The Reagan Economic Legacy

1.

The twelve million new jobs that were created during the Reagan years fall into four main categories. The first group consists of services to wealth, or to the rich. Two million new jobs between 1981 and 1987 were created in finance, insurance, real estate, and legal services. ¹ “Sales representatives, securities and financial services,” “investigators and adjusters, except insurance,” “managers, properties and real estate.” These are among American occupations that have grown most rapidly in the 1980s.²

The second category is the semiprivate welfare society that I have described in the June 30 issue. Health, education, social services, and government provided 3.1 million new jobs in the Reagan years. “Managers, medicine and health,” “administrators, education,” and prekindergarten teachers—these, too, are boom American jobs; they are dependent on government programs, and they are very largely for women.

The third category consists of services provided by the poor, or poverty jobs, such as for cooks and salesclerks. Of the new jobs 3 million were in industries, such as retail trade and hotels, that pay poverty wages. People in “service occupations” are the worst paid of all American workers (except in agriculture); they have the highest concentration of black or Hispanic workers, and their number has increased by 1.8 million from 1981 to 1987.³

The fourth category of new jobs is for people, most of them men, who handle and move material things. There were 2.3 million new jobs in construction, trucking, and wholesale trade, mostly for “operators,” of vehicles, for example, and for production workers. The most successful single occupation of the recent boom—increasing more than five times as fast as all employment—was that of “light truck drivers.” There are other expanding occupations, of course (such as computer equipment operators), and other expanding industries (such as guided missiles and horticultural services). But the new jobs consist largely of services to the rich; of services such as education to the welfare society; of services supplied mainly by the poor, such as retail trade; and of jobs in trucking, moving, and building.

The high-employment service economy is the principal economic success of the Reagan period. Mr.Reagan’s Council of Economic Advisers say in their 1988 Annual Report that the US expansion was shaped by “market-oriented, policies,” which are thereby a “blueprint” for world-wide economic growth. This hypothesis is difficult to verify, as was shown in an earlier article.⁴ Taxes were in fact higher during the Reagan period than in preceding years; transfer payments, made to individuals for social security and welfare, were higher; government spending was higher, and so was the government deficit. Investment was lower and savings slumped; profits were sharply lower; and the economic advantages of deregulation and privatization were not yet evident.

The rate of US economic growth was virtually the same, from 1981 to 1987, as the average rate for OECD countries, and the growth of productivity was much less. The rate of inflation fell in the US after 1980, but it also fell in other OECD countries. The US share of total OECD exports fell sharply, as the US external deficit—the difference between import and export transactions—increased.⁵

The distinctive US achievement, under these circumstances, was the capacity to create employment. US employment, mostly in service industries, has increased by an average of more than two million jobs a year since 1976. This, if anything, is the US “blueprint.” It is not only the consequence of the Reagan administration’s economic policies, since the rise in employment has continued under three successive administrations. Nor is it the result of policies for reducing government, as has been seen. But other Reagan administration policies—notably for government deficits, monetary expansion, and international borrowing—may have helped to establish the conditions under which the employment boom could continue.

It is also possible that there is some special relationship between employment in service jobs and Reagan’s policies. The members of the Council of Economic Advisers are forthright in their defense of service industries. The new jobs of the 1980s are in “higher paid, high-skill” occupations, they suggest; the “apparent poor productivity performance” in services “appears inconsistent with observed improvements in technology.”⁶ They even recommend services to other countries—another US blueprint, of sorts. “Resources need to shift away from tradable goods and toward nontradable goods,” they write; they mean by this that countries should produce fewer goods and services for export, and more of the public and private services—light truck deliveries, for example, or kindergarten education—that do not enter into international trade. ⁷

2.

There is one sense in which the economic policies of the Reagan period clearly did establish the conditions for employment growth. The US economy has grown without interruption since 1982, and public policies have helped to make this possible. Government has consistently spent more than it receives in taxes: it has provided a “fiscal stimulus” to the domestic economy in the form of the overall government deficit, or the difference between what the government spends and what it removes in taxes. This amounted to 2.9 percent of GNP, on average, during the seven years of the Reagan administration. Monetary policy has also been expansive, for most of the time since 1982: interest rates have fallen and the supply of money has increased faster than output. The “real money supply” has increased six times as much in the Reagan period as in the previous twenty years.⁸

The US has meanwhile consumed more than it has produced; it has spent more on imported goods and services than it receives from foreigners for its exports. Imports have exceeded exports by 1.8 percent of GNP, on average, and these exports have been financed with capital provided by the rest of the world. If the US pays more for its imports (of, say, computers from Italy or financial accounting services from Hong Kong) than it receives for its exports (of computer software to West Germany or tobacco to South Korea), then it must finance the consequent deficit—the excess of payments over receipts—with “foreign investment” from the rest of the world or “foreign disinvestment” by the US): by borrowing money from foreigners, or by selling US assets to them.

