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Government and the cost-disease -- provoking you
Matt Yglesias writes:
I would make a few points. First, some progressives wish to argue that government is fairly efficient (low Medicare overhead costs is a common observation here); in those sectors this argument won't apply. Second, if a given activity could go to either the private or public sector, we might be reluctant to stick it in the less-productivity-enhancing public sector. Third, many government activities should benefit greatly from private sector technological advancement (electricity, cars, internet, etc.), yet we don't usually observe those sectors shrinking rapidly, as a percentage of gdp, as a consequence. This should worry us. Still, there is truth in Matt's basic observation.
Posted by Tyler Cowen on February 1, 2009 at 05:26 PM in Political Science | Permalink
Comments
Waaaaaahhhhhht?
There are so many things wrong with that argument that it's difficult to know where to begin.
First, it doesn't follow that more automation in manufacturing will necessary mean fewer works. Fewer workers per unit produced now, yes. But new products and more volume means that more efficient doesn't necessarily mean fewer workers. And that's without even getting into the relative weakness of the dollar to foreign currencies going forward. The U.S. may have another industrial revolution in its future thanks to profligate monetary policy. (Incidentally, I don't think that would necessary be bad for our culture.)
Second, why shouldn't other sectors of the private economy not increase faster than government? Because (at least our) government is (largely, see Ribstein and O'Hara on the Law Market) insulated from the disciplining effect of competition, as "customers," we should always be demanding government to justify its jurisdiction. If Yglesias is making a positive point here, fine. But as a normative matter there's no reason to resign ourselves to a bigger and bigger government.
Third, ... oh I'm tired already.
Posted by: Michael F. Martin at Feb 1, 2009 5:53:54 PM
Yes, production, in practically every enterprise that produces anything - cars, food, knowledge, information, pleasurable experience - has become vastly more efficient in the past 30 years, the result of something demonstrably new in the world: the development of information technology and the harnessing of that technology to machine control. That doesn't mean that production becomes less important; it means that costs have gone down. And prices haven't, at least proportionately; the spread between what it costs to produce anything conceivable as a commodity and what that is sold for has grown enormously over just a little more than a quarter century. That means that prices of practically everything could, in principle, drop very significantly without affecting the wages of those few people still required to deliver the goods. The only people hurt by that price drop, again in principle, would be the ones contributing least directly to the production process: the gamblers playing the stock market game, the highly paid consultants providing marketing and legal services, and the very highest levels of "management".
The division between public and private sector is not, I think, very important really. To the extent that there is still some investment required to start something new, and to stimulate innovation, it doesn't really matter much where that investment comes from, especially if we accept the possibility of a world that is flatter in its distribution of wealth than the one we've been used to, which would also be a world in which commodities of every sort are much cheaper - so cheap, in many cases, that they could be inexpensively subsidized by government and made freely available - and therefore more widely distributed.
Posted by: Richard Blumberg at Feb 1, 2009 6:04:25 PM
Just on the face of it, I don't see all that much in Matt's argument. In 2007 government at all levels spent about 36% of the GDP, including transfer payments and interest, up by about 4 points from, say, 1979, before the bad Republicans. If you pare that down to just the value added of government (taking out transfer payments, about a $trillion for stuff it bought from the private sector, and most of its "investment", which it also bought mostly from the private sector), that value added in 2007 was only a little over 11% of GDP, down almost a point from 1979. So I don't see the growth in spending that's not subject to private sector possibilities for efficiency gains, unless you propose the government takes over more private sector activity (say, health care, like the Brits). Of course a lot of what the government buys or pays for may be in those parts of the private sector that don't gain much in productivity (maybe because the govt pays for it), but that's another argument.
Posted by: TA at Feb 1, 2009 6:16:15 PM
The comparison of manufacturing and agriculture is interesting, in that manufacturing does seem to be following the path that agriculture has. Perhaps, fifty years from now, residents of the info-entertainment cities will wonder why the handful of folks in Michigan still have two senators.
Non-sequitur on the government fraction of GDP though. As Michael Martin says, future private sectors can fill the gap. Also, even if government sectors are less efficient, it is still quite plausible that they can piggy back on progress in private sectors and see comparable fractional improvements in productivity.
Posted by: jonm at Feb 1, 2009 6:21:40 PM
This is a weird way of looking at relationship between the public and private sectors. Mainly because Matthew is assuming the number of sectors of the economy is fixed. He should remember, the economy not only grows in efficiency but in complexity, so relationship between the private sector as a whole and private sector doesn't hold water. I think we should look for the phrase "fallacy of composition" to come up somewhere in the other comments, hopefully else someone will point out the fallacy of using GDP% as a measure of the importance/productivity/usefulness of an industry.
