Hostname: page-component-78c5997874-m6dg7 Total loading time: 0 Render date: 2024-11-10T17:36:31.620Z Has data issue: false hasContentIssue false
  • English
  • Français

Baumol's cost disease and the withering of the state

Published online by Cambridge University Press:  13 June 2018

Joshua Semat ,
David Lowery ,
Suzanne Linn  and
William D. Berry
Get access Rights & Permissions [Opens in a new window]

Abstract

Most theories of government growth place nearly exclusive attention on real changes in public sector activity. Yet, much nominal post–WWII government spending growth was not in the form of the public sector doing more relative to the general economy (real growth), but in the form of government activities becoming relatively more expensive (cost growth). Baumol's (1967) “cost disease” model is our best guide to understanding cost growth, but over time, Baumol has offered conflicting hypotheses about how cost growth bears on real growth. Using 1947–2012 U.S. data, we test these hypotheses, along with a more novel expectation, by modifying Berry and Lowery's (1987b) econometric models of real growth in public purchases and transfers to consider the influence of government cost growth on real public domestic spending.

Keywords

cost diseasepublic sectorfiscal policycost growthtransfer spending
Type
Research Article
Information
Business and Politics , Volume 21 , Issue 1 , March 2019 , pp. 53 - 85
Copyright
Copyright © V.K. Aggarwal 2018 and published under exclusive license to Cambridge University Press 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Bates, Laurie J. and Santerre, Rexford E.. 2013a. “Does U.S. Health Care Sector Suffer from Baumol's Cost Disease? Evidence from the 50 States.” Journal of Health Economic 32: 386–91.Google Scholar
Bates, Laurie J. and Santerre, Rexford E.. 2013b. “Is the U.S. Private Education Sector Infected by Baumol's Cost Disease? Evidence from the 50 States.” Munich Personal RePec Archive. http://mpra.ub.uni-munchen.de/52300/1/MPRA_paper_52300.pdf.Google Scholar
Bates, Laurie J. and Santerre, Rexford E.. 2015. “Does Baumol's Cost Disease Accunt for Nonfederal Public-Sector Cost Growth in the United States? A New Test of an Old Idea.” Social Science Quarterly 96 (1): 251–60.Google Scholar
Baumol, William J. 1967. “Macroeconomics of Unbalanced Growth: The Anatomy of Urban Crisis.” The American Economic Review 57 (3): 415–26.Google Scholar
Baumol, William J. 2012. The Cost Disease: Why Computers Get Cheaper and Health Care Doesn't. New Haven, CT: Yale University Press.Google Scholar
Baumol, William J. 1993. “Social Wants and Dismal Science: The Curious Case of the Climbing Costs of Health and Teaching.” Proceedings of the American Philosophical Society 137 (3): 612–37.Google Scholar
Baumol, William J., Batey Blackman, Sue Anne, and Wolff, Edward N.. 1985. “Unbalanced Growth Revisited: Asymptotic Stagnancy and New Evidence.” The American Economic Review 75 (4): 806–17.Google Scholar
Beck, Morris. 1976. “The Expanding Public Sector: Some Contrary Evidence.” National Tax Journal 29 (1): 15–21.Google Scholar
Berry, William D. and Lowery, David. 1984. “The Growing Cost of Government: A Test of Two Explanations.” Social Science Quarterly 65 (3): 735–49.Google Scholar
Berry, William D. and Lowery, David. 1987a. Understanding United States Government Growth: An Empirical Analysis of the Postwar Era. New York: Praeger.Google Scholar
Berry, William D. and Lowery, David. 1987b. “Explaining the Size of the Public Sector: Responsive and Excessive Government Interpretations.” The Journal of Politics 49 (2): 401–40.Google Scholar
Blais, Andre, Blake, Donald, and Dion, Stephane. 1993. “Do Parties Make a Difference? Parties and the Size of Government in Liberal Democracies.” American Journal of Political Science 37 (1): 40–62.Google Scholar