“Net investment” by foreigners in the US amounted, in this sense, to a cumulative total of $531 billion from 1981 to 1987 (or a US deficit of $76 billion per year). The cumulative total from 1948 to 1980, by contrast, amounted to net foreign investment by the US of $95 billion (or a US surplus of $3 billion per year).⁹

Mr. Reagan’s present Council of Economic Advisers seems to be pleased, in general, with the effects of fiscal, monetary, and international stimulus. The members of the council even include such stimulus in their blueprint for worldwide growth:

Clearly, it is important to maintain policy momentum in the macroeconomic area…when appropriate, judicious easing of monetary policy and increased spending on worthwhile public investments can contribute to demand and output growth without raising risks of inflation.

They see further potential for growth in increased borrowing: the “removal of artificial restraints on mortgage and consumer credit can aid growth under appropriate circumstances.”¹⁰

US economic policy has come a long way, evidently, from the initial positions of the Reagan administration’s economists. Mr. Reagan campaigned for the presidency against government deficits, for “monetary restraint” (or slower and steadier growth in the supply of money), and against “fine tuning” of the economy by frequent changes in fiscal and monetary policy.¹¹ For most of the period, successive Councils of Economic Advisers have blamed budget deficits—and thus fiscal stimulus—on Congress.¹² They have blamed fluctuations in the money supply—and thus monetary policy—on the Federal Reserve.¹³

The Reagan advisers’ present view of polices that stimulate the economy is different, and welcome. Even “fine tuning” has been rehabilitated in the present Report, at least in the special circumstances of the Federal Reserve’s response, week by week, to the stock market crash of October 1987.¹⁴ Some combination of congressional, executive, and Federal Reserve policies—some “easing” and some “spending”—has made the economic recovery possible. But this hardly justifies the Reagan administration’s claims to international leadership, or its demand, expressed by Secretary of the Treasury James Baker to the 1988 Economic Summit, that the world “will recognize the enormous contributions made by the Reagan-Bush administration to the course of the world’s economic policy over the past eight years.”¹⁵

United States international policies are the most novel aspect of the “Reagan-Bush” (or the “Reagan-Volcker-O’Neill-Greenspan-Wright”) expansion of the economy. They are also the aspect that makes the US experience least plausible as an international “blueprint.” Deficit spending and loose money are a fairly familiar prescription, after all, for economic recovery.¹⁶ But as “left-wing” policies, they have almost always been stymied by the combined pressure of international financial markets and international financial institutions. Countries that try to spend their way out of recession find that the value of their currencies falls (they become “low confidence monies,” as earlier Reagan economists put it), and they have difficulty in paying for their imports. They also find that they must reduce government investment in order to satisfy their international creditors.¹⁷

The US expansion was remarkable in several respects: it has lasted a long time; it has brought an uninterrupted increase in imports; it was accompanied for four years by a sharp increase in the value of the dollar; and it was also accompanied by a large and continuing flow of foreign investment to the United States. The dollar has fallen, of course, since its peak in 1985. But the “adjustment,” so far, is gentle by the standards of other debtor countries.¹⁸

The sustained excess of imports over exports, and the corresponding flow of foreign investment into the US, is thus the distinctive element in the Reagan administration’s policy for economic recovery. It is also one of the policies that were announced in advance by Reagan’s economists—in the form of an expressed desire for foreign savings—and then actually carried out. If foreigners invest their savings in the US, they noted, then the savings available for US investment are thereby increased.

There is some evidence that Reagan’s economic advisers were looking hungrily at foreign savings as early as their first Annual Report, as was pointed out in these pages at the time. They were concerned, even then, about the low level of US savings (which have since fallen much further).

The solution…is to seduce savings from countries that save more: “Some saving could also come from abroad.”… This flow of foreigners’ “savings” would presumably be offset—as the Report does not point out—by an increase in US imports of goods and services.¹⁹

The subsequent increase in imports was even more dramatic—producing the cumulative $531 billion deficit—than could then have been predicted. But the Reagan advisers were prepared for the worst, or the best: “Nor should a current account deficit [i.e., an excess of payments to foreigners over receipts from them] that is comfortably financed by net inflows of capital evoke concern.²⁰

The question of the US international deficit is central, evidently, to any evaluation of the Reagan administration’s economic policies. The Council of Economic Advisers continues to presume that this deficit has been in many ways “worthwhile”; that it is “comfortably financed,” perhaps, or that it is evidence of the international contributions of the ReaganBush administration.²¹ “The current level of net foreign claims”—the excess of foreign assets in the US over US assets abroad—“should not be cause for alarm,” they write. Even by the end of the century, the return to be paid on foreign assets would amount to only 2 percent of US GNP: “still not a large percentage,” they observe, although they concede that it would be (at $100 billion or so per year) “a very substantial absolute sum.”²²

There are problems, all the same. Some, which are not prominent in current US discussions, have to do with the consequences of US borrowing for the rest of the world. The size of the “net capital inflow” into the US is difficult to imagine. But one might think of the US economy as a living thing that needs imported capital in order to satisfy its growing consumption of imported goods and services; a teen-age python, perhaps. It must be fed once a week, and its needs increase as it gets bigger (a mouse, a rat, a hamster, a rabbit, and so forth). The US needed an “inflow” in 1982 that was roughly half the size of Iceland’s Gross Domestic Product (GDP). It had progressed to the rough equivalent of New Zealand’s GDP in 1983, to Norway’s in 1984, to Switzerland’s in 1985, and to Sweden’s in 1986; in 1987 it needed the GNP of Africa.²³

