A shortened version of this piece appeared in the Lexington Minuteman on May 10, 2007

As we approach another override asking us for more cash, I would like to recommend to my fellow townsfolk a classic book on economics published way back in 1966 called Performing Arts: The Economic Dilemma. In it, two of the most celebrated economists of their generation explained the “cost disease” of the service sector. While clever business managers could forever invent new ways to more efficiently produce manufactured goods (including importing them from low-wage countries), a symphony quartet still requires four musicians, it takes a nurse to hold a patient’s hand, and a teacher to educate a classroom full of kids. Unlike manufacturing, productivity improvements in these labor-intensive areas are hard to come by.

Thus Bowen and Baumol explained why the arts, health care, and education rise in price faster than manufactured goods. They concluded that service inflation was a disease without a cure, and helped explain why the cost of government services rises faster than overall inflation. Thus it was, thus it always will be. If Socrates were alive today he might bike to his classes and call Plato on his cell phone, but once he arrived at school he’d find that the job of teaching really hasn’t changed all that much.

The professors’ insights are front and center in today’s national inflation statistics. Over the year ending this past March, overall inflation rose 2.8%, a little more than the increases in property taxes allowed under Proposition 1/2. As Bowen and Baumol predicted, what kept inflation down over the past year was the price of manufactured goods: new car prices fell -1.1%, apparel prices rose only 0.5%, and personal computer prices dropped a whopping 10.6%. The painful big-ticket items, predictably, were Medical Services, including Hospital Services (+5.8%), and Education (+6.1%), including Tuition, other School Fees and Childcare (+6.0%).

I will admit to being a trained economist, and as such I accept the fact that my taxes may need to rise by more than 2.5% to finance education. Meanwhile, I benefit from cheaper cars, computers and televisions. Prop 2 1/2 spending caps would make a lot of sense if our tax dollars paid mostly for laptops and furniture, but what we are buying are fire fighters, police officers and teachers, and we’ve had solid economic theory for decades now as to why the cost of these admirable civil servants goes up faster than the price of toasters.

So what is the upshot of the “cost disease of the service sector”? The price tag for town services is likely to rise faster than the 2-3% that represents general inflation, unless the school population is shrinking (as it is likely to do once the baby boomers become empty nesters). If we want

to maintain town services, alas, we will have to pay for them. Unless state funding increases substantially, I will be voting YES on overrides, while looking for a bargain on my next flat screen TV. Overall, it’s a pretty good deal.