THE COST DISEASE AND GOVERNMENT GROWTH - QUALIFICATIONS TO BAUMOL

Changes in real world wage movements across sectors account for about a third of the rise in the cost of U.S. government services between 19 59 and 1989, while relatively slower productivity in the public sector acccounts for the remaining two-thirds. Even though it is slower, how ever, the productivity record still is positive even in the labor inte nsive government sector. Consequently Baumol argues that the public's likely future objection to necessary increases in the share of expendi tures over the next 50 years will betray a fiscal illusion unless poli cymakers take pains to dissolve it. But slower productivity may be equ ally due to the structural organization. Removing public monopolies, r educing bureaucracies, and undertaking privatization in education for example, are other policy options that could radically change the prod uctivity record. Meanwhile in his recent calculations of dramatic gove rnment expenditure increases expected in the next half century, Baumol omits reference to the marginal welfare cost of public funds, which o n our estimates, will increase at least ten times to reach 1.71 by the year 2040.