The Reagan policies of economic stimulus have been good, in some respects, for the US, and for other countries as well. The US has ingested the savings of the rest of the world, and it has also ingested their exports: $122 billion worth, in 1987, from the non-OPEC developing countries alone.²⁴ But the American picnic of foreign savings has presumably reduced investment in other countries, including developing countries and the high-unemployment economics of the EEC.²⁵ Foreign investors have bought US land and shopping centers and commercial paper, and the proceeds have been used to finance US consumption; this money might otherwise have been used to finance investment in their own countries.

The problem of a future “adjustment process”—the eventual reduction in the US international deficit—remains, and it is troublesome both for the US and for the rest of the world. The Reagan economists provide glimpses of the mess that they propose to leave behind for their successors. The US may need trade surpluses “in the 1990s,” in order to “pay back some of its borrowing of the 1980s.” That is, the US will be in the situation, more or less, of indebted Latin American countries after their borrowing of the 1970s. US production will have to grow faster than US consumption: a condition hitherto associated with “sharp recession.”

US indebtedness, according to the Council of Economic Advisers, could “by the end of the century…present difficulties for the world financial system, especially if for some reason foreigners suddenly become less willing to hold claims on the United States.”²⁶ The US will be vulnerable, in other words, to crises in the confidence of skittish foreign investors: the Swiss who buy US insurance companies, the Mexicans with US bank deposits, the Japanese with US Treasury securities, and all the other wealthy of the world, “market-oriented” and IMF-influenced, whose spiritual trust in America helped to make possible the Reagan boom.²⁷

The US is in an utterly different situation, of course, from other indebted countries. It sets the rules of international financial institutions. Even as its own “adjustment process” impends, it is relentless in imposing fiscal orthodoxy on others.²⁸ Its exports have increased recently.²⁹ Its size in the world economy—the python of modern times—gives it a forceful influence on other countries.³⁰ But its very size, and the special uses of its international borrowing, mean that the prospect of US adjustment is ominous for virtually everyone.

3.

The US has not made good use of its enormous, temporary supply of foreign capital. If it were a third world country, it would be convicted of using “the money” for consumption and “unwise projects,” and turned over to the IMF for “programs of needed policy changes.”³¹ Even persistent dependence on foreign capital “need not be a source of concern,” according to the present Annual Report, when it is “used to finance productive investment.”³² But US investment has been sharply lower during the boom of the 1980s, and very little of it has been used to promote future exports.

Gross private investment accounted for 15.9 percent of US GNP between 1981 and 1987, down from 17.5 percent in the Carter years between 1977 and 1980. Net private investment—which excludes allowances for using up older fixed capital—fell from 7.8 percent to 5.2 percent of Net National Product (NNP) over the same period.³³ The composition of GNP has thus moved away from investment during the years of capital inflows. It has moved toward personal consumption, especially of services such as medical care and housing, and toward consumption by government, particularly of military equipment and research.³⁴

The decline in investment is even more serious when government investment is included. State, local, and federal governments buy things—schools, for example, and sewers, water pipes, and highways—that have prospective uses and that are productive. But public investment in sewers and water (such as in the shanty towns of EI Paso) was 25 percent lower in the Reagan years than in the Carter period, and investment in schools was 30 percent lower.³⁵ Government purchases of buildings and other construction projects, excluding defense, fell from 2 percent of GNP to 1.6 percent between the two periods. Defense “investment”—purchases of buildings, durable goods such as missiles, and contract research and development—meanwhile increased from 1.6 percent of GNP to 2.4 percent. ³⁶

The federal government, by 1986, was spending more than three times as much to buy defense research from industry as federal, state, and local governments were spending, in total, to build schools and universities.³⁷ It is easy enough to imagine the visit of policy inspectors from the IMF and the World Bank, if the US were an underdeveloped—and not an overdeveloped—country. “And what did you do with the money, Mr. Bush?” “No unwise projects, we presume?” “How much, again, was the cost of research on the Strategic Defense Initiative?” “Is it not the case, as you yourself put it, that ‘the best investment we can make is in our children’?” “Or that civilization is a race between education and catastrophe’?”³⁸

Private investment in construction is hardly more impressive. About a third of gross private investment is in housing. But the volume of investment in housing was actually lower, on average, in the Reagan than in the Carter period. Investment in the new housing that is most likely to resolve the present crisis of homelessness—in “two-or-more-unit structures”—was only half as great as it had been in the early 1970s.³⁹

