25 February 2013

Long-term economic planning

One of my favorite lefty political blogs, The Weekly Sift from Doug Muder, has a terrific post which asks the question What if there’s no spending problem?

As we all know, Republicans have been circulating scary-looking graphs showing how projections show government spending ballooning out of control in the decades to come.

It looks bad. Taxes as a percentage of GDP have stayed in a relatively narrow band since World War II, only occasionally peaking over 20%. But starting in about 2016, spending as a percentage of GDP starts to take off, reaching the incredible level of 40% by 2080 with no end in sight.

He supplies the same comment I have made on this subject countless times.

Government spending goes out of control because healthcare costs go out of control. But just capping what the government spends on Medicare and Medicaid (i.e., the Ryan plan) doesn’t fix anything. If healthcare costs are unsustainable, then what does it matter whether we’re paying those costs through government, through private insurance, or out of our pockets?

Enter William Baumol, who made a sharp observation about economics decades ago which led him to predict our rising health care costs. The theory which produced that correct early prediction turns out to be comforting.

Baumol is an economist who is most famous for identifying Baumol’s Cost Disease in the 1960s. His observation is that although the economy as a whole becomes more productive with the advance of technology, not all sectors progress equally, and some don’t improve their productivity at all. For example, a 21st-century farmer feeds far more people than a 19th-century farmer. Likewise, a worker at a modern shoe factory makes more shoes than a 19th-century cobbler. But it still takes four talented musicians to perform a Beethoven string quartet, and they don’t do it any faster than they did in Beethoven’s day. String quartets have not seen a productivity increase.


Health care has a high component of personal service. It does not have high productivity growth.

Now this part gets a little tricky, because we all know how much medical technology has improved over the decades. But the improvement is almost entirely on the outcome side rather than the productivity side. Adrian Peterson could tear up his knee and be better than ever the next season, where half a century before Gale Sayers was never the same. But the amount of attention patients need from doctors and nurses has not gone down. Health professionals are doing better for their patients, but they are not processing more of them faster.

Were it a snake, it would have bit me.

Some time ago I read a little essay that pointed out semi-seriously that the reason why the corridors of the Starship Enterprise are so shiny and clean was because the Federation has replicator technology which makes manufacturing work unnecessary, so people have plenty of free time to spend keeping things tidy.

Of course, that's more than a little silly: one does not imagine the Enterprise employing a big cleaning crew. (Indeed, apropos of Baumol's theory, keeping things clean does benefit from productivity increases, from the development of the washing machine for clothes to the robot which wanders around my house vacuuming the floor. Presumably the Enterprise is somehow self-cleaning!) But it made Baumol's point that productivity gains reshape the economy, and I've daydreamed about different kinds of future societies which could be possible as more and more of the work we do now becomes the province of robots or people with extremely effective tools. That leaves more time for the stuff that requires human-human interaction, like teaching and art and sex.

It's a seductively optimistic image, but recall that Marxist futurists early in the 20th century predicted a coming utopia of leisure as industrial technologies provided for all of our material needs. Things didn't work out that way, in part because of cost-shifting predicted by Baumol, in part because the economy is just weirder and more complex than that. Muder's hint that Baumol's theory suggests that having health care costs represent 40% of GDP after my nephew retires will be a post-scarcity paradise appeals to guys like me who have a certain kind of mathematical intuition, but of course the real world is messier and more complex than that, as Muder himself admits ... leading him to the more important observation that one simply cannot make solid predictions that far into the future.

There are many possible objections to Baumol’s argument. (I wonder how it’s affected by the way that wages in general have come unstuck from productivity.) But here’s the message that I take from his book: When someone presents a graph like Hennessy’s and acts like the conclusion is obvious — say, that government spending can’t reach 40% of GDP by 2080, and so some catastrophe will have to intervene before that point — don’t buy it without a more compelling explanation.

The economy of 2080 or 2105 will be different from today’s in many, many ways. Maybe current trends will persist until then or maybe they won’t. But you can’t conclude anything from the mere fact that some statistic from the far future looks implausible.

The far future is going to look implausible to us, if we manage to survive long enough to see it. That’s the one prediction I have complete confidence in.

Check out the whole post on The Weekly Sift. Fascinating.

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