The economist William Baumol warned us about one of the problems which human beings create under conditions of prosperity, Baumol’s cost disease:
Baumol’s cost disease (also known as the Baumol Effect) is a phenomenon described by William J. Baumol and William G. Bowen in the 1960s. It involves a rise of salaries in jobs that have experienced no increase of labor productivity in response to rising salaries in other jobs which did experience such labor productivity growth. This goes against the theory in classical economics that wages are always closely tied to labor productivity changes.
The rise of wages in jobs without productivity gains is caused by the requirement to compete for employees with jobs that did experience gains and hence can naturally pay higher salaries, just as classical economics predicts. For instance, if the banking industry pays its bankers 19th century style salaries, the bankers may decide to quit and get a job at an automobile factory where salaries are commensurate to high labor productivity. Hence, bankers’ salaries are increased not due to labor productivity increases in the banking industry, but rather due to productivity and wage increases in other industries.
The original study was conducted for the performing arts sector. Baumol and Bowen pointed out that the same number of musicians are needed to play a Beethoven string quartet today as were needed in the 19th century; that is, the productivity of classical music performance has not increased. On the other hand, real wages of musicians (as well as in all other professions) have increased greatly since the 19th century.
In a range of businesses, such as the car manufacturing sector and the retail sector, workers are continually getting more productive due to technological innovations to their tools and equipment. In contrast, in some labor-intensive sectors that rely heavily on human interaction or activities, such as nursing, education, or the performing arts there is little or no growth in productivity over time. As with the string quartet example, it takes nurses the same amount of time to change a bandage, or college professors the same amount of time to mark an essay, in 2006 as it did in 1966.
Baumol’s cost disease is often used to describe the lack of growth in productivity in public services such as public hospitals and state colleges. Since many public administration activities are heavily labor-intensive there is little growth in productivity over time because productivity gains come essentially from a better capital technology. As a result growth in the GDP will generate little more resources to be spent in the public sector. Thus public sector production is more dependent on taxation level than growth in the GDP.
As it turns out, many of those jobs without productivity gains occur in government activities and in industries, such as medical-care, which are particularly susceptible to an excessive degree of government meddling, though it might start out as low-level regulation. As a consequence, such jobs have increased in number as well as in salary and benefit levels. The industries so friendly to government meddling, especially health-care and weapons manufacturing and military services, have grown so huge as to distort the very political process, black holes distorting political and economic spacetime so that more stuff is sucked inside.
We’ve allowed ourselves, and our more local and more natural communities, to become passive in our economic roles, workers and consumers, and many of those centralized institutions upon which we are dependent are generators of the unproductive jobs I wrote about above. Politicians and allied businessmen have poured borrowed money into the medical-care or military industries. We’ve created an economy in which our health-care industry, as a percentage of GDP, is twice the size of the same industry in Germany. Our military-industry complex is about as large as the military industries of all other countries combined. How much do we have to spend to think our precious American selves are properly cared for by our hospitals and properly protected by our armies?
The economic costs of our self-indulgence and the indulgent behavior we’ve allowed in our politicians are starting to hit when so many Americans, especially those no longer young, have a belief they have a right to new joints, new veins, expensive drugs at low-cost, long stays in hospitals and rehab centers. We accept it as natural that we will invade or at least surround any country which behaves badly, for real or as presented by our scheming politicians and think-tank sharks. I knew some young drivers when I was young who bragged of their fathers’ power to protect them from the police but some of those daredevils learned the laws of physics hold even in a politically corrupt town. We will also learn that some basic rules of economic and political relationships will hold despite our perceptions of unlimited American power and wealth. We the citizens of the United States are trapped like rats conditioned not to escape. We’ll be squashed or driven out of the cages we’ve constructed for ourselves.