Nonresidential construction is presumably important to the Reagan economists’ vision of useful debt: “the increased productive capacity financed by the capital inflow can generate the income to pay foreign creditors,” such as through “improvements in real net exports.”⁴⁰ But investment in industrial buildings such as factories, too, was lower in the Reagan years. There has been a construction boom, of sorts, during the Reagan years, or at least a boom in construction jobs. The main expansion, however, has been in commercial and “other” structures such as shopping centers, hotels and motels, greenhouses, and animal hospitals. These structures—which produce only a small share of US exports, such as tourist visits—accounted for three quarters of all new nonresidential buildings in 1986. They were worth $58 billion, in 1982 dollars, up from to $42 billion in 1981. New industrial structures—the buildings in which most US exports are produced—were meanwhile worth only $12 billion, down from $18 billion in 1981.⁴¹

Private investment has been concentrated, more generally, in the low-productivity, low-export service economy. In the years of the great capital inflow, from 1983 to 1986, US industry added $300 billion to the value, in 1982 dollars, of its net capital stock. But the value of the net capital stock in manufacturing, agriculture, and mining—the goods sector in which US merchandise exports are produced—was actually lower in 1986 than in 1983. Services, trade, and finance, insurance, and real estate together accounted for 88 percent of the total increase in capital; the two industries in which capital expanded most were “insurance carriers” and “holding and other investment companies.”⁴²

“What have you done with the money?” is the question US officials ask of debtor countries, or debtor economies. If the question were asked about the US itself, the answer would be that the money has gone to private consumption, to defense research and procurement, to building hotels and shopping centers, and to financial, trade, and services industries. US policies of fiscal and monetary stimulus in the 1980s are not a blueprint for other countries, because no other country could have got away with them. They are not a blueprint, because their costs will still be paid in the 1990s and 2000s. They are not a blueprint, above all, because they have been used for the present and not for the future.

4.

The last element in the US economic blueprint is the service society itself. The high-employment, low-productivity service economy is not the consequence of the policies of the 1980s, although the Reagan economists defend it with enthusiasm. But it has increased even faster, since 1981, than in the previous postwar period.

Retail trade, finance, insurance, and real estate, and the “services industry” group, including hotels and doctors’ offices, together accounted, in overall effect, for all new private jobs in the US from 1981 to 1986; that is to say, employment in the rest of the private economy fell slightly over the period.⁴³ From 1977 to 1980, these service industries—which might be called the “consumption services sector”—accounted for only 63 percent of new private jobs.⁴⁴ Real GNP per person employed in consumption services was only 61 percent of that in the rest of the private economy in 1986; the ratio was 70 percent in 1981. Real compensation (wages, salaries, and benefits) per employee, in 1986, was only 58 percent of that in other private industries.⁴⁵

The members of Mr. Reagan’s Council of Economic Advisers see the recent changes in patterns of employment as an improvement in “job quality,” and they are to some extent right.⁴⁶ But the improvement has been very largely for women rather than for men. It has been accompanied by an expansion in poorly paid jobs, and an increase in poverty. It has done little to improve US prospects for future exports. It is dependent, above all, on the “welfare society” and thus on government spending.

In one “low-quality” industry—“eating and drinking places,” or “flipping hamburgers”—the growth of employment has indeed slowed down: it accounted for 10 percent of new jobs between 1973 and 1981, and for only 7 percent since 1981.⁴⁷ The Reagan economists point out that employment in the badly paid “food service” occupations has grown relatively slowly. But one of the major transformations during the 1980s has been a decline in the teen-age population. There were 14.6 Americans between the ages of sixteen and nineteen in 1987, down from 16.2 million in 1981; 6.6 million were employed in 1987, down from 7.2 million in 1981. One out of five were employed as food service workers, accounting for 25 percent of food service employment, compared to only 6 percent of total employment.⁴⁸ Much of the slowdown in the growth of waiters and short-order cooks—and some of the improvement in overall job quality—is therefore a consequence of the decline in the supply of teen-age workers.

“Employment gains during the current expansion have been largest in higher paying occupations,” the council claims. This is true, and surprising. The expanding services are heterogenous; they include the best paid as well as the worst paid industries (respectively security brokers and personal services such as hairdressers). But retail trade and services are in general much the worst paying industry groups, followed by construction and finance.⁴⁹

The employment boom has thus been most pronounced for the higher paying occupations within the lower paying industries. This is a curious outcome, and part of the explanation is to be found in changes in the employment of women and men. Women accounted for 43 percent of all employment in 1981 and for 61 percent of the new jobs created between 1981 and 1987. But employment of women in highly skilled or high paid occupations—executives, professionals, and technicians—grew by 5.1 percent per year, while employment of men in these jobs grew by only 1.9 percent per year.⁵⁰

During the period of the “current expansion,” between 1983 and 1987, the largest single category of new jobs for women was “professionals in services” (such as kindergarten teachers or registered nurses). The largest category for men was “precision production workers in construction” (such as plumbers and carpet fitters).⁵¹

The Reagan economists emphasize the rapid growth of jobs in “executive, administrative and managerial” occupations. The employment of executives has indeed grown much faster since 1973 than total employment. But for women it has increased by 8.6 percent per year, while for men it has grown by only 2.1 percent per year (or at just about the same rate as total employment). The composition of the executive classes has changed correspondingly. The most rapidly expanding executive occupations, during the Reagan expansion, were rather far from Joseph Schumpeter’s idyll of the risk-taking entrepreneur, or from Max Weber’s paterfamilias. These occupations were “managers, medicine and health,” “underwriters and other financial officers,” and “management analysts.”

