I've meant to write about this for a while. Economist William Baumol died on May 4th. Among other things he worked on, what interested me most in the Economist's obituary of him was his work on cost disease. From the Economist:
Mr Baumol will be remembered best for his cost disease. Its origin was unlikely: a commission to help those promoting the arts understand the financial struggles that cultural organisations faced. A report co-written with William Bowen closed with a simple but striking observation. Workers in the arts compete in the same national labour market as those in factories. As rising productivity in manufacturing lifts the wages of factory workers, arts organisations must pay their staff more to keep them from quitting to make widgets. But rising wages in the arts are not matched, as in manufacturing, by corresponding productivity growth: performing a piece by Schubert took the same time and the same number of musicians in the 20th century as it did in the 19th. Thus rising costs and stagnant productivity create increasing pressure over time to raise ticket prices, or take in more donations, or produce less art. The analysis bore relevance outside the arts, he quickly realised. Technological progress in some industries implies that in services with relatively low rates of productivity growth—like health care, education and government—swelling costs will outstrip growth in productivity. Costlier public services are a necessary side-effect of long-run growth.
Trouble results, Mr Baumol pointed out, when rising spending creates political pressure for cutbacks, leading to needless deterioration in the quality of services. Whereas cost-saving efficiencies are both possible and welcome, budget cuts premised on the notion that the share of spending on, say, education should remain flat hinder rather than help the economy. Indeed, if stagnant services complement an economy’s high-flying sectors (plying tech firms with educated workers, for example), then rising employment in stagnant areas raises rather than lowers overall productivity growth.
I'm still digesting the theory, and trying to come up with a way to make it meaningful in the arts organizations I support.