Borcherding, Thomas E. 1977. “The Sources of Growth of Public Expenditures in the United States, 1902–1970.” In Budgets and Bureaucrats, edited by Borcherding, Thomas E.. Durham, NC.: Duke University Press: 45–70.Google Scholar
Borcherding, Thomas E. 1985. “The Causes of Government Expenditure Growth: A Survey of the US Evidence.” Journal of Public Economics 28 (3): 359–82.Google Scholar
Bradford, David F., Malt, Richard A., and Oates, Wallace E.. 1969. “The Rising Cost of Local Public Services: Some Evidence and Reflections.” National Tax Journal 22 (2): 185–202.Google Scholar
Buchanan, James. 1977. “Why Does Government Grow?” in Budgets and Bureaucrats, edited by Borcherding, Thomas E.. Durham, NC: Duke University Press, 3–18.Google Scholar
Buchanan, James M., and Tullock, Gordon. 1977. “The Expanding Public Sector: Wagner Squared.” Public Choice 31 (1): 147–50.Google Scholar
Buchanan, James M. and Wagner, Richard E.. 1977. Democracy in Deficit. New York: Academic Press.Google Scholar
Burman, Leonard E., Geissler, Christopher, and Toder, Eric J.. 2008. “How Big are Total Individual Income Tax Expenditures, and Who Benefits from Them?” The American Economic Review 98 (2): 79–83.Google Scholar
Cameron, David R. 1978. “The Expansion of the Public Economy: A Comparative Analysis.” American Political Science Review.72 (4): 1,243–61.Google Scholar
Colombier, Carsten. 2010. “Drivers of Health Care Expenditures: Does Baumol's Cost Disease Loom Large?” Paper Presented at the 66th Congress of the International Institute of Public Finance in Uppsala, Sweden.Google Scholar
Craig, D. and Heins, A. J.. 1980. “The Effect of Tax Elasticity in Government Spending.” Public Choice 35: 267–75.Google Scholar
Downs, Anthony. 1960. “Why the Government Budget is Too Small in a Democracy.” World Politics 12 (4): 541–63.Google Scholar
Estelami, Hooman, Lehmann, Donald R., and Holden, Alfred C.. 2001. “Macro-Economic Determinants of Consumer Price Knowledge: A Meta-Analysis of Four Decades of Research.” International Journal of Research in Marketing 18 (4): 341–55.Google Scholar
Garand, James C. 1988. “Explaining Government Growth in the U.S. States.” American Political Science Review 82 (3): 837–49.Google Scholar
Garrett, Thomas A. and Rhine, Russell M.. 2006. “On the Size and Growth of Government.” Federal Reserve Bank of St. Louis Review. 88 (January/February).Google Scholar
Goetz, Charles. J. 1977. “Fiscal Illusion in State and Local Finance.” In Budgets and Bureaucrats, edited by Bocherding, Thomas E.. Durham, NC: Duke University Press, 176–87.Google Scholar
Hardwig, Jochen. 2008. “What Drives Health Care Expenditure? Baumol's Model of Unbalanced Growth Revisited.” Journal of Health Economics 27: 603–23.Google Scholar
Heller, Peter S. 1981. “Diverging Trends in the Shares of Nominal and Real Government Expenditure in GDP: Implications for Policy.” National Tax Journal 34 (1): 61–74.Google Scholar
Higgs, Robert. 1985. “Crisis, Bigger Government, and Ideological Change: Two Hypotheses on the Ratchet Phenomenon.” Explorations in Economic History 22 (1): 1–28.Google Scholar
Howard, Christopher. 1999. The Hidden Welfare State: Tax Expenditures and Social Policy in the United States. Princeton, NJ: Princeton University Press.Google Scholar
Larkey, Patrick D., Stolp, Chandler, and Winer, Mark. 1981. “Theorizing About the Growth of Government: A Research Assessment.” Journal of Public Policy 1 (2): 157–220.Google Scholar
Lewis-Beck, Michael S., and Rice, Tom W.. 1985. “Government Growth in the United States.” The Journal of Politics 47 (1): 1–30.Google Scholar
Lowery, David. 1987. “Electoral Stress and Revenue Structures in the American States Searching for the Elusive Fiscal Illusion.” American Politics Research 15 (2): 5–46.Google Scholar
Lowery, David and Berry, William D.. 1983. “The Growth of Government in the United States: An Empirical Assessment of Competing Explanations. American Journal of Political Science 27 (4): 665–94.Google Scholar
