In this two part analysis, I ask a question that may have serious implications for the U.S. economy: are there now some service industries that are parasitic on the U.S. economy, so that their output should be subtracted from rather than added to gross domestic product figures? In the first part, published Monday, I examined four examples of service industries that appear to me to have become largely parasitic. In this second part, I look at the economic implications of this formulation, and suggest what might be done about it.

In the case of the industries examined in part 1, accounting, tort law, investment banking and software, a business that began as economically productive has metastasized in the 1980s and 1990s into one subtracting value from the economy.

We’re on tricky economic ground here. Classical economic theory says, if people will pay money for something, it has value. Maynard Keynes, Bloomsbury Group to the last, believed that the hoi polloi were not capable of figuring out what they wanted, but that an elite group of suitably educated government mandarins could, by regulation and adjustment of the price mechanism, make the system work right. Of course the problem with Keynes’ answer was not only that the mandarins had to be incorruptible, but also that the moral values and tastes of E.M. Forster, Lytton Strachey, Virginia Woolf and Keynes himself did not necessarily reflect those of us lesser mortals.

The assertion that an industry can be parasitic does not simply rest on a “Bloomsbury Group” assumption of cultural superiority. To the elevated mind, the antics on “The Jerry Springer Show” may seem unattractive, yet millions watch the show, and are exercising their right of economic choice in doing so. In a parasitic situation, a service is provided that has no value, actual or psychological, to the recipient, but is only lucrative to the service provider, who is thus a parasite on the recipient’s wealth. Most theft and embezzlement are parasitic, so also were the activities of the 19th century “medicine men” (other than a possible placebo effect from their nostrums.) Accounting services that mislead investors, lawyers that bankrupt companies in unrelated industries decades after the event, Wall Street houses that delude investors and manipulate markets, and software operations that multiply complexity and cost all have value only to the service providers, and detract from the ability of the economy to act in an efficient and wholesome manner. From the discussion in Part 1, it is clear that the volume and value of such parasitic services has greatly increased in the past generation.

Why this has happened in several sectors simultaneously is not clear. The arrival to positions of power of the “baby boom” generation, which rejected past constraints and norms of behavior, would certainly seem to be one cause. Another cause is the complexity and geographical “reach” of modern life; it becomes impossible for consumers to perform their proper function of disciplining producers’ service standards if the producers are gigantic, with their headquarters far from the consumer’s locus of operations, and politically well connected. Yet another cause, in some cases, is a separation between the decision-makers and those who bear the cost of bad decisions.

Finally, all four industries (with the partial exception of tort lawyers) have enjoyed rapid concentration in recent years; this has made it impossible for new entrants to gain market share by providing a superior and cheaper service to the consumer, as should theoretically happen.

Just as the size of a tree should not, if one is measuring its health, be taken to include the various fungi and parasites hanging from it, so the GDP of the U.S. economy should not, taken strictly, include the dollar total (generally, the fees billed) of these value-destroying activities. In today’s economy, that total is a very substantial percentage of the whole, perhaps as much as 5 percent-10 percent ($500 billion-$1 trillion.) Since parasitic service industries have increased as a percentage of the whole economy in the ’80s and ’90s, economic performance during those decades has been correspondingly overstated.

The more difficult question is not that of measurement but of cure. The horticultural metaphor seems here to remain apt. Just as the tree on which parasites have grown to substantial size is threatened, and may have to be severely pruned if it is to survive, so too parasitic service industries, if allowed to grow beyond a modest size, threaten the economy as a whole. At some point — and it would be very much better not to find that point by experiment — they will cause economic collapse.

There are two possible cures. One is of course direct government regulation. Here the problem is that the parasitic service industries themselves, being often exceptionally profitable, have devoted huge resources to lobbying and accumulating favors from the political class, to the extent that it must be very doubtful whether true reform is possible by this means. Applying public opinion to force reform is also unlikely to be fruitful, since the problems involved are technical, and industry lobbies are generally able to make a highly plausible, if spurious, case to block change. The feeble Bush plan for improving corporate governance following the Enron collapse is a case in point; for example it completely fails to address the clear and present danger in the current system of accounting for stock options.

The other cure lies within the industries themselves, by industry practitioners voluntarily “cleaning up their act” and ceasing to engage in practices that are lucrative but parasitic. In any individual case, that is of course expecting too much of fallible human nature. However, it is not too much to ask that industry associations, by all means under the threat (but one hopes only rarely the reality) of stern remedial legislation, should act to improve practices in their area. Even this may be a lot to ask; the accountants’ response to the modest Volcker proposals to limit conflicts of interest in Andersen appears to have been to ignore the proposals as pertaining to themselves, and eliminate Andersen from accountants’ decision making until it ceases to be under indictment (or goes bankrupt, whichever comes first.) Nevertheless, what needs to be done is fairly clear.

Accountants must be appointed by company shareholders directly, through open tender, rather than by management with only confirmation by shareholders. If shareholders have the ability to fire auditors, any attempt by the “Big 5” through the Financial Accounting Standards Board to perpetuate shoddy and misleading accounting standards will result in non-“Big 5” accountants rapidly gaining market share by promising to safeguard shareholder interests properly.

For trial lawyers, legislation is needed to limit class action suits (these people are lawyers, after all) but in addition the American Bar Association needs to discipline lawyers that charge obviously excessive fees, whether contingency or otherwise — fees should be limited to say three times the normal rate for hours billed, and transgressors should be disbarred.

For investment bankers, the market itself, if it enters a bear phase, will probably eliminate the worst abuses of trading and “principal trading,” and will sharply reduce the capital devoted to these activities. An absolute prohibition against a bank underwriting issues on which it provides an investment recommendation could be the best solution to the analyst problem. This would separate the businesses of underwriting and brokerage, which is probably beneficial — it worked fine in the London market before 1986.

In software, greater client sophistication may solve the problem, as users come to realize that the world will not end because of a bizarre software problem such as the Y2K bug. In this context, I admire the insouciance of the Italian trade minister, who early in 2000, after it had become clear that the sky was not about to fall, remarked that the Italian government should be congratulated for having done absolutely nothing about the Y2K problem. A similar skeptical attitude should in the long run rein back, if not eliminate, the parasitic activities of software consultants. However, antitrust action against Microsoft, bringing greater competitive forces to bear on the problem of providing simpler, bug-free software for routine tasks, would also help.

Like Enron’s financial statements, the U.S. GDP figures contain much that should not be there. Like Enron, the U.S. has a basically sound core business, but the excesses of the 90s have produced a huge superstructure that is counterproductive and may possibly prove fatal. It is to be hoped that, unlike Enron’s, the U.S.’s top management recognizes the problem in time to make changes. In that way, the U.S. economy, shorn of its parasitic elements and no doubt weakened by their effect, will nevertheless have the strength to survive and in the long run prosper on a sound, non-parasitic basis.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

This article originally appeared on United Press International.