The rise in the number of women executives has been accompanied, as might be expected, by a decline in the relative position of executives. Women executives are concentrated in lower-paid occupations, just as women professionals are concentrated in such occupations as prekindergarten teachers and registered nurses. This is part of the explanation, presumably, for the growth, during the 1980s, of higher-paid occupations in lower-paid industries. The “quality” of executive jobs may also be falling, as work becomes more mechanized.⁵² There is even—in an economy in which one worker out of eight is an “executive, administrator or manager”—a process of what might be called “occupational bracket creep”: people do the same sort of thing but are called something grander.

5.

Welfare society services—the industries clustered around the state and semi-private welfare, which were the subject of an earlier article—are the main source today of jobs that require professional skills.⁵³ There are four large groups of new jobs in the 1980s, as shown in the box on this page. Of the four, welfare services are much the most important source of improvements in “job quality.” They have a high proportion of their total employment in professional and technical occupations, and they provide skilled jobs for women and blacks. Employment in the least skilled occupations—nursing aides, for example—is increasing relatively slowly.

Services such as education and health are not on the whole well paid, but their wages are rising relative to other industries. The health and other benefits that these industries themselves provide—which make it possible for the young women who supply health services also to be customers for them—are low, but not as low as in retail trade. Jobs in child day-care services, in dentists’ offices, in general government work, in social services, and in the offices of chiropractors: these are among the most rapidly expanding activities of the recent boom. They are a surprising legacy of the Reagan economy, and they are its best claim to providing high quality work.

“Services to wealth or to the rich”—i.e., jobs in finance, insurance, real estate, and legal services—are the best paid of the four large groups. A quarter of all the people employed in “finance, insurance and real estate” are executives. But almost all the rest are in sales and administrative jobs: receptionists, for example, or people who work at billing accounts. The proportion of professional and technical workers is much lower in the financial industries than in the rest of the economy: the “accelerated process of general financial innovation” that the Reagan economists describe has little to do with scientific innovation, or even with increases in “human capital.”

The financial industries are also exceptionally unwelcoming to many Americans, and especially to black workers. Finance, insurance, and real estate have the lowest proportion of black and Hispanic workers of any industry group except mining. Their most rapidly increasing occupation—“sales representatives, securities and financial services”—has fewer than 2 percent black employees: 70 percent are white males.

People who are not white are also closed out as customers from many of the “services to wealth,” whether stockbroking or real estate insurance. There were 23 million American households, in 1984, with a total net worth of less than $5,000; they included 54 percent of black households, 50 percent of Hispanic households, and 22 percent of while households. The median value of net worth, for white households with assets, was $39,135; for black households it was $3,397.⁵⁴ There are not many financial services, in the 1980s, for black Americans, and there are not many financial occupations either.

Services provided by the poor—“poverty services”—cannot possibly be considered as the source of good jobs. They are defined, here, as consisting of the two major industries—retail trade, including eating and drinking places, and personal services, such as hotel work and hair-dressing—whose employees make less than half of the average earnings in manufacturing.⁵⁵ Two industries within “business services” can also be defined as “poverty services”: they are “services to dwellings and other buildings,” such as the services of janitors, cleaners, and “pest control assistants”; and “personal supply services,” or employment agencies and temporary help services.

The Reagan administration economists say that the growth in employment has been “less vigorous in lower-paying, low-skilled occupations.” But the lower paying industries just listed accounted for 21 percent of all US jobs in 1987, and for 26 percent of the new jobs that were created from 1983 to 1987. The proportion of all Americans employed in “service occupations” (excluding private households) increased from 12.2 percent in 1981 to 12.6 percent in 1987.⁵⁶ Low wages, in the “poverty services,” are exacerbated by an even greater disparity in such “supplements” as contributions to private health insurance and pensions: a fourteen-fold spread, as was seen earlier, between the petroleum industry and personal services.⁵⁷

So far as growth in jobs is concerned, the “personnel supply services” industry—which supplies temporary workers to other industries—is much the most successful in the modern US economy. Its employment has grown by 14 percent a year during the past four years of the Reagan boom. It employs some highly skilled people, such as nurses, computer specialists, and engineers. But its two leading occupations are “nonspecified helpers, laborers, and material movers,” and “general office clerks.”⁵⁸ It provides short job tenure and very low benefits. It is the industry, above all, in which people are treated like things: in which work crews are “assembled, transported to the jobs in company vehicles, and then returned to the office at the end of the day”; and in which certain contracts for office work contain “a ban on the permanent hiring of temporaries for some period of time after their use.”⁵⁹

The employment of poor people in services is likely to be even higher than official statistics show: illegal immigrants, for example, are concentrated in restaurants and janitorial services.⁶⁰ The expansion of badly paid jobs accounts for much of the increase in poverty in the US. The decline in the real income of young families between 1979 and 1984 was entirely explained, as was seen earlier, by a decline in their earnings.⁶¹ The percentage of working households with low weekly earnings increased sharply over the same period.⁶² This too is the legacy of the new service economy.

