Explaining flagging productivity
Although William J. Baumol, who recently died at 95, was not widely known beyond the ranks of economists, all Americans are living with, and policymakers are struggling with, “Baumol's disease.” It is one reason brisk economic growth is becoming more elusive as it becomes more urgent. And it is particularly pertinent to the increasingly fraught health-care debate.
When in 1962 the Metropolitan Opera's orchestra went on strike, Baumol, an aficionado of New York opera, sought an explanation. He postulated “cost disease” afflicting labor-intensive service industries: Productivity will often increase not at all, or much slower, in some sectors — e.g., nursing, teaching, the performing arts — than in the overall economy.
Decades later, Sen. Daniel Patrick Moynihan explained Baumol's disease this way: “The number of players, the number of instruments, the amount of time it took to ‘produce' a Mozart quartet in the 18th century will not have changed one whit two centuries later. To play the ‘Minute Waltz' in 50 seconds leaves something to be desired. True of first violinists, kindergarten teachers, beat cops, sculptors, and so through a great repertoire of occupations.”
Labor Secretary Arthur Goldberg's 1962 encounter with Baumol's disease in the Met's orchestra initiated thinking that led in 1965 to the National Endowment for the Arts. This elicited Moynihan's corollary to Baumol's theory: “Activities with Baumol's disease migrate to the public sector.” In 1993, at a health care hearing before the Senate Finance Committee, Chairman Moynihan received blank looks when he asked three medical deans what they could do about Baumol's disease.
So Moynihan elaborated: “Montefiore Hospital was founded in New York City in the 1880s. At that time, how long did it take for a professor of medicine to make his morning rounds, and how many interns would he take along with him?”
Dean: “Oh, about an hour; say 12 interns.”
Moynihan: “And today?”
Dean: “Got it!”
Perhaps technological advances will somewhat increase the productivity of teachers and doctors. The current health-care policy morass suggests this: The two parties are about equally identified with government, and equally expected to use it to nurture public contentment with labor-intensive service industries.
The Economist noted this possible implication of Baumol's disease in a world of increasing automation: “As machines become better at doing things, the human role in generating faster productivity growth will converge towards zero. At that point, so long as society expects everyone to work, all spending in the economy will go towards services for which it is crucial that productivity not grow, in order to provide jobs for everyone. Society could seemingly be both characterized by technological abundance and paralyzed by cost disease.”
John Maynard Keynes lamented that the “encroachment of ideas” in public policy usually is gradual because politicians and government officials are rarely influenced by new ideas after age 30. Today, however, increased productivity is increasingly imperative as an aging workforce retires into the expensive embrace of the entitlement state. So, Baumol's disease is a now-old idea that should be on policymakers' minds.
George F. Will is a columnist for Newsweek and The Washington Post.