Services are everywhere, some well and some less well paid

February 4, 2017

Economic policy is being driven by the belief that good paying manufacturing jobs are being lost and replaced by lower paying service sector jobs, and that the manufacturing jobs can be recovered by protectionist trade policies and subsidies.
It is the case that the share of employment classified as manufacturing is declining and that of services increasing, but the reasons and implications need to be understood. This phenomenon is occurring in all developed countries. A similar change took place in earlier times, when the share of employment in agriculture declined while agricultural output increased. The loss of agricultural jobs was offset at least in part by growth in other parts of the economy, especially manufacturing. What needs understanding today are overall changes in the economy and how jobs classified as manufacturing and services are recorded.

Employment data by firm and industry are collected on a plant and enterprise basis where the enterprise may consist of several plants. Each plant typically employs a combination of manufacturing and service sector personnel. The former include assembly line workers and the latter accounting, legal, secretarial and others. While the latter appear in national statistics as employees in the manufacturing sector, they are actually providing service-type employment.

If a firm decides to contract out the accounting and legal work to service sector firms which specialize in these activities, then manufacturing employment declines and services employment increases. Overall employment may remain unchanged.
(By the way a similar phenomenon occurs when plants and firms are allocated to industries. If a plant produces mainly automobiles but some bicycles, it will be allocated for reporting and data collection purposes to the industry where most of the production occurs, in this case automobiles. The bicycle industry will in turn under-report production of those bicycles produced in the automotive industry).

The loss of jobs in manufacturing can occur because manufacturing firms reorganize their operations by outsourcing service sector jobs. The reverse may be true if they insource certain services. The former case may be one reason for the loss of manufacturing employment. As technological change occurs, manufacturers are continually changing their production processes. The use of robots for humans on assembly lines will reduce the number of assembly line manufacturing workers, but increase the number of workers required to service the robotic equipment, positions that did not previously exist.

The services-manufacturing dichotomy means that a worker who uses a wrench on the assembly line is classified as a manufacturing employee, while a worker who programs a computer to instruct the robot to do the same work is a service worker. The distinction between what is considered manufacturing and services work can be messy.

Magnus Lodefalk, who has studied this issue for both Sweden and other industrialized countries, notes the following: (Review of World Economics (2014) 150:59-82)

Manufacturing in industrialised countries is intensifying its use of services, and there are indications that the share of services in total turnover is rising. On the input side, the ratio of bought-into value added services has increased since 1995 across all manufacturing industries, and in-house services production has also expanded. The manufacturing sector increasingly employs mathematicians, engineers, computing professionals and business professionals. Services used or produced by manufacturing firms include research and development (R&D) services but also extend to knowledge or intangible capital services more generally, as well as to services such as telecommunication and transport. On the output side, the share of services in total turnover also has grown since the mid 1990s for some countries. Regarding export, Lodefalk studies Sweden and finds that manufacturing’s service exports have more than doubled between 1998 and 2006. There are arguments for the ability of services to support exports in manufacturing. Services may help firms to overcome costly informal barriers, such as asymmetric information, in international trade. Changes on the demand side in industrialised countries are also likely to favour manufacturing firms that increase the services content of their offerings.”

 

 This is not to ignore the simultaneous growth of low paid service sector jobs in food and beverage operations and homecare businesses among other. What is happening is the simultaneous growth of highly paid skilled jobs in manufacturing and some services, and the growth of low paid service sector jobs in certain areas. The medium skilled jobs are in decline or growing slowly. A TED lecture by David Autor (Dec.2016) is worth viewing as it sets out how the skill structure of the labour force changes and is always changing.
The implications include the need for retraining existing members of the labour force and assuring that young people, new entrants, get the right skills. There is nothing new about such advice except that the speed of change may be faster now and educational and training institutions slower to provide the required skills. People can expect this to happen throughout their working lives.

Cultural Diversity

January 28, 2017

Does protection promote cultural diversity?

