Despite all the hype surrounding the growth of the “knowledge-based” economy and the touting of America as a service super-power, the failure to develop and maintain a high-end manufacturing sector, such as Japan’s, is proving to be a serious economic liability to the country. While some might argue that comparing the US economy to Asia’s newly industrialized economies is inappropriate, this is not true for that of Japan’s. Despite setbacks following World War II, Japan is by no means newly industrialized, and if one claims comparisons between the US and Japan are prima facie invalid, than one is effectively claiming that the US economy cannot be compared to anything.
While empirically we do know that the service sector in the United States occupies a greater portion of the economy than in Japan, and that the US is also a leader in very advanced information, software, bio and other “knowledge-based” technologies, this does not necessarily imply the conclusion that the growth of the service sector in the US is a sign of economic progress. It is possible for the majority of growth in the service sector to be attributable to non-high technology industries such as food service, day-care, hospice care, prisons, litigation, manicures and the proverbial hair cut, things that are not easily trade-able, and in some cases not even necessarily in the long-term interests of society.
What growth there is in the high-value-added “knowledge” sectors, such as biotech, software, and information and communications technology goods (ICT), simply can't replace the huge number of manufacturing jobs that have been lost to outsourcing. Furthermore many of these industries are themselves at risk to off shoring (China is now a larger ICT exporter than the US, India is making inroads into programming and pharmaceuticals, and the developmental arm of the Japanese government is well aware of the need to strengthen Japan’s own “knowledge” sectors).
As for the oft-touted financial sector, the events of 2008 should force even its strongest proponents to seriously rethink their definition of meaningful economic “restructuring” when the country is asking for fiscal bailouts from authoritarian regimes like the Chinese Communist Party who have grown wealthy selling us things we no longer make for ourselves.
As a result, even as the country grows more “high-tech” the current account deficit continues to increase. In the end many of those who are losing out in this game discover that their best hope is to find work at what is now the nation’s largest private employer: Wal-Mart (WMT). That approximately 70% of Wal-Mart’s merchandise is made in China exacerbates the deficit and perpetuates the problem.
And this is exactly where the problem lies: the consistently large US trade deficit means precisely that as a whole, Americans consume more than they produce; this excess consumption is funded primarily by the governments of China, Japan and various Persian Gulf States. To claim that a consistent trade deficit is not economically harmful is disingenuous unless that trade deficit is the specific result of that excess “consumption” being used for investment in infrastructure, plants, technological research or education. This is not the case in the United States, unless one is to consider consumer debt and military expenditures as “investment”.
Some economists argue that free-markets, such as those the US economic system is built around, are always efficient and therefore always “right”. Thus, the economic conditions of such countries must also be “right” or at the very least, nothing to worry about. However, unless one claims that the current financial crisis, or the great depression occurred because markets were not free enough (a claim that absolutely must be backed up with direct empirical evidence) then this crisis is an example of free-markets failing, if not in efficiency then at least in effectiveness.
To be clear, I am not claiming that the basic tenets of neoclassical economics are wrong, but rather the assumption that whatever occurs in the economy must be progress because “the market always knows best” is flawed. There are numerous examples throughout neoclassical economics and game theory that demonstrate the usefulness of regulation and policy.
It is a fact that real median household incomes in the US have been stagnant or in decline for the past 10 years and are only about 3% higher than they were in the late 1980s. The claim that a shift to a service-based economy is economic progress is highly questionable. In the free-market world this may be economic evolution, but evolution is not synonymous with advancement.
