The Myth of The Service Economy

I’m reading “Killing the Host” by Michael Hudson and encountered these little gems of information. In the post-WW2 USA economy, profits and net investment were closely entwined, at around 9% of GDP. In the aftermath of the rise of the Chicago school and the Reagan/Thatcher period, profits rose relative to investment. So much so that by 2012, pre-tax profits were 12% and net investment was just 4% of GDP.

My first encounter with economics was in grade 8, when my school made me take it for our O/Levels. One thing always stuck with me since then. Our textbook had a table showing US economic growth and one of the students seeing the table asked our economics teacher, “Sir, why did the US growth go down like at the end of 1970s?” He replied no one really knew but there were different explanations. The US economy had evolved into a post-industrial age, it became a service economy, and such vague explanations were provided. They used to make me wonder, so much so that it’s been with me for over a decade and half. The numbers hint at a different story though.

Seeing the numbers provided by Michael Hudson made me curious and to go digging around for the actual digits.

From the data provided by the St. Louis Fed, the following was collected. It shows the net domestic investment of that year as a percentage of GDP. Both are seasonally adjusted and are averaged annually. The trend lines are power averages.

Graph showing how corporate profits rose and investment declined as a share of GDP
Graph showing how corporate profits (red) rose and investment (blue) declined as a share of GDP

The graph shows that overall investment in the economy went down, to roughly around half (in percentage terms) of what it was during the 1950s-1970s.

The reduction in investment in the economy leads to lower demand for highly educated researchers and also for R&D related work. It also can explain partially the decrease in the labor productivity. Result is that US labor is now overqualified and there has been a “qualification inflation” for a lot of jobs.

The real reason economic growth has gone done and is refusing to pick up in the United States has less to do with the economy “maturing” and more to do with one of the GDP components (investment) decreasing drastically.

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