Diagnosis: ‘Baumol’s disease’ afflicting economic growth

Although William J. Baumol, who recently died at 95, was not widely known beyond the ranks of economists, all Americans are living with, and policymakers are struggling with, “Baumol’s disease.” It is one reason brisk economic growth is becoming more elusive as it becomes more urgent. And it is a disease particularly pertinent to the increasingly fraught health care debate.

Born in the Bronx, Baumol spent his teaching career at Princeton and NYU but remained an aficionado of New York opera, and when in 1962 the Metropolitan Opera’s orchestra went on strike, Baumol sought an explanation for the Met’s regularly recurring labor troubles. He postulated “cost disease” afflicting labor-intensive service industries: Productivity will often increase not at all, or much slower, in some sectors — e.g., nursing, teaching, the performing arts — than in the overall economy. Decades later, Sen. Daniel Patrick Moynihan, who in 1962 was a young aide to Labor Secretary Arthur Goldberg as he arbitrated the orchestra dispute, explained Baumol’s disease this way:

“The number of players, the number of instruments, the amount of time it took to ‘produce’ a Mozart quartet in the 18th century will not have changed one whit two centuries later. To play the ‘Minute Waltz’ in 50 seconds leaves something to be desired. True of first violinists, kindergarten teachers, beat cops, sculptors, and so through a great repertoire of occupations.”

Goldberg’s 1962 encounter with Baumol’s disease in the Met’s orchestra initiated thinking that led in 1965 to the National Endowment for the Arts (and, on the Great Society principle of no conceivable claimant left behind, the National Endowment for the Humanities). This elicited Moynihan’s corollary to Baumol’s theory: “Activities with Baumol’s disease migrate to the public sector.”

Moynihan, thinking that it will be “the undoing of modern government” if there is too much migration, worried especially about health care. In 1993, at a health care hearing before the Senate Finance Committee, Chairman Moynihan received blank looks when he asked three medical deans what they could do about Baumol’s disease.

So Moynihan elaborated: “Montefiore Hospital was founded in New York City in the 1880s. At that time, how long did it take for a professor of medicine to make his morning rounds, and how many interns would he take along with him?”

Dean: “Oh, about an hour; say 12 interns.” Moynihan: “And today?” Dean: “Got it!” Perhaps technological advances will somewhat increase the productivity of teachers (e.g., online learning) and doctors (e.g., diagnostic advances using the human genome) as they have of policing (e.g., more efficient deployments of personnel). But there are limits. And a Mozart quartet must raise prices and donations or become dependent on government.

As a Democrat, Moynihan worried that the “stagnant services” would become identified with government, as would his party, while the Republican Party would be increasingly identified with a private sector becoming ever more dynamic relative to the public sector. Actually, however, the current health care policy morass suggests this: Disregarding, as the public seems wisely inclined to do, Republicans’ rhetorical flights, the two parties are about equally identified with government, and equally expected to use it to nurture public contentment with labor-intensive service industries.

Such industries might become increasingly important and problematic. In an appreciation of Baumol’s work, The Economist noted this possible implication of Baumol’s disease in a world of increasing automation:

“As machines become better at doing things, the human role in generating faster productivity growth will converge towards zero. At that point, so long as society expects everyone to work, all spending in the economy will go towards services for which it is crucial that productivity not grow, in order to provide jobs for everyone. Society could seemingly be both characterized by technological abundance and paralyzed by cost disease.”

Happily, predicted horrors have a way of not happening, because projected trends become disrupted by unforeseen developments. It is, however, not prudent to count on what cannot be anticipated.

John Maynard Keynes lamented that the “encroachment of ideas” in public policy usually is gradual because politicians and government officials are rarely influenced by new ideas after age 30, so they apply to current events ideas that “are not likely to be the newest.” Today, however, increased productivity is increasingly imperative as an aging workforce retires into the expensive embrace of the entitlement state.

So, Baumol’s disease is a now-old idea that should be on the minds of policymakers.