron required to build and progress a nation.

What is noteworthy about the US service sector is that, at over 75 percent and growing, it is steadily occupying a bigger and bigger percentage of the national GDP (agriculture is less than 2 percent and manufacturing is at 20 percent). The creative genius involved in the proliferation of services is matched by its relentless rent-seeking: in South Florida television ads are dominated by ambulance chasers (who prefer the term “personal injury lawyers”), pill-pushers and geriatric care providers who offer relief and compensation for a myriad of ills previously unheard of or for which personal responsibility used to suffice.

The majority of US college graduates, be they from two or four year colleges, receive degrees in areas other than science or engineering (business, education and liberal arts degrees are the majority of those granted in the US). Since the bulk of undergraduates do not go on to graduate school, this leaves a labor pool full of people who cannot actually produce or add value to anything other than by virtue of their slick talk and quick uptake on the job. Since most people coming out of US universities and colleges are neither particularly articulate or quick on the uptake, their default option is to join the legion of personal service providers.

No that all services are of the silver variety. Some of these are important, such as electricians, plumbers, carpenters, doctors, firefighters, police and lifeguards (I shall defer from elaborating on the public versus private aspects of the service sector, but note that what are considered public services are basically considered to be core functions of government, many of which are being privatized and downsized in the current fiscal environment). Many services are linked via supply chains to the manufacturing and research sectors. Others, such as the information technology services that spawned Google, Facebook and Twitter, create wealth but do not always really produce anything tangible or contributory to the value-added project (which in part explains the lukewarm stock market reaction to the Facebook public stock float). The vast majority of US services are, needless to say, even less contributory to the national productive apparatus.

The critical and deleterious aspect of the services domination of the US economy is that it is moving the country away from the production of real value added assets, much of which is increasingly monopolized in terms of ownership anyway. Add to that the overwhelming influence of the financial service sector, and what is left is a country that buys more than it makes (and what it makes are increasingly capital goods as much as consumer durables and non-durables), and in which people increasingly use services rather than do things or rely on themselves.

The social division of labor created by service sector dominance in the US appears to produce two distinct cultural characteristics. First–and this is very evident in South Florida and a subject that I have addressed in previous posts–is a culture of blame-assignment and responsibility-shifting where nobody is personally accountable for the consequences of their actions. Even hardened criminals commonly use the excuse that their teachers, counselors and psychiatrists failed them in the lead-up to their crimes, and in many instances this suffices to mitigate their culpability and reduce their sentences. They are not alone in this. In fact, there is an entire service industry comprised of counselors, insurers and lawyers that profits from shifting blame and responsibility, criminal or not.

The second aspect is the increasing compartmentalization and personalization of service work, which in turn produces an erosion of horizontal solidarities brought about by common insertion in the productive process. Much of the service sector is characterized by individual entrepreneurial or material pursuits. The individualization of service work, often aided by stay-at-home technologies that facilitate the rendering of such services, removes the associational and emotive ties that are part of the working experience in mass productive enterprise. This atomizes and alienates individuals as social subjects, as their material fortunes no longer depend on common identifications and sense of purpose (which occurs whether the workforce is organized or not precisely because it is a collective enterprise).

Social group associations, service group size and individual immersion in non-work related collective undertakings such as sports and churches mitigate against a complete return to survivalist alienation, but they do not fully overcome the dissociative effects of the nature of service provision. The effect of this is to reduce the ties that bind people together, which helps explain the turn to shifting blame and responsibility onto others.

Needless to say, I am only extrapolating from what I am seeing in the US during my limited time here. I recognize that generalizations are fraught and speculation based on fraught and fragmentary generalizations are to be suspected. So take this appraisal as an opinion, nothing more. Moreover, the US remains the largest national economy in the world, the largest trading nation, and the largest manufacturing economy. Its information technology, robotics, telecommunications and aerospace industries are world leaders. Its automobile and construction sectors are on the rebound. It is by no means weak in spite of what I have outlined above.

Even so, the trend is disturbing (at least for those with an interest in the US). For small countries not intent on projecting power or devoid of natural and human resources, reliance on services as the mainstay of the economy is acceptable if not advisable. Competitive advantage in services may counterweight a lack of comparative advantage in productive resources.

However, it seems to me that if a large, militarily aggressive country with a global reach relies on services as its engine of economic growth rather than on value-added production, than it will find it increasingly difficult to hold the its position over time. I might be wrong and, like (but better than) the USSR, the US can continue to ride on the production associated with an immense military-industrial corporate complex that spins off technological innovation and civilian applications as a matter of course even as the overall presence of value-added manufacturing as a component of GDP decreases. But if that is the case, it seems a risky proposition for sustained growth and global prominence given that an increasing percentage of the inputs to that type of production are derived from external rather than internal sources.

Meanwhile the life coaches continue to facilitate personal self-realization, realtors hustle properties, lawyers litigate and asset managers channel money made from services into other services. Wall Street and Washington both believe that ongoing reliance on services for economic growth is sustainable and desirable. In broad economic terms, that is like equating a merry-go-round with a wheel. It is that merry-go-round that Obama, Romney and other US politicians are trying to fix.

