THE SERVICE SECTOR

Well the debate is over, while the slaves to market valuation of mortgage based assets continue to seek an uptick in the property market to save the economy, the march of history goes on in another direction, i.e. US Government gaining the largest single stake in the private sector. This will be a principle feature of the "New Economy" and certainly the most controversial. The debate here will range from the philosophical to the ridiculous to the sublime.

The market slaves still don't get it, the market, meaning the financial markets, with the New York Stock Exchange being the most visible, have failed to correctly value our assets. They have got it so bad everyone has given up buying equity and loans (bonds) and is shoveling his funds into US Government debt, i.e. Treasury bonds or "T bills." This tectonic shift has led to the ridiculous situation where the Feds are borrowing at zero or even negative interest, i.e. it costs the Feds nothing to borrow. Now I don't know about you but, if I am offered money for no cost, I will take it. And so will Uncle Sam.

Uncle Sam is using this money to acquire the largest single stake in the private sector. It is buying into banks, mortgage companies,insurance firms, and the auto industry. And it is doing this on borrowed funds.

One could call this "backing into socialism." Many cry that US Government ownership will ruin private business. I reply that Uncle Sam is merely becoming the largest share holder in the economy and will act as any other investor whose interest is making a return on his investment. Even more important, as profits from its investment portfolio grow, the government will have to rely less on taxes to pay its bills.

Although I do not foresee government taking an active role in running the businesses it acquires, as a long time government minion who subsequently entered private business by making a new business venture succeed beyond the owners wildest dreams, I would say government types can be good business managers.

But before looking at how this ownership transfer will affect the "New Economy" we should look at two other features that initiated the talk about the "New Economy" earlier, the so-called "post industrial economy" and "globalization."

Post Industrial Economy

In 1982 I gave a speech in Helsinki, Finland to a large audience of businessmen and related government entities. In the speech I made two predictions. First, that the US economy would recover from the slump it was in then, in 1983. I said that not many would see this coming but those who did would make big gains. What's that, did I take advantage of it? You betcha. I traded my house in Mallorca, Spain for a much larger one at a rock bottom price (sounds like today) in 1982 because I knew it was the time to act. Was I right, well read the history books, economic recovery began in November, 1982. How could the recovery be so precisely defined? Easy, that was when then Federal Reserve Bank Chairman Volcker dropped the Fed interest rates.

My second,and more profound, prediction in that speech was that there had been a major change in our economy. I noted that the main motor (yes, pun intended) for our economy in the 20Th Century had been transportation, with the automobile leading the way and aviation not far behind. In short the major stimulus to the economy was to transport the corpus from one place to another. Visible evidence of this was the fact that the largest corporations in America were auto makers and the ones supplying fuel for those cars.

But I predicted that we were on the cusp of a major change, and that in the balance of the 20Th Century and well into the next, the economy would be led by communications. Moving the corpus would be replaced by communicating ideas and information.

Now many argue that this transfiguration has been to an economy based on the computer, e.g. the "IT" or Information Technology" Age. I do not deny the importance of computers to all aspects of life, e.g. they run our cars, they run our assembly lines,they allow us to explore the frontiers of medicine, and so on. But then which is the more important invention, the computer or the internet?

And when I say communication I mean it in a broad context, the composer communicating with the listener, the author communicating with his reader, the entertainer communicating with his audience, the politician communicating with voters and so on. Moving the corpus has been replaced by moving information, ideas, concepts, wishes, desires, hopes, aspirations, joys, sorrows, and more, as the main motive force in the economy.

My prediction did not fall on deaf ears, present in my Finnish audience was a contingent from Nokia, which subsequently became the largest maker of cell phones in the world. No, I did not provide them direction, I merely confirmed what they had also already seen.

The importance of this lesson? A couple of decades back or thereabouts economists began to correctly understand that the US economy had changed in basic structure. No longer was the manufacturing sector the dominant motive force of the economy as agriculture had been until the beginning of the 20Th Century. The easiest why to see this was employment. Believe it or not, agriculture had been the largest employer until the beginning of the 20Th Century when workers began to leave the farms to work in factories in massive numbers. I really don't remember the exact numbers but I recall that in 1899 over half the workforce was in agriculture and by 1930 or so the number fell to less than 5% of the work force. Maybe I have compressed the time frame, but that was the massive shift that changed the face of our economy.

Manufacturing became the primary motor of the US economy. However, employment in manufacturing never exceeded 25% of our work force. During the course of the century employment in manufacturing fell to about 16% of the work force and has held steady there.

Enter the "post industrial economy" which is what many mean when they talk about the dramatic shift to that amorphous term the "service sector" as being the main economic activity. I call the term amorphous since the immediate image of the service sector is that of someone "flipping hamburgers at McDonalds." I would contend that the short order cook is actually in manufacturing, since he turns raw materials into a finished product.

How ever you define it, the service sector accounts for 80% of our work force. It is the dominant actor in our economy. As I have presented above, a leading service sector activity is communications. There are others with similar great growth expectations. Health care now accounts for about 20% of all consumption, more than food or shelter. And it will continue to grow exponentially as our population ages. Education is also growing rapidly, as we come to realize that this is a continuing requirement, and not something confined to a fixed period of our lives. We enjoy more leisure, so activities catering to this will continue to grow rapidly -travel, entertainment, sports, and so on. And, of course, perhaps the ultimate service activity, the government. The Federal Government budget is now equal to 20% of our national economy and managing this spending requires a vast army of workers. Its requirements for staff will grow even more with its new role of being the major share holder of "Corporate America."

The service sector is a major pillar of the "New Economy." Next we will look at the second pillar, "Globalization." Then we will see how this latest development, government acquisition of the private sector, will help formulate the "New Economy."

Leo Cecchini