The Budget's Next Battlefront

The debt ceiling fracas that consumed Washington this summer made it seem as if restoring economic health was only a matter of finding a new balance of taxes and spending. But Arnold Kling of the Cato Institute and Nick Schulz of the American Enterprise Institute argue that policymakers are neglecting a transformational development on the horizon: Health care and education are on track to become “the heart of the economy." That is, or should be, the central issue, they argue.

Unlike many fields, health care and education will enjoy solid demand and wage growth for the foreseeable future. They’ve already accounted for the vast majority of job gains in recent memory: Employment in health care, education, and other parts of the public sector increased by 16 percent over the past 10 years, while employment in all other sectors fell by eight percent. And the trend will only continue. The way the modern economy has evolved means that Americans use a smaller percentage of their income for basic needs such as food, clothing, and shelter, freeing up money for secondary but still integral services such as education and health care. What’s more, even in hard times, people refrain from tightening their belts when it comes to these secondary services: In 2008, at the height of the panic over the financial system, personal spending on education and health care continued to rise.

Kling and Schulz note that it is also hard “to squeeze labor costs out of” these industries. Teachers and medical professionals need to have good judgment and problem-solving skills, and are virtually impossible to replace with machines. Just compare the idea of “increasing the number of operations per surgeon, or the number of essays graded per teacher,” with increasing the speed of a production line. And while the market generally offers people in such low-productivity occupations lower wages, the indispensability of teachers, doctors, and the like means their wages will climb to remain competitive with those in professions in which output is more readily manipulated.

Another notable characteristic of the education and health care industries is that they’re dominated by government. Kling and Schulz argue that as these two areas’ shares of the economy continue to grow—they totaled 26 percent of U.S. GDP in 2010—they will increasingly exert a negative influence. The public sector is largely exempt from imperatives that are routine in the private sector, such as “economic value, efficiency, productivity, and consumer preferences.” If so much of the U.S. labor market comes within the purview of the state, the values of the private sector may lose their salience. Kling and Schulz predict that “the struggle for power over these sectors will be the focal point of American domestic politics in the 21st century.”

THE SOURCE: “The New Commanding Heights” by Arnold Kling and Nick Schulz, in National Affairs, Summer 2011.

Photo courtesy of Flickr/Ahmad Nawawi