Lybeck, Johan A., and Henrekson, Magnus. 2014. Explaining the Growth of Government. Amsterdam, North Holland: Elsevier.Google Scholar
Marlow, Michael L. 1988. “Fiscal Decentralization and Government Size.” Public Choice 56 (3): 259–69.Google Scholar
Mintrom, Michael. 2000. Policy Entrepreneurs and School Choice. Washington, D.C.: Georgetown University Press.Google Scholar
Neck, Reinhard and Getzner, Michael. 2007. “Austrian Government Expenditures” Wagner's Law or Baumol's Disease.” International Business and Economics Research Journal 6 (11): 49–66.Google Scholar
Nordhaus, William D. 2006. “Baumol's Disease: A Macroeconomic Perspective.” The BE Journal of Macroeconomics 8 (1): 1–39.Google Scholar
Page, Benjamin I. 1983. Who Gets What From Government. Berkeley, CA: University of California Press.Google Scholar
Peltzman, Sam. 1980. “The Growth of Government.” Journal of Law and Economics 23 (2): 209–87.Google Scholar
Piketty, Thomas. 2014. Capital in the 21st Century. Cambridge, MA: Harvard University Press.Google Scholar
Plotnick, R. D. 1998. The Twentieth Century Record of Inequality and Poverty in the United States. Doctoral dissertation, University of California at Berkeley.Google Scholar
Pommerene, W. W. and Schneider, Friedrich. 1978. “Fiscal Illusion, Political Institutions, and Local Public Spending.” Kyklos 31: 381–408.Google Scholar
Schaffer, Mark E. 2010. “egranger: Engle-Granger (EG) and Augmented Engle-Granger (AEG) Cointegration Tests and 2-step ECM estimation.” (Accessed on 1 November 2015) http://ideas.repec.org/c/boc/bocode/s457210.html.Google Scholar
Schnedider, Mark, Teske, Paul, and Mintrom, Michael. 1995. Public Entrepreneurs. Princeton, NJ: Princeton University Press.Google Scholar
Semat, Joshua, Lowery, David, Linn, Suzanna, and Berry, William D.. 2015. “The Cost Growth of Government Revisited.” Business and Politics 17 (4): 723–37.Google Scholar
Shafir, Eldar, Diamond, Peter, and Tversky, Amos. 1997. “Money Illusion.” The Quarterly Journal of Economics 112 (2): 341–74.Google Scholar
Spann, Robert M. 1977a. “The Macroeconomics of Unbalanced Growth and the Expanding Public Sector: Some Simple Tests of a Model of Government Growth.” Journal of Public Economics 8 (3): 397–404.Google Scholar
Spann, Robert M. 1977b. “Public versus Private Provision of Governmental Services.” In Budgets and Bureaucrats, edited by Borcherding, Thomas E.. Durham, NC: Duke University Press, 100–29.Google Scholar
Tarschys, Daniel. 1975. “The Growth of Public Expenditures: Nine Models.” Scandinavian Political Studies 10: 9–31.Google Scholar
Thoma, Mark. 2013. “Who First Said the US is ‘An Insurance Company with an Army’?” Economist's View. (Accessed on 16 July 2015) http://economistsview.typepad.com/economistsview/2013/01/who-first-said-the-us-is-an-insurance-company-with-an-army.html.Google Scholar
Thuronyi, Victor. 1988. “Tax Expenditures: A Reassessment.” Duke Law Journal 37 (6): 1,155–206.Google Scholar
Thurow, Lester. 1971. “Income Distribution as a Pure Public Good.” Quarterly Journal of Economics 85: 327–26.Google Scholar
Tufte, Edward R. 1978. Political Control of the Economy. Princeton, NJ: Princeton University Press.Google Scholar
U.S. Bureau of Labor Statistics, All Employees: Government [USGOVT], retrieved from FRED, Federal Reserve Bank of St. Louis. (Accessed on 10 December 2014) https://research.stlouisfed.org/fred2/ series/USGOVT/.Google Scholar
Wagner, Adopf. 1877. Finannzwissenschaft, pt. 1. Leipzig, Germany: C. F. Winter.Google Scholar
Wagner, Richard E. 1976. “Revenue Structure, Fiscal Illusion, and Budgetary Choice.” Public choice 25 (1): 45–61.Google Scholar
Wagner, Richard E. and Weber, Warren E.. 1977. “Wagner's law, Fiscal Institutions, and the Growth of Government.” National Tax Journal 30 (1): 59–68.Google Scholar
Wagstaff, Joseph V. 1965. “Income Tax Consciousness Under Whitholding.” Southern Economics Journal 32: 73–80.Google Scholar