The U.S. can't survive on services alone

This post is taken from my post at that I put up a few months ago.

Rebuilding the manufacturing sector would not only provide millions of direct jobs, it would transform the entire economy, because manufacturing is the foundation of an economy.

No large nation, not even the U.S., can survive by only producing services. The vast majority of services consist of the economic activity that surrounds manufactured goods. In order to see why this is so, we need to take a stroll through the main sectors of the service economy; consider this an exercise in economic natural history.

According to the WTO's "World trade in review, 2005" (p.21), 81 percent of trade among regions of the world is trade in goods, while only 19 percent is trade in services. So if you don't have any goods to trade, well, what are you going to exchange for other peoples' goods? In other words, you can't trade services for all of your goods, at a national level. (All of the following figures are for 2003, U.S. Department of Commerce, Bureau of Economic Analysis, value-added as a percentage of Gross Domestic Product; the figures come from a paper at my website, "Why manufacturing and the infrastructure are central to the economy" [pp. 8-10].)

The services sector is diverse, and involved in the manufacturing economy. The wholesale and retail sector (12.9 percent of the economy) is responsible for distributing the goods that the manufacturing sector creates. Transportation services (2.9 percent) use planes, trains, trucks, ships, and taxis to move people and things, and use transportation infrastructure such as airports, roads, rail, and ports.

Hotels and restaurants (2.6 percent) use hotel buildings and food preparation equipment, respectively, and janitors(0.4 percent) take care of those buildings. Health care (6.3 percent) is an enormous repair process on the machinery known as the human body. Repair of machinery, including cars, (1 percent) is really a form of manufacturing.

Software, computer and data services (1.9 percent) are the activity of people using computing machinery. Telecommunications (1.8 percent) are completely dependent on very complex equipment, as are miscellaneous services such as travel (0.5 percent). Engineering services (1 percent) are directly related to manufacturing, as is, indirectly, scientific R&D (0.5 percent). Education (0.9 percent) is also part of the service sector that is necessary for manufacturing, as education and training are vital aspects of producing goods. Engineers, skilled production workers, scientists and operational managers must all be educated and trained.

And what about that part of the economy that so dominates our culture, the sectors of TV, radio, print, sports, entertainment, recreation, gambling, movies and music? A big fat 3 percent of the economy is all. And they all use machinery, telecommunications equipment, and other manufactured goods in profusion.

The other large part of the service economy is finance(5.7 percent), insurance (2.3 percent), and real estate (12.4 percent), but maybe that will go down), or FIRE, for short. Real estate is the retail equivalent for buildings. Almost all financing and insuring is ultimately for manufactured or constructed things. So one way or another, virtually every corner of the services sector is centered around the use of manufactured goods.

According to my calculations, of the nearly $2 trillion worth of manufactured goods consumed in the U.S. in 2003, about 54 percent was imported. Private services, however, only totaled $294 billion in exports for 2003, but we imported $228 billion in private services that same year. The resulting $66 billion surplus in services can do little to pay for $1,079 billion of imported manufactured goods.

So in order to manufacture all of those solar panels and wind turbines and retrofitting material that all those green-collar people will be installing, the U.S. will have to rebuild its manufacturing sector, or face a future in which it won't be able to afford the necessary imports. In order to transform our economy, we need manufacturing.



What the hell do we need to do to get D.C. to wake up?

You are so right and I simply am horrified that the financial sector is getting (???).... I think it's now $8.5 trillion in money pledges total. Yet manufacturing cannot even get obviously, oh so damn obviously, completely unfair trade agreements or even the same subsidies given to foreign manufacturers in the United States even lip service?

I do know there were many fair traders election and the U.S. population on the Congressional side obviously is trying to get in better representatives but from administrations the manufacturing sector should be the center piece of any stimulus plan and we just don't even heard the term manufacturing mentioned!

I mean they are blasting the big 3 over $25 billion loan with AIG got overnight $85 billion. What is wrong with this picture!!!!!

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Well, hopefully facts might help

Although you never hear people argue that you can't trade for all of your manufactured goods with services -- I know why that is, it would only call into question the entire foundation of neoclassical economic analysis. So there's a religious ideological problem.

This is part of the whole "post-industrial" idea that's been propagated as well. At any rate, there's actually a fairly easy way to rebuild manufacturing with policy: domestic content legislation. Now, the problem is with -- guess who? -- the WTO rules, which say that if you subsidize an industry, you can't demand domestic content, unless it's for general infrastructure. Which trains are. So the easiest way to lift up much of the manufacturing base is to embark on a huge program of train-building.