The fourth group of new jobs—construction, trucking, and wholesale trade—are even more precarious. The Reagan economists point to the strong growth of employment in “precision production occupations.” But more than 60 percent of the new “precision” jobs have been in the construction industry, and in occupations like “drywall installers.” They are also strongly influenced by cyclical changes in the economy; the base year chosen by the Reagan economists—1983—was a time of low construction activity, while there was a construction boom in 1986 and 1987.

The trucking and handling jobs provide stereotyped masculine work in an economy where more and more “high quality” work is done by women. In some of the most physically demanding jobs, such as that of concrete finishers, almost half of all workers are black and Hispanic men. The jobs are also dangerous. Service industries have relatively low rates of occupational injuries and illnesses. But the rate for trucking is 75 percent higher than for the private economy as a whole, and for construction it is almost twice as high.⁶³

The expansion of the trucking industry is the epitome, in a sense, of the Reagan economic strategy. The new jobs in trucking will contribute very little to future exports or to resolving the economic problems of the 1990s and 2000s. The Reagan administration, in its indifference to the long term, and to costs that cannot be measured in immediate profits and losses, is meanwhile endowing even more serious problems for the more distant future.

The present dependence on trucking is an important source of future pollution, future injuries, and future oil imports. The US uses about a third more energy in its overall transportation sector than Japan uses for all purposes together. The share of US energy use going to transportation has increased steadily throughout the Reagan period. Trucks now account for some 42 percent of motor fuel consumption, compared to 28 percent in 1974. There was a modest shift from motor vehicles to railroad freight between 1974 and 1981—and a sharp shift back to motor vehicles after 1981. The average fuel consumption of trucks was 6 percent higher in 1985 than in 1974 (while the average fuel consumption of cars was 27 percent lower).⁶⁴ These changes, too, should be counted as future economic costs of the Reagan expansion.

6.

The new service jobs are “bad,” finally, because they produce relatively little output. The “real output per person” of people in the construction industry—according to the Bureau of Labor Statistics series cited in the Annual Report—was lower in 1986 than in 1948; in finance, insurance, and real estate it was lower than in 1966; in transportation and services it was lower than in 1973.⁶⁵ A one percent shift in the composition of employment to “consumption services” such as retail trade would now, with all other circumstances unchanged, bring a half of one percent decline in overall output per person. There have been four such shifts since the beginning of the Reagan administration.⁶⁶

There are serious, and well-known, difficulties with the measurement of productivity in service industries, to which the Reagan economists allude. But the sections on productivity are the most confused in the report. The authors observe, for example, that the US “is not becoming primarily a service economy.” They support this view with a thoroughly misleading contrast between the relatively low share of services in GNP when it is measured by “final demand,” as compared to the relatively high share of service-producing industries when GNP is measured by “value added”: they cite figures that suggest that the service share is respectively 47 percent and 68 percent without noting that trade is treated quite differently in the two measures.⁶⁷ They criticize “measurement procedures” but give little evidence they understand them.⁶⁸

The US government has for more than half a century supported much of the most important work ever done on economic measurement: by Wassily Leontief and Simon Kuznets and by the “national accountants” of the US Department of Commerce. The economists and statisticians now working in the Departments of Commerce and Labor produce economic statistics of unequaled quality (including virtually all that have been used in this and the preceding article). They deserve better consideration from the Council of Economic Advisers.

The real problems of measuring the output of services are serious and important. I do not think that they are purely “technical.” They raise deep questions about modern concepts of economic measurement, and even about how economic life is conceived. I think that these questions will only be resolved, or understood, by an extensive reconstruction of economic accounts—in which the notion of output in “well-measured” industries, such as manufacturing, is also redefined.

It is certainly possible to imagine that revised measurements of this sort would be favorable to the service industries, in the sense that the productivity of the “consumption services” (such as retail trade, or nursing homes, or temporary office help) would be higher than that of goods-producing industries such as manufacturing. One might, for example, subtract the estimated cost of pollution, accidents, or occupational illnesses from the output of mining and manufacturing industries; one might add a “positive nonconventional output” of human encounters, or of “labor as an end in itself,” to the output of industries like education or health care. These adjustments would be likely to increase the relative productivity of the services industries. Others—such as changes in the treatment of capital investment, other business purchases, or “human capital” investment—might well reduce the relative productivity of services. ⁶⁹

There is an obvious sense, nonetheless, in which productivity is in fact low in the services industries. The low and unchanging level of output per person in consumption services corresponds to some aspects of economic reality. This is so, at least, for many of the industries in which employment has increased most rapidly during the Reagan expansion (such as retail trade or office cleaning). Some of these industries are not technically innovative, in the sense that they employ few technical people and produce little scientific research. They are not inventive, in the sense of being open to new technical (and social) ideas from the US or other countries. They produce “negative output,” such as occupational illnesses in dry cleaning stores, or occupational injuries in nursing homes.⁷⁰ Some—such as the “temporary help” agencies in which work crews are “assembled” and secretaries are “used”—provide the very opposite of “labor as an end in itself.”

