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Thursday, Nov. 15, 2012 09:02 am

Diagnosing the cost disease

Why government costs can’t go down

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Find a cure for Baumol’s Disease and you will be hailed as the benefactor of millions, even though the only people it harms are politicians. Baumol’s Disease strikes the body politic, specifically the tendency of government costs to so outpace the cost of everything else. Right-thinking commentators liken them to a cancer, in spite of the fact that public sector employment has been shrinking for years, and Illinoisans pay less in total taxes even than residents of other U.S. industrial states, never mind Europe.

Ask the public how the cost of government might be reduced, and they shrink in horror at the thought that their favored programs might be amputated. “Cut waste instead!” they cry. It is true that few would offer the typical government agency as a paragon of public administration. I have complained, perhaps too often, that State of Illinois government is not well-run, thanks mainly to interference by incompetent or inattentive political appointees, by cheese-paring budgeters and by outmoded equipment and managerial systems. (It should also be said that not all government agencies are badly run, a point confirmed by the likes of the Social Security Administration or Jesse White’s Secretary of State office.) And grown-ups can agree that even if government does not spend too much, it often gets too little from what it spends.

Fair enough. So imagine a more perfect Illinois – call it Minnesota, maybe, or Massachusetts. Imagine that every county health department and jobs bureau and school district delivered so reliably, effectively and efficiently as to make a professor of public administration think she’d died and gone to heaven. Government would cost a little less than it does now, or its services would have a higher value. But the cost of government services, and the taxes levied to pay for them, would still tend to rise faster than the cost of everything else.

Two reasons. We need government to provide all the things for which there is no natural market. Taking care of abandoned children and the severely handicapped, teaching children who do not come from rich families, keeping streets and buildings safe, providing parks and fire protection, running libraries – every single one of these services could be provided privately. In fact, all of them once were. They ended up as public responsibilities because the supposedly superior private sector and charities could not or would not provide them to everyone, as government must.

The second reason was first described in the 1960s by economists William J. Baumol and William G. Bowen. They noted that government work is indeed inefficient. Not because it is wasteful, but because the overwhelming component in costs is labor, and many government agencies do work that is inherently and irremediably labor-intensive.

And labor-intensity that is cost-inefficient is not the same as waste. To borrow one of their examples, it takes a first-grade teacher 12 minutes to read her class Green Eggs and Ham, no matter which management system her school uses or whether she reads it from a paper book or an ebook. Every day will have 24 hours in it no matter what, and if we want firefighters to be on duty during all of them, not much can be done to reduce the number of firefighters.

While the inflation-adjusted costs of doing government work thus have remained pretty static at a given level of service, the cost of doing other things is not. Consider the revolutions since the 1950s in how we make, move and sell things. Everything from building a flat-screen TV to growing a bushel of soybeans has become dramatically less labor-intensive, and thus less costly even as wages go up. And wages for government workers will go up even when their productivity does not because otherwise government can’t attract people capable of doing the work when wages in other sectors are rising. Thus does the relative difference between government costs and the costs of everything else grows and grows. But if government looks like it’s getting fat, it’s only because the rest of the economy is becoming leaner.

Springfield should hope that people understand this. Providing government services is how a great many people in central Illinois make their livings. How many of them make such livings, and how good a living each of them can make, is affected by the willingness of the people elsewhere in Illinois to pay for them. If Illinoisans want their children and grandchildren to thrive and lead decent lives, far more of their wealth, attention and intelligence will have to be spent providing education, health care, teaching and research. And these are things that government does exclusively, or does better or does more efficiently than the private sector. Government services are never going to be cheap, but they will always be a tremendous bargain.

Contact James Krohe Jr. at KroJnr@gmail.com.

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