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Wednesday, May 17, 2017 08:25 am

Will Baumol

 Will Baumol died on May 4. He is the economist who conceived of the concept of “cost disease.” An  interesting man and an important thinker. He is obituarized here and his ideas are discussed here, here and here.

Briefly put, Baumol argued that costs rise to provide government services  because of productivity gains in other sectors drive up wages, against which government hirers must compete for workers. But unlike a factory worker, most government workers – teachers, say, or child care aides – can’t improve their productivity meaningfully.

I addressed the phenomenon in a 2015 column.

 

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.

 

In fact. attempts to made a welfare worker more efficient in terms of time and money – as Mr. Rauner seeks to do -- makes them less efficient at what they are being paid to do. Beware of tinkerers who try to fix things they don’t understand. 

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