The New Economy
Part VII: Yes, Now is the Perfect Time to Talk Economic Recovery in America
Note: This post is one part of my series, Yes, Now is the Perfect Time to Talk Economic Recovery in America, which provides an in-depth look at the current economic crisis and how the United States will climb out of it. Click the link or scroll to the bottom to check out the other posts in the series.
Even before the COVID-19 pandemic, America’s economy had been rapidly transforming. The United States, which once relied on manufacturing might, now engineers more than in constructs. It buys more than it sells. It lavishes more than it labors. And honestly, it’s not even close.
The reverence for “Made in America” runs deep in the country’s DNA. After all, America became the preeminent world power on the back of Gilded Age industrialization, turn-of-the-century assembly lines, and World War II full-scale mobilization. America now leads in a world where it does not produce the way it did and grapples with this reckoning.
The United States still builds, develops, and delivers, but it looks quite different. America relies on a digital economy where services mean everything. This trend is not slowing down.
The Shift Toward Importing
The United States started to move away from production in the 1970s but its precipitous decline manifested in the 1990s. Unsurprisingly, the internet’s rise fueled a speedy, growing, and more interconnected marketplace. America, which had long balanced its share of importing and exporting, drastically and decisively pivoted to the former.
It’s important to understand the 1990s in full context. While the internet provided vast opportunities for businesses and purchasing power, it also created speculation in the form of the “.com bubble”. When the bubble burst, investors learned that internet-based companies did not guarantee success but rather that small businesses seeking rapid scale must have a robust digital presence. “Brick and mortar” businesses would forever struggle to compete.
The internet would allow unprecedented accessibility to customers, but perhaps more importantly, it would open channels for production. Manufacturing and supply chains could predominantly be offshored, where the costs of labor and materials were cheaper. Meanwhile, the communication and procurement pieces could be handled stateside. In turn, the same customers could then buy goods faster and at a better price.
The net exports chart above also provides two key insights. First, during previous recessions, which are colored gray, imports rose. The American federal government would spend, in great capacity, to get citizens working and building on projects at home. However, with the COVID-19 pandemic, which is highlighted in yellow, the economy steered into the skid. Its natural inclination remains to import.
Second, the United States has been in a more protectionist mode for the last decade and yet the trend has not reversed. The Obama Administration committed to saving the auto-industry and other manufacturing jobs in the wake of the Great Recession. The Trump Administration then built most of its economic platform and policy base around the concept of bringing jobs back home through tax incentives, tariffs, and pressure campaigns.
In isolation, certain cases and instances worked for both administrations. Some of these short-term decisions saved jobs. But overall, there was no sweeping course correction and, in the end, quite the opposite.
Impact to Labor Market
According to the Office of the United States Trade Representative, service industries account for over two-thirds of U.S. GDP and four out of five private-sector jobs.
The definition of “services” is quite broad. These jobs can range from more traditional business-oriented jobs to technology roles that one might associate with a digital economy.
Still the goods-producing sector, which includes jobs like mining, manufacturing, and construction, has been cut in half.
Overwhelmingly, the jobs which are growing belong to the service sector. They’re predominantly technical and flexible. Clear from the conditions of the pandemic, in-person service jobs have been hit specifically hard like retail, leisure, and hospitality.
Some of these jobs are not only currently declining but have been for some time. The jobs below have been declining since 2003, and if anything, COVID-19 has hit the gas pedal. The restaurant and teaching sectors will likely never see their labor force return to pre-pandemic levels. The displacement of these jobs is of great concern.
In contrast, the digital market only continues to grow. LinkedIn, which has the most robust labor market data of any private sector firm, notes the trends that are here to stay in its 2020 Emerging Jobs Report.
While skewing toward professional positions, LinkedIn notes that technology jobs reign supreme. While familiar jobs like data scientists and engineers continue to dominate, the technology industry also heavily relies on people skills jobs in customer success, sales, and behavioral health. eLearning will continue to thrive as a multibillion dollar industry and remote work will be prominent.
Natarajan Chandrasekaran, the Chairman of Tata Consultancy Services, which is one of the largest management consulting services in the world, notes what COVID-19 means to the future of work, “The pandemic has accelerated digital trends that will stick after it has gone.” In essence, we have gone through a one-way door.
International Context
In the modern international economy, the more a nation develops, the greater its capacity to grow its service sector. As discussed, America’s rise in services has been tied to its erosion in industrial prowess. However, this is not an entirely unique phenomenon.
China provides the most comparable example. Dr. Graham Allison, the former Dean of Harvard’s Kennedy School of Government and advisor to multiple U.S. presidents, explains China’s similar dilemma:
“As the largest producer of ships, steel, aluminum, furniture, clothing, textiles, cell phones, and computers, China has become the manufacturing powerhouse of the world…[yet] it steadily moves from the manufacture of basic goods to higher-value products and services, incomes should increase. But President Xi Jinping is wary of the middle-income trap that has ensnared many developing countries as rising wages erase their competitive edge in manufacturing. This is the impetus for what he calls “supply-side reforms,” which aim to rebalance China’s export-led economy with domestic consumption and services. In fact, “China’s service sector grew by 8% in 2015, and for the first time accounted for over 50% of GDP.”
Essentially, China is running into the same problem. The rise of economic modernity couples with a strong services sector. It also correlates to a decline in manufacturing. It simply gets too expensive.
While it still has the largest industrial sector and consumer market, China is increasingly relying on imports from elsewhere. Primarily, it has found a partner in Southeast Asia which holds the “largest, youngest workforce in the world with cheap labor rates and proximal access”. “Made in America”, which became “Made in China”, is on a path to become “Made Somewhere Else”.
As Allison further notes, China has pivoted to “boosted R&D spending, incubated tech start-ups, and a robot revolution”. This strategy reminisces the economic transformation in America. It’s not a coincidence that every new job seems like a STEM job.
This is the new, global Twenty-First century economy.
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