ARC's 1st Law: As a "progressive" online discussion grows longer, the probability of a nefarious reference to Karl Rove approaches one

Sunday, June 03, 2007

Falling Behind Dad - A Fisking

The St Louis Post-Dispatch Piece of Trash had this editorial earlier in the week and I've been meaning to fisk it, as it demonstrates such a clear misunderstanding about economics and historical trends that it is laughable.

The subject of the article is a recent study by Pew's Economic Mobility Project which shows that upward economic mobility is now no longer purely attributable to the man in the household - and that, in comparison to men 30 years ago, the income of men is lower.

Here's how the Post covered the study (and I'll be interrupting throughout):

Falling behind Dad
Wednesday, May. 30 2007

For generations, it has been an article of faith among American parents that their children would be better off economically than they were.

That may be changing. At least one group of Americans, men in their 30s, now are earning less than their fathers did at the same age. In 1974, the U.S. median income for men in their 30s stood at $40,210 in today's inflation-adjusted dollars. In 2004, median pay in that age group stood at $35,010.

Families headed by people in their 30s are living better than they once did, but that's only because more women are working. Even so, the improvement has been modest: $53,280 in 2004 versus $49,503 three decades earlier.

Now, this last paragraph is crucial as it explains the entire phenomenon. Let's do a point by point:
  1. Families are better off in inflation adjusted dollars than in 1974. This is good news, right?
  2. Women are contributing towards the household income. This is good news, right? If I recall, more women in the workplace was one of the objectives of the feminist movements.
  3. The income increase is "modest," at just over 7%.

Now, some context. What happens to the price of something when its supply increases? Econ 101 and the law of supply & demand tells us that the price of something decreases as its supply increases. Now, what percentage of women worked outside of the home in the 70s? This was the beginning of an upsurge in women in the workplace, so clearly not as many as are working now.

As the supply of labor increased over the years (almost doubling?), its price should have decreased substantially.

Also, it should be noted that many of the conveniences we enjoy today (both products & services) would have been luxury items in the 70s. Our purchasing power (thanks to Wal-Mart and innovations in business) has increased significantly. Car phones, clothing, food, computers (which became personal computers in the late 70s as opposed to the Goliaths that only a company could afford), and other items were either of poorer quality in the 70s or did not exist.

Back to the P-D:
Those figures come from the Economic Mobility Project, which is trying to measure how people climb the economic ladder — and how they fall from it. The project is an unusual collaboration between conservative think tanks like the American Enterprise Institute and the Heritage Foundation and liberal groups such as the Brookings Institution and the Urban Institute. As such, the project may be able to deliver findings untainted by ideological spin.

Of course, the Post-Dispatch is more than happy to editorialize and provide some ideological spin if the Project does not...
The decline in men's earnings is a break from this country's long history of rising earnings from generation to generation. It also comes despite a remarkable rise in productivity over the past decade, as well as healthy growth in gross domestic product.

"This suggests that the up-escalator that has historically ensured that each generation would do better than the last may not be working very well," the report says. That ties in with a raft of other statistics indicating a widening income gap between people at the top of the ladder and everyone else.

The American economy has grown at a healthy rate for most of the past quarter century, and that rising economic tide has indeed lifted all boats. But the rich are surfing a wealth tsunami, while most others are stuck paddling in a backwater. According to the Congressional Budget Office, the poorest fifth of Americans saw their real incomes rise by 9 percent from 1979 to 2004. The richest fifth saw a 69 percent rise, the wealthiest 1 percent saw a spectacular 176 percent explosion in real income.

Back in President Jimmy Carter's day (1977-1981), the average corporate chief executive earned 35 times the average hourly worker's pay. Under George W. Bush, the average top dog earns at least 262 times the paycheck of the average worker. Other studies place the CEO multiple at more than 400 times pay on the shop floor.
Of course, the responsibilities of CEOs in today's global economy is 400x more complex than the responsibilities of a CEO in Carter's malaise era. Back in the day, CEOs were primarily focused on the domestic economy, and in many cases regions of the US. Today, CEOs have to be cognizant not just of their company's value chain in the US, but also of the entire value chain system (upstream to the global supply base, the company's value chain consisting of a global enterprise, and the downstream global customer base).

