"The problem is that service industries ultimately have to compete for workers in the same national labor pool as sectors with fast productivity growth, such as finance, manufacturing, and information technology. "
Is it really a problem? The productivity growth is mostly because of automation that increases the national labor pool (much less workers are needed because of robotics, computerization). Besides, traditionally service industry labor pool and highly trained qualified labor pools are separate. Only very recently PhD-s are applying for janitor positions to put bread on table.

Reading the whole article gave me rather strange impression about the well-known economist. At first, he acknowleges the increse in the government involvement in the economy and the ineffciency of the goverment. Then, he seems to be convinced there is no alternative, and the answer to the problems is to make the government more efficient.
I have bad news for the academic: it can not be done. To be honest, the US has developed into full-blown cleptocracy. The coroprations not only suck huge sums of money out of the government [read taxpayers] through health care system, military etc. but government also just prints money and hands it over. In the Soviet Union the economists thought the growth in the information technology will make viable centrally planned economy possible.
There is only one solutionto the problem how to make the government more efficient and it is: STARVE the BEAST.