In 1997, I was invited to be a member of the Cultural SAGIT (Sectoral Advisory Group for International Trade for the Canadian government). Mostly the members were drawn from the different cultural sectors such as print, audio-visual and live performing arts. Lawyers advising these groups were members as well those representing industry and employee organizations. Each represented a lobby group and did so forcefully. In addition bureaucrats, mainly from Heritage Canada, were in attendance to record the views of the members.

As the lone academic unassociated with any cultural sector, unless you count education, but with an interest in public policy, I found the expressed viewpoints interesting, but almost unanimously concerned with either continuing or increasing financial support and protection for the cultural industries. Subsidies and protection should be maintained or increased was the general tone of the discussion. In international fora France and Canada were strong supporters for continued protection while the US opposed it. I questioned the protectionist viewpoint.

All this took place while two events were occurring. One was a series of trade negotiations where cultural protectionist policies were being challenged by some countries, especially the US, as in the case of subsidies and content policies for the audiovisual sector, especially for film and TV.

The second was the influence of technology on both the production and distribution of cultural content. Audiences for over-the-air programs distributed by established public and private radio and TV networks were declining as new online delivery services were being created. The latter expanded viewer choice, and with the internet allowed audiences to select content from all over the world. At the same time print newspaper distribution and associated advertising were declining and have continued to do so.

In the case of public broadcasting, for example, while financial support was maintained audiences were shrinking. Thus on a per viewer basis the subsidy was actually increasing. For example the federal government has maintained its subsidy to the public broadcaster at around a billion dollars per annum while with declining audiences, especially for English language television, it means that on a per viewer basis the subsidy has increased. It costs more to service Canadian TV audiences. Meanwhile those in favour of public broadcasting still argue for either maintaining or increasing the subsidy. CRTC Annual Monitoring Reports (available online) show the CBC’s share of the English language television market fell from 13.2 percent in 1994 to 7.5 percent in 2000 and to 5.1 percent in 2012.

Technological change has also affected the print media with a sharp decline in the distribution of hard copies of books, newspapers and magazines and the ability of consumers to obtain content from an expanding array of online content providers from around the world.

Within the past two decades, the developments have been so major that the ability to protect the cultural industries in the traditional ways – a combination of public ownership, restrictions on foreign ownership, Canadian content requirements and subsidies to Canadian producers – has lessened. Protectionist policies no longer work. Technology has undermined them.

The Cultural SAGIT members were presented with these changes, which became more pronounced with time, but chose to ignore their impact arguing that it would, or might, be possible to perpetuate the protectionist policies by negotiating in UNESCO an International Agreement on Cultural Diversity. This came about in 2005 with the UNESCO Convention on the Protection and Promotion of the Diversity of Cultural Expressions.

How the Convention has worked out will be the subject of a future posting. Much is posted on the UNESCO website, but often outsiders are unable to open certain pages related to this Convention.

Security versus Abundance

January 9, 2017

Economics is a discipline often introduced by focussing on scarcity, the scarcity of resources to satisfy human and animal wants, although the latter are usually ignored. An alternative approach is to focus on underutilized resources as illustrated by Uber and Airbnb. Both illustrate the absence of scarcity. Cars spend much of their lives parked and not providing transportation services, except as an option good for people to use when it suits them. Uber arose as owners decided that they could use their cars to make money when they were not needed to provide the owners transportation. The cars were underutilized resources and a way was found to make use of them. Scarcity was not the issue underutilization was.

The same could be argued for Airbnb where owners had space in their homes for others to use. Scarcity of living space could be reduced if not overcome in many societies if a process of sharing was organized. Bed and breakfast arrangements have been around for years and Airbnb is just a way of extending these hotel-like activities.

Anything which is a public good tends to be underutilized such as the text of a book, an empty park, road or beach. At home, wardrobes and chests of drawers hold clothing which is not being used. A surplus rather than scarcity is the issue because people want choice and are prepared to use their incomes to create options, but these require creating access to a surplus of clothing on hand.

Other examples illustrate not-scarcity, a surplus or underutilized resources include:

Cars being driven with no passengers, only the driver.

