The Unassuming Economist

Services are gaining newfound respect as the basis of modern global trade

In 1988, General Motors launched an ad campaign with a memorable jingle: “This is not your father’s Oldsmobile. This is the new generation of Olds.” The car’s image had not kept up with its transformation from a staid cruiser to something far more high-tech and stylish. The service sector could use such an ad campaign: it too needs an image makeover to match its transformation over the past decade. The Oldsmobile didn’t make it, but the service sector is here to stay—it already accounts for 60 percent of global employment.

Prejudice against the service sector runs deep. Some regard it as the useless sibling of other sectors of the economy such as agriculture and manufacturing. In The Wealth of Nations, Adam Smith questioned the social value provided by “churchmen, lawyers, physicians, men of letters of all kinds, players, buffoons, musicians, opera-singers, opera-dancers, etc.” To this day, as economist Christina Romer lamented in a New York Times op-ed, there is a “feeling that it is better to produce ‘real things’ than services” (Romer, 2012).

Others have treated services not as socially useless but as somewhat challenged. A famous 1967 paper by U.S. economist William Baumol fostered the view that services is a sector resistant to improvements in productivity. He noted that the provision of services—such as restaurant meals, haircuts, and medical checkups—required face-to-face transactions. These did not lend themselves easily to standardization and trade, the source of growth in productivity and hence income.

This image is no longer a fair representation of the service sector. Service occupations today include a few that even Smith might have considered useful. Trade in services has increased within and across national borders. Many services are now high tech and pay high wages. And increasingly, manufacturing and services, far from being competing siblings, are part of a joint family of value creation. Services are ever more critical to the successful operation of manufacturing, debunking debate over countries’ need to choose between the two sectors.

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“With monetary conditions remaining accommodative and housing prices [in Switzerland] growing faster than incomes, measures to curb mortgage demand especially from the more vulnerable households need to be strengthened,” says the latest IMF’s annual report on Switzerland. Read the report here for a dedicated section on the housing market. 

“(…) the level of overvaluation [in house prices in Finland] is lower than in other Nordic countries. However, the national average conceals rapid growth in prices in large metropolitan areas (…),” according to the IMF’s economic report on Finland. 

More specifically, it says that “House prices have risen the fastest in metropolitan areas. The pace of house price growth has been pronounced in Helsinki and other highly developed areas despite the crisis, but less so in other regions, especially where there have been declines in manufacturing and industry. Similar dynamics are evident in the relative prices of smaller dwellings compared to larger properties or detached homes, underscoring the upward pressures on house prices in highly populated areas.” The report also talks about macroprudential policies, read the full report here.

“House prices rose significantly in recent years, fuelled by a robust expansion of income and credit growth and government subsidies. If prices were to fall, banks’ non-performing loans could increase. However, the risk is mitigated by low households’ loan-to-value ratios (about 55 percent), fixed borrowing rates, and a low exposure of banks to mortgage loans. High growth in credit to the private sector, including consumer loans, has been a concern in recent years (IMF Country Report 13/35), but has been abating,” says IMF’s annual economic report on Colombia. 

The Science Magazine has dedicated a special issue on the science of inequality, which features articles from the following authors: H. Pringle, A. Deaton, E. Pennisi, M. Ravallion, E. Marshall, T. Piketty and E. Saez, and others.