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The impact of Baumol’s disease on the North

At this very moment you are suffering from Baumol’s disease. And if you understand Baumol’s disease you can predict the future.
David Robinson Economist, Laurentian University Director, Institute for Northern Ontario Research and Development.

William Jack Baumol is among the most influential economists in the world. He discovered a disease. At this very moment you are suffering from Baumol’s disease. And if you understand Baumol’s disease you can predict the future.

The story begins sometime in the early 1960s, when Baumol was talking about the rising price of theatre tickets with fellow economist William Bowen. The two realized something really obvious — so obvious, in fact, that they nearly got a Nobel Prize for it. One flute player can only play one flute at a time, and one flute can normally only play one note at a time.

Big deal, you say?  Who cares that the productivity of flautists is stuck in the middle ages? The economy has stagnant sectors like flute playing, but it also has sectors with rapidly rising productivity. The speed of auto assemblers doubled over the last 30 years, for example. Output per farmer has increased by a factor of 12. The average milk cow increased her output of milk by 242 per cent. The electronic industry has made unbelievable gains. In 1960, the richest person in the world could not get a computer capable of managing the Apollo mission, a music player and a radiotelephone into a tractor trailer. You may have a child who carries all that functionality plus a camera, an encyclopedia and a game cabinet all in a package the size of a Cadbury’s milk chocolate bar.

What Baumol and Bowen noticed that others have missed is that when many things get cheaper, it seems like the other things get more expensive. For instance, say Jack was a musician who plays one concert a day. Jill works in a factory and makes two chairs a day. With mechanization Jill makes 10 chairs a day. Her wage could rise from one to five chairs a day. The trouble is that Jack will change jobs unless he also gets a comparable wage. Either the price of performances goes up or the supply of performances dries up. But will Jill pay the higher price?

This is bad news for the arts, so Baumol and Bowen wrote a book the called “Performing Arts, The Economic Dilemma: a study of problems common to theatre, opera, music, and dance.” The performing arts, they said, are suffering from a ‘cost disease.’ They seem to cost more and more every year.

You are suffering from Baumol’s cost disease, too. You rely on governments to collect funds for schools, health care, universities, fire protection, police services, public health, and nurses. These are all occupations with low productivity growth. Our government is stuck with all the jobs that suffer from Baumol’s cost disease. If our government has Baumol’s disease, we have Baumol’s disease.

The average college professor, for example, can’t grade papers or give lectures any faster today than she did in the early ’90s. Doctors still need to meet with patients one-on-one to diagnose their problems. If anything, doctor productivity is falling because the problems that they can deal with get more and more complicated. Education now consumes 25 per cent of the Ontario budget, health care 40 per cent and justice and social services another 15 per cent.

And using Baumol’s crystal ball you can predict it will get worse. Will we want less health care, education, justices, fire protection, or security services in the future? If you are at all in touch with the real world, you know we will want more of all of these things. That has been the pattern for 70 years, even though the services have been getting relatively more expensive. The pattern won’t change. Like it or not, you are predicting that government expenditures will have to grow and that taxes will have to rise. You are really saying that is what you and other people will want.

And you should be happy about it. We are richer as a result of rising productivity. Buying power is growing much faster than medicine; education and the arts are getting more costly. With Jill’s new productivity, both Jill and Jack can have a wage that is two and a half times higher. They can have both more chairs and more music. Baumol’s disease only hurts if you let it.