Not every enterprise can do more with less

Earlier this year, a freshman member of the Minnesota Legislature was heard to remark: "When will our transit system ever become profitable?"

The answer to this question is, of course, "never" -- at least as long as transit vehicles require operators.

Why? Because public transportation suffers from "Baumol's Cost Disease."

William Baumol is a New York University economist and longtime patron of the arts. He has served on the boards of a number of performing-arts organizations in New York City.

As an economist, he was troubled to no end that none of these organizations could, as they say, "live within their means." Year after year, costs always seemed to increase faster than inflation. So Baumol dug into their books to find out why.

The answer turned out to be quite simple: It took four people to play a Mozart string quartet in 1790, during the composer's lifetime, and it still takes four people today.

In other words, there are never any labor productivity gains in the live performing arts.

Thus, the wages of skilled musicians (or actors or dancers, etc.) rise along with the wages paid to skilled workers in other fields -- but many of those fields are experiencing productivity gains.

When standards of living are rising (as we hope, over time, they always are) then wages, including wages in professions that suffer from low labor productivity gains, will, by definition, be rising faster than inflation.

That's what a rising standard of living means. As a consequence, the operating costs of labor-intensive organizations with little opportunity for labor productivity gains rise faster than inflation.

This phenomenon came to be known as "Baumol's Cost Disease."

So what does this have to do with the lack of profitability of bus services?

Baumol's friend, the late Sen. Daniel Patrick Moynihan, observed that essential public services that suffer from Baumol's Cost Disease tend to migrate from the private sector to the public sector over time. Public transportation is a case in point.

In fact, most of the services provided by state and local governments today suffer from this "disease."

In education, greater labor productivity would mean more students per teacher -- i.e., larger class sizes -- and no one wants that. In public safety, greater labor productivity would mean fewer cops and firefighters per resident, and no one wants that, either.

One could argue that the trend toward a greater government role in the financing of health care arises, at its root, from the fact that no one wants more patients per doctor or nurse.

Directly or indirectly, the vast majority of the state general-fund budget goes to pay for the payroll expenses of educators, health care providers, public works employees and public safety workers in fields that suffer from Baumol's Cost Disease.

It's just that the big bucks go to the state and local government functions where we're all quite vocal about not wanting fewer public servants per citizen.

Does this mean that we should just give up and pay our taxes because government can't be "reformed"? No, it just means that we have to recognize that "reform" is not easy.

For example, in his book "Disrupting Class," disruptive innovation guru Clayton M. Christensen notes that the pace of adoption of online computer-based education suggests that it could, over the course of a decade or so, change the face of education by transforming teachers from being lecturers at the front of the class to being coaches assisting individual students when they're stumped with their computer-based lessons.

Because students could move at their own pace, the better students could progress to high school graduation in fewer than the currently prescribed 12 years (and from there to college graduation in less than four). Teachers could potentially "coach" more students than they can "lecture" in the current regime.

Both of these outcomes would represent true improvements in teacher productivity. However, the technology isn't there yet. Class sizes at the better online colleges, like Minnesota-based Capella University, are no larger than those of top tier brick-and-mortar colleges, and so today's online education is just as costly as traditional education.

Until we find cures for Baumol's Cost Disease in education, health care and public safety, we can only do less with less. That's not reform -- it's just shortsighted and mean-spirited.