TCS Daily

Got to Admit It's Getting Better...

By David R. Henderson - September 1, 2006 12:00 AM

In two major newspaper articles, one in last Monday's New York Times (August 28, 2006) and one in last Wednesday's Washington Post (August 30, 2006), two of the nation's leading newspapers do their readers a huge disservice.

In the Times piece, "Real Wages Fail to Match a Rise in Productivity," reporters Steven Greenhouse and David Leonhardt give the impression that workers are somehow doing worse and getting a raw deal from employers. Errors in the Times piece make the reporters' case appear stronger than it really is. But the even bigger problem is that the data are presented in a way that will surely leave an incorrect impression in their readers' minds. Indeed, their article is a model of how to write a news story to mislead your reader or, alternatively, a model of how not to write a news story if you want to inform your reader.

The basic message Greenhouse and Leonhardt deliver is that "wages and salaries now make up the lowest share of the nation's gross domestic product since the government began recording the data in 1947, while corporate profits have climbed to their highest share since the 1960's." That is literally correct, according to the federal government's measures. But it's also misleading, for two main reasons, in order of importance.

First, as marginal tax rates have increased for most people except the highest-income people, due mainly to rising Medicare and Social Security tax rates over the last 40 years, employers have paid a higher and higher percent of compensation in the form of untaxed benefits. So a more-relevant measure is not wages and salaries but total employee compensation. Second, national income is a better base to use for considering each group's -- employees, corporations, proprietors, landlords, and lenders -- share of income.

Before considering the more-relevant measure, it's important to at least get the numbers right, which they don't. Greenhouse and Leonhardt write that in the first quarter of 2006, "wages and salaries represented 45 percent of gross domestic product, down from almost 50 percent in the first quarter of 2001 and a record 53.6 percent in the first quarter of 1970." Actually, in the first quarter of 2006, wages and salaries were 45.9 percent of GDP, not 45 percent; you can't get from 45.9 to 45 by rounding to the nearest whole number. And in the first quarter of 2001, wages and salaries were 49.5 percent of GDP. So the change was really from 49.5 to 45.9, a drop of 3.6 percentage points, not the 5-percentage point that their numbers would imply.

Greenhouse and Leonhardt are aware that they need to consider employee compensation -- wages plus benefits -- and not just wages alone. So they do. Wages plus benefits, they write, were 56.1 percent in the first quarter of 2006. Actually, that's wrong. Wages plus benefits were 56.9 percent of first-quarter GDP. Moreover, there's an obvious next comparison. Greenhouse and Leonhardt thought it was important to tell their readers how wages changed as a percent of GDP between the first quarter of 2001 and the first quarter of 2006. Isn't it as important, therefore, to show how wages plus benefits changed over that same time period? But they don't. So let's do so. In the first quarter of 2001, their comparison quarter for wages alone, wages plus benefits were 59.3 percent of GDP. In other words, wages plus benefits dropped by 2.4 percentage points, only half the drop that they lead readers to believe was the drop in wages alone.

Not that they don't compare their incorrect 56.1 percent number. They do. But Greenhouse and Leonhardt twist themselves into pretzels to make things seem grim. They write, "Total employee compensation -- wages plus benefits -- has fared a little better. Its share was briefly lower than its current level of 56.1 percent in the mid-1990's and otherwise has not been so low since 1966." Get it? If we were to rewrite their sentence to make the changes over time clearer, the sentence would go something like the following: "Wages plus benefits as a percent of GDP rose after 1966, fell in the 1990s, and has since risen and fallen, but has never fallen to the low it reached in the mid-1990s." That more-accurate wording leaves a different impression, doesn't it?

They leave out one other interesting number: that is corporate profits as a percent of GDP. If you read that wages plus benefits are 56.1 percent of GDP, you might think that corporate profits are the remaining 43.9 percent, right? Well, it's not true. First, there are payments other than corporate profits and employee compensation: proprietors' income, net interest, and rent, to name the main three in order of importance. Second, profits and employee compensation come out of national income, and national income is substantially smaller than GDP. In the first quarter of 2006, for example, national income was 88.8 percent of GDP. The factor subtracted from GDP to get national income is consumption of fixed capital (i.e., depreciation). So what did happen to corporate profits? They rose, from 7.8 percent of GDP to 12.1 percent of GDP. That is a large increase, and percentage-wise it's huge. So why didn't Greenhouse and Leonhardt report this number? I think it's because they didn't want their readers thinking that only 12 cents out of every GDP dollar went to profits.

The Washington Post's "Devaluing Labor" by Harold Meyerson, credulously quotes the New York Times piece to buttress his case. And what is Meyerson's case? He hearkens back an America from 1947 to 1973 when "More Americans bought homes and new cars and sent their kids to college than ever before" and writes, "That America is as dead as a dodo." He doesn't present data to make his case, which is understandable because the America of today is even in better economic shape than the America of his golden era. Let's take his own criteria -- home ownership, car ownership, and the percent of the population with college degrees. In focusing on these data, I'm assuming that Meyerson cares about whether Americans own homes, own cars, and have college degrees, not whether they bought houses, bought cars, and went to college last year.

Take home ownership. In the first quarter of 1965, the first date I could find quickly, 62.9 percent of American households owned their homes. That was during Meyerson's golden era. In the second quarter of this year, the "dead middle-class era," it was 68.7 percent, an all-time high. Cars? What's relevant, as with homeownership, is the percent of the population that owns cars. And this has boomed. In 1970, presumably near the peak of Meyerson's golden era, there were 108.4 million vehicles registered in the United States; by 2003, this had soared to 231.4 million, an increase of 113.5 percent, while the population had risen by only 42.4 percent. And note that Meyerson doesn't even mention air travel, which, due to deregulation and technological improvement, has become so much cheaper that even poor Americans, let alone middle-class ones, can now afford to fly. How about college? In 1970, only 10.7 percent of the population 25 years old or more had a college degree; by 2004, this was up to an all-time high of 27.7 percent.

The bottom line is that the vast majority of us are doing well by the standard measures. Finally, (like Don Boudreaux) ask yourself this: Would you rather be in the middle 20 percent of the income distribution today or in the top 20 percent 50 years ago? How much do you value cell phones, cars that last 10 years, airline travel to Europe, iPods, and being able to fight cancer and win?

David R. Henderson, a research fellow with the Hoover Institution and an economics professor at the Naval Postgraduate School in Monterey, Calif., is author of The Joy of Freedom: An Economist's Odyssey and co-author of Making Great Decisions in Business and Life (Chicago Park Press, 2006).


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