My thoughts on macroeconomics, 2021

By the time I moved on to college, my impression of the American economy was pretty simply: America made stuff. Growing food, pulling minerals out of the ground and building things in factories. Agriculture, mining and manufacturing. Everything else we did was in support of or related to those three key pillars of a modern economy. Kids went to school to learn to farm, mine or machine, for the most part. Other occupations, like law, medicine, journalism, civil service, and the like, were all to support the 'real' economy.

Only after World War Ii do I think the textbooks recognized the emergence of the 'service economy,' and I remember it being given short thrift, that services basically consisted of activities that used to be done in the home but now you paid someone else to do it, often somewhere else. It was a sign of the growing prosperity of America that families could hire someone to do what they often did themselves, like laundry, haircuts, meals. Just as manufacturing had shifted towards building consumer goods that made some life easier, these consumer appliances provided a service, i.e., washing your clothes, storing your food, vacuuming your floors. In many case, this meant replacing what was once second only to agricultural work in terms of number of people employed, and that was domestic service, i.e., housekeepers, maids, cooks, etc. Consumer goods replaced and displaced many of these domestic jobs and workers.

But the 'service economy' was still usually given short shrift, as a small part of the economy and limited. Sending out your laundry was one example. It did not create much value, just convenience. It did not add much to the economy but it did add a little, i.e., mom doing the clothes at home adds nothing to GDP. Sending the clothes out to a cleaner adds to the economic numbers. Seems silly, but it's true. Without a wave for her labor, mom's labor went unrecognized in the economist's national incomes data.

But through the second half of the twentieth century the service portion of the economy boomed. One could even shift some manufacturing into service. For example, a car was a manufactured product that produced a good and a wage for a auto worker, yet the car also provided a service to a traveling salesman or a taxi driver. A car wasn't really a consumer good as much as it was a depreciating asset that provided a service, a service hopefully valued more than the cost of the depreciation and operation of the car.

Yet World War II also laid much of the groundwork for the 'next wave,' i.e., the information or knowledge economy, where economic value and much of our wealth was created and maintained by moving information, managing, financial transactions and investments, using credit cards, creating debt, distributing advice, knowledge and data, and more.

By the twenty-first century, I came to teach about a fifth wave, the 'networked economy'. Information and data alone were not the key; rather it was the analysis of trillions of bits of data, linking them together with models, simulations, networks and other processes that further enhanced the value of the information by making it cost less, putting it in the right place, distributing and storing it more safely, and emphasizing connections over raw data. 'Big' data are only useful if they can be analyzed and distributed. Otherwise it is just one huge green blob, not even a forest or trees.

Today, the cornerstones of the American economy are no longer mining, manufacturing and agriculture. Instead, education, health (medical) care/treatment, the retired demographic and, sadly, the government (not even counting defense, which used to be more than half of the federal budget, now it's less than 20%). Colleges and supporting educational functions are the new factories, producing workers for the gig, entrepreneurial, technical, knowledge and networked elements of the economy. Machines are doing most of the work in the three traditional, highly capital intensive fields of agriculture, mining and manufacturing. Those three sectors produce more of their outputs almost every year, with fewer people employed in those fields every year as well. Healthcare -- doctors, hospitals, medical equipment, pharmaceuticals, spas, nursing homes, hospices and more -- is a 'huge' part of the 2021 economy. The argument as to how much we spend on health-related services seems to have disappeared, replaced by arguments as to who pays for these services and who deserves to receive these services (and at what cost to the patient). While a hundred years ago there were about three million Americans over the age of 65, today that number is fifty million. And, as noted in earlier posts, that 'elderly' demographic is, on the whole, both pretty rich and in pretty bad health, meaning they have a lot of saved resources and that they consume a massive amount of the medical expense budget, not to mention Social Security transfer payments which are a larger part of federal expenditures than is the defense budget.

Government -- like college administrations -- expand at warp speed, adding layers of bureaucracy and regulations, inefficiencies, and people often more interested in their own egos and powers than they are in what they profess to 'serving the public.' The key services provided by the government -- building roads, policing, fighting fires, running the courts -- have become a relatively small part of the budget, partially because of the bloat in unproductive bureaucratic branches and partially because some of these traditionally 'public' services have been privatized, like trash collection, prison operations.

So where does this lead us and what does it say about the state of affairs of the American economy? Stay tuned for some ideas about that. Until next time, here's to the joy of life after 65, pandemic or otherwise!