The so-called “Baumol Effect” is something that’s pretty widely known even as its implications are rarely confronted squarely. For example, suppose you’re thinking about spending on teacher compensation. The following options are available:
— Class size can steadily increase over time.
— Teacher pay relative to average pay can steadily decline over time.
— Taxes can steadily rise over time.
As of January 2010 only four percent of people thought public school teachers are paid too much. And yet the public is hardly clamoring for larger class sizes or endless tax hikes. However you feel about this, though, the point isn’t just that tradeoffs exist at the margin but that the problem continually recurs as long as average productivity and compensation are rising in the private sector.