Our thinking about productivity is cockeyed, according to a new economic report. We’re ignoring the real productivity problem: surging costs for health care, housing and education. We need to understand this argument, because it just might be correct.
Unless you’ve been vacationing on Mars, you know that productivity is the catchword for economic efficiency — and also that we’re facing a quiet productivity crisis. Gains in productivity have slowed to a crawl or stagnated. Unless they revive, prospects for higher living standards will fade or vanish.
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The conventional solution is more innovation, driven by advances in science and technology. We need the equivalent of the invention of the computer chip or the internet. Nope. That’s too simple, says economist Jonathan Rothwell, author of the report for Gallup, the polling company.
A huge part of the productivity slowdown, Rothwell contends, is the poor performance of these three large sectors of the economy: health care, education and housing. These sectors have gotten bigger, he says, without getting more productive. As their costs escalate, they absorb more of families’ incomes, making it harder to satisfy other wants.
The size of these three sectors has increased from 25 percent of national spending (gross domestic product) in 1980 to 36 percent of GDP in 2015, Rothwell estimates.
Everyone knows about rising health costs, including higher insurance deductibles and co-payments. The same thing is happening in the other sectors.
From 1980 to 2014, median rent for families rose from 19 percent of income to 28 percent, Rothwell says. Over the same years, homeowners’ mortgage costs went from 12 percent to 16 percent of income.
Likewise, costs for K-12 public schools, after adjusting for inflation, jumped 74 percent between 1980 and 2013. College tuition has also soared.
If these price increases had been accompanied by dramatic improvements in quality and value — that is, productivity gains — they might be easily explained. But Rothwell doubts this. Gains in life expectancy have been modest, he says. Despite higher rents, the median size of rental units has declined about a fifth since 1980. Scores on standardized tests have remained roughly stable since the early 1970s.
The reality is that inefficient practices are protected by politically strong interest groups, the report argues.
Take health care. Doctors support laws prohibiting nurse practitioners, who could handle much routine care, from doing so except under the supervision of doctors. Only about a fifth of nurse practitioners live in states permitting them to practice independently.
“The physicians who run the clinics can charge insurance organizations the same or only a slightly reduced fee if a patient sees a nurse practitioner while paying the nurse practitioner half as much, allowing the physician to keep the rest as profit or salary,” asserts Rothwell.
Or consider housing. On the one hand, the federal government pumps up home demand by providing a huge tax break — the deduction of mortgage interest. Meanwhile, local governments limit housing supply with tough zoning laws that favor single-family homes. The aim is to placate homeowners who don’t want apartments or condominiums in their neighborhoods.
High demand meets constricted supply. Should anyone be surprised that rents and home values have an upward bias?
Promoting higher productivity in these sectors is clearly in the nation’s interest. On paper, it seems possible. We could change public policies. In practice, it isn’t so easy for two reasons.
First, it’s hard to measure productivity in health care and education. Is obesity a failure of the health-care system or a social condition that the health-care system can’t easily fix? So, too, with education. Are schools and colleges to blame for poor student performance? Or are they being asked to remedy social ills — poverty, family breakdown — not of their making?
Given the problems, the government’s broad productivity indicators mainly ignore possible gains or losses in health care and education. These sectors grow or shrink with the hiring or firing of workers. There are no productivity changes; though this is unrealistic, it may be better than the alternatives.
The second reason is familiar: Debates about overhauling health care or education are usually contentious and inconclusive. People feel passionately, and differences are not easily reconciled. The same is true of housing.
Still, the crux of our productivity problem lies in these crucial sectors. We need schools that work, affordable housing and cost-effective health care. It is so easy to state and difficult to achieve.
Mr. Samuelson has written about business and economic issues since 1977.