Arnold Kling  

Some Data to Ponder

What is Mandatory Spending? W... Asymmetric Loss Functions...

Michael Mandel writes,

We can see that public/quasi-public employment rose steadily over the past ten years, and is now up 16%. By comparison, the rest of the private sector is down 8% in jobs over the past 10 years.

He includes education, health care and social assistance in the quasi-public category.

Mandel was a stagnationist before stagnation was cool (Tyler Cowen quite properly credits Mandel). I can think of a number of questions stimulated by his post.

1. How bad has the last decade been?

I agree that, looking at the employment data, the last ten years have been terrible, particularly for the private sector. My one-liner is that so far, the 21st-century U.S. economy seems to be shedding a large portion of its 20th-century work force.

Incidentally, that is why I do not blame monetary policy for being "loose" in 2003-2004. At that time, the labor market still had not recovered from the 2000 recession. Output had recovered, but that was only because of productivity growth. Elsewhere, Mandel argues that the productivity growth was an illusion, due to errors in government statistics. I have not evaluated his argument, but I will say in general that measures of employment are more reliable than measures of output.

2. Why did health care and education add workers while employment went down elsewhere? Note that as a matter of simple arithmetic, labor moves from industries where productivity grows faster than demand to industries where demand grows faster than productivity. So, why did demand grow faster than productivity in health care and education, with productivity growing faster than demand in manufacturing?

The William Baumol answer: the explanation comes from the supply side. You can substitute capital for labor in manufacturing, but it is harder to do that in health care and education. As productivity goes up in manufacturing, wages rise in general, which raises costs in the more labor-intensive industries of health care and education.

The Robert Fogel answer: this is a natural shift in demand, as consumers become relatively satiated with durable goods and get more marginal utility from education and health care

The cranky libertarian answer: government is responsible for both the increase in demand and low productivity growth in health care and education. On the demand side, government spending and credentials policies serve to subsidize education. Meanwhile in health care, government pays for a about half of all medical services, it subsidizes medical innovation, and the tax code subsidizes generous employer-provided health coverage. On the supply side, heavy government involvement in and regulation of education and health care serve to stifle productivity growth.

Offhand, I would say that I lean 60 percent Fogel, 30 percent cranky libertarian, and 10 percent Baumol.

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COMMENTS (7 to date)
John Peterson writes:

Measuring (or even estimating) productivity growth in health care (and education) is extremely difficult, and I feel that productivity growth in medical care has been much greater than indicated by official statistics. Real growth measures depend on price measures, and I believe price measures for medical care do not come close to capturing the benefits of medical advancements (much less pain and the ability to save teeth in dental care; elimination of polio; saving vision for people with diabetes; longer life expectancies; etc). As medical care becomes more important, this measurement bias becomes more important.

I agree that government involvement in medical care may slow productivity growth in many ways, but it also speeds productivity growth in many ways, particularly in basic research. I don’t know how you can say that the government depresses medical productivity growth on balance without somehow measuring these things. It would be better to analyze specific policies and areas of medical care than to jump to blanket statements.

Shangwen writes:

John, I agree that productivity in health care is tricky to measure, and certainly is difficult to measure meaningfully in a sector-wide way. However the point of health care is to contribute to improvements in health, and population health gains are much easier to track.

In some areas it is true, as I think you imply, that there can be significant consumer surplus, but in many other areas (e.g., psychotherapy, ultrasound for healthy pregnant women, antidepressants) there can be significant destruction of value through excessive consumption and provision. One of the problems in health care is that its main focus, health, is overwhelmingly determined by genetics, education, and income, and yet we continue to believe that our vast health improvements over the past century are due to improvements in medicine.

I am 80% Fogel and 20% Hanson on the problem of bloated health care growth. As we have grown wealthier and more secure, we have turned to health care as a symbolic consumption ritual far in excess of its marginal utility. Getting back to Arnold's point, this is one of the reasons sustaining employment growth, especially since productivity in health care is so far behind other sectors. The demand is increasingly not for enjoying its marginal utility, but for enjoying its consumption.

David R. Henderson writes:

Why do you modify the word libertarian by "cranky?" Couldn't one have this view and not be cranky?

Hugh writes:

I'm 95% cranky on this one.

People are spending more on health care without getting richer - look at levels of private debt. Education basically ditto.

Make that 99% cranky.

Arthur_500 writes:

Government intervention into the medical field has slowed productivity growth because the medical field must slow down for government. government is not nimble and does not adjust to change. this is why paper records are the norm rather than computerization because the govenment can't allow one company to dominate the computeriztion process.
It has been pointed out that government dumps money into valuable research. That is what they are good at because nothing matters. No one has to be accountable.
All in all, business and the market do a much better job than government in areas where accountability and productivity matter. the reason so many people are used in healthcare is that the business model is wasteful and there are too many people doing nothing of value for the product delivered.

Lorenzo from Oz writes:

What it also means is that more of the economy will be in the realm of sticky wages and prices.

Elvin writes:

I've always thought that health care and education were luxury goods. As our incomes rise, we spend a greater fraction of our income on these goods. Education is definitely a labor intensive industry, so it's no surprise that employment has risen so much if we assume that it is a luxury good. Health care is more capital intensive--drugs, dialysis, cat scans, lasik, etc. My guess is that education had higher relative employment gains than health care.

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