>"Deflation to cure inflation is like running over a man with a car and then, to apologise, backing up and running over him again."

- Sylvia Porter

NATIONAL economies are summaries of human endeavours and can therefore be seen as living things. Economies are akin to rivers, in that they are always the same - always the Yangtze River, say, or the US economy - despite constantly changing shape and course.

Like people or rivers, the health of economies is critical. Economic health may be measured in a variety of ways. The rate of growth is one. Capitalism requires economies to grow in order for them to survive and prosper. This is a basic law of economics and one that governments ignore at their peril.

A good example has been Bermuda's tourism industry in the past 20 years. Its inability to grow means that it has shrunk, and caused terrible pain for the Bermudians it serves. Had Bermuda not had international business, a continually growing concern, Bermudians would now be starving in the streets, or barely getting by. The appalling situation in Cuba and the hapless economic state of its citizenry is a good example of what happens when economic growth is not achieved.

But growth is not the only way to measure an economy. Its health can be assessed as much by the ways in which it changes as by its absolute dimensions.

Lately, there has been talk of deflation. The term is used to describe a reduction in the level of total spending and economic activity, resulting in lower levels of output, employment, investment, trade, profits and prices.

The Japanese have been experiencing the full effects of deflation for a while. The Germans appear to be entering into a deflationary cycle. The Americans were almost heading for it, but appear to have avoided it. In Bermuda, however, deflation is just about an impossibility.

Bermuda produces hardly any goods, and must import almost all its needs. The law requires at least one Bermudian to be involved in the importation and sale of all goods. Often several layers of agents are involved. This affects pricing: the cost of this protectionism has to be paid by someone.

THE longer the supply line in any arrangement anywhere, the less chance price reductions have of making it all the way to the consumer (while price increases tend to be multiplied). In the case of specific commodities, price decreases are technically impossible. When fuel prices fall in Bermuda, for instance, governments raise the fuel tax to compensate.

On top of these structural disadvantages, the Bermuda economy has an advanced case of a condition known as cost disease, or "Baumol's disease".

Generally speaking, economies produce both goods and services and the healthiest economies produce both. Economies that produce only goods or services are prone to various economic ailments, much as a one-income family is at greater risk of disruption than a two-income family.

Bermuda's economy is almost entirely service-based. Outside of newspapers, Mr. Dunkley's cows and Mr. Barritt's soda bottlers, not much is manufactured here. Therein lies the danger.

Lawyers and accountants, insurers and other service people work at a fairly consistent rate. Any specific service employee could work a bit harder or faster, but generally speaking, no great productivity improvements are possible from knowledge workers. Would you want the fastest lawyer?

Manufacturing employees, however, can greatly increase their output. For example, General Motors takes 24 man-hours of work to produce a car. In 1979, it took 41 man-hours. The improvement in productivity has enabled the company to produce more goods for less cost. The company has been able to raise wages when it had good years, without increasing cost.

If productivity rises and wages rise by the same percentage simultaneously, cost remains the same.

Since productivity cannot be increased across a service industry (other than by working overtime, which adds cost), over time service employees tend to want more money for doing the same amount of work.

Prices rise without productivity increasing. Cost disease is no one's fault, and it affects most directly service industries. Bermuda is almost all service.

THE effect shows up in what secretaries, for example, are paid. Government secretaries earn a package worth about $50,000 a year. Ten years from now, although their job and output will be exactly the same, they will earn maybe $60,000. If their wages do not increase, they will leave and work elsewhere. Either taxes must go up to cover this increased cost, or the number of secretaries must go down, even though nothing has changed in the nature or amount of work performed.

Of course, the number of Government employees is considered by many to be an altogether different and more debilitating disease, but that is a matter of political opinion, and could be cured in a second.

Cost disease, named after William Baumol, the New York University professor who first made the diagnosis in the 1960s, cannot be cured and must be endured.