You might think that this is in the realm of fantasy, but let's fantasize that we add a high-speed rail system to this country that covers most of the 46,000 miles of the Interstate Highway System. According to the figures from California's high-speed rail planning, it costs about $50 million per mile for high-speed rail. So if you put down, oh, say, 40,000 miles of high-speed rail, over 20 years, you have $2 trillion in spending, or about $200 billion a year.

So the point is, if you can figure out infrastructure investments that involve buying parts from the industrial base, then the government can basically invest big bucks into rebuilding the manfufacturing base.

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WTO on U.S. state tax incentives

On state tax incentives U.S. states give both domestic corporations as well as FCDC (foreign controlled domestic subsidiaries) massive tax incentives to say build a factory in some state. Right now, the FCDCs (Toyota, Honda, VW) are getting greater subsidizes than the big 3 for various factories in the U.S. Japan has bought and planned some advanced FABS (high tech chips, microprocessors) in the U.S., also with huge tax incentives and other breaks.

I've not heard of any of those being challenged via the WTO.

and frankly if the WTO rules against the United States, when every other nation is subsidizing major industry, case in point, Airbus, then piss on 'em.

Honestly, I think the United States is absurd to have ever joined this organization at least without veto power and so far it seems the WTO is completely biased against the United States, never mind the other issues.

Can you define domestic content via whatever the WTO is claiming it is and if this is true, how does China with it's 50% state owned JVs or things like Airbus not be deemed illegal?

Working around it in the interim, sounds like a plan. Hell man, the United States needs a big honking battery manufacturing facility smack dab in the middle of Detroit for aesthetic reasons. ;) It's an architectural wonder, really I swear.

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A note about the US Constitutional Convention

One of the major drawbacks to the Articles of Confederation was that they allowed foreign Heads of Atate to play off one US State against another, for favorable trade deals.

Tax incentives nowadays have the exact same effect. It may be that Congress can prohibit those by legislation, but it is interesting to note that the evil of this State vs. State competition (a race to the bottom) is nothing new.

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even worse, corporations renege with no consequence

Most of those negotiation tax incentives, pitting states against each other trying to attract industry, after the deal, corporations plain do not honor the agreements.

IBM for example was supposed to create jobs. They did not. They outsourced even more jobs.

The Neilson ratings company literally forced U.S. citizens to train their H-1B replacements before being fired, after they received millions and millions in tax incentives from Florida to....create jobs.

I believe the local government in Neilson's case pulled some of the tax breaks but I know in IBM's case, nothing happened.

That's pretty sad when states give all of these incentives, infrastructure and don't even pull the deal when they get screwed over by these corporations.

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Yet another drawback that consumers LOST


This is a drawback?  Seems to me it would give the governors the ability to be protectionist- a big plus.

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Maximum jobs, not maximum profits.

Well, the WTO has good data

but on a more serious note, we had long arguments over at Grist with an OECD economist about the WTO, so I sort of promised myself not to be totally knee-jerk against the WTO; what I think I learned was that it's pretty malleable. However that may be, I would agree that, at the least, if the US threatened to withdraw from the WTO they would probably move pretty fast to allow whatever we wanted.

If memory serves, the main thing they do is keep everybody "honest", at least in some respects, to obey their own trade laws and not discriminate against particular countries.

Unfortunately, for very practical reasons you couldn't discriminate for domestically owned companies, in the case of high-speed rail and subways, for a very simple reason -- there aren't any. You could borrow from the Koreans/Chinese/Japanese and demand that foreign contractors train domestic engineers, and even sell the factories to locals (yes, Korea did that), although I won't hold my breath.

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Forgive me

but I find this claim sorta dubious. I'm not doubting that there aren't any domestic sources for high speed rail. But if there's money involved, how much you want to bet someone's going to form a company fast? As for plans and designs, there have been such things laying about for decades. I remember reading somewhere that several universties about 15 years ago came up with a plan, it was some sort of project not really mean't to for anything. It was one of those "what if we gave a damn about high speed rail, here's something to work with" kinda projects that politicians said was cool and would do it, but at the end of the day the support would be as visible as one of my dog's farts.

I think what needs to be stressed is that if someone does come up with something, or the State does, then that domestic sources either be found or fostered for growth. The French started from scratch with their TGV, and the Japanese did so as well with their Taikado Main Line. Why the hell can't we? Too long? Well if it means made in America, I can be patient.

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There are regional high-speed rail plans

I have a post about it here, suffice it to say that much of the country has plans for high-speed rail -- although not to hook them together for a national system. this is an excellent academic study.

