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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