OK it’s a bit obvious when you think about it but this article in The New Yorker was nonetheless insightful in the way it presented the case clearly. Economists may be starting to worry about deflation while many bills just seem to keep going up. Why? Because some parts of the economy are inherently more resistant to productivity improvement than others – labour intensive ones like plumbing or education. As other things get cheaper, these get relatively more and more expensive.
What made me think was Surowiecki’s observation that, “Cost disease isnt anyones fault. (Thats why its called a disease.) Its just endemic to businesses that are labor-intensive. Colleges, for example, could do many things more efficiently, but, since their biggest expense is labor, the only way to reduce costs is either to increase the number of students each professor teaches or to outsource the work to poorly paid adjuncts.” And furthermore:
“Some of the most important services that the government provideseducation, law enforcement, health careare the hardest to make more productive. To keep providing the same quality of services, then, government has to get more expensive. People pay more in taxes and dont get more in return, which makes it look as though the public sector, at least compared with the private sector, is inept and bloated. But it could be that the government is merely stuck in inherently low-productivity-growth businesses. Its not inefficient. Its just got a bad case of Baumols.”