The impending problem of US international deficits that the Reagan administration is leaving behind makes the inadequacies of innovation in services especially clear. The prospect of increases in US exports of services has been discussed extensively by the Reagan administration, which is “vigorously pursuing” negotiations for freer international flows of such “traded” services as insurance, management consulting, and engineering services.⁷¹ The US is not endangered, according to an earlier Annual Report, “if our exports shift from steel and machinery to engineering services.”⁷² But such a change is still remote. The services industries make a very small contribution to US exports, and one that has actually become less important during the Reagan years.

US exports of “services” were worth about $160 billion in 1987, out of total exports worth $420 billion. But most were “factor services,” i.e., payments made by foreigners as a return on US investment abroad; or travel and transport payments; or payments for royalties and licenses. The only exports that correspond in some approximate way to the output of the “services industries”—the “other private services” on which a future boom in service exports would depend—were worth $12 billion, or about 3 percent of total exports.⁷³

The international prospects are even worse for the high-employment services industries than these statistics suggest. Other US government studies show that industries corresponding to the “consumption services” actually account for only a third of US companies’ sales of services to foreigners; most services (such as engineering consulting) are in fact sold by industries like manufacturing, petroleum, and transportation.⁷⁴

During the period of the Reagan boom in service jobs, exports by US service industries were modest, while net exports of these services actually declined. The year 1987 was one of rapid growth in US exports, which were $17 billion higher in the last quarter of the year than in the first. But less than one percent of this increase came from “other private services.” The US also, of course, imports services from foreigners—accounting services from the Philippines, or airline ticketing services from Barbados—and these, too, have increased.

Since 1981, in fact, the US net balance on all “nonfactor services”—all service exports less all service imports, measured in 1982 dollars, and excluding returns on investment—has fallen sharply. The pattern is similar to many other differences between the supposedly “grim” Carter years and the “good” Reagan years. Net US service exports increased from $8.5 billion in 1977 to $14.3 billion in 1981; they then fell back to $4.5 billion in 1987.⁷⁵

7.

The service society, even in the version that has flourished in the Reagan period, is admirable in many respects. The policies of economies with low employment—the EEC countries, above all, with more than 10 percent of their labor force unemployed since 1983—have wasted people’s lives in other, and more destructive, ways. The Reagan administration leaves behind it a set of international problems that might only be resolved, during the 1990s and 2000s, in the course of a recession in which US unemployment would increase sharply. The choice—of increases in US exports through worldwide (and US) expansion, or reductions in US imports through US (and worldwide) recession—will be imposed on Mr. Reagan’s successors by other countries, and by worldwide investors. But if the US can avoid sharp increases in unemployment in the future, the policies of the Reagan period will have succeeded in the central respect of sustaining employment. It is better, surely, to work in a hospital cafeteria in Boston than to wait and be rejected in an unemployment office in Dundee or Barcelona.

Employment in the services industries may also have the advantage of being relatively “recession-proof”: jobs in retail shops and hospitals, that is to say, will tend to decline less during a recession than employment in generally “cyclical” industries like manufacturing. This may not be the case in some of the boom industries: “temporary help agencies,” for example, are supposed to make it easy for employers to “shed” labor in a recession. The new jobs in construction, whether for carpenters or electricians, are presumably even more vulnerable than manufacturing employment to cyclical change.

The welfare society jobs, in day care centers or university pension offices, are likely to be the most resilient in the face of recession. What is interesting about them, however, is not so much that they are “recession-proof” as that they have turned out to be “reaction-proof.” Even seven years of Reagan administration policies against the public sector have done rather little, as has been seen, to reduce the growth of employment in the private and public welfare society. Such policies have been particularly ineffective in those sections of the welfare economy in which the clientele is well-to-do, or retired with good benefits.

The prejudice of politicians and economists against service output and service employment is just that: a prejudice in favor of industrial products that is as inconsequential as the fondness for crops which Adam Smith criticized in the French “Physiocratic” economists; or as the fondness for material things that the economist Jean-Baptiste Say criticized, a few years later, in Adam Smith himself.⁷⁶ People want public and private services. They want animal hospitals and visits to chiropractors, and these are “luxuries” which a decent society, or a society as rich as the United States, should be able to afford.

