As pointed out in Pearlstein’s Washington PostP article of 10/7/12, economists Baumol and Bowen, back in the 1960s, foresaw the situation we see in the US (and also in the UK and Europe) in the early part of the 21st century.
Over the last 50 years there have been huge productivity gains in agriculture and industry, where things can be automated and mechanized. But many services, such as health and education, cannot be mechanized and so have been going up in cost relative to goods like washing machines. There is simply no substitute for the many aspects of these services provided by people, and in our society we want workers’ wages to increase, not decline. So health and education have become more expensive relative to food and household goods. This growing cost of services relative to goods–and the growing share of a typical family’s income that inevitably goes to services–is called Baumol’s Disease. There is not much we can do about it; it is a fact of life.
Government, too, is a people-intensive activity that not only finances healthcare and education but offers other important services such as criminal justice, national security, diplomacy, regulation, and scientific research. Thus, suffering from Baumol’s Disease, government will naturally assume over time a bigger proportion of the national economy. Government efficiency is of course always an issue to contend with, but a growing government does not necessarily reflect incompetence or padding of bureaucracies, as some claim. It is mistaken to demand that government expenditure on services return to some historic percentage of GNP. Just as the typical family now needs to spend an increasing share of its income on services, so does the nation at large. Sacking swathes of government workers and ending numbers of programs is misguided and will damage the social fabric.
(Drawn to my attention by the excellent Steven Pearlstein in the Washington Post 10/7/2012. Read the whole article on page G6)