Friday, July 3, 2009

The Future of the Economy

The untold story of the financial crisis is the transition from manufacturing to services. This won’t mean the death of the economy – as some skeptics proclaim - and it shouldn’t even come as a surprise.

Historical View

To gain some perspective, the Great Depression had a similar underlying theme as the country transitioned from farming to manufacturing. Agricultural products were considered tangible necessitates; the rugged American farmer was seen as a cornerstone of the economy; and, it was argued, the country’s best interest lay in keeping the farmer alive. Supporting the farmer was considered patriotic – the same sort of pathos which, ironically, we currently see in the manufacturing sector.

The sequence of events was remarkably similar to that of America’s car companies – a former leading industry begins to falter during an economic boom, depression hits, and it suddenly implodes.

Looking back, we can at least feel some comfort that, as useless as our current attempts to bail out the Big 3 have been, they pale in comparison to the damage caused by trying to salvage the farming industry. Leading the way was the Federal Farm Board (FFB), which was setup before the crash.

The FFB began with $500 million dollars dedicated for loans to farmers. After the Great Crash, prices for agricultural products, like most consumer goods, took a nose-dive. Farmers complained that they couldn’t turn a profit. The FFB was then placed in the awkward position of trying to keep farmers alive while raising the prices of their goods. In order to accomplish the latter, they tried to limit farmers’ output by buying and storing huge quantities of agriculture goods, encouraging farmers not to farm, and going so far as to encourage the destruction of farmland. In 1930 it even tried to raise cotton prices by seizing 1.25 million bales of cotton for 1 year; this had no effect on the price.

Tangibility of Services

I imagine that before the Great Depression, one could make the same argument against the foreseeable manufacturing revolution as one can make today against the upcoming service-based economy: Services are non-essential and an economy cannot be built on such intangibles.

On the contrary, the only tangibles in any economy are supply and demand. This holds regardless of how concrete a given product is.

Part of the confusion has to do with what, exactly, we mean by services. At times its distinction from manufacturing is blurry. People are also quick to point to failing service sectors – advertising can be lucrative, but its success is strongly tied to that of the overall economy; journalism, another quintessentially American industry, has received a heavy blow; and IT support is overly prone to outsourcing.

These smaller service sectors may reveal some clues, but the central veins of a service-based economy – as key today as auto making became after the Great Depression – are healthcare and education. As intangible as services may seem, the modern American cannot live without these 2 services. They are the bread-and-butter of a service economy.

Healthcare & Education

The rising cost of healthcare and education is heavily debated. Regardless of where you side, it can be agreed upon that a large portion of the cost resides in systematic inefficiencies linked to public policy. At the same time, the mere fact that Americans continue to pay such high costs for healthcare and education is testament to their growing importance.

The importance of these services is forgotten when pundits speak only of the rising “costs” of healthcare and education, although it is forgotten for a good reason. In the final quarter of 2007, for instance, Apple reported revenues of $3.4 billion from iPod sales; and yet you wouldn’t say that during those 3 months the iPod cost the nation $3.4 billion. Yet by means of contrast, what remains alarming about healthcare and education is that, however you look at it, we haven't found a way to let them thrive. Some sectors do flourish, but on the whole the industries really do “cost” the economy quite a lot of money.

Our current problem is that we haven’t figured out a way to integrate these areas into the economy. The question is not “how do we minimize the costs health care and education upon the economy?”, it’s “how do we make them a part of the economy?” Lots of government regulation and subsidies, I suspect, aren’t the answer. But either way the debate is too focused on minimizing their negative impact.

The success of the automobile industry hinged on not only better cars, but on cheaper cars as well – this was the famous recipe to Ford’s success, that he was able to tap an economy of scale. In contrast, healthcare and education in the US are, by any measure, diseconomies of scale. And yet as national employment continues to decline - with manufacturing taking the biggest hit - service-based employment is growing substantially, and projections suggest that it will continue to accelerate with healthcare and education leading the way. Looking forward, it’s hard to imagine a successful future economy without these 2 industries on board.


Media (in order of appearance)

Photos: (1)CROP CIRCLE MAKER - Matthew Williams, 06/07/2007, Mark Berry; (2)USA 2005 (October 1st) Nevada, Reno, National Automobile Museum, 02/25/2008, by Paraflyer; (3)The Causes of the Great Depression/FDR Memorial Site, 09/15/2008, Tony the Misfit; (4)2008AUG121654, 08/12/2009, bootload; (5)Gesundheit, 04/01/2009, by Gunnar Ries; (6)iPod Family, 02/09/2007, by CokeeOrg; (7)Class, 12/04/2007, by Nik Lee.
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  1. You make some very interesting and insightful points. I wonder if you could expand your analysis a bit more into the area of journalism. Is there a sense in which this change over to a service economy has implications for a radical change in journalism? Was journalism, perhaps, not previously service oriented enough? There are some great interviews with top journalists about the future of journalism at,com_sectionex/Itemid,200076/id,8/view,category/#catid69 which I have found very useful in considering issues like this.

  2. Hi Jorem, thanks for reading & for the comment.

    I mostly brought up journalism as a counter-example of a service area that has taken a hit. But reflecting on it from your comment, I do think it holds a unique position in a service based economy.

    I don't think that journalism wasn't "service oriented enough" so much as it's in the unfortunate position of undergoing some painful changes. Leading newspapers have a clunky of structure of having to gather "all" of the news & present it objectively, & that's no longer necessary.

    The Atlantic Monthly recently had a fascinating essay ( contrasting the decline of most newsweeklys with the steady rise of The Economist. The notion is that as consumers continue to be barraged with more info than they can handle, it's more important for news sources to synthesize the info, choose what not to include as well as what to include, & present a relevant "survey" different areas of the world. I think that this view is right-on (although I maybe biased b/c I particularly like The Economist), & suspect that this is what the future of journalism will look like. Fox News, who constantly get high ratings, is another exemplar - I enjoy them, & suspect others do, b/c they are biased (altho they say they aren't).

    What is needed is less news gathering & more news digesting (as it's gotten to the point that more objective news gathering inhibits news digestion). Inherent in this is the customer's trust that they'll at least be told the essential facts & the important stories. To the extent that certain businesses are uniquely suited to meet this need, they'll thrive; & to the extent that others aren't, they'll falter.


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