There is a sense, even, in which some sort of service society really is an “international blueprint” for high employment. No country has come close to full employment—in the 1980s, or perhaps ever—without having a high proportion of its nonagricultural population employed in services. Several countries, it was shown earlier, have been much more successful than the US in their recent policies for employment and economic recovery. Described as the “Japan/EFTA group,” they consist, apart from Japan, of the smaller European countries, such as Sweden and Switzerland, which are grouped into the “European Free Trade Association” or EFTA. The unemployment rate was 2.8 percent in Japan, in 1987, and 2.6 percent in EFTA, and both have had a rapid increase in their net exports in the 1980s.⁷⁷

The Japan/EFTA countries, like the US, have a very high proportion of their labor force in public and private “consumption services.” The blueprint is different in each case. In most of the EFTA countries (although not in Switzerland), the public sector accounts for a large share of service employment, and for virtually all of the “welfare society.” In Japan, retail trade supplies much of the “consumption service” employment: Japan has the highest proportion of its labor force in wholesale and retail trade of any OECD country—higher, even, than the present US economy.⁷⁸

The successful countries also, again like the US, have a high proportion of their population—especially of their female population—participating in the labor force; this proportion was relatively high even before unemployment started to increase rapidly in other countries.⁷⁹ In each of these countries, the employment of women is concentrated in services: a high proportion of women work in trade in Japan, or in community services in Sweden, or in financial services in the US.

The question, in the high-employment countries, is not whether service employment is “a good thing” or “a bad thing” (or “right wing” rather than “left wing”) but what sort of employment it is. Are the jobs in the public or in the private sector, and which is better? Are they interesting jobs, for people who have skills and learn new ones? Are they confined by restrictions of class and race and gender? Is their productivity increasing, at least if it is measured in “nonconventional” accounts? Are they outside the “technological society” in which people learn to use (and not be used by) technical innovations? Are they outside the international flow of ideas and innovations? Do they have the potential, at least, to be part of a future international economy in which developed countries really do export engineering services and ideas about child care, rather than steel and wheat?

These are the important questions about the future of employment in the service industries, and they are ones to which the Reagan administration has not given satisfactory answers. The seven years of Reagan policies have left serious economic problems facing the US for the 1990s and 2000s, as has been seen. They are also leaving behind serious social problems: from the destitution of poor children to the increased dependence on energy use in trucking, and to the impending decline of private nursing homes. The statistics for US international indebtedness are virtually certain to get worse in the coming years. So are the statistics for the well-being of American children, after seven years of reduced investment in the poor and the young.

The social problems to come will only be resolved, or mitigated, or prevented, by public policy: by federal, state, and local government, and by government spending. It would be yet another dire inheritance of the Reagan years if the administration’s destructive and rhetorical criticism of government continued to dominate US politics after the November election. One of the ways in which US political discussion has deteriorated, since 1981, has been in the extent to which debate on economic policy has concentrated on the government deficit (the difference between what the government spends and what it receives in taxes), rather than on the level of government spending; and on the level of such spending rather than on its content.⁸⁰ This view is international, too, and it poses serious dangers for Mr. Reagan’s successors: that cuts in public spending will be taken—by other “summit countries,” or by the orthodox opinion of international investors—as the main, or even as the only, indicator of US economic resolve to “adjust.”

There are very good and very urgent arguments for the US to reduce the government deficit. But they are not the same as arguments about the level of government spending—arguments that should be about the content of public spending, its benefits, and the costs (including “distortions” and “disincentives”) of paying for it. There is no reason at all that the deficit should not fall, while the level of government spending increases: this is what should happen, in fact, if what needs to be done in the US should best be done by government.

Such government activity would require higher taxes. The present level of taxes in the US is foolishly low, it seems to me, in relation to the urgent need for services and investment by the public sector. The Democrats—Dukakis in his plan for expanded health care, for example, or Jackson in his budget for education and housing—are beginning to talk about this need. A Dukakis or a Bush administration should find the courage, and the consensus, to increase taxes. This would mean explaining why the government programs that would be bought with increased taxes are good for the country—not for “deficit reduction,” but for the well-being and prosperity of its citizens.

The next administration could in this respect learn something once again from the “Japan/EFTA” model. The EFTA countries as a group have much the highest taxes—the highest share of government receipts in GNP—of the OECD countries. Japan has low taxes: the same share of GNP as in the US. But the share in Japan has increased extremely fast over the past ten years of Japanese economic success: about five times as fast as for the OECD countries as a whole. Nothing in the Japan/EFTA experience, either, suggests that reductions in private consumption would in themselves be ominous for the US economy: private consumption expenditure accounted for 65 percent of Gross Domestic Product (GDP) in the US in the 1980s, for 59 percent in the high savings Japanese economy, and for 55 percent in the high tax EFTA countries.⁸¹

The history of the Reagan economic experiment is encouraging in one way for the unfortunate administrations that will lead the US in the 1990s. A lot of what worked best for employment in the Reagan period was a consequence, as has been seen, of not following the Reagan policies. In spite of those policies, there were increases in at least some kinds of useful government nondefense spending and support for at least some parts of the welfare society. But an enormous amount of reconstruction remains to be done: in providing health visits and adequate schools and immunization for children, who have been particularly deprived during the Reagan years; in building sewers and water plants and railroads and telecommunication systems; in stopping the present deterioration in care for the elderly, who did relatively less badly in the Reagan welfare system. The solution is obvious, in a sense: it is to do more, with more dignity, of what has already been done in the public and private welfare society; to explain why this is good; and to have a welfare society for poor people and children as well.

This is the second of two articles.