February 24, 1996 in City

Bad Data Lead To False Conclusions

H. Eric Heinemann Journal Of Commerce

In the 1992 election, the big issue was “the economy, stupid.” Now, pundits are saying the presidential debate this year will be about falling wages and record profits. Politicians aver both are “bad” events. Voters, however, should ask whether wages are really falling. Record profits, if they exist, should be celebrated, not attacked.

Even Kansas Sen. Robert Dole, the Republican front-runner, has climbed on the populist bandwagon. Shame on Dole. The claim of falling wages is false. Dole should know better.

Stop a minute and think. If real, inflation-adjusted wages had actually fallen for the last 20 years - as politicians claim and news people mindlessly repeat - why did retail stores hire 8.5 million more workers from 1975 to 1995? Consumers cannot buy something with nothing.

If profits were truly as good as politicians claim and news people mindlessly repeat, why has net private investment averaged 3.8 percent of net national product thus far in the 1990s? That is down almost 50 percent from the average of 7.1 percent in the 1960s and 1970s.

Corporate cash, after all, is the main source of financing for investment, which adds to productivity and increases the nation’s living standards.

The idea that the real wage of the average American worker has gone down in recent years is rooted in a long-running scandal at the Bureau of Labor Statistics. Every month BLS publishes figures that purport to show average hourly earnings of production or non-supervisory workers that BLS says hold about 80 percent of all non-farm payroll jobs. The BLS then divides this number by the Consumer Price Index.

The measure of real wages from this calculation has had an irregular downtrend for almost a quarter century. If these data showed something actually happening in the economy, they would indeed be alarming. They do not. The BLS excludes both benefits and bonuses from its computation. These are the fastest-growing parts of worker compensation.

Including benefits and bonuses, the average real earnings of American workers are now about $16.75 an hour compared to the $10.65 estimated by BLS for its sample of production and non-supervisory jobs (both figures in 1992 dollars). The trend in this more comprehensive measure of real compensation is up, albeit slowly, not down.

In fairness to BLS, the agency publishes other, separate yardsticks of real earnings that show, correctly, that pay has been rising gradually and steadily over the years. Unfortunately, Secretary of Labor Robert B. Reich has ignored the flaws in the payroll data on earnings. He regularly emphasizes numbers that are going down, whether correct or incorrect. This has helped to focus the political debate on spurious data.

Real consumer spending for goods and services per hour worked in the non-farm economy (the flip side of real hourly wages) has risen at a steady rate of about 1 percent since the mid-1970s. This was slower than the 1.8 percent growth recorded from 1947 through 1975, but still respectable.

The amounts are huge. Real personal consumption expenditures were at an annual rate of $4.6 trillion in the third quarter of 1995, roughly 68 percent of the entire U.S. economy. That represented a real increase of $1 trillion in the last decade alone, more than the total economy in all other countries except for Japan, Germany and possibly China (depending on how you measure the Chinese economy). There is no way U.S. consumers could have boosted real spending that much if their wages were falling.

The claim of falling real wages is false, but lethargic growth is the nation’s No. 1 problem. A slow-motion syndrome has infected the U.S. economy since the 1970s. Despite endless palaver, neither political party has a coherent plan for curing the disease.

In the heat of debate, politicians often imply that the sharp rise in corporate profits is evidence that greedy companies are cheating their employees. Reality is different.

Labor’s share of national income was 72.4 percent in the third quarter of 1995, above the average of 67.8 percent from 1946 to 1968. Pretax operating profits, by contrast, were 10.5 percent of income in the third quarter, below the average of 12.6 percent from the first quarter of 1946 through the first quarter of 1968.

The primary role of profits in the economy is not simply to reward investors but to finance productive investment. Profits from current operations of non-financial businesses have averaged 3.5 percent of net worth since 1975, down from 5.6 percent in the 20 years after World War II.

In 1977, the late Arthur F. Burns warned that “if poor profitability is adversely affecting economic performance, we should expect business firms to exercise great caution in embarking on capital investment projects.” Burns - chairman of the Council of Economic Advisers under President Eisenhower and chairman of the Federal Reserve from 1970 to 1978 - added that “no businessman is likely to add to his plant or equipment if the promise of a decent return is not present.”

Burns’ warning is as valid now as in 1977. The erosion in the rate of return has led to a parallel drop in net investment and stagnating living standards.


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