Truck owners try to avoid dead-heading by arranging full loads for their lorries travelling in both directions between two points.

Shops with unsold goods, especially when expensive and held for a long time. Annual sales are one way of disposing of surplus goods.

Buildings such as schools and universities which are only used for part of each day, and part of each year. Accommodation and lecture rooms are often hired out for other uses.

Empty warehouses and buildings of all kinds.

Trained workers unable to find paid work. OK, scarcity of jobs is the flip side to unemployment.

Underutilized resources occur with the sun in terms of both heat, light and energy as well as with wind, tides and waterfalls.

Recycling is a way of reducing scarcity by making more intensive use of resources.

This is not to suggest that scarcity is unimportant in examining economic issues, but to note that especially in high income societies, the issues are also often those of coping with underutilization not scarcity. If the focus is switched to developing countries, then there is obvious scarcity related to items like health, education, housing, safety, food, and water. And in developed countries examples of scarcity can be found. It just seems misleading to initiate the study of economics without noting that scarcity is not the only issue to address. Where scarcity is paramount is in the finite number of hours in the day, but these too can be underutilized.

Meeting with remarkable men – one occasion

January 3, 2017

In July 1966, I was fortunate enough to be introduced to and have lunch with Ronald Coase, the 1991 Nobel prize winner in economics. His citation included two articles, The Nature of the Firm and the Problem of Social Cost. Coase was a close friend of Basil Yamey his colleague at LSE and my PhD supervisor.

Coase and Yamey had undergraduate degrees in accounting and business before pursuing academic careers as economists. Both were interested in how firms worked and how and why transactions took place. For Coase, theory was derived from observation, and while he was not averse to mathematics, he felt it should come after studying actual agreements and how conditions and obligations were established.

In 2003, at age 93, Coase gave the Coase Lecture at the University of Chicago Law School. He said that he found it odd to be giving the Coase Lecture as every time he spoke it was a Coase lecture. What is of interest to economists today is his description of how the Nature of the Firm evolved, first as an undergraduate essay in 1929 which was turned into a published article in Economica in 1934, but which in 2003 he considered an undergraduate essay. At the time, he said the article drew no attention unlike his second famous article The Problem of Social Cost.

As a student while studying business and accounting at LSE Coase was awarded a travelling scholarship to the US where he visited a number of firms observing how production was organized at the plant level as well as at head office. A combination of lectures, onsite visits and interaction with other students, Coase viewed as a recipe for the development of both theories and policy alternatives. One implication today is the importance of both the school you attend and the calibre of fellow students. The two are probably related.
The lecture is posted on the University of Chicago Law School website under 2003 Coase Lecture.

Political correctness beyond understanding

November 28, 2016

Political correctness (PC) has gone rogue. Anything said by anyone that is conceived as mildly offensive to someone else is today often deemed to be off limits for discussing or even mentioning. The consequences for intelligent and informed debate are chilling, and reminiscent of what successful dictators attempt and often achieve, at least until their demise. The new Vice-Chancellor of Oxford University, Louise Richardson, in favour of promoting robust debate over contentious issues, stated that educational institutions are “places where we should hear any legal speech, and we should teach our students how to confront any speech which you (they) find objectionable.”

The Vice-Chancellor has specialised in studying and publishing on terrorism while holding academic positions on both sides of the Atlantic. Her research on terrorism and its causes culminated in an acclaimed 2006 book What Terrorists Want, described by the New York Times as an “essential primer on terrorism and how to tackle it”. In the 1970s, she was recruited by the student branch of the IRA, attended meetings and discussions but decided not to join as she could not endorse the use of violence.

If PC is given a free rein, it will ultimately restrict informed debate and support conditions for a type of theocracy to prevail that will suppress the discussion needed to stimulate understanding, especially regarding social (political and economic), cultural and scientific issues. We see this already in the field of climate change and global warming where not only deniers but sceptics are widely considered to be beyond the pale as they are told the “science is settled.” As opponents of Galileo found out, the science is never settled.

