Arnold Kling  

The Great Reconfiguration

Housing Finance Reform... Hayek in Tucson...

Michael Mandel writes,

This first chart shows the change in wage and salary payments by major industry from 2000-2009, adjusted for inflation, using BEA data. We see that healthcare and social assistance generated $210 billion in real wage gains from 2000 to 2009 (all in 2009 dollars). Next biggest was state and local government, which generated $151 billion in real wage gains.

Read the whole thing. Note that he is charting the total wage bill, not the individual wage rate. The total wage bill can go up because employment goes up, because wages go up, or both.

Over half of the increase in the wage bill over the past decade has been in the public sector rather than the private sector. About three-fourths of the increase has been in health care and education, rather than the rest of the economy. Some comments:

1. I frequently cite Robert Fogel, and I will do so again. The economic historian sees a long-term secular decline in the share of output devoted to food, housing, and durable goods. He sees a secular increase in education, health care, and leisure. It seems to me that if you view long-term economic trends through that lens, you cannot go wrong.

2. How does this trend relate to the balance between the public sector and the private sector? The Baumol's Cost Disease story is that government gets "stuck" with the parts of the economy where productivity grows less rapidly than demand. Nick Schulz and I have a "new commanding heights" theory which is that government wants to take over the sectors of the economy that are most important, so that as governments have backed away from owning and heavily regulating basic manufacturing, they are focused on controlling health care and education.

If the presumption continues to be that education and health care are too precious to be left to the private sector, then the market economy is going to continue to shrink. The so-called capitalist countries are going to run into the socialist calculation problem. We are allocating resources in the health care sector and the education sector without having any basis for knowing what those resources truly cost or for valuing what those resources produce.

It could turn out that as the economy transitions toward a greater emphasis on health care and education that socialism is the way to go. Perhaps technocrats will do a good job, and perhaps markets do not provide much benefit. But I hope we get to test those ideas experimentally, by allowing some regions to use market mechanisms. If the chief reason that government takes over health care and education is because it can, that is not an outcome I would wish for.

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COMMENTS (7 to date)
Lord writes:

And what do these sectors have in common? They are all in nontradeables. If we refuse to address exchange rates, distribution will have to be through government.

floccina writes:

I tend to think that it was OK to have Government and 3rd party insurers pay for health care and schooling when it was a smaller part of the economy but now that they have become big parts of our expenditures it is much better to have individuals do the spending. There are important choices to be made that would be best made buy the most effected individuals and closest individuals.

Shangwen writes:

Dr. Kling, can you please give some future clarification to you commanding heights theory?

There are serious consequences to government takeover of sectors. In education and health care, human resource value is conceived of largely in terms of "expertise", a relatively fixed knowledge base in a narrow area. I would contrast expertise with skills, a bundle of marketable abilities. Although we certainly talk about skills in health care and education, at the margin--contract negotiations, political lobbying, inter-credential turf wares--expertise is cited as the basis for resource allocation, rather than demonstrated skills. This contributes to the fossilized, pre-industrial type of guild labor that we have come to expect as normal in these areas. In that sense I think government ownership is a way to protect turf and employment to the detriment of innovation.

Mark Bahner writes:

"But I hope we get to test those ideas experimentally, by allowing some regions to use market mechanisms."

It's highly unfortunate that neither the federal government nor The People pay attention to the Constitution. If they did, they would see that dealing with education and healthcare are not authorized powers of the federal government, and therefore are powers reserved to "the states or the people" by the Tenth Amendment.

If the Tenth Amendment were followed, we would have individual states dealing with healthcare and education (or potentially even leaving those to the people). Then we would see, among as many as fifty different methods, which worked best.

Various writes:

Well, it's just my opinion, but I think you have most of the causality backwards. Regarding education, I don't think its share of GDP should increase necessarily as an economy becomes wealthier. I mean, the effect may be there, but I think it is much stronger in a developing nation as it migrates toward developed status. I say this with no evidence what-so-ever. Just my opinion. With regards to healthcare, I think maybe 1/4 of the increase in the last decade is due to the very mild increase in wealth of the nation.

So....what I'm saying is that education and healthcare's GDP share is increasing BECAUSE the government is running them. It's not that government is running them because these sectors intrinsically gain GDP share.

fundamentalist writes:

George Will has a column about the same thing:

James Q. Wilson, America's preeminent social scientist, has noted that until relatively recently, "politics was about only a few things; today, it is about nearly everything."...

There has been," Wilson writes, "a transformation of public expectations about the scope of federal action, one that has put virtually everything on Washington's agenda and left nothing off." Try, Wilson suggests, to think "of a human want or difficulty that is not now defined as a 'public policy problem.'"

William J. Baumol, Princeton economics professor emeritus, said that in certain economic sectors - e.g., labor-intensive service industries - productivity will increase, if at all, more slowly than in the rest of the economy. The late senator Daniel Patrick Moynihan's corollary was that such services - e.g., teaching, nursing, the performing arts - tend to migrate to the public sector.

Roger Sweeny writes:

Fogel may be right that schooling will take up more and more of GDP, but as a high school teacher I would be willing to bet large amounts of money on two things.

1. There is little demand by students for education, if by education you mean learning about science, history, literature, etc. Among some students there is a large demand for the signaling function of schooling: "I got good grades." "I have a degree."

All students would prefer, other things being equal, to have lots of credentials. But most don't want to learn much in the way of academics in order to get them.

2. Beyond elementary school, the vast majority of students forget the vast majority of what they have been taught within a year of a course's ending.

Why? First, they weren't interested in the subject in the first place. Second, they don't use the information later. Middle school kids still ask, "When will I ever use this?" High school kids don't bother because they know they won't get a positive believable answer. (Often, the most honest answer is, "When you take a course like this again"--though this is often phrased more generally, "It will help prepare you for college.")

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