Service Sector Stimulus |

How can our economy get the most bang for its buck in terms of consumer spending? In the past 35 years or so the emphasis has been on growing the service sector of our economy so it seems to follow that we need to put more emphasis on stimulating that sector. My humble reasoning powers suggest that when a consumer spends $100 at a big box retailer on consumer items (most of which are manufactured outside the US), 30 to 50% of that $100 goes outside the US doing little to further stimulate the US economy.If a person has $100 to spend on a consumer item, she can get something that costs about $92 after paying about $8 for sales tax. Typically half of that $92 is the wholesale cost. That means that about $46 represents the retailer’s gross profit which is divided among domestic stakeholders including property mortgage/rent, utility providers, business taxes, employees and shareholders stimulating the US economy while the remaining $46 is potentially going offshore to a foreign manufacturer. These dollars are essentially dead in terms of stimulating the US economy.If the same consumer were to take the same $100 and spend it locally on a personal service such as auto repair, beauty or spa treatments, health club, entertainment, restaurants, US travel and tourism, home improvement, education or healthcare services that $100 will circulate locally doing more to stimulate the economy. In fact more than $90 of the $100 will stay in the US economy. This is an oversimplification but it seems that nearly twice the amount stays in the US economy when purchasing a service using US labor rather than a consumer item manufactured offshore.According to a paper by economics professors Broda/Parker August 2008, the 2008 economic stimulus program was successful in increasing general consumer sales. Nearly half of the stimulus went towards routine retail consumer goods. From which we can conclude that a little less than half of that went offshore as the cost of goods, so about 20 to 25 percent of the stimulus package likely went to stimulate the economies of other countries.As the new administration considers another stimulus package it seems we should consider how consumers can be encouraged to spend their windfall on personal services that will in turn create more stimulus as the dollars circulate within our economy. It seems to me the death of the dollar occurs when that dollar goes offshore as very little comes back in the form of payment for US exports.It is time for a paradigm shift that stops giving incentives to big retailers who pay low wages and whose costs of goods largely go outside the US. Advertisers have trained the American consumer to believe that buying a lot of things, most of which are of poor quality and of little value will improve their life. We need a similar initiative to convince the consumer that purchasing services that enhance their physical well being, stimulates their mind and improves their environment is the fashionable and more desirous way to spend discretionary income.This is not a plea for isolationism or an end to consumer goods. The global economy is a reality here to stay. Most services have a product component so the need for manufactured products will continue. The proposed shift is toward “service” as the focus and not “product” as the focus of the purchase. For example, most of us have a computer, what we need is not a new computer but someone to help us maintain, and get more enjoyment and productivity from the one we have. This is true of many of our “life enhancements”. We have been sold on the idea that the next one will be better. We are on to the next thing before we have fully explored the possibilities of our last purchase.How can the government encourage spending in the service sector? Here are a few ideas.Encourage consumers to make home improvements that promote positive environmental changes with labor components that are more than 50% of the cost.Encourage preventative healthcare and exercise that can stimulate service sector spending while improving health.Support services for the growing population of seniors that enhances quality of life and promotes health and well being.Encourage auto repairs and maintenance that enhance fuel efficiency and/or reduces carbon output.Promote US travel and tourism.Promote arts and entertainment.Encourage education, vocational training and avocation learning.Encourage new home construction.Encourage public transportation and support innovative transportation ideas.Support small service businesses that create jobs and stimulate local economies.These ideas can be accomplished through tax incentives, rebates, vouchers and grants. It is important that the incentives be significant and be implemented quickly. The government has a precedent for using tax dollars and incentives to encourage people to make “good” choices. This is a better and more focused approach that will bring more desirable results then simply giving citizens a check and telling them to shop. Why not use the same dollars to encourage spending with a more focused and long term goal in mind?