Arnold Kling  

Progress and Displacement

Caldwell, Hayek, and Math... Why is Health Care Inefficient...

Tyler Cowen points to a paper by Foster, Haltiwanger, and Krizan (unlike Cowen's link, my link goes to the full paper) that stresses the importance for productivity growth of resources leaving inefficient firms and going to efficient firms. I was surprised by the following:

A pervasive empirical finding in the recent literature is that within sector differences dwarf between sector differences in behavior...4-digit industry effects account for less than 10 percent of the cross-sectional heterogeneity in output, employment, capital equipment, capital structures, and productivity growth rates across establishments.

I was less surprised by this:

The theoretical literature on creative destruction as well as the underlying theories of heterogeneity characterize technological change as a noisy, complex process with considerable experimentation (in terms of entry and retooling) and failure (in terms of contraction and exit) playing integral roles.

The authors' main point is that productivity growth tends to occur within an industry (as opposed to replacing entire decaying industries with new ones), and that entry and exit are crucial factors in this productivity growth. It makes one suspect that if we could find an industry where entry and exit are severely restricted because of government policy, we would expect to find poor productivity growth.

For Discussion. Can you guess what industry I have in mind?

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COMMENTS (4 to date)
Chris C writes:

I think you have not one, but two, industries in mind: health care and education. The health care industry is propped up by government regulation concerning credentials, certification, and pricing. The same goes for the public schools. No school is allowed to fail, it is simply a sign that it needs more money.

JT writes:

How about real estate as a 3rd candidate? Very interesting post. Thanks.

Lawrance George Lux writes:

The real industry crucified by government restrictions upon entrance is Energy. Oil development is curtailed, Cracking plants are not expanded, Power companies are allowed to avoid liability so technological upgrades are not done, and Consumers pay for the inefficiency at rates higher than if the upgrades were forced. lgl

rvman writes:

Chemicals, especially refining. Air transportation - worse before Carter, but still heavily restricted. Health care (entry as a doctor is restricted, entry in drug manufacture is restricted, entry as an insurer is restricted - the triple crown), education of course. Utility delivery, including gas, electric, sewer and water. Any industry impacted by environmental regulation with "grandfather" clauses or rights issued based on current pollution levels. (An entry-friendly pollution policy would involve per unit of pollution taxes, which would force out old,dirty units and encourage new, cleaner ones. Tradable credits encourage old, dirty units to stay intact but not run, so as to continue to collect credits - not efficient.)

Public transport like buses and taxis, in most places. Legal services (bar exams "lock in" one type of lawyer - the generalist, "locking out" specialists in a single kind of law.) Florists in Louisiana, pharmacists, masseuses many places, hair stylists in many places - all require testing and licences. Auto manufacture - entry isn't so restricted (entry cost, yes, but not by government), but exit is - remember the Chrysler and Harley bailouts, and look at Japanese coddling of its dying companies. (Exit restriction can mean protection for incumbents as much as requirements to remain in the market.) In fact, all bankrupcy "reorganization" rather than dissolution of failed companies retards exit, placing old, failed companies like several incumbent airlines in the way of new players.

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