Monday, March 15, 2010

The service sector is cannibalizing itself

The demand curve: In economics, the demand curve is the graph depicting the relationship between the price of a certain commodity, and the amount of it that consumers are willing and able to purchase at that given price. In the US, due to the gutting of the manufacturing sector over the past 25 years, the workforce had to shift from goods producing jobs to service sector jobs. The treasonous bastards in congress are primarily responsible for this. I love the free market and free market capitalism. However, I understand that free markets work best in conjunction with the notion of national sovereignty ( more on this topic in my next post).

Corporations found that by outsourcing goods producing jobs to third world countries, where environmental standards and labor laws are nonexistent, there profit margins would explode. Less labor costs equals higher profits. And who reaped the profits? Well, upper management of course. Observe the chart.

So congress took the bribes from the corporate mob and left the people with no work in the manufacturing sector. Because people need incomes to feed the family they sought employment in the services sector.

Notice how we have become a service economy as of late? Notice how consumer spending accounts for up to 74% of GDP? Notice how the debt levels have exploded upward in the past 20 yrs? All we are doing now is selling shit to each other, whether its retail products, sales, advertising, banking, financial services, LEGAL services, real estate services, all kinds of services. In 2009 we exported $990 billion worth of products while we imported over $1.5 trillion worth of products. In 2007-2008 the trade deficit had swelled to over $800b per annum. And lets not forget that a substantial amount of our exports were made outside of the US (i.e. in some Indonesian factory).

It is clear that our present economic path is unsustainable. Chinese, Japanese, and Middle Eastern vendor finance whereby we borrow to buy their goods works for a short while but leaves all parties broke in the end. The great crash of 2008 was the free market punishing our imbalances. Unfortunately, CONgress decided it needed to bail out its rich friends on wall street. So the scam artists keep their jobs and lovely bonuses while main street rots. Oh, and we owe ALOT more now as the federal debt has exploded higher.

So with less goods producing goods available for the labor market, more people are forced into the service sector to feed themselves and their families. More and more coffee shops and burger joints open up. More clothing shops open up, hoping to make it. More people attend law school, business school, any school, in the hopes of obtaining employment in the services sector. This is unsustainable and until we have a meaningful correction things will continue to get worse.

The bottom line is this: the service sector needs to contract while the manufacturing sector needs to expand. In 1970 there were 200 million people in the US and over 22 million working in the manufacturing sector. Today, at 315 million people we have less then 19 million working in manufacturing. When you take into account the population growth and the fall in manufacturing jobs, it shows just how grim the situation has become.

So more and more of us were forced to work in the services sector, now competing with millions of other "service professionals". Competition is good, as it weeds out the unproductive and rewards the productive. However, when the demand curve has been seriously violated (with debt assisting this violation), it has now come to the point where due to the supply of legal and other services, the demand is so low that the price of the service "commodity" continues to shrink.

Some solutions:
(1) China must slowly unpeg the Yuan from the dollar (slowly)
(2) The US government MUST represent its constituents and uphold the sovereignty of these United States by preventing the outsourcing of US jobs by US based companies that hold a license to operate here
(3) Let debt deflation ensue so that market forces can correct the horrendous price imbalances



  1. eammon fingleton nailed this idea years ago in his books and essays about how much better core manufacturing jobs were than software jobs (real manufacturing, as opposed to mere assembly) and how japan took that work from us, nad how japan had sandbagging us and had us believing their nation was in bad shape, when all along it was America that was in bad shape.

  2. Note that our problem is not merely foreign outsourcing, but also other aspects of Global Labor Arbitrage, such as H-1B and L-1 visas and mass immigration.

    The H-1B and L-1 visas (and other work visa programs) have displaced hundreds of thousands of Americans from middle class, knowledge-based, college-education-requiring jobs and also driven down wages in those fields. These are the very jobs that people are supposed to retrain and reeducate for. Of course, some of those displaced Americans mistakenly believe that they can improve their lot by going to law school.

    Mass immigration, both legal and illegal, has three large negative consequences. First, it displaces lower class Americans from poverty-wage jobs and puts downward pressure on those wages.

    Second, since many of those immigrants and their families are poor, they consume more in government services (education, health care) than what they contribute in tax money (if any). This reduces the amount of resources available to help poor Americans and increases the tax burden on everyone else (or it increases our national debt). Our nation's immigration policy is retarded. If you already have tens of millions of poor Americans, why the hell would you want import more poor Americans? The only reason is some businesses benefit from the cheap labor at the expense of the rest of society.

    Third, it leads to population explosion, which decreases the amount of resources we have per capita and increases the prices for those resources (such as oil, natural gas, timber, freshwater, and land). I often refer to this as a "Malthusian Force". Basically, it makes us all poorer and reduces our standard of living.

    I agree with what you said in another one of your recent blog posts that the U.S. economy will not recover and most Americans have no clue about it. What we are seeing is not a temporary cyclic recession but rather a permanent structural change in the nature of our economy. Basically, we are transforming ourselves into an overpopulated, impoverished third world country. We are positioning ourselves become the next India, Brazil, or Mexico.

  3. Frank,

    I HIGHLY recommend that you read the zerohedge blog. The latest article is titled "the road to serfdom". ZH is one of the best sites i have ever found. There are many of us out there that believe that our "leaders" are setting the stage for "neofuedalism". Basically turn the US into a brazil/Mexico but with a twist. In the end your still a serf.

    Read that article Frank.

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