'One Market Under God' Chapter One: The Illuminati

[Measure_for_Measure]

jshore says Now, it may well be that there is no reasonable sense in which we could say that Frank’s general claim is correct. However, it seems to me that you are far from proving that…You have only shown that you can abstract from it one specific claim that is incorrect.

To be honest, Frank is ambiguous here. I’m not hoping for the “no reasonable sense” standard. Rather, I’m saying that Frank is misleading, driven by ideology and indifferent to the facts. (I may be wrong, this is after all only one article. Furthermore, Frank would hardly be alone in this regard. Which is why I can’t get too bent out of shape about the guy.)
Let’s look at Frank’s quote again:

According to Frank, the “New Economy’s”…greatest achievement–the booming stock market of recent years–has been based in no small part on companies’ enhanced abilities to keep wages low even while CEO compensation soars to record levels.

Leaving aside whether the stock market was actually the New Economy’s greatest achievement, I think it’s clear that Frank was talking about the “recent years” during the 1990s. Unless you want to trace the New Economy back to the Reagan years. I trust Heritage has made such an argument.

I almost grabbed that quote at random: it’s from the last paragraph in the article, so one would think he might not want to end on a misleading note. Yet from the epi link, we see that real wages bottomed out in 1996 and then started growing during the years of the “New Economy’s greatest achievement (sic)”.

But jshore’s LBO link was really great. “If there are real real wage gains, then it’s about damn time.” Precisely. And my eyeballing of their productivity chart suggests that compensation and productivity were moving in lockstep during the late 1990s – for the first time in about 20 years. To me that would be the greatest accomplishment of the New Economy. But right-wingers like Frank, jshore and Mandelstam may disagree with me. I can respect that. (d&r: please don’t hurt me.)

Ok, so I’m being obtuse. The point is that there were some rather large changes in the economy, that Frank really should have made his business to know about. As far as I can tell, Frank is more concerned with ideology than facts. But (dammit) I think quality control is important. Kuddos to the left business observer.

Let me restate. I would appreciate learning what exactly Frank has to offer. I’d like to see a paragraph of his with some empirical content that is neither obvious nor misleading. Surely, I’m setting the bar pretty low. Even better would be a link to another article of his which is superior.

[Measure_for_Measure]

Mandelstam: Well, sorry to say, I haven’t seen much empirical reality from you either flowbark. You skimmed Frank fast enough to offer a somewhat irrelevant response to his main argument, you alleged a debate as to Asian industrialization that has nothing to do with Frank’s article and, in general. you’ve adduced no empirical arguments whatsoever. As I say above, I believe your assumptions as to real wages are faulty. Sorry, flow, but the truth is that your participation in this thread, thus far, is 100% ideology.

Gotta be polite here. The truth is my Asian industrialization point has more to do with comments made by Mandelstam than by Frank. Furthermore, I’ve made no assumptions about real wages, I’m reporting facts about my memory of (among other sources) the back pages of The Economist, where they show wage growth and inflation of a variety of countries each month. Facts that, OBTW, were not disproved by jshore (although we have some literary disagreements with what exactly Frank said).

When I originally cited “the Washington Consensus” and the “Golden Straightjacket”, I was referring to Frank’s tendancy to misuse key phrases. I was a bit off in the former case - I was using the original definition which has since been superceded - but my point is that Frank’s analysis tends towards the, um, impressionistic.

100% ideology: Bullshit. Look back in the thread. I grant Frank’s point about CEO compensation, but I make another point about real wages - a point backed up by jshore’s 2 links. I don’t claim that the record is clear regarding the developmental policies of East Asia -you are the one who claims it’s “common knowledge”- rather I say that “it’s a highly contentious issue”.

What separates ideologues from analysts is the latter’s willingness to weigh conflicting evidence, usually at the expense of clarity and narrative convenience.

[Measure_for_Measure]

Now, then, for some empirical reality. I busted my chops trying to get median wage data from the CPS (which would have abstracted away from compensation flowing to CEOs and other high wage earners) but was unable the historical data on the BLS website. (grrrrr.)