Posted by: Michael Lachanski at Feb 1, 2009 6:23:15 PM
To paraphrase Arthur C. Clarke, any sufficiently advanced form of manufacturing is indistinguishable from a service. As technology progresses and becomes productive, it also almost inevitably becomes more specialized and complicated, meaning there is a need for more specialists to apply it, and the money to pay them due to increase in productivity. That is it the products turns into a service. This has happend in IT, and in other fields (one company doing meteorological measuring devices and other building elevators come to mind) companies make their money from service contracts, the actual products are often loss leaders used to sell the contracts.
Now government plays a much smaller role in manufacturing than in services. Some services are considered necessities (law enforcement for example), and in some services there are big benefits of scale (healthcare). That is, Matt is right, progress ceteris paribus means bigger government. It is called progressive politics for a reason :-)
Posted by: teme at Feb 1, 2009 6:27:45 PM
Matt Yglesias is absolutely correct.
All labor intensive services seem to have had lower productivity growth than Ag and Mfg in the past: How much more productive is a symphony orchestra now than it was in the 19th century? Anybody wanna hear the Firebird Suite played faster? Quartet pieces written for trio? Seems as though government has become stuck with such stuff. This is a challenging measurement problem completely separate from the questions of how big government should be, and how much influence government has on its own productivity growth.
In the US, we have an ever so slightly small government sector compared to similarly rich countries, for better and for worse.
Posted by: Frank at Feb 1, 2009 6:45:04 PM
Tyler wrote: "Third, many government activities should benefit greatly from private sector technological advancement (electricity, cars, internet, etc.), yet we don't usually observe those sectors shrinking rapidly, as a percentage of gdp, as a consequence. This should worry us."
Yes, Tyler, you work at a public university, right? Can you tell us how your activities have benefitted greatly from technological advancement so that the educational sector has declined as a percentage of gdp? Tell me about the Moore's Law of education in the private and public sectors.
Then tell me about the Moore's Law of the military, of infrastructure, etc.
I call BS.
Posted by: Mike Huben at Feb 1, 2009 6:56:52 PM
Matt Y is incorrect here. The gap caused by the undoubtedly shrinking manufacturing sector will not be filled as the night follows the day by the government, but by the service sector--accounting services, computer-delivered services (those that are not invested in manufacturing, such as search engines, online retailing, etc.), etc., etc.
Government may well grow as a percentage of GDP, but it must have some limit, unless we're going to end up like North Korea only with a slightly less nasty dictator, maybe a descendant of the current vice president, who is one of the nastiest pols alive, and dumbest.
Posted by: anon. at Feb 1, 2009 6:58:43 PM
some progressives wish to argue that government is fairly efficient (low Medicare overhead costs is a common observation here); in those sectors this argument won't apply.
The argument is that Medicare is relatively efficient, compared to other ways of providing the same service. That doesn't mean if you replaced doctors with artificial intelligences and drugs with self-replicating nanobots you couldn't achieve extremely high absolute efficiency.
Posted by: Nathan Cook at Feb 1, 2009 7:25:17 PM
Absolutely. We see this happen all the time. I don't think of it quite the same way as he does however.
If you treat government as a microeconomic monopoly. You can see it tries to maximize its absolute size/profits/growth/etc at the expense of the "consumer" (in this case the citizenry).
Because government is trying to maximize its absolute size, it has a maximum size relative to the economy as a whole. When governments get too "greedy" and take a larger percent than what maximizes its absolute size, its absolute size is smaller. We can compare the government of North Korea and South Korea for examples of how this works. Relative to their own economies SK has a much smaller government than NK, but in absolute terms SK's is larger.
Increases in the efficiency of the private sector mean that the government at maximum absolute size will take a larger and larger chunk of the economy as a whole.
The effect that Matt Yglesias sees is a natural result of government being a monopoly and comes straight out of microeconomic theory once you start actually treating government as a monopoly.
Libertarians and others who want small government, should encourage laws that allow people to change their governments more easily. Governments that allow for easy migration would begin to behave more like oligopolies (for example compare US states to each other and nowadays EU member countries are beginning to behave like oligopolies.)