 

 

 

Where the light does not shine

November 21, 2016

One of the more interesting pieces on the 2016 US election is by David Remnick, editor of the New Yorker. It is available online at:

http://www.newyorker.com/news/news-desk/an-american-tragedy-2

The short video that follows it is worth watching as well.

 

Like others, journalists and non-journalists, Remnick failed to forecast the outcome, and is now commenting on the future, mainly for the US. He views it bleakly but cautions, as Orwell did during the 1930s, against despair.

The prospect is bleak for the US and other countries, but before peering ahead it might be useful to consider the counterfactual. What would have happened if Clinton and the Democrats had won? The outcome would have been that about half the US population that bothered to vote (turnout was 58% of the 224 million electorate, so 94 million did not vote), would be reacting with disgust and demonstrating their disappointment.

 

  1. The so-called Republican supporters (now in opposition) would consist of all those who voted Republican. They were Trump supporters and Sanders supporters, both of whom were protesting against the way Washington politics operates.
  2. This combination of Trump supporters (now on the losing side) would have protested that the election was rigged, and had resulted in the continuation of politics under Democratic leadership, which had held the Presidency for the past eight years and had failed to recognize the plight of many lower income Americans.
  3. Resentment would have increased and politics become even more toxic with unforeseen consequences at the next election. It would not have been a pretty sight.

 

Considering the counterfactual is not to welcome the actual outcome, but to use it as a warning for what might have happened, what could still happen, and what needs to change during the current administration, and by the traditional Democrat and Republican parties prior to the next election.

There are now two wings to both parties. For the Democrats there are the Clinton and Sanders supporters; many of the latter said that they would not have supported Clinton if Sanders was not the candidate. For the Republicans, there are those like McConnell/Ryan, and the Tea-Party group like Sarah Palin and possibly Ted Cruz (who may be a party of one as no-one seems to like him, although he is recognized as being smart).

Will the party structures change? I have no idea, but some sort of change seems to be in the wind. The media, traditional and online, will change as people adjust to how they receive information. At the moment, the shock of the results and a focus on Trump, his cabinet and advisers, exercises the media. In time, political and economic conditions in the US and the rest of the world will hopefully receive more attention.

In Canada, there is a certain smugness that it happened there and not here, and some Americans are talking about moving north as they did during times of slavery in the South and the Vietnam war. A fleeting acquaintance with what happened globally since 1900 should discourage a leaning towards smugness.

When your keys are lost, you look under the street lamp because that is where it is brightest.  You may need to look in the shadows. The same is the case for the fallout from the election. Some of the dark spots may be more revealing, like the number who did not bother to vote.

Déjà vu

November 15, 2016

Two events come to mind as providing some sort of precedent to the 2016 US election, the 1989 fall of the Berlin Wall and its impact on the Soviet Union and satellite countries, and events leading up to and following the French Revolution, 1789 to 1799. In both instances, pressures built up leading to a volcanic type explosion which became visible on the surface but where the causes lay underground.

The establishment media and almost all of the rest of us failed to appreciate what was happening in the US, because we were not looking at or listening to what half the population was saying. A few were, such as Bernie Sanders and Michael Moore. Sanders sits in the Senate as an independent and caucuses with the Democrats in the Senate. He raised a large amount of money in small donations with a crowd-sourcing type process. Moore is a documentary film maker who is skilled at covering topics ignored by the mainstream media.

 

The former Soviet Union

The 1989 demise of the Soviet Union has been followed by almost three decades of change for member countries which are now more or less independent. The transition has not always been smooth. Aside from foreign relations, what happened within each country was a change of the domestic political scene, generally towards democracy except in those places which are now part of Russia. It was a major upheaval as the countries of eastern Europe became more democratic.

America had a revolution in 1776, but this was a revolt against an external force, British control, and was not a result of dissatisfaction within the country as is the case today. Its success gave impetus to events in Europe.

 

The French Revolution

The French Revolution beginning in 1789 suggests parallels. It was an internal uprising by groups in French society which rebelled against their rulers and the prevailing economic and social conditions. It lasted for ten years and brought about change, but it also led to the rise and rule of Napoleon until his defeat in June 1815 at Waterloo.