I do, however, have some GDP share data that the group may or may not find interesting.
The following represents shares of national income devoted to total compensation (wages + other labor income (benefits)), wages, benefits, corporate profits, proprietary income and net interest. Note that wages and benefits don’t total up to total compensation. I’ve forgotten what the missing element is.

date total comp wages   benefits Corp Prof Prop Y Net Interest
1973q4	71.4%	62.2%	4.4%	9.5%	10.8%	5.1%
1974q4	74.2%	64.0%	4.9%	8.2%	9.4%	6.2%
1975q4	72.1%	61.6%	5.1%	10.9%	9.4%	5.9%
1976q4	73.2%	61.8%	5.7%	10.4%	9.2%	5.9%
1977q4	72.2%	60.6%	5.9%	11.3%	9.1%	6.3%
1978q4	71.5%	60.0%	5.9%	11.8%	9.0%	6.6%
1979q4	72.6%	60.6%	6.0%	10.1%	8.7%	7.7%
1980q4	73.4%	61.1%	6.2%	8.7%	8.1%	8.8%
1981q4	73.5%	61.0%	6.2%	7.5%	7.1%	9.9%
1982q4	74.2%	61.3%	6.4%	6.1%	7.3%	9.8%
1983q4	72.9%	60.2%	6.2%	7.5%	6.9%	10.1%
1984q4	71.6%	58.9%	6.0%	7.0%	7.7%	10.2%
1985q4	72.1%	59.4%	6.0%	6.5%	7.9%	10.1%
1986q4	73.2%	60.2%	6.2%	6.4%	7.9%	10.0%
1987q4	72.0%	59.4%	6.2%	7.4%	7.9%	9.8%
1988q4	71.4%	59.0%	6.0%	8.3%	7.8%	9.8%
1989q4	72.3%	59.6%	6.4%	7.4%	8.1%	10.3%
1990q4	72.2%	59.3%	6.6%	7.6%	8.0%	10.1%
1991q4	73.0%	59.6%	6.9%	7.8%	8.0%	9.0%
1992q4	72.6%	59.2%	7.1%	8.2%	8.6%	8.1%
1993q4	71.9%	58.3%	7.3%	9.4%	8.6%	7.3%
1994q4	71.2%	57.9%	7.1%	9.7%	8.3%	7.5%
1995q4	70.7%	58.1%	6.5%	10.7%	8.3%	7.0%
1996q4	70.7%	58.5%	6.1%	10.8%	8.4%	6.6%
1997q4	70.9%	59.0%	5.9%	10.9%	8.2%	6.4%

Yikes, let's summarize  

date  total comp wages benefits Corp Prof Prop Y  Net Interest
1992q4	72.6%	59.2%	7.1%	8.2%	8.6%	8.1%
1995q4	70.7%	58.1%	6.5%	10.7%	8.3%	7.0%
change:	-1.9%	-1.2%	-0.5%	2.5%	-0.3%	-1.1%
						
1997q4	70.9%	59.0%	5.9%	10.9%	8.2%	6.4%
ch92-97	-1.8%	-0.2%	-1.2%	2.7%	-0.3%	-1.7%

Too bad I don’t have data through 1999; I missed a lot of the real-wage growth era. Note the big increase in corporate profit shares. Weirdly, the bottomed during the Reagan era and grew by leaps and bounds during the Clinton period.

I thought I’d be able to tell a story centering around another trend reversal, that relating to slower growth in health costs. But declining benefit shares of -0.5% are smaller than the decline in wage shares (-1.2%). So for the 1992-1995 era, the Frank story about Robber Barons squeezing the workers can be supported.

The trend appears to reverse itself between 1995 and 1997. Big picture change? Corporate profits, as a share of the economy, rose from 1992-1997. A little less than half of that was related to declines in compensation shares (mostly benefits, not wages). The other half was due to… declines in interest rates.

Interestingly, the suits can thank Clinton in both cases. Declines in health care expenses are thought to be related to the growth of managed care, a trend that was accelerated by Clinton’s unsuccessful attempt at health care reform. And Clinton’s attack on the deficit (and to a lesser extent Rubin’s boring and predictable signalling to the bond market) helped lower long term interest rates.

Finally:
Those who believe that wages can grow at the same rate as productivity are implicitly assuming some combination of shrinking profit shares, and more important, much lower growth in health care expenses. It is the latter element which make Frank’s apparent social security assumptions less plausible.

[Measure_for_Measure]

*Originally posted by erislover *
…my intent wasn’t to say that meat packing industry should be self-regulated per se, but rather that the workers, as part of a union or other less formal organization, have the ability to ensure that the job is done right…

They may have the ability. They don’t necessarily have the incentive, though.

