Baumol's disease and how it affects us.

I'd never heard of "Baumol's disease" until I read this Steven Pearlstein column about it. It turns out that we're all affected by it.

It's not a physical ailment. Instead, it explains why the costs of some labor-intensive professions such as education and health care will always increase faster than the rest of the economy. (In short, because they can't keep up with the productivity increases of the rest of the economy, despite demand for them increasing (along with their pay rates.)

Not only should we not be surprised, argues Baumol, but we shouldn’t be that concerned. Given the large productivity gains in the goods producing sector, he says, we cannot only afford the higher prices for things such as health care and education, but still have plenty of money left over to pay for more food, more cars, bigger houses, more clothes and more home appliances. The idea that we can’t afford medical care or higher education, he argues, is just an “illusion” reflecting some fixed notion of what percent of our income should be devoted to such activities.

This doesn’t mean that there aren’t things we can and should do to bring down the price of medical care or of a college education.

Pearlstein predicts, as others have, that economic growth will slow as proportionally more workers shift to these labor-intensive sectors of the economy.

And there's this:

From a political perspective, Baumol’s most important insight is that government spending must grow as a percentage of the economy. Most of the services that are provided by, or financed by government — health care, education, criminal justice, national security, diplomacy, industry regulation, scientific research — are those that suffer most acutely from Baumol’s disease. That’s not because of incompetence or self-interest on the part of public servants or even the socialist instincts of Democratic politicians — it’s in the nature of those activities.

To demand, as Republicans do, that government be held to some historical average as a percentage of the economy stubbornly ignores this reality. It would condemn the country, as John Kenneth Galbraith once put it, to a future of “private affluence and public squalor.”

(Pearlstein's on a roll; his previous "manifesto for the entitled" was a trenchant summary of the nonsense spewed by and about "job creators.")

(Via rc3.org)