In addition, the pace of innovation within every sector of the economy (and the interdependence of those sectors) means that a CEO of today must have an extraordinary vision of the company's opportunities. But, don't let me get in the way of your bashing of corporate executives...
This is a sharp break from the past. Until about 1980, earnings of American families tended to rise roughly with productivity in the economy; all economic classes prospered. Then the connection between productivity and prosperity loosened, and now it seems broken altogether. Productivity rose by an average of 2.8 percent per year during the current decade. But median family income in 2005, the last year for which statistics are available, still was below the level of 1999.
Hmmmm... the connection between productivity and prosperity has "loosened" and "is now broken." How can this be?

This is due to the innovation of information technology over the past 30 years. Now, instead of getting a raise each year because you were more productive, companies are investing in technology to improve the efficiency of processes - with the goal of reducing or eliminating human involvement. Manual involvement in a process costs money. As IT automates processes throughout the enterprise with relatively low cost, productivity skyrockets without a need to substantially increase the cost of labor.
There are lots of theories as to why this is happening. Labor unions are much weaker today than in previous decades. Low-skilled factory jobs have moved to other countries where costs are lower, leaving less demand for unskilled workers here. But in recent years, even families headed by college graduates have seen their incomes fall when adjusted for inflation.
Yes, the reason for the decline is the weakness of labor unions. LOL.

And wait a second... Low-skilled factory workers in the US are more expensive compared to people with similar skills in other countries (ie, they are overpaid for their corresponding level of skills)? With regard to college graduates, I have to say that the dismal public education system has now forced employers to require a college degree from prospective employees, if only to ensure that the candidate has sufficient skills (reading comprehension, math, communication skills, etc).
Solutions to the income gap are even harder to come by.
But the Post-Dispatch decides to provide some suggestions.
A more progressive income tax system would help by taxing the rich more and the middle class less.
Increasing taxes on the wealthy improves the economic mobility of the lower- and middle-class how? How would an increase in income taxes on the wealthy change anything in this story? Why is this suggestion listed first?

And, did the study take into account the tax rates? It would be interesting to apply the Carter-era tax rates (up to 70%) to the income comparison and find out exactly who is better off...
It would especially be useful as a way to fund universal health care at a time when workers are paying more out-of-pocket for their health care.
Ahh, socialized medicine. That's a sure-fire way to improve people's incomes. Actually, if you add in the cost of health care borne by a company as compensation, the numbers would show that today's employees are much better off.
The Bush tax cuts for the wealthy have thrown the federal budget deeper into deficit while doing little for ordinary Americans.
Actually, it's the explosion of spending that caused a increase in the deficit, since tax receipts after the Bush tax cuts have actually increased.
The impending hike in the minimum wage to $7.25 an hour will help workers on the lower end.
Except for those unskilled workers who do not have skills commensurate with $7.25/hour. Companies will either increase prices (something that they're reluctant to do in today's competitive environment or send those low skilled jobs offshore, where the relationship between skill and pay is more accurate.
Improved education and job training might help equip more people for better-paying jobs. Federal statistics clearly show that unions raise wages, but Republicans in Congress are blocking a bill that would make it easier to organize workers.
Yes, improved education and job training is important. Unfortunately, the government's involvement in education has been a failure, demonstrated year after year by the abilities of home-schoolers around the country and the private schools where even the biggest proponents of public education send their kids.
Corporate shareholders with the right to vote on executive pay packages might help put a check on exorbitant pay packages negotiated with friendly boards of directors.

In general, our lightly regulated brand of capitalism has worked well; that's a compelling argument against heavy-handed regulation by government in order to spread the wealth. But if the earning disjuncture and income disparity we're seeing now turn out to be more than a funny little phase, that argument may need to be revisited.
Yes, lightly regulated brand of capitalism. I trust that the members of the Post-Dispatch editorial board have never tried to run a public company. The amount of regulations on business in this country will make your head spin. Factor in the increased complexity of today's regulations (Sarbanes-Oxley anyone?) to the CEO's responsibilities and you can see why CEO's are paid significantly more.

All in all, the study (and the Post-Dispatch's coverage of it) does not appear to take into account the complexity of today's global economy. In truth, everyone living today is better off than their parents in the 1970s.

Your Co-Conspirator,
ARC: St Wendeler

Comments (1)
Brian said...

Of course, the responsibilities of CEOs in today's global economy is 400x more complex than the responsibilities of a CEO in Carter's malaise era. Back in the day, CEOs were primarily focused on the domestic economy, and in many cases regions of the US. Today, CEOs have to be cognizant not just of their company's value chain in the US, but also of the entire value chain system (upstream to the global supply base, the company's value chain consisting of a global enterprise, and the downstream global customer base).

You forgot that under Sarbanes-Oxley they could go to JAIL now for things their underlings might do. That is certainly ratcheting up the risk for being a CEO.