by Chris James
To
me, George Will's recent column on the May 7 death of Dr. William Baumol at age
95 was an eye-opener. Dr. Baumol was a well-known (by the cognoscenti,
but not by me), well-respected economist - mainly for his pioneering work in
incorporating the role of entrepreneurship into economic models. He may
have been almost equally well-known for what is now called Baumol's Cost
Disease (BCD).
In a
nutshell, BCD attacks manpower intensive institutions, where it is difficult,
sometimes impossible, to increase productivity, yet manpower costs associated
with these sectors keep rising. Typically, qualifying institutions and
businesses comprise the service sector of the economy; it is the largest
component (some 70+%) of most developed economies. Therefore, BCD can be seen
to be a serious problem, not so much that we've got the bug, but that we
understand it, and that we try to find solutions to ameliorate its impact on
society.
How
does BCD work? Take a simple, whimsical example based on the old
jocularity "how many (blank) does it take to change a light bulb?"
Let's say that back in the 1920's, it took three individuals. These
are your service providers. Today, despite advances in light bulb
technology, higher quality and faster production (all indicative of increases
in manufacturing productivity), it still takes the same three service people to
screw the light bulb into the same type of socket used in 1920. In other
words, services productivity has not increased to any extent over the years.
However, the wages of today's light bulb service providers are 50 times higher
than they were in 1920.
There are many internet examples of BCD in real-life action. Here
is a smattering. The Arts are one of a multitude of service components of
the economy, as is medicine. From the Arts, a classic case. Today,
it still takes about the same number and types of instruments to perform
Beethoven's 7th symphony as it did when he wrote it. Over the decades,
symphonic musicians' salaries have escalated healthily (thanks, in part, to a
robust Musician's Union). Ergo, BCD.
Medicine is a fecund source of germane anecdotes. Classic: A
retired octogenarian doctor of some repute was asked how many interns he took
on his rounds back in the day. He replied 10 to 12. He was then asked how
many interns do the (hideously more expensive) rounds today. Guess his
answer. Medicine is a rich source of services infected with BCD.
Examples: Can a doctor examine two patients simultaneously with the same
care that he would give to a single patient? Could a technician draw
blood simultaneously from two patients at the same level of efficiency as with
one patient? Doubling effective treatments in the same time that it takes
to provide single patient treatment would increase productivity 100%. The
practicality of such a strategy? Puh-lease!
So, how
does a manpower intensive industry cope with the inevitability of BCD?
Well, business owners or institutional bosses could, ahem, terminate some
of those on the firing line and then beat on the remaining employees to work
twice as hard to pick up the resulting slack. On paper, productivity up;
in reality, nobody wants to work there anymore. Alternatively, bosses
could beat on workers to spend less time with each customer and, thereby, cram
more people into their schedules. On paper, productivity up; in reality,
because of lousy service, nobody goes there anymore.
Another approach is to cut costs other than those of manpower. Such
as those of processing time. And, it is here, that the service industry
was thrown a life-saver. The computer. Not only did data
manipulation, storage and communication improve by leaps and bounds in terms of
its cost cutting (time) impact but, for many, productivity improved - that it
is to say, with access to this technology (to speed things up), a single
employee could cover more work in a single day than before. But, as every
manpower-intensive, service provider scrambled aboard the life-boat, and the
new technological stimulus became routine, the gains eventually ran out of
steam.
Now
what? Answer: The simplest antibiotic of all with which to fight BCD is
to Raise Prices. In any given service industry group, some participants
will raise prices less than others (it's called competition, and is an
essential driver of a capitalist society). But, the fact remains that
price increases are mandatory, if BCD is to be - not defeated - but contained. So,
for the average Joes and Janes out there, much of your grumble about the cost
of living going up all the time is embodied in this largest sector of the
economy.
All
very nice and neat. But what happens when prices, designed to combat BCD,
get riotously out of hand? In other words, when the proletariat rises up
against the prices that they have to pay for certain manpower intensive
services become devastatingly high. For this condition to be significant,
the sector at fault would have to be a large one. Let's see - anybody
know of a real-life example? Well done! Of course, health care.
As
in any sector of manpower intensive business, when molecular-sized increases in
productivity - if any - get bludgeoned by blatantly public price increases,
there's gonna be trouble. What can the beleaguered sector do about it
when all other - usually feeble - curative options have been inadequate or have
failed? You knew it was coming, didn't you? Turn to the government!
That all-knowing, all-seeing institution; in reality that knows very
little about next to nothing, especially about the play in which they are about
to perform.
Well, the government can't do anything about health care productivity, so
that leaves using its power to artificially beat down prices (aka bullying).
But, STOP! The government is also sole possessor of the magic fairy
dust that will make health care "affordable" for everyone and -
productivity be damned - cure BCD once and for all. Subsidies!
Subsidies cost money. Yours. Case in point. California,
in its whack-job socialistic wisdom, wants to divorce itself from whatever else
is going on out there in the world of U.S. health care. An independent
study has calculated that it would cost the State, as a single payer insurance
system, around $400 billion a year. The financial wizards in the
California legislature have budgeted $140 billion out of the General Fund for
this, so far, whimsical purpose. Where is the rest going to come from? Dum-de-dum-taxes-tumpty-tum.
But, of course. And you thought that health care was your God-given
right, and therefore "free."
What
we have here with BCD is a classic case of a vaporous manipulation that is the
life-jacket for most politicians at all levels. Namely, the rallying cry
that "although we cannot solve it, we can manage it and contain it
indefinitely." Sure you can.
