Budget basics, Part 3 : Baumol's Cost Disease

My friendly neighborhood economist (and fellow town meeting member) thinks my skepticism on "Level Services" budgets is unwarranted, and that using inflation-adjusted per-capita spending as a metric isn't fair.

Here's the rationale: Government suffers from "Baumol's Cost Disease" -- it has to pay ever-higher employee salaries to compete with private industry. Private industry pays higher salaries (relative to the overall cost of stuff) because innovations (especially in manufacturing) make their employees more productive.

The government, and other service industries (Baumol's original 1967 study was of orchestras), can't use technology to be more productive, so the costs of government rise faster than inflation over time.

I'm biased; I'm a high-tech software entrepreneur. It's hard for me to put aside my belief that competition and technology inevitably leads to higher productivity and lower costs.

And not all economists agree that Baumol's Cost Disease is at the heart of increased government spending:

The bottom line is that governments have grown in recent decades, that they did not do so earlier, and that economists do not really know why. -- Gordon Tullock

Then there's this widely cited 2002 research paper:

We find that labor productivity in services industries has grown as fast recently as it has in the rest of the economy, and that the major contributor was an unprecedented acceleration in multifactor productivity. Baumol’s Disease has been cured. -- Jack E. Triplett and Barry P. Bosworth

That paper notes that our biggest local expense, "education", bucks the overall trend (productivity for the education sector declined from 1995-2000).

So I'm not sure what to think. Did the information technology revolution leave teachers behind because that's just the nature of teaching? Or did lack of competition in the education market make them less innovative than (for example) lawyers? Did college education productivity (where there are lots of private schools) fall as much as primary education productivity (where the government has a near monopoly)? Do countries with a more competitive education market (like Sweden or Chile) also suffer from declining productivity over time?

And does any of this really matter for Amherst? We're stuck with the system we've got, and we compete for teachers (and firefighters and building inspectors...) with the rest of the towns and cities in New England. Maybe in a perfect world government spending wouldn't rise any faster than inflation. But we don't live in a perfect world.