Baumol’s Cost Disease, Productivity And The Future Of Growth

William Baumol, one of the very most famous economists you’ve never heard about, died recently. Baumol’s fame arrived of the observation that we now have sectors of the overall economy in which productivity is rising swiftly, for example, manufacturing, and industries where it is increasing slowly or never, for example, string quartet shows. The final outcome, he drew from observing the behavior of income in these sectors was that income had to go up in the low-productivity growth sectors even while they do in high-productivity development sectors. This is because people will over time simply leave the low-productivity growth industries for the better wages of the other sectors.

This theory became known as Baumol’s cost disease. In practice, culture still values string quartet shows to pay their practitioners sufficiently to keep them playing enough. Baumol extended his theory to any financial sector where personal service is essential to that sector. For example education, healthcare, child treatment, and legal services. As it turns out, no one (yet) desires a robot attorney or nanny. Baumol’s theory clarifies why costs are rising so fast for educational organizations, health care organizations, municipal government authorities, and performing arts groups. Their productivity increases are limited, but their comparative charges for labor continue steadily to rise for their low-productivity growth compared to other parts of the economy.

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In more effective sectors, rising wages can be offset by rising productivity which allows costs per hour of labor to stay level or, in some cases, decline. Baumol understood that even in the mid-1960s when he first developed his ideas (see here and here), the technology was already enabling performing performers to reach larger and larger audiences through television, record, and radio players.

That certainly increased their productivity by allowing many more people to like a particular performance. But these systems and their newer variants do not increase the number of shows that a musician can do. The broader implication of Baumol is that as societies expand their service industries, it is unavoidable that overall productivity growth will drop. And that can mean that overall economic growth will tend to decline as well.

We have certainly seen steadily slower growth in adult world economies over time, because the 2008-2009 downturn especially. All attempts to reduce overall costs across entire low-productivity sectors (as opposed to small areas of them) have essentially come to naught–unless the sector is simply disappearing. For instance, does anyone remember the typesetting business which was wiped out by the advancement of software able to handle that task on a graphic designer’s on? Some efforts have been designed to reduce the price of education.

Back in the mid-1990s the University of Michigan proclaimed that it could become a million-person institution using its distance education program. It required 20 years before the school created what it calls Massive Open Online Courses. These are free (though you pay a fee to get a nice certificate of completion). Paying customers, however, still want real live teachers in front of them in the same way they still crave live performers of music and plays. And, they need the recognized qualifications that are incorporated with attendance at the live instructions venue. Municipalities provide an array of services including public safety, fire security, building code enforcement, and public health.

All of these services require people whose efficiency is difficult to improve on par with what is going on in manufacturing, particular high-technology manufacturing. We have now accepted that preserving an opera company or a symphony orchestra will definitely cost more than ticket receipts can boost. With an exceptionally low overall efficiency development in the United States and the world, chances are that Baumol’s cost disease is catching up with us–even if it is not the only cause of that low growth. The fantasy that people can make all services constantly better simply can’t see through the human factor in many cases.

And, where that factor has been reduced–for or eliminated example, automated bank tellers, self-serve restaurants, and online learning–we have found increasing bifurcation of the industry. The human being touch has been reserved more and more for those who can afford it: private banking, high-end sit down restaurants, and a lot more expensive college educations (that include actual personal connections to trainers and with bona fide credentials). Is our future one where only the wealthy are inoculated against Baumol’s cost disease? The alternative is increased open public subsidies for those services which we consider socially important to make them accessible. Kurt Cobb can be an author, speaker, and columnist focusing on energy and the surroundings. He has been a regular contributor to the power Voices section of The Christian Science Monitor and it is the author of the peak-oil-themed novel Prelude.

Income Tax Regs. Whether a taxpayer relies on the advice and whether such reliance is reasonable hinge on the facts and circumstances of the case and the law that apply to those facts and circumstances. Neonatology Assocs., P.A. v. Commissioner, 115 T.C. At trial petitioner testified that she was advised by her counsel that the settlement payment was not taxable.

Petitioners’ counsel is an avowed public accountant (C.P.A.) and lawyer. The professional qualifications of petitioners’ counsel justified their reliance on his advice. We note there is a level of uncertainty regarding when physical manifestations of psychological distress give rise to physical damage or physical sickness under sections 104(a) (2). Compare Moulton v. Commissioner, 2009 Tax Ct. “), with Domeny v. Commissioner, T.C. Although we notice petitioner’s symptoms do not qualify as a physical injury or physical sickness under sections 104(a) (2), petitioners’ counsel’s advice was not so unreasonable as to not justify petitioners’ reliance on it. See Longoria v. Commissioner 2009 Tax Ct. 33 (taxpayer who received advice from C.P.A.