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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
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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 

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