Larry Summers, Mr. Obama's main economic adviser till the end of 2010, argues that the goods governments buy, especially health care and education, have proved much more resistant to productivity enhancements than the rest of the economy. Since the 1970s real wages in America have risen tenfold if you measure them against the cost of televisions; set against the cost of health care, they have gone down.Unintentionally, Mr. Summers has presented some truly fabulous arguments against the increase in government spending he seems to advocate.
Mr. Summers expects that trend to continue. An ageing population will need ever more health services provided by the state...
Is it truly just random chance or amazing foresight which has led the state to invest in sectors which just happen to be resistant to productivity enhancements? The Economist article points to the so-called Baumol effect, whereby some activities are immune to improvements in labor productivity. For example, it still takes the same number of musicians to perform a Beethoven symphony as it did in the 1800s.
To me, this seems like a completely inadequate explanation for the growing costs of education and health care. Unlike symphonies, there have been many technological improvements which should make the provision of those services much cheaper. Increased access to computers has revolutionized other industries and this would seem to be especially true in health or education, where the rapid and accurate transfer of information matters especially. But that hasn't happened.
There is a much simpler explanation: more government intervention causes higher costs. As health and education became increasingly regulated, the incentive to increase productivity became smaller. Teachers and doctors have to satisfy the demands of politicians and not just the parents or patients. There's no reason to rein in costs because taxpayers will foot the bill regardless.
I'd speculate that if the government had decided to regulate and oversee the production of symphony music, it would take twice as many people as it did to perform in the 19th century (and they'd miss twice as many notes). Instead, we have a medical industry that kills 98,000 people per year with preventable accidents, and an educational system that spends the most in the world but can't keep us in the top ten for global rankings of student proficiency in basic math and sciences.
Is this really a success story for government social spending? To me, it sounds like a reason to chop down the vines of red tape choking the market for education and health care. If costs continue to rise after the government's influence has ended, there may actually be an argument for the Baumol effect. Until then it's just empty apologetics.