Friday, August 2, 2013
Mostly good news from Baumol
Baumol and his co-authors explain that the cost disease
takes place because “progressive industries” experience above average
productivity growth, and “stagnant sectors” experience below average
productivity growth due to the irreducible amount of labour they require. The amount of labour in personal services is constant, but the workers cannot earn much less than workers in "progressive industries" (otherwise they would not accept working there). Many
stagnant sectors, for technological reasons, are in the public sector, which is one reason why the costs of
public sector activities keep increasing. The good news is that because on
average the economy’s productivity increases, we have more resources to afford
a more expensive public sector. The products and services from progressive
industries become cheaper (think of computers, mobile phones, electronic
appliances, but also agricultural products, which in this sense are
“progressive”), so that societies tend to spend more on stagnant sectors (health, education) than
on progressive ones. Unfortunately, that this cost structure is affordable for
society overall does not mean that it is affordable for everybody, and there
are distributive consequences of some groups not being able to afford cost
increases. These distributive implications are most worrying. Another caveat is
that activities with negative externalities also belong to the progressive
industries, like weapons construction and distribution or polluting activities
that produce climate change. Therefore, it is cheaper now to produce bad things. The condition for the affordability in general of
a more expensive public sector is that the economy’s productivity keeps
increasing at the rate of the last century. Baumol thinks that this is most
likely. Let’s hope that he is right.
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