Baumol’s Cost Disease & the Democratic Coalition

A lot of the rise in healthcare costs comes from something called Baumol’s Cost Disease: basically the cost of labor-intensive work goes up in sync with the productivity of capital-intensive work.  For example, consider a teacher and a cobbler; the teacher teaches and the cobbler makes shoes by hand.  Now introduce a shoe-making machine that makes the cobbler five times as productive – his salary will rise as his output does.  However, Baumol pointed out that teacher’s salary will rise too – their employer will need to to pay higher salaries in order to stop all his teacher’s running off to become shoe manufacturers.  So over time, salaries in all fields will creep upwards and low-productivity work (like teaching or healthcare) will consume greater and greater portions of government budgets.

We should see policy fights over education and healthcare as specific examples of a larger fight over how to deal with Baumol’s Cost Disease.  The growth in healthcare costs is the main driver in projected government deficits; if healthcare continues to get more expensive at the same rate it has been, the expense of Medicare will bankrupt the country.  Major sections of Obamacare centered around attempts to “bend the cost curve”.  The education reform fight is nominally about pedagogy, but proposed solutions seem to always center around gutting teachers’ benefits and unions.  And in higher education, endlessly rising costs are threatening the access of lower-income Americans to get any education at all; and the stopgap solution of student loans is crushing new graduates under mountains of debt.

What’s more interesting is that this fight is almost entirely within the Democratic Party.  The Republican Party has basically lost interest in healthcare provision entirely, and are more interested in rolling back healthcare availability than in doing the kind of tough, thankless work of cutting costs that would make provision more affordable.  Within education reform, the substantive fight is between the unions and Democrats like Michelle Rhee, with Republicans mainly joining in to indulge their favorite pastime of cutting public-sector benefits.  And for higher education, the question of affordability has been mainly off the table but has increasingly become a subject of interest to Democrats.  Jon Chait reminds us today that seriously tackling college affordability will require antagonizing college professors, the most reliably Democratic group there is.

Baumol’s Cost Disease is the existential threat to the Democratic coalition.  Public-sector workers and academia are two of the bedrocks of the Democratic Party; public-sector workers are probably more important since they supply the foot soldiers for campaigns, but academia is important too.  But in order to achieve liberalism’s core goals of effectively providing public services, the Democratic Party has to figure out a way to keep costs down.  The left needs to figure out ways both to cut back on the salaries of their coalition-members, but also a way to constrain their growth.

Before liberals crow too much about the problems Republicans are having with nonwhites, they ought to consider how solid the liberal coalition really is.


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