Skip to: Content
Skip to: Site Navigation
Skip to: Search


For Services, What Goes Up Must Go Up

By Eliot JanewayEliot Janeway is the publisher of the Janeway Letter. His latest book is ``The Economics of Chaos: On Revitalizing the American Economy.'' / September 12, 1989



IN the United States, things are worth less than people. Quite aside from any sense of moral worth this might give us, this simple summary of our complex economic muddle can help us keep score on the tug-of-war between inflationary pushes and deflationary pulls. Within the working economy, cheaper price tags on the things industry manufactures measure the deflation suffered by sellers of goods. At the same time, however, higher tribute exacted by people providing services is a grim reminder that inflation did not melt when the Federal Reserve Board applied heat to interest rates. Inflation remains virulent in the service segment of the economy.

Skip to next paragraph

Manufactured goods create wealth. In so doing they work to expand the entire economy, by generating overtime income, by spilling over into exports, and by triggering waves of investment in plant modernization. When all three forces join, they set off a boom that can be trusted to last.

By contrast, spending on services is not responsive to market forces, like manufacturing. By and large, people are left with nothing tangible to show for the money spent on services, certainly not with wealth that will grow for them without further work or risk-taking.

Paying for services is inescapable and continuous. With debt a way of life, interest payments are a tax on living standards. Spending on education is an entrance fee required to qualify for employment: The more skilled and rewarding the job, the more expensive the education for it. Increasingly, health is the prize of an auction where those able to pay can buy increased life expectancy. Insurance is an indispensable wealth tax on those with assets, and an income tax on those without them. Repairs are the cash cost of keeping tangible assets operable. Local government taxes are tolls paid to city hall, the county court house, and the state capital for services expected or rendered, while rent is a tribute paid by those unable to ride the wave of property inflation to those who have managed to do so. Utilities are the cost of creature comforts.

Each of these drains on incomes and savings is caught in an inflationary spiral unreachable by overall performance or government policies. The spiral of unavoidable service costs picks up speed during slowdowns in the business cycle; and it speeds up even faster during pickups. Hospital administrators, for example, can't tell whether they need to charge more when they are half full or full.

Successive crops of economists have been taught to accept the marriage of goods and services as binding and beyond analytic scrutiny. Services now account directly for over a third of gross national product and for half of consumer spending that, in turn, accounts for two-thirds of GNP. So, with services up and goods down, the big surprise about the economy spinning to nowhere is that it comes as a surprise.

Economists follow and forecast the GNP, too, accepting too easily the smooth joint between goods and services to pick up clues from their divergent performance. The evidence that we are getting by through habitual spending rather than by acquiring actual things is worrisome, especially in view of the steady increases in our borrowing to support our spending.

Looking around the world, Americans can take considerable satisfaction from evidence that things are worth less than people in the US. The chaos in Russia is a dreary anticlimax to the hopeful joke of Lenin's time contained in the doggerel: ``Electricity plus soap equals revolution's hope.'' Soviet power is crumbling under the weight of people dreading new Chernobyls and clamoring for soap. China is shortage-ridden, too. So is the entire third world.

Surprisingly, however, the most onerous premium of things over people is felt in Japan, the world's new economic superpower. In Tokyo, the need of people for things is as desperate as in Warsaw or in famine-ridden Africa. In other countries where people are priced at discounts under the most rudimentary needs of life, settled populations are mercifully sheltered from real estate booms. But Japan's boom is turning a population with roots into refugees.

Lest we forget, America's homeless and other large groups rejected by her economy do not share the premium over things enjoyed by others. Instead, they go begging for the rudiments of life as if we had abandoned them to the third world.