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The Wall Street Journal had an article on slow pay growth in recent years that was headlined, “shift to benefits from pay helps explain sluggish wage growth.” The article goes on to explain that one of the reasons that wages are not growing is that an increasing share of compensation is going to benefits like health insurance.
The problem with this explanation is that it is clearly not true. According to data from Bureau of Economic Analysis, wages accounted for 83.2 percent of labor compensation in the corporate sector in 2007 (Table 1.14, Line 5 divided by Line 4). In the most recent quarter they accounted for 83.8 percent of labor compensation. This means that the wage share of compensation has increased by 0.6 percentage points over the last eight years. That goes the wrong way for the WSJ’s story.
Note: Typo and link corrected, thanks Robert Salzberg and ltr.
The Wall Street Journal had an article on slow pay growth in recent years that was headlined, “shift to benefits from pay helps explain sluggish wage growth.” The article goes on to explain that one of the reasons that wages are not growing is that an increasing share of compensation is going to benefits like health insurance.
The problem with this explanation is that it is clearly not true. According to data from Bureau of Economic Analysis, wages accounted for 83.2 percent of labor compensation in the corporate sector in 2007 (Table 1.14, Line 5 divided by Line 4). In the most recent quarter they accounted for 83.8 percent of labor compensation. This means that the wage share of compensation has increased by 0.6 percentage points over the last eight years. That goes the wrong way for the WSJ’s story.
Note: Typo and link corrected, thanks Robert Salzberg and ltr.
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Neil Irwin, a writer for the NYT Upshot section, had an interesting debate with himself about the likely future course of the economy. He got the picture mostly right in my view, with a few important qualifications.
First, his negative scenario is another recession and possibly a financial crisis. I know a lot of folks are saying this stuff, but it’s frankly a little silly. The basis of the last financial crisis was a massive amount of debt issued against a hugely over-valued asset (housing). A financial crisis that actually rocks the economy needs this sort of basis.
If a lot of people are speculating in the stock of Uber or other wonder companies, and reality wipes them out, this is just a story of some speculators being wiped out. It is not going to shake the economy as a whole. (San Francisco’s economy could take a serious hit.)
Anyhow, financial crises don’t just happen, there has to be a real basis for them. To me, the housing bubble was pretty obvious given the unprecedented and unexplained run-up in prices in the largest market in the world. Perhaps there is another bubble out there like this, but neither Irwin nor anyone else has even identified a serious candidate. Until someone can at least give us their candidate bubble, we need not take the financial crisis story seriously.
If we take this collapse story off the table, then we need to reframe the negative scenario. It is not a sudden plunge in output, but rather a period of slow growth and weak job creation. This seems like a much more plausible story.
As Irwin notes, the rising dollar and weak economies of U.S. trading partners are reducing net exports for the country. This is likely to be a drag on growth through the rest of this year and well into 2016. Non-residential investment growth has slowed to a crawl, and with a lot of vacant office space in many markets (look around downtown D.C.), it may slow further. In spite of all the whining about people being unwilling to spend, consumption is actually quite high relative to disposable income.
This doesn’t leave much to drive growth. We have been stuck at a weak pace of just over 2.0 percent for the last five years. This has been associated with decent job creation only because of the collapse of productivity growth over this period. It is reasonable to think that growth may slow further. If slower growth were coupled with even a modest uptick in productivity growth (e.g. to 1.5 percent), it could bring job growth to a halt.
This would leave us with an indefinite period of labor market weakness. The unemployment rate may not go up much, but we will make no headway towards bringing the employment to population ratio back to a more normal level. And most workers would continue to see their pay stagnate.
We got a piece of evidence supporting this bad story yesterday when the Labor Department released the Employment Cost Index (ECI) for the third quarter. Instead of the prospect of rising wages, that has folks at the Fed worried, the ECI showed wage and compensation rates slowing from earlier in the year. Over the last year, total hourly compensation has risen 2.0 percent, with wages rising 2.1 percent. There is zero evidence here of any acceleration.
Anyhow, a story of slow job growth and ongoing wage stagnation would look like a pretty bad story to most of the country. It may not be as dramatic as a financial crisis that brings the world banking system to its knees, but it is far more likely and therefore something that we should be very worried about.
Neil Irwin, a writer for the NYT Upshot section, had an interesting debate with himself about the likely future course of the economy. He got the picture mostly right in my view, with a few important qualifications.
First, his negative scenario is another recession and possibly a financial crisis. I know a lot of folks are saying this stuff, but it’s frankly a little silly. The basis of the last financial crisis was a massive amount of debt issued against a hugely over-valued asset (housing). A financial crisis that actually rocks the economy needs this sort of basis.
If a lot of people are speculating in the stock of Uber or other wonder companies, and reality wipes them out, this is just a story of some speculators being wiped out. It is not going to shake the economy as a whole. (San Francisco’s economy could take a serious hit.)
Anyhow, financial crises don’t just happen, there has to be a real basis for them. To me, the housing bubble was pretty obvious given the unprecedented and unexplained run-up in prices in the largest market in the world. Perhaps there is another bubble out there like this, but neither Irwin nor anyone else has even identified a serious candidate. Until someone can at least give us their candidate bubble, we need not take the financial crisis story seriously.
