In the nineteenth century, more than 70 per cent of American workers were farmers. By 2017, that figure was under 2.0 per cent. In 1970, about 32 per cent of private employment was in goods-producing industries. By 2018, that figure was 13.5 per cent. The dynamic sectors of the American economy are in services, though US President Donald Trump, with his fixation on old manufacturing industries, doesn't seem to have grasped that.
Just as manufacturing companies comprised the most rapidly growing industries in an earlier era, services companies do today. Many people - possibly including Trump - think of services as consisting of housecleaners, maintenance staff, and restaurant workers. But services include transportation, IT, finance, professional and business services, education, entertainment, and more. In the United States, the largest numbers of service employees are in transportation and utilities, education and health care, and business services. And that does not even include the self-employed.
In 2017, there were 12.4 million workers in the entire US manufacturing sector, compared to 20.6 million in business and professional services alone. Most observers categorise the economy's most modern and dynamic activities - and many of its high-paying jobs - among the latter activities. Overall, service-producing employment constituted 70 per cent of total private-sector employment.
The reasons for the shift from goods to services are much the same as the earlier reasons for the shift from agriculture to industry: as people grew richer, they spent a higher share of their income on non-agricultural goods and a smaller share on food. Simultaneously, agricultural productivity was increasing even more rapidly than demand, and capital and labour shifted to the then-modern goods-producing sectors.
The same trend continues, although now a higher share of incomes is spent on services. As per capita incomes and productivity grow, people devote more of their consumption budget to tourism and travel, entertainment, education, health care, and much else. Firms spend more on finance and business services.
The US is fortunate to lead the world in many services. America's exports of services in 2017 were $798 billion, while imports were $542 billion. Services exports have been growing rapidly, up 275 per cent since 2000, outpacing the 192 per cent increase in goods exports.
Given this trend, a major challenge for all advanced economies is to support those goods-producing workers whose jobs disappear and to facilitate their transition to employment in services. As technological change accelerates the decline in manufacturing employment, the appropriate policy response is to provide support for vulnerable workers and facilitate the expansion of sunrise industries in which demand - and employment - will increase most rapidly.
After World War II, the successful economies were those where policymakers provided support to the real economy by investing in infrastructure, education and training, and health care, and by strengthening the ability of private markets to choose among prospective industries. The losers were those where policymakers fought the market and supported declining industries.
The Trump administration, no surprise, is following the losers' path. Trump bemoans the "trade balance," which measures trade in goods, without recognising services, and has decried the closure of factories even when output has been stagnant or falling. His administration's tariffs on steel imports surely will cost more jobs in steel-using industries than will be "saved" by locking up resources in an old industry.
The current-account deficit reflects the excess of expenditures over output. But it is the excess of goods and services that matters. Foreigners' trips to Disney World, high foreign demand to attend US universities, and foreigners' expenditures for the services of Google, Amazon, and other services firms reflect America's leadership in the new industries. Imposing import tariffs to shore up the old goods-producing industries ignores the dynamics of growth and does nothing to help sunrise sectors. Indeed, protectionism undermines them. Clearly, fighting the forces of change is not the way to go.
The current-account deficit comes about partly because foreigners want to invest more in the US than Americans want to invest abroad. It is a symptom of American vitality. It may also partly reflect that Americans are spending beyond their means. If so, the appropriate policy response is to use monetary and fiscal policy, not to try to protect old industries, which will not reduce the external deficit anyway.
The Washington Post journalist Bob Woodward reports in Fear, his book about the Trump administration, that Gary Cohn, Trump's then-chief economic adviser, tried to persuade the president to focus on services by asking whether he thought workers would prefer to stand all day in a factory or sit behind a desk in an air-conditioned office. The same question can be put another way: Would Americans prefer slower growth and higher prices for "old industry" goods, or faster growth, falling goods prices, and additional income to spend on tourism, travel, health, IT, entertainment, and other services that hold so much promise for the future?
Woodward reports that Trump, who appears incapable of having a new idea, stuck to his old beliefs. The country will pay a heavy price if the president's obsessions prevail for long.
Anne O. Krueger, a former World Bank chief economist and former first deputy managing director of the International Monetary Fund, is Senior Research Professor of International Economics at the School of Advanced International Studies, Johns Hopkins University, and Senior Fellow at the Center for International Development, Stanford University.
Copyright: Project Syndicate, 2018.
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