…the point is that labor unions serve as a check on employers. Regulation serves as a check on employers. I think that putting two and two together here is something that should be considered.

And my point is that labor unions serve as a check on employers in some ways (eg safety standards) but not in others (eg pollution). And that we shouldn’t expect them to (though we may part company on this latter point).

Democratic governments, OTOH, have an incentive to avoid scandals (such as an excess of rotton meat being sold). (Policy entrepreneurs have an incentive to find scandal -perhaps the meat has higher-than-acceptable-levels of, um, MSG).

And inspectors have an incentive to do their job, provided they operate within a noncorrupt judicial system. Which is not to say that rule of law is easy to establish.

Perhaps we have to add another continent (in addition to Oceania, et al) full of environmentalists, consumer activists, NGOs and other assorted do-gooders. Call it Naderland.

[Measure_for_Measure]

Frank says It is this intellectual unanimity about the nature and the purpose of economies, as much as the technological advances of recent years, that we refer to when we talk so triumphantly about the “New Economy.” It is this nearly airtight consensus–this assurance that no matter what happens or who wins in November, a strong labor movement and an interventionist government will not be returning–that has made possible the unprecedented upward transfer of wealth that we saw in the Clinton years, that has permitted the bull market without end, and that has made the world so safe for billionaires.

Frank seems to make a number of varied points here. It seems to me that he is claiming that there is “intellectual unanimity” about the purpose and nature of economies. Controlling for hyperbole, I agree.

Furthermore, this POV is antithetical to a strong labor movement and interventionist government, as I read Frank. On that, I disagree, assuming I understand him correctly. Much of what I said above was illustrating the gap between the “intellectual consensus” and the doctrine of “market fundamentalism”. This gap is not limited to 3rd world development issues; indeed, many of the prescriptions given to the third world (eg. tax reform, investment in human capital, fiscal restraint) have their origins in US debates.

[erislover]

*Originally posted by flowbark *
They may have the ability. They don’t necessarily have the incentive, though.

No kidding. I think this applies to every single job anywhere.

Democratic governments, OTOH, have an incentive to avoid scandals (such as an excess of rotton meat being sold). (Policy entrepreneurs have an incentive to find scandal -perhaps the meat has higher-than-acceptable-levels of, um, MSG).

I don’t see how this is a political scandal that will cause a shift in government.

And inspectors have an incentive to do their job, provided they operate within a noncorrupt judicial system.

How?

Perhaps we have to add another continent (in addition to Oceania, et al) full of environmentalists, consumer activists, NGOs and other assorted do-gooders. Call it Naderland.

Fine by me. The more people there are acting as power brokers the less they each have.

[jshore]

*Originally posted by flowbark *
But jshore’s LBO link was really great. “If there are real real wage gains, then it’s about damn time.” Precisely. And my eyeballing of their productivity chart suggests that compensation and productivity were moving in lockstep during the late 1990s – for the first time in about 20 years. To me that would be the greatest accomplishment of the New Economy.

Yes, but the point is that if we have to wait for the economy to totally catch fire and record low unemployment rates to make labor incredibly scarce in order to just get compensation to increase as fast as labor productivity, then what pray tell is going to happen the rest of the time? That’s sort of like trying to sell me a car by telling me that it can easily do 65 on the highway for a stretch of about 15 minutes of the time out of every hour (with it piddling along at about 30 the rest of the time). Should I buy such a car?

As for your GDP share data, I am actually a bit puzzled by why it doesn’t seem to jive with the story told by the LBO curve. It doesn’t directly contradict it, but certainly doesn’t show what I would expect it to if the two as being totally consistent. Do you understand it?

Those who believe that wages can grow at the same rate as productivity are implicitly assuming some combination of shrinking profit shares, and more important, much lower growth in health care expenses. It is the latter element which make Frank’s apparent social security assumptions less plausible.

Well, this is true technically but I am not convinced it would have that large an effect. For one thing, your GDP share data still shows that the ratio of benefits to wages has been fairly steady at a ratio of 1:10 after a climb during the mid 70s. So, even if benefits for medical continue to rise at rapid rates, it seems like it would have to be really quite dramatic in order to make compensation rates rise at a much faster rate than wages. As a concrete example, I assumed that over the next 40 years, total compensation rises at an annual rate of 2.1% (Bush’s number for labor productivity through 2012). I then assumed that the ratio of wages to benefits goes from 10:1 to 5:1. And, I still get that wages rise at an annual rate of 1.9%. (Of course, if health care costs continue to spiral out of control, my guess is that at some point we will get away from a system where employers pay for health care or at least to the same extent they do now…i.e., I find it hard to believe that the ratio of wages to benefits will even double.)

