The cost disease and government growth: Qualifications to Baumol

Abstract

Changes in real world wage movements across sectors account for about a third of the rise in the cost of U.S. government services between 1959 and 1989, while relatively slower productivity in the public sector accounts for the remaining two-thirds. Even though it is slower, however, the productivity record still is positive even in the labor intensive government sector. Consequently Baumol argues that the public's likely future objection to necessary increases in the share of expenditures over the next 50 years will betray a fiscal illusion unless policymakers take pains to dissolve it. But slower productivity may be equally due to the structural organization. Removing public monopolies, reducing bureaucracies, and undertaking privatization in education for example, are other policy options that could radically change the productivity record. Meanwhile in his recent calculations of dramatic government expenditure increases expected in the next half century, Baumol omits reference to the marginal welfare cost of public funds, which on our estimates, will increase at least ten times to reach 1.71 by the year 2040.