Posted by: Jorge Landivar at Feb 1, 2009 7:42:19 PM
Yglesias is laughingly wrong- I am beginning to wonder why anyone takes him seriously. Does he suppose that the complexity of manufacturing will not deepen over time- that new, additional products won't be invented, or even that people will decide to simply work less rather than devote time to government. Indeed, the argument can be made that as the production of goods and services becomes more and more efficient that government will actually fade rather than grow.
Posted by: Yancey Ward at Feb 1, 2009 7:53:47 PM
Look before you leap; measure before you criticize.
I would be very wary of making any of these arguments, on any side, on numbers alone.
Posted by: Frank at Feb 1, 2009 8:50:57 PM
Hi,
Industry may (or may not) represent an increasingly smaller percentage of employment. But I just can't understand why it should become increasingly smaller % of GDP. Unlike angricultural goods, there is no satiation (say 2000-3000 calories/day for food).People will always "need" a greater variety of increasingly complex manufactured goods. What I say is that the Marginal rate of substitution of manufactured goods for public goods will never be zero.
Hope I expressed myself clearly... this is a south-american 3rd year undergrad Economics student try his best.
Saludos a todos.
Posted by: Gustavo at Feb 1, 2009 9:30:57 PM
I guess the size of goverment will depend on the same things... ideology, the political system, people's preferences on public goods, private goods, freedom and liberty, etc...
Posted by: Gustavo at Feb 1, 2009 9:45:08 PM
This is right about agriculture, but for the wrong reason. Technology made agriculture a smaller percent of GDP because the demand for food is price-inelastic. No matter how cheap food gets, there's a limit on how much each person can eat. The improvement in technology over the last 200 years was so huge that it vastly outstripped people's ability to eat more. So the share of GDP and of the labor force dropped from 80-90% to less than 2%.
One of the main reasons the "economic pie" is now so much bigger is that all those people who used to have to work on the farm can now go and do other things.
That will happen with some manufactured items, but perhaps not all. It all depends on the price elasticity of demand, relative to the improvement in technology.
Posted by: Robert Book at Feb 1, 2009 10:12:54 PM
This sounds like a lesson from Introduction to Macro where we assume that Acme Widgets is the only company in the economy, who employs the only 10 workers in the country. It might work to teach a general lesson, but goes to hell when you try to apply it to today's economy.
Posted by: Laf at Feb 2, 2009 12:34:21 AM
Why do you bother with Yglesias? Who really cares what he says?
Posted by: bababooey at Feb 2, 2009 1:35:04 AM
I think Frank has it wrong. A symphony orchestra is more efficient now than it was in the past. That orchestra today can record a concert or play it live via television or the web, so that millions can enjoy (and potentially pay to enjoy) that that one concert.
Posted by: Stuhlmann at Feb 2, 2009 4:05:41 AM
How much more productive is a symphony orchestra now than it was in the 19th century?
Vastly. In the 19th century, a single performance was able to satisfy, at most, a couple thousand listeners in a single location only once, whereas now a single performance can satisfy millions of listeners, all over the world, repeatedly and indefinitely -- at virtually zero cost. The productivity of symphony orchestras has increased so much that it threatens to make the industry industry (which could not exist without large subsidies) redundant.
In fact, past productivity was such that for my own limited (but pretty typical) orchestral music needs, the entire (taxpayer dependent) industry of symphonies and music schools could now be shut down, and the money and human energies turned to more productive uses.
Posted by: Slocum at Feb 2, 2009 8:04:37 AM
I think this is similar to the argumnet made by Baumol many years ago in a paper about the Dynamics of Unbalanced Growth. I believe his argument was that the relative share of employment in the less productive sectors (e.g., governmnet) should grow relative to the share in the more productive sectors. There was some neat insight in that paper, but my memory isn't good enough to remember it - I will try to locate the article and see.
Posted by: dale at Feb 2, 2009 8:38:03 AM
The article is "Macroeconomics of unbalanced growth: the anatomy of urban crisis," by Baumol, AER, June 1967(yes, I am that old). Essentially, he makes the argument that the relative cost of the less productive sectors (like government, and services more generally) must rise. A rising relative price does not necessarily lead to a rising share of GDP, of course - it depends on the demand as well. However, it is not a stretch to assume that the demand for many government services also rises as income rises - for these, their share of GDP should go up.
Posted by: dale at Feb 2, 2009 8:58:35 AM
It is interesting to me that education has become vastly cheaper today with the internet and TV/radio. Now baby sitting and testing (credentialing) have not gotten that much cheaper but they have become cheaper and yet Government which dominates the baby sitting and testing (credentialing) markets have continued to get more expensive. Government acts as if nothing has changed.