The process was messy. On the positive side, it ushered in democracy to France – freedom of religion, legalization of divorce, decriminalization of same-sex relationships, civil rights for Jews and black people, plus the execution in 1793 of Louis XII.

A couple of short extracts on the French Revolution from Wikipedia suggest comparable circumstances to today’s US with of course different institutional factors in play.

Many other factors involved resentments and aspirations given focus by the rise of Enlightenment ideals. These included resentment of royal absolutism; resentment by peasants, labourers and the bourgeoisie towards the traditional seigneurial privileges possessed by the nobility; resentment of the Catholic Church’s influence over public policy and institutions; aspirations for freedom of religion; resentment of aristocratic bishops by the poorer rural clergy; aspirations for social, political and economic equality, and (especially as the Revolution progressed) republicanism.

Louis XVI ascended to the throne in the middle of a financial crisis in which the state was faced with a budget deficit and was nearing bankruptcy. This was due in part to France’s costly involvements in the Seven Year’s War and the American Revolution. 

…the country’s extremely regressive tax system subjected the lower classes to a heavy burden, while numerous exemptions existed for the nobility and clergy. He argued that the country could not be taxed higher; that tax exemptions for the nobility and clergy must be reduced; and proposed that borrowing more money would solve the country’s fiscal shortages. Necker (finance minister) published a report to support this claim that underestimated the deficit by roughly 36 million livres…

 

So, parts of the world have been here before. How it will all play out, and throw in Brexit and upcoming elections in Europe, is a mystery to me. But there are similar circumstances to suggest parallels.

 

 

Trump plus 4

November 12, 2016

It can be a mistake to focus on leaders and not on their supporters. Looking back, why did we and most pollsters get it wrong? A few did not, but they were ignored and often reviled by the mainstream media and few listened to them. Some thoughts on this, in no particular order.

 

  1. Clinton ended up with a majority of the overall vote but not enough electoral college votes. The so-called battleground states like Florida and North Carolina went Republican, and the Democrats picked up far fewer senate and house seats than had been forecast. The pollsters got it wrong at all three levels.
  2. If you add Trump supporters to those of Bernie Sanders, it constitutes about half the US electorate. When questioned at Sanders’ rallies, most said that if Sanders lost they would not vote for Clinton, a situation that received little coverage in the press.
  3. Trump supporters did not necessarily like his electioneering performance, but there was no way they were going to support the Washington establishment to which Clinton was seen to belong.
  4. The Democrats had held the White House for eight years and nothing had improved for a large chunk of the population, and so they felt that it was time for a change. The Democrats were past their best before date. In a sense Obama had failed them. During the past two years, he had done very little and was very popular. What does that tell us?
  5. Trump rallies witnessed enthusiastic supporters, while Clinton rallies, especially towards the end were smaller and generated little excitement. This was not reported in the press.
  6. The press became supporters of a Clinton win, and refused to take seriously anyone with a contrary opinion. The press and their pundits ended up looking biased and foolish.
  7. When he was on political message, Trump identified the concerns of a large segment of the electorate and did so without offering more than general solutions, such as to make America great again. They bought it and now await the how. Maybe they had little to lose.
  8. Michael Moore has, for me, one of the more persuasive explanations of what happened and why almost no one forecast the outcome (see Moore interviewed on MSNBC’s Morning Joe). J.D. Vance’s Hillbilly Elegy – A memoir of a family and culture in crisis (2016) is another book worth reading. Now we await similar developments in Europe.

 

The Promise of Canada by Charlotte Gray – A review

November 7, 2016

I would strongly recommend this book to all diplomats posted to Canada, as well as to all Canadians posted abroad who need to understand the history of their country. In fact, the same is true for all Canadians who, if like me, may think they know how Canada evolved but would be pushed to identify all the relevant factors. Charlotte Gray has done this in a brilliantly researched and written way.