10 thoughts on “A surfeit of services.

  1. Fascinating, thanks Pablo. You’ve given me plenty to think about there not just in the US but also in the NZ context.

    Just a thought for you: does the growing reliance on the financial services sector, mean that volatility in the markets is likely to increase? In which case what are the implications for an export focussed economy such as NZ? Not good I’d venture to suggest.

  2. A very interesting post Pablo, some unique insights here.

    I think you are bang on about the polarising nature of US politics. I sometimes wonder why New Zealand is so centrist. Of course, the average kiwi blogger or anyone with a finger in politics does not think it so, but you explain NZ political values to an American and left – right, in comparison we all seem exactly the same. Something has obviously occurred in our own history that makes us more moderate. I wonder if it relates to our social and economic history. We share a similar colonial history, but slavery for example has left a very dramatic crease on the US broadsheet, even today.

    As for the focus on the service industry, I couldn’t agree more. A very good friend of mine here in DC has just hired an “admissions consultant” to help her with her MBA applications. At several thousand dollars – per school – I wonder what value this is bringing to society (undoubtedly it brings some sort of individual value). Some will argue that merely the fact something is sold (i.e. consumption is occurring) is enough for the wider benefit. The idea is that if people are spending the economy grows and all will be well. But this belies the issues you raise, accountability, social connections. If she doesn’t get into Harvard, well she has someone to blame I guess. It’s not that she didn’t have the right grades, or essay, or “fit”, but her consultant wasn’t good enough.

    And yet its the norm, apparently.

    I’m also interested to hear of your travels. I’ve not travelled as much as I would like while being here (east coast mostly), but its a vast and very dramatic country, I look forward to exploring it more.

    As for the election, yes a little policy might be too much to ask (please excuse the self promotion, but I posted on this: http://doubleportion-blog.blogspot.com/2012/09/who-needs-policy-when-you-have.html), it seems though that rather than spending valuable time talking about what needs to be done, the better thing is actually trying to persuade people to get tot he polls – a mission in itself. At least that is the democrat way: the right just need to hold more parties, and hope the cash continues to trickle in…

    A sad start of affairs – but a function of the system their chosen. Change is needed, but I dont see it any time soon.

  3. At risk of being seen as irreverent but the Golgafrincham’s leapt to mind.


    ” The planet of Golgafrincham was once home to the Great Circling Poets of Arium. The descendents of these poets made up tales of impending doom about the planet. The tales varied; some said it was going to crash into the sun, or the moon was going to crash into the planet. Others said the planet was to be invaded by twelve-foot piranha bees, and still others said it was in danger of beaing eaten by an enormous mutant star goat.
    These tales of impending doom allowed the Golgafrinchans to rid themselves of an entire useless third of their population. The story was that they would build three Ark ships. Into the A ship would go all the leaders and scientists, and other achievers. Into the C ship were supposed to the people who made things and did things, and into the B ark would go everyone else, such as hairdressers and telephone sanitizers. They sent the B ship off first, but of course the other two-thirds of the population stayed on the planet and lived full, rich, and happy lives until they were all wiped out by a virulent disease contracted from a dirty telephone.”

  4. I’m going to register some dissent here. I don’t think a focus on production is the key to economic improvement. I think it’s actually the opposite. The global economies which are dominated by primary production as opposed to services are actually the poorer ones. In East Asia, and more recently in Latin America, moves from production-based economies to service-based economies are generally marked by general improvement in economic standards.

    On a more personal note I feel that, as the holder of a degree that isn’t in science and engineering, I have the ability to add value. I think you do too, Pablo (apologies if you have a science/engineering degree I don’t know about)

    The idea that what developed societies need – I know you’re talking about the USA specifically but I’ve often heard this said about the UK and NZ too – is to return to manufacturing and move away from services is, in my opinion, a blind alley based more on nostalgia than rigorous analysis.

  5. Pablo, what you describe is basically the Broken Window Parable on a near-nationwide scale. You know something’s up when heavy industry in America is over-reliant on the armed forces – or even the Orwellian concept of Perpetual War.

    Peanut Monster: Geoffrey McNicoll, a history professor at the Australian National University, seemed to nail it as such:

    “America reflects the influence of its classically liberal, Whig, individualistic, antistatist, populist, ideological origins. Canada…can still be seen as Tory-mercantilist, group-oriented, statist,
    deferential to authority—’a socialist monarchy’… (Lipset, 1990:212).”

    The two parts of North America, he speculates, attracted different types of people: Canada the more conservative British Protestants and Empire loyalists, the United States the more radical and democratic émigrés from Catholic Ireland and across Europe. Australians are in no sense descendants of winners, yet the contrast in some respects can apply also to the Tasman case. Australians are more whiggish, New Zealanders more Tory—though Tories can still be radical, as recent New Zealand economic policy demonstrates.

  6. Imagine how the hunters harrumphed when some enterprising person discovered that with a little assistance wild cereals would produce more and provide additional food. She swapped that food for more meat than she could catch herself.

