Yesterday’s post about how growth in the number of WA state government full time employees has remained flat relative to total population growth, prompted a debate in the comment thread regarding the impugned productivity of state workers versus those in the private sector. It was a stupid debate… devoid of actual, you know… facts, but it was a debate nonetheless, and as it turns out, a useful springboard for discussing the nature of government expenditures, and why the right’s familiar “population plus inflation” formula is little more than a cynical gimmick intended to erode government services over time.
Implicit in the population plus inflation model is the notion that services delivered by the public sector are somehow representative of the economy as a whole, and thus the per unit costs incurred should generally rise in step with the Consumer Price Index. This notion also forms the basis of the critique in the comment thread that looks to the population-proportional growth in government FTEs as an indication of zero productivity growth, and “a fucking testament to inefficiency.”
Of course, this notion is total bullshit.
To compare the inflationary pressures or productivity gains of the public sector to that of the economy as a whole would be as ridiculous as comparing that of one private sector industry to another. For example, according to the federal Bureau of Economic Analysis, the cost to consumers of durable goods has plummeted 14 percent since 2000, while the cost of consumer services has risen 29 percent. Over that same period of time the Implicit Price Deflator (generally accepted to be the most accurate measure of inflation) has risen 21.6% for Personal Consumption Expenditures as a whole, but over 42% for State and Local Government.
Why has the inflation rate for state and local government services risen at nearly twice the rate as that for consumer expenditures? According to a report compiled by the Washington D.C. based Center on Budget and Policy Priorities, productivity is indeed a major factor:
Proponents of TABOR-type tax and expenditure limits sometimes contend that a growth formula based on population plus inflation would be adequate to maintain public services at a roughly constant level. But researchers long have recognized that the services provided in the public sector, such as education, health care, and law enforcement, tend to rise in cost faster than many other goods and services in the economy in general. This analysis was first put forward by economist William Baumol, who pointed out that technology and productivity gains may make goods cheaper to produce, but the services that government provides are different. Baumol said public services typically rely heavily on well-trained professionals — teachers, police officers, doctors and nurses, and so on — and technology gains do not make these services cheaper to provide. It may take far fewer workers to build an automobile than it did 30 years ago, but it still takes one teacher to lead a classroom of children. (In fact, as education has become increasingly important, the trend is toward more teachers per pupil, not fewer.) Doctors generally still see patients one by one, and nursing care remains labor intensive despite technology.
In fact, we haven’t seen the same sort of productivity gains in the public sector as we have in the private, because there simply haven’t been the same inherent opportunities to improve efficiency overall. In the same way that the price of consumer services rises even as the price of durable goods falls, the cost of providing most government services—even the exact same services at the exact same level—continues to rise substantially faster than the average rate of inflation across the broader economy.
It’s not that, compared to the private sector, government is inherently less efficient at delivering services, but rather that productivity in these sort of labor-intensive, high-skilled services is impacted far less by technological advances than, say, the manufacturing sector. Indeed, when it comes to health care, quite the opposite has been true, with dramatic technological advances tending to dramatically increase costs. (While at the same time, government health insurance programs like Medicare and Medicaid have consistently proven to be less expensive and more efficient than their private sector competitors.)
Population plus inflation may seem like an intuitive measure by which to compare growth in government expenditures, but it simply is not grounded in economic reality: both simple logic and prior history proves that the long term cost of maintaining government services at constant levels rises faster than this rigid formula would allow. And given this reality, it is hard to argue that today’s budget crisis is largely the result of profligate spending, when state spending has long trailed behind growth in demand and cost for the services it provides.
There has been some surprise in the media that under yesterday’s Senate budget proposal, the dollar amount of general fund expenditures from state revenue sources would actually decrease from the previous biennium, for the first time ever. I suppose then, they will be absolutely shocked to learn in future posts that when measured by its ability to provide existing services at constant levels, Washington state government has actually been shrinking for some time.
