Revealing article by Harvard’s Kenneth Rogoff linked above…
- The government operates in the service industry, which generally exhibits slow productivity growth.
- While productivity growth is slow, the industry is still forced to pay higher wages for relatively the same output because it competes for workers in the same labor market as other, high-productivity industries like finance and telecommunications. This translates into ever-increasing costs.
- This cost issue plagues the service industry. Costs are so high that the industry now accounts for more than 70% of spending.
- While this “cost disease” permeates the industry as a whole, the government suffers more than most players because (a) it’s expected to provide a wide array of services, making it impossible to specialize and reduce costs and (b) government often provides services in areas where there is little competition, making it difficult to lower costs since there is little incentive to innovate.