    Imagine how the farmers harrumphed when one of their number gave up tilling his own land with a stick and produced shovels and hoes. He swapped those for more cereal than he could produce himself. And he had a nice sideline in making and fixing spears for the hunters.

    Read about the anger of the Luddites when they smashed those new fangled weaving machines.

    Recall the riots in Britain when modern mining equipment replaced hundreds of thousands of miners.

    Welcome to the economic concept of comparative advantage.

    In Australian mines they are using driverless trucks which use GPS navigation to get from one point to another.

    In car factories robots weld with an inexhaustible precision humans can only dream of.

    Agricultural employment has declined as methods have become ever more efficient. Manufacturing is going exactly the same way. Programmed machines can produce things far more efficiently than fallible humans.

    The commodity value of an iphone, including copper, rare earths, iron, hydrocarbons is pennies. And yet the value of the human knowledge built into that small manufacture, is incredible. That is something to be marveled at and praised rather than mourned.

    The Value added production you describe is precisely the intellectual knowledge that is called services.

    An engineer and an architect do not manufacture a building, they provide irreplaceable services.

    The financial services sector exists for a reason but is plagued by many parasites who can clip the ticket on the way through in exchange for the provision of theoretical services. The sector exists to match capital looking for an investment with enterprise looking for funding. A service, but very necessary.

    People working in services are simply following the path of increasing specialisation. The path that has brought humanity to the point of development where we are on the verge of going to the stars.

    Those people providing services are more productive at what they do than the people to whom they provide the service. My favourite from your list above are the dog walkers. They walk a dog so the owner can work harder and buy another donut for themselves. Or possibly so they can solve the programming problem that is stopping the latest technological advance in space exploration.

  7. Phil: I liked your comment about the dog walkers saving productive people time to be productive, but the truth is that most of service sector is not so supportive of enterprise as you seem to think. And at over 75% of GDP that is simply too much service for too little value-added innovation for my taste.

    Hugh: It is the synergy between services and value added that makes for eeconomic advancement in this day and age. I do not see those synergies being the mainstay of the US economy.

    TerryB: The rise of financial services is to my mind a major drain on the economy since its focus is on short-term gain and profits made from (manipulated) interest. Wealth generated in financial services is like beer calories–it can materially fill you up and make you high (or rich) but it is not conducive to healthy structural development.

  8. Evocative piece. Some services enable the atomized and alientated to experience that warm aspirational glow, that they too are living the dream as they glug down another latte and compulsively check a smart phone.

    Two things underline the era of the dog walker (an NZ friend of mine employs one much to my amusement); inequality levels and participation rates in adequate paid work. This is also the time of low pay, precarious employment, and contracting.

    The fact is millions are being left behind, The US gave up ‘taking care of its own’ decades ago with NZ not far behind with it’s very own current “war on the poor” strategies of attacking welfare and
    unions ability to organise thereby putting significant downward pressure on wages in a high unemployment environment.

  9. Tiger Mountain: Germany’s social market model has managed to survive even the bailing out of the former East Germany.

    Pablo: I am also reminded of the new book “100 Bullshit Jobs And How To Get Them“.

    Phil Sage: A couple of generations ago, heavy industry in many countries was the social glue of the day, and in spite of its relative inefficiency, it did allow the working classes and low-skilled to climb up the ladder. Nowadays, heavy industry is far more mechanised and hence more efficient and reliable, but a generation of people now surplus to requirements – many of whom were immigrants imported as cheap labour in the post-WW2 period – have been left behind by the kicking away of the ladder and scapegoated as parasites.

    And it’s interesting to compare the newspaper industries of NZ and the UK during the transition from mechanical typesetting to computerisation. The process was a lot more orderly in NZ than in the UK – NZ print workers were given computer training, whereas Rupert Murdoch took the scorched-earth approach with the equally bolshie British print unions.

  10. Some years ago I too worried about the relative sizes of the productive and service sectors and how any society could survive simply be the people providing services that are often unnecessary to each other.

    In more recent times I have come to realise that the basic problem is something quite different.

    As we have advanced technologically we have needed to employ less people in the productive sector to generate the same, or even more, output.

    Instead of using this reduction in the need to do hard work in the productive sector to rearrange how we organise society, we have insisted that people need to work just as many hours, or more, at something or another if they want to survive.

    Instead of reducing the hours of work and sharing the increase in productivity we have reduced the mumber of people working in the productive sector and moved others to often unnecessary and sometimes even counterproductive work (the financial sector for example) in the service sector.

    Instead of increasing the hourly rate to the same number of people to compensate for doing less hours of labour we have done the opposite.

    Increasing productivity should have resulted in weakening the link between the number of hours a person needed to work to support themselves at a reasonable standard of living but it has done just the opposite.

    The net result of the greedy ruling class holding on to most of the productivity gains for themselves is the massive growth of the precariat both locally and internationally.

    What you observed in the US is the natural result of up to 40 per cent of the workers in the developed world now being part of the precariat who have no stake in society and no option but to sullenly go about trying to survive as best they can as second class citizens in fundamentally wealthy countries.

    It really is time to start looking at challenging the hegemony of labourism as the central idea in ordering our affairs and start exploring how we can delink income from work.

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