It is interesting to me that today most education is free but diplomas are very, very costly. Why?
Posted by: Floccina at Feb 2, 2009 10:21:38 AM
It would be real nice to have some evidence rather than just nice reasoning salted with anecdote and waffle. The only scrap I have is that I once measured the productivity of some government offices for a few years -a stead 4 to 5% a year improvemwent. One swallow does not make a summer, but it is apparently inconsistent with an assumption that there are no birds in the sky - that the productivity of government services is by definition constant.
Remembering that Baumol article - which I also recall as full of insight - one point seemed to be that you had a race between elasticity of demand and falling cost of supply. In almost all conditions, in the end the falling cost of supply outpaced elasticity of demand; hence the share of resources employed in sectors with above average rises in productivity shrinks.
Posted by: D iversity at Feb 2, 2009 10:22:13 AM
"How much more productive is a symphony orchestra now than it was in the 19th century?
Vastly. In the 19th century, a single performance was able to satisfy, at most, a couple thousand listeners in a single location only once, whereas now a single performance can satisfy millions of listeners, all over the world, repeatedly and indefinitely -- at virtually zero cost. The productivity of symphony orchestras has increased so much that it threatens to make the industry industry (which could not exist without large subsidies) redundant.
In fact, past productivity was such that for my own limited (but pretty typical) orchestral music needs, the entire (taxpayer dependent) industry of symphonies and music schools could now be shut down, and the money and human energies turned to more productive uses."
The better argument is that thru leaps in audio technology one person has the ability to replicate an entire orchestra (though not yet perfectly).
Posted by: meter at Feb 2, 2009 1:43:52 PM
While manufacturing has declined as share of GDP, has it also declined as sharp as share of consumption? The trade balance of rich countries has clearly shifted from manufacturing-heavy exports to manufacturing-heavy imports and more sevice exports (and debt!).
Also, how much of the productivity growth in manufacturing is technological progress that can be expected to continue, how much is progress we cannot expect to continue without bound (think limited resources), and how much is cheap Chinese workers, who are not in unbounded supply?
Posted by: Zamfir at Feb 3, 2009 4:01:22 AM
There is another idea that as things get cheaper we the saving in transactions costs become greater that losses due to the inefficiency of government.
Posted by: Floccina at Feb 3, 2009 10:37:02 AM
In 1900 manufacturing accounted for 42% of all employment in the US. By 2007 By 1950 it had fallen to 37%. By 1980 it had fallen below 25%. In 2007 it was 12%. If you read the literature people have been worried about rising efficiency in the manufacturing sector since at least the early 1930s. By the 1950s the problem was considered severe. My guess is that it is going to drop even more, probably to somewhere between 5% and 10%. Outsourcing of this shrining sector to China and the like has sped its fall in the US in recent years, but the long term trend is unmistakable. There is no reason that a planet with 6 billion people on it needs to have more than 30 million people doing manufacturing and maybe 30 million farming if they are properly capitalized. The problem is to find something for everyone else to do so they can afford to buy manufactured goods.
I've seen the private sector and the public sector grow increasingly productive, just over my lifetime. The garbage guy has a robot arm to dump my trash. That means no more guy walking alongside the truck like Ed Norton. The tax assessors office and the planning department use a GIS which means a lot fewer cartographers and map file clerks. Better communications and GIS based policing mean fewer cops and better crime control. Look at what Bloomberg did with NYC's 311 information system. A friend of mine works on a judicial review commission that just two years ago handed out case packets with thousands of pages. It's all online PDFs now, and some copy room clerk is out of a job.
Personally, I have nothing against efficiency eliminating jobs. The big challenge is still coming up with an excuse for giving everyone enough purchasing power to keep the more productive sectors from collapsing, and to keep less productive sectors from collapsing as they grow more productive and can provide fewer jobs.
Posted by: Kaleberg at Feb 4, 2009 12:02:15 AM
"The big challenge is still coming up with an excuse for giving everyone enough purchasing power to keep the more productive sectors from collapsing"
Also known as collective ownership of the means of production. There isn't that much news under the sun.
Posted by: Zamfir at Feb 4, 2009 4:46:54 AM
He might be right for any given wave of economic development, but we have entire economic sectors that were previously unimaginable. It's very hard to believe that new sectors of the economy become begin life at full efficiency. I believe his argument is possibly cyclic and definitely asymptotic - likely far below where Yglesias imagines.
Posted by: pidgas at Feb 6, 2009 4:26:14 PM