I came to Canada from the UK over sixty years ago and have lived here ever since, except for a period of study at the London School of Economics. Two years after arrival I became a landed immigrant and after a further thirteen a citizen. My children and grandchildren are all Canadian by birth.

Charlotte Gray arrived in 1979 and has become a superb chronicler of the evolution of Canada over the past two centuries. In my time here, I have not fully appreciated what was going on around me, but now I do, as she has skillfully authored an account of the country’s evolution from the time of politician Sir George-Etienne Cartier (1814-1873) to rapper Shad (1982- who is new to me).

It requires an enormous amount of skilled research (using both secondary sources and interviews) to develop these materials, and still more to integrate them into an intelligent portrait of a country which has grown in both size and numerous other ways.

Canadian literary blue-bloods have rightly given the book outstanding reviews. Rather than add to these, I will try to outline several things I have learned or have come to appreciate about Canada.

  1. One starting point to understanding Canada is geography, both its relation to other parts of the world, and what goes on inside. As for the latter, there are very few people in Canada in terms of population density or persons per square km. In 1961, the figure was 2/sq km and in 2015 4/sq km. Comparable figures for other countries are Russia 7 and 9; US 20 and 35; China 70 and 146; Singapore 2541 and 7829. Canada is largely empty.
  2. By far the majority of Canadians live in urban areas,18 million (about 60 %) in the ten largest metropolitan areas as of 2011. A light map of the country shows most of these people living close to the US border, while large swathes of the country are drenched in darkness.
  3. The rural population expects preferred treatment and often has difficulty in making its voice heard. The continuation of such measures as supply management for dairy products shows that in some instances this occurs.
  4. The diverse regions in which Canadians live include the Maritimes, Central Canada, the Prairies, British Columbia and the North. The economic, cultural and social character of each has meant that it is often difficult to get agreement on things that affect the whole country, and explains why parts, especially French Canada, from time to time toy with separation. Holding the parts together is a continuing challenge for federal politicians.
  5. All Canadians are immigrants who have arrived at different times. The original settlers came out of Africa about 60,000 to 100,000 years ago, travelling up to and through today’s Russia, across the land bridge to Alaska and down into North and South America. Later settlers, the ones most often covered in history books, came from Europe, especially the French, English, Dutch and Spanish. The arrival of each changes the lives of those already there, and does so for migrants arriving today.

It is how Canada has and continues to respond to these geographic and demographic factors which has influenced how the country has and may evolve in the future. Charlotte Gray’s detailed portraits of nine Canadians from different walks of life, politician, policeman, artist, academic, lawyer, and vignettes of five others (journalist, business, mayor, rapper and pop artist) provides the reader with an outstanding introduction to understanding Canada today and how we got here from there.

Clumpout one day to go

November 6, 2016

Be grateful to Trump for the favour he has bestowed. Regardless of the outcome, along with Bernie Sanders, Trump has mobilized about half of the US electorate to tell us that the American political system, at least in Washington, is malfunctioning and in need of major repair. No matter who wins on November 8th, that toxic situation will remain and is now visible to all.

The next administration will have a difficult time of governing depending on the membership of the House and Senate, and appointments to the Supreme Court. The elected members no longer belong to two parties, at least on the Republican side, where the Tea Party gang is willing to shut down the government by failing to authorize funding for government operations. And for Democrat supporters there are now two branches of the party, represented by those who in the primaries supported Clinton and those who supported Sanders….in a sense there are now four parties not two.

My guess, with one day to go, is that Clinton will win the presidency, and perhaps the Democrats the Senate but not the House. But the electorate has a way of surprising the country as shown recently, for example, by Brexit in the UK, and the large number of Liberals elected in the last Canadian federal election.

In an election where both candidates are unpopular, some voters will stay at home. Democrats who don’t vote will be giving support to the Republican candidate, and vice versa for stay at home Republicans. For this reason, pre-election polls are frequently wrong, and because voters don’t want to reveal their choices. While the outcome is uncertain, what is clear is that Washington is in bad need of a makeover, and that while this happens Canada and other countries are likely to be sideswiped, especially as trade liberalization is no longer a popular goal.