Arnold Kling  

Cost Disease

Leftist Austrian Economics... Job-Creation Arithmetic...

If the government is taking more in taxes than it did forty years ago, then why does the typical citizen not feel that he or she is getting more in services? Kevin Drum proposes an answer.

In fact, most of the per capita increase in government expenditure over the past 40 years has come from Medicare, Social Security, and interest on the national debt, none of which benefit him at all — for the moment, anyway. And much of the rest of it comes from the fact that we pay government employees more, just the same as we pay private sector employees more these days too thanks to rising GDP and increasing prosperity. School teachers, for example, are no longer expected to do their jobs for $15,000 per year.

My problem with the latter explanation is that it begs the question of why public-sector productivity growth is nonexistent. The only reason that private-sector employees earn more than they did forty years ago is that their productivity is higher. While it is true that the public sector must now pay higher wages in order to compete with the private sector, it would seem plausible that the same technologies that have increased productivity in the private sector would increase productivity in the public sector.

There is, of course, William Baumol's "cost disease" thesis, which is that productivity tends to stagnate in the service sector in general and in the government sector in particular. However, it seems to me that we should try to alleviate cost disease if we can.

Note that Victor Davis Hanson's assessment of the war in Iraq would suggest that the military has managed to overcome cost disease.

The United States military is now evolving geometrically as it gains experience from near-constant fighting and grafts new technology daily. Indeed, it seems to be doubling, tripling, and even quadrupling its lethality every few years.

For Discussion. Given that much of government spending growth in the past decade has been at the state and local level, is there anything other than cost disease that might explain why a taxpayer would perceive a failure of the quality of government services to keep pace with taxes?

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COMMENTS (8 to date)
Eric writes:

Gulf War II made me think about the vastly increased "productivity" of our armed forces.

How would you measure that productivity? The denominator is definitely the number of our troops killed. I don't know what would be in the numerator.

I read somewhere that on D-Day, we lost something like 100 soldiers per minute. We only lost that many this time in a month.

David Thomson writes:

“Given that much of government spending growth in the past decade has been at the state and local level...”

Alas, the federal government does not have a monopoly on foolish spending. The local governments and the states also know how to waste money. Thankfully, however, the latter have a far more difficult time of continuing their nonsense. Sooner or later, the nasty stuff hits the fan. Why is this? Please note that no government entity outside of Washington, D.C. has the ability to print money! This makes all the difference.

Productivity gains? Only private sector businesses have to seriously worry about this factor. This is a very secondary issue for our government bureaucrats.

scott writes:

State and local governments spend more money on education than anything else. All of the educational proposals currently in vogue specifically involve reducing productivity. They keep looking for smaller class sizes and higher teacher pay with the promise of better educational achievement for the students.

But no one is promising as large an increase in student achievement as they are proposing to increase teacher salaries. Likewise, the class size reductions are far greater than the promised educational gains.

We are planning and implementing policies in education today that are designed to reduce productivity.

David Thomson writes:

Spending more money on public education would accomplish very little in many school districts. A lack of finances has little to do with the poor results. Parental indifference and spoiled students are often the real culprit. On top of that, the teachers' unions are hostile toward remedies premised upon maritocratic values. Sadly, it is fair to say that it would be a matter of merely throwing more money at a problem.

Are there school districts that would spend any extra money in a wise manner? I'm sure that there are. However, we are still left with the dilemma of discerning which schools are successfully meeting their educational goals.

Joe Grossberg writes:


That's right, blame the students and parents (i.e. the "customers" of that "good") for the low quality of education, instead of the teachers and administrators (i.e. the "producers" of that "good").

Come on; this is an economics blog. You should know better.


Eric writes:

This topic is very timely to me. I just went to a vilage board meeting in my town to rant about their latest budget which contains:

1) 2.5% property tax increase

2) .25% sales tax increase

3) Movement of garbage collection from the property tax to a fee of over $200 per year.

While the board members went on and on about how hard it was for them to raise taxes, that they didn't want to do it but felt that they had no choice, when challenged to cut employee costs through layoffs and pay cuts, they got REALLY defensive.

They all felt that they couldn't cut head count without negatively impacting "vital services". No one felt like tackling the $77,000 average salary of municipal employees.

I don't know about you, but I won't get a raise in 2003. My firm laid off 10% of its workforce in 2002. Yet, it isn't like there is any less work to do here. There just isn't any revenue, because no one wants to pay us for what we do.

My question is, why should municipal employees be immune from this phenomonon? If revenue is down, they need to do the same or more work with less, just like everyone in the private sector.

BTW, 80% of the villages budget is for personel costs. That's where the money is.

David Thomson writes:

"That's right, blame the students and parents (i.e. the "customers" of that "good") for the low quality of education, instead of the teachers and administrators (i.e. the "producers" of that "good").

Come on; this is an economics blog. You should know better."

My original point is right on target. Many parents are indeed at fault for the poor school work of their children. They don't deserve the slack you are cutting them. In no way can the schools accomplish their goals without the full cooperation of the parents. It is akin to expecting the doctor to cure your lung troubles while you insist on continuing to smoke!

My buddy teaches in an affluent public high school in the Houston, Texas area. He could tell you countless horror stories of teenagers who get away with near murder because of their pampering parents.

Joe Grossberg writes:


I disagree with you not on the merits of your point -- I agree that it's a big challenge to *make* bad students learn something -- but on the relative importance/weight of those factors.

In hindsight, though, let me apologize though, for the rude tone of my post -- thank you for not being offended. :)

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