As for an American company making trains, I'd be all for it. Some years back my friend, the now late Professor Seymour Melman, wrote a letter to major industrial CEO's, including GE and Ford, asking them to consider making subways, because nobody is a major contractor for subways in this country. They paid him the respect of a personal response, but it was still, "Thanks but no thanks". So the Feds, or group of states, would have to form a new company, I have a feeling, which I think would be a great precedent for further efforts at reindustrialization. But however that works, they will need, at least, technical help from foreign firms.

JR on Grist

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Who owns

Denver Railcar? They're the ones who manufactured the high-speed (well, high speed for US) railcars that are going into my neighborhood (Beaverton-Wilsonville Westside ExpresS, aka WES) this January (recession can't touch construction that is already done).

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Maximum jobs, not maximum profits.

Looks American

Here's their website, under construction, from an article in the Oregonian.

From their site, "COLORADO RAILCAR through aggressive innovation has become a leader in developing profitable new pathways for railway transportation. Founder and COLORADO RAILCAR President, Tom Rader maintains exclusive patents on the Ultra Dome, the futuristic railcar he designed 'from the trucks up'."

JR on Grist

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I said in the above comment that at $2 trillion, a 20 year program of rail-building would cost $200 billion per year, when it would actually be about $100 billion per year...unless you did it in 10 years.

By the way the WTO rule does not apply, I believe, to government-owned companies, so if the US took over the Big 3, they could mandate that the Big 3 buy most of their components in the US while subsidizing them.

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oh interesting

So, we simply need preferred stock, controlling interest or some method?

Of course Hanky Panky isn't bothering to get preferred stock. We could have bought Citigroup outright and had a lot of left over change by now. I think the total cost was less than $15 Billion recently yet the government gave Citigroup $45 Billion and guaranteed $300 Billion in toxic assets.

What did the U.S. get in return? $7 billion worth of preferred shares.

We could have outright purchased 3 Citigroups by now with that money.

Unf**king Believable!

And this slides right by the press!

So why not outright get voting as well as preferred shares in the big 3, end of story.

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Subtract out the services, and given the numbers in this post, the US GDP isn't $13 Trillion- it's a mere $920 billion, a little less than 1/13th the true amount.

Tell me again how money is a measure of PRODUCTION?

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Maximum jobs, not maximum profits.

back it up

Remember, one of the things we do not want on EP is economic fiction. If you want to claim this, you need to back it up with real statistics, references.

I don't get anything even remotely close to that number from his post.

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It is suggested in the article

That our actual production/consumption in the United States is only $2 Trillion.

And that 54% of those goods are imported.

Leaving 46% of those goods domestically made.

Thus the GDP, excluding (and now I see my error, but I'll continue my original thinking anyway) services *and exports* is $920 billion.

Thanks, for making me show my math and pointing out my error. Having said that, are we really exporting $12 trillion, give or take, in goods? Or is MOST of what we do services, and thus not really "production" in the classic sense?

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Maximum jobs, not maximum profits.

That's percentage of goods consumed in the U.S.

You might argue that this isn't a fair comparison, because I'm not counting the $507 billion (2003 figures) that are exported. Although in Robert's article Michael Mandel, I belive, calculated that 40% of goods consumed were imports, so I think I'm in the ballpark.

It's tricky figuring out imports as a percentage of consumption. The figures I show in the post, and the best ones for understanding the economy, are in value-added dollars, that is, how much did a particular sector contribute to the economy by itself? When you get an import (or export) you're bundling all of the services that were value-added on top of the manufacturing value-added, so it's a little like apples and oranges -- but again, I think 40-50% is a good ballpark. And scary.

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Classic GDP vs Actual Production

From Wikipedia:

The components of GDP Each of the variables C (Consumption), I (Investment), G (Government spending) and X-M (Net Exports) (where GDP = C + I + G + (X-M) as above) (Note: * GDP is sometimes also referred to as Y in reference to a GDP graph) C (Consumption) is private consumption in the economy. This includes most personal expenditures of households such as food, rent, medical expenses and so on but does not include new housing. I (Investment) is defined as investments by business or households in capital. Examples of investment by a business include construction of a new mine, purchase of software, or purchase of machinery and equipment for a factory. Spending by households (not government) on new houses is also included in Investment. In contrast to its colloquial meaning, 'Investment' in GDP does not mean purchases of financial products. Buying financial products is classed as 'saving', as opposed to investment. The distinction is (in theory) clear: if money is converted into goods or services, it is investment; but, if you buy a bond or a share of stock, this transfer payment is excluded from the GDP sum. That is because the stocks and bonds affect the financial capital which in turn affects the production and sales which in turn affects the investments. So stocks and bonds indirectly affect the GDP. Although such purchases would be called investments in normal speech, from the total-economy point of view, this is simply swapping of deeds, and not part of real production or the GDP formula. G (Government spending) is the sum of government expenditures on final goods and services. It includes salaries of public servants, purchase of weapons for the military, and any investment expenditure by a government. It does not include any transfer payments, such as social security or unemployment benefits. X (Exports) is gross exports. GDP captures the amount a country produces, including goods and services produced for other nations' consumption, therefore exports are added. M (Imports) is gross imports. Imports are subtracted since imported goods will be included in the terms G, I, or C, and must be deducted to avoid counting foreign supply as domestic.