[jshore]

*Originally posted by jshore *
i.e., I find it hard to believe that the ratio of wages to benefits will even double.

Of course, I should have said “the ratio of benefits to wages…” there.

[Measure_for_Measure]

*Originally posted by jshore *
Yes, but the point is that if we have to wait for the economy to totally catch fire and record low unemployment rates to make labor incredibly scarce in order to just get compensation to increase as fast as labor productivity, then what pray tell is going to happen the rest of the time?

I’m losing the thread here. I was just trying to show that the 1990s were not a period where the suits were particularly adept on putting the screws on the workers. Indeed, during the mid to late 1990s, the median worker appeared to make consistent real wage gains for the first time in decades. My fire was directed at Frank; it wasn’t a defense of the status quo.

When I saw real wage growth turn positive after many years I can recall thinking (like the LBO), “Yeah, it’s about time.”

As for your GDP share data, I am actually a bit puzzled by why it doesn’t seem to jive with the story told by the LBO curve. It doesn’t directly contradict it, but certainly doesn’t show what I would expect it to if the two as being totally consistent. Do you understand it?

No. I haven’t pulled together all the data and given it an interpretation. Recall though, that compensation shares will change not only with increases in wages and benefits, but also with increases in employment. (It’s possible to decompose changes in national income into various components, including employment, wage and benefit growth though.)

Separately, I speculate that part of the wedge between labor productivity and compensation[sup]1[/sup] was due to increased factor costs: in the 1970s that means higher energy prices and during the 1980s it means higher interest payments. (Of course, it’s true that energy prices dropped during the 1980s.)

And, yes, declining unionization from 1973 - ??? also probably played a role.

There’s another possible explanation for rising profits. There was a big investment boom during the 1990s. When a machine is sold from one company to another, the seller books the sale as revenue, but the buyer gets to spread the cost out over many years. Thus, a jump in investment will result in a leap in economy-wide accounting profits. Or so I’ve read.

RE: Soc. Security, wages and benefits: Let me get back to you on that. I need to do some scribbling.

[sup]1[/sup]And I was pleased that LBO looked at total compensation, rather than “cheating” (sort of) and just looking at wages.

[Measure_for_Measure]

*Originally posted by jshore *
Well, this is true technically but I am not convinced it would have that large an effect. For one thing, your GDP share data still shows that the ratio of benefits to wages has been fairly steady at a ratio of 1:10 after a climb during the mid 70s…

1. When I fooled around with my spreadsheet, I got similar numbers FWIW:

Over the next 10 years:
If Health care costs (benefits, actually) increase at 4.2% and compensation increases at 2.1%, then wage growth increases at 1.9% and the ratio shifts from 1:10 to 1:8 after 10 years.

That’s an optimistic scenerio.

If benefits increase at 5.5% and compensation increases at 2.1%, then wage growth increases at 1.7% and the ratio shifts from 1:10 to 1:7 after 10 years.

That’s a middle scenerio.

If benefits increase at 6.7% and compensation increases at 2.1%, then wage growth increases at 1.5% and the ratio shifts from 1:10 to 1:6.4 after 10 years.

That’s a pessimistic scenerio, although health care costs were growth that fast before 1992.

2. Compound growth can be pretty powerful, so the difference between 1.9 and 2.1% may be nontrivial. But I’ll concede the point anyway.

3. 2.1% seems high, as a long term growth rate in productivity. (REM: 2.5% is a central forecast for long run US real GDP growth - that includes ?1%? growth in the labor force). But perhaps Frank was saying that his plan had similar assumptions as the one he was comparing it to.

[jshore]

flowbark,

But if you look at the numbers that you have provided showing the ratios of wages to benefits, they have generally been constant at about 10:1 except for a spike down to about 8:1 in the early 90’s. So, I don’t understand why your pessimistic scenario is likely to be anywhere in the cards. Remember that benefits are more than just health care and that employers react to increasing health care costs in a variety of ways including passing off more of the costs to workers, providing the benefits to fewer workers, … After all, haven’t health care costs risen at a high rate for much of the last 25 years and yet there has been little change in this ratio?!?