This Economic Phenomenon Is Making Government Sick
Some sectors bring bigger productivity gains than others, and often for sustained periods of time. For instance, computing and communications have made enormous strides over the last few decades, but K-12 education hasn’t improved very much and also costs more, an economic phenomenon that has been labeled the “cost disease.” It turns out the cost disease also shapes politics: To the extent governments manage, run or fund low-productivity-growth sectors, the spending required to sustain those sectors can automatically boost the size of government over time.
This logic may apply most of all to health care and retirement. For all the medical advances we have seen, the costs have gone up a lot as well. The temporary pause in health-care cost inflation now seems to have ended, with U.S. costs rising 5.8 percent in 2015. By the way, health-care cost inflation is a global phenomenon, indicating the near-universal nature of this problem.
Much of the associated burden will continue to fall upon government budgets, at least under the plausible assumption that the demand for health care doesn’t shrink radically. Part of the problem is that fixing people is harder than fixing machines, because it requires the cooperation of what are often recalcitrant patients. That’s why productivity improvements are difficult to achieve in education as well. Online learning can be potent and very cheap, but it is hard to get enough of the students to care.
Arguably, we as fallible humans are the ultimate source of the productivity problem, and also a big part of why governments tend to grow. If patients and students would diet properly, take the right medicines and crack open their textbooks, more drastic cost improvements could result.
These dilemmas in health care and education don’t have easy fixes. For instance, as Medicare and Medicaid become more expensive, many people will suggest that taxes and spending be raised. We’ve done that in the past, but at some margin voters will balk at further spending and tax increases, or maybe governments won’t find it so easy to bring in more revenue. To make matters worse, the very expansion of government, and thus third-party spending, may itself contribute to waste and thus lower rates of productivity growth, creating a vicious circle.
The first problem will be that other areas of government spending (“discretionary spending”) will tend to suffer, as money is soaked up by the low-productivity sectors. Voters will feel that governments are neglecting some of their most important interests, such as infrastructure.
At a further margin, government’s contribution to the health care, retirement and education sectors will also seem inadequate, because at such high prices a government really cannot pay for everything. A heated political debate will ensue. Progressives will argue that significant human needs are being neglected, and they will be able to point to numerous supportive anecdotes. Conservatives will argue that the fiscal path behind such policies is unsustainable, and they will be right, too. Because it will feel to voters that government isn’t doing a good job in these high-cost areas, the conservative view will get further traction. Libertarians may promote radical spending cuts, hoping for much higher productivity growth, but the government interventions are built in so thickly that that strategy could take a long time to pay off, and in the meantime it won’t look like a political winner.
All of the various sides may be correct in their major claims, but none will have a workable solution. This actually isn’t so far from where the health-care debate stands now, and where the retirement and nursing home debate is headed as America ages.
The hardest thing, politically speaking, is for a politician to stand up and suggest that we need to set clear limits on how much we will spend on health care. Keep in mind that at some margin, investing money in, say, job creation and higher wages may end up helping human health and well-being more than boosting health-care spending. That doesn’t make it much easier to yank dollars away from people’s coverage.
As it stands, we’re set to re-create these debates at higher and higher levels of government spending in the low-productivity sectors. And I don’t view such dramatically tense, life-or-death issues as conducive either to rational decision-making or to a broadly liberal, consensus-based politics. How well have the debates over Obamacare gone, in terms of being a model for reasonable discourse?
If you care about politics, I suggest spending less time on the candidates and more time studying productivity growth. I also suggest spending more time thinking about how to make working with human beings as easy and as fruitful as manipulating physical capital. Often the real political problem is not the people who disagree with you, but rather the empirical regularities of economies and the humans who inhabit them.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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