Ok, so what I've left out of the classic is Investment and Government Spending.  According to this website, another $3 Trillion of my missing $9 Trillion is indeed government spending (additional consumption neither you nor I took into account).

But that still leaves $6 trillion to go- in investments.  If we're investing $6 trillion in working durable goods every year to make a mere $920 billion in finished goods, I'd say we've got some incredibly bad investments on our hands (oh, and remember above, this excludes "paper" investment- strict financial products).  Especially given the Software engineering idea that any investment that does not pay for itself in 4 months, is a bad investment.


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Maximum jobs, not maximum profits.

Seebert, we're mixing up GDP accounting

You're talking about the GDP in national income terms, where does it come from, consumption and investment, where does it go, wages or profit. My analysis is GDP by industry, which is a completely different way of looking at the economy, although less used, and allows one to look in gory detail at the inner workings of the economy (you can get gorier in input-output accounts). So if you look at the BEA accounting you see all dollars accounted for, by industry.

JR on Grist

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Ok, thank you

THAT finally makes more sense, in combination with your other post.

In fact, the services do account, based on the BEA accounting, for the missing $6 Trillion, thanks.

Darned scary, but thanks.

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Maximum jobs, not maximum profits.

No prob

National income accounting is sort of fun, once you get into it, although it can look like quite a mess -- the Survey of Current Business is a good place to browse.

JR on Grist

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math is good juju

Well, services are production and one of the best cases that you are aware of is STEM, IT, Tech related areas. Those are all (I believe all), are labeled services, yet obviously software is a product.

Econ Stats has GDP and the rest of it.

GDP is much more than just manufactured goods.

It's consumption, Government spending and imports are already subtracted from GDP. wikipedia

From investorwords:


If you want to get to the problem with GDP and the miscalculation of imports, here is a Business week article, that's very good highlighting a study on Phantom GDP where due to global sourcing, offshore outsourcing, they are attributing goods and services domestically when they really are imports.

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Here's gdp by industry

At the good ol' Bureau of Economic Analysis, their publication "Survey of Current Business", last year's "Annual industry accounts" which shows in Table 1 the breakdown by industry (meaning services and industry), and table 2 the breakdown percentage-wise (in PDF format, pages 6 and 7 if you're using Adobe's reader)

JR on Grist

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very useful paper thanks

I'm looking it over and it confirms for me at least fueled by a hollow real estate bubble. I'm also not too thrilled with software publication and it's contribution: suspect outsourcing, immediate impression.

BTW: On EP you can upload PDFs and then link to them locally or attach them to your blog post.

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not real wealth

How much "growth" was funded by debt, i.e. home equity loans, over-inflating home evaluations is a very good question. In terms of the dot con, it's really amazing to me just how much manipulation and to me, outright fraud happened in Silicon valley and no accountability at all.

Everybody who was buddies with another guy was getting millions in funding, no real business plan, no experience to execute and all about the IPO (which is another entire discussion in and of itself). So, my impression is they did take the money and run.

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More Production vs. Imports quotes

I just wrote Obama Promises to Create 25 million jobs, but in what countries, where I have a few quotes on the percentage ratios of imported goods versus manufacturing.

If you haven't checked out Tonelson, who tracks manufacturing, that's one of the economists where I got the numbers from.

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Even those numbers seem grossly low

Like there's a huge mismatch between the reported GDP and manufactured goods- and another huge mismatch between the amount of "phantom GDP" and the subtraction of our consumption from the total GDP is huge. As in around $9 trillion. Where is the rest of the money going? Is the free market so incredibly inefficient that it supports $9 trillion in phantom GDP that can't be accounted for by consumption + exports - imports?

You say you don't like a fictional economics- but there's a huge hole here that even the services economy can't cover.

I don't know where that $9 trillion went- maybe to paying for our military in Iraq and other sweetheart deal bailouts- but it's a huge mismatch that I've personally never noticed before.

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Maximum jobs, not maximum profits.