Tuesday, March 20, 2018

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.

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