William Baumol, that\’s why.
Tyler\’s got the abstract to a paper which shows why middle incomes have been stagnating (well, not rising very fast) and here\’s, to me, the money \’graph:
On the nontradable side, government and health care are the largest employers and provided the largest increments (an additional 10.4 million jobs) over the past two decades…..(…)….A related set of challenges concerns the income distribution; almost all incremental employment has occurred in the nontradable sector, which has experienced much slower growth in value added per employee. Because that number is highly correlated with income, it goes a long way to explain the stagnation of wages across large segments of the workforce.
So, that last sentence is really only a restatement of something Paul Krugman says in Ricardo\’s Difficult Idea (I mention this just to show that this is not a right wing, neoliberal or even libertarian idea), that average wages in an economy are determined by average productivity in that economy.
Akin to his comment that productivity isn\’t everything, but in the long term, it\’s almost everything.
So, what\’s all this got to do with William Baumol? Well, one part of his research has been into \”Baumol\’s Cost Disease\”. One way of putting which is that increasing labour productivity in services is more difficult than improving it in manufacturing. Canonically, we cannot get a symphony orchestra to be more productive by playing at twice the speed. So, ally this with wages being determined by average productivity, we\’ll see the amount we need to spend on labour to get services to rise against the amount we need to spend on labour to get manufactures. Services will become more expensive relative to manufactures over time.
However, this is not certain. A tendency, yes, but not a certainty. For it is possible, through innovation, to turn a service into, if not a manufacture, at least an automated operation. Think replacing bank clerks with ATMs. Skilled typists with dictation software. We can record the symphony once and play it many times on a gramophone/Walkman/iPod.
Which leads us to another part of Baumol\’s work. What system, what structure, boosts innovation?
Note that \”innovation\” here is not taken to mean the invention of new stuff. Rather, the dispersion of such new inventions through society, enabling people to think up ways of using it in new and interesting ways: boosting labour productivity as they do so.
One point he makes is that the Soviets invented some pretty spiffy stuff but as anyone who was there either during those times or in the rubble following 1991 will know, almost none of it ever got used by anyone.
No, it\’s a market system that encourages the use, experimentation with and thus improvements in productivity, that new inventions allow. Planning doesn\’t, the State doesn\’t, markets do.
Which brings us to our conclusion.
Let us agree that middle incomes in the US have been stagnating (they haven\’t, just not growing very fast but….). Let us also agree that we\’d rather like to get them rising again.
It\’s that nontradeable sector, healthcare especially, which we need to worry about, the one where innovation, which determines labour productivity and which in turn determines general wage levels, is more difficult. And the way we know how to increase innovation is through having a market based economic system.
So Obamacare is moving in the wrong direction, isn\’t it? We want more, not less market, less not more government.
This point is discussed at greater length in my favourite book.