If we take this collapse story off the table, then we need to reframe the negative scenario. It is not a sudden plunge in output, but rather a period of slow growth and weak job creation. This seems like a much more plausible story.
As Irwin notes, the rising dollar and weak economies of U.S. trading partners are reducing net exports for the country. This is likely to be a drag on growth through the rest of this year and well into 2016. Non-residential investment growth has slowed to a crawl, and with a lot of vacant office space in many markets (look around downtown D.C.), it may slow further. In spite of all the whining about people being unwilling to spend, consumption is actually quite high relative to disposable income.
This doesn’t leave much to drive growth. We have been stuck at a weak pace of just over 2.0 percent for the last five years. This has been associated with decent job creation only because of the collapse of productivity growth over this period. It is reasonable to think that growth may slow further. If slower growth were coupled with even a modest uptick in productivity growth (e.g. to 1.5 percent), it could bring job growth to a halt.
This would leave us with an indefinite period of labor market weakness. The unemployment rate may not go up much, but we will make no headway towards bringing the employment to population ratio back to a more normal level. And most workers would continue to see their pay stagnate.
We got a piece of evidence supporting this bad story yesterday when the Labor Department released the Employment Cost Index (ECI) for the third quarter. Instead of the prospect of rising wages, that has folks at the Fed worried, the ECI showed wage and compensation rates slowing from earlier in the year. Over the last year, total hourly compensation has risen 2.0 percent, with wages rising 2.1 percent. There is zero evidence here of any acceleration.
Anyhow, a story of slow job growth and ongoing wage stagnation would look like a pretty bad story to most of the country. It may not be as dramatic as a financial crisis that brings the world banking system to its knees, but it is far more likely and therefore something that we should be very worried about.
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We all know how hard it is for folks like David Brooks, living in remote corners of Washington, to find out about changes in public policy. Therefore, it wasn’t surprising to see him praise Marco Rubio, Brooks’ favored candidate for the Republican presidential nomination, for a welfare reform proposal that was put in place almost 20 years ago.
The context was the installation of Paul Ryan as speaker and Brooks’ perception that Rubio has emerged as the likely Republican presidential nominee. Brooks see both as promising conservative leaders.
The 20-year-old proposal that Brooks sees as a new idea is the plan to:
“…convert most federal welfare spending into a ‘flex fund’ that would go straight to the states.”
Brooks may be too young to remember, but this proposal was at the center of the 1996 welfare reform in which TANF, the main government welfare program, was transformed into a block grant. It turned out that block granting did not work very well. While some states did respond to the increased need for TANF in the last recession by increasing funding, many did not. This is the reason why programs are run by the federal government or with rules set by the federal government.
This is not the only item on which Brooks is apparently unfamiliar with the evidence. He also tells readers:
“As Oren Cass of the Manhattan Institute has pointed out, there are two million fewer Americans working today than before the recession and two million more receiving disabilities benefits.”
Accordiing to the Bureau of Labor Statistics, we actually have 4 million more people working today than before the recession, but the 2 million increase in disability beneficiaries is approximately correct, although the implication that it is due to more people opting not to work is completely wrong. The vast majority of this increase was due to the aging of the baby boomers into the peak disability years and the increase in the normal retirement age to 66. (Disability beneficiaries stay on disability insurance until they reach the normal retirement age.)
Since these factors were known before the recession, the Social Security Trustees were able to predict in their 2007 report that the number of disability beneficiaries would be 1.8 million higher in 2015 than in 2006. One item that the Trustees may not have incorporated into their projections was the tightening of state worker compensation program eligibility requirements. As a result, many people who might have otherwise been getting worker compensation benefits are instead collecting disability benefits.
The characterization of Speaker Ryan as a forward looking moderate is also questionable. He has repeatedly advocated extreme positions that are far outside of the mainstream of both parties. He has called for privatizing Social Security and Medicare and shutting down the non-military portion of the government by the middle of the century.
We all know how hard it is for folks like David Brooks, living in remote corners of Washington, to find out about changes in public policy. Therefore, it wasn’t surprising to see him praise Marco Rubio, Brooks’ favored candidate for the Republican presidential nomination, for a welfare reform proposal that was put in place almost 20 years ago.
The context was the installation of Paul Ryan as speaker and Brooks’ perception that Rubio has emerged as the likely Republican presidential nominee. Brooks see both as promising conservative leaders.
The 20-year-old proposal that Brooks sees as a new idea is the plan to:
“…convert most federal welfare spending into a ‘flex fund’ that would go straight to the states.”
Brooks may be too young to remember, but this proposal was at the center of the 1996 welfare reform in which TANF, the main government welfare program, was transformed into a block grant. It turned out that block granting did not work very well. While some states did respond to the increased need for TANF in the last recession by increasing funding, many did not. This is the reason why programs are run by the federal government or with rules set by the federal government.
This is not the only item on which Brooks is apparently unfamiliar with the evidence. He also tells readers:
“As Oren Cass of the Manhattan Institute has pointed out, there are two million fewer Americans working today than before the recession and two million more receiving disabilities benefits.”
Accordiing to the Bureau of Labor Statistics, we actually have 4 million more people working today than before the recession, but the 2 million increase in disability beneficiaries is approximately correct, although the implication that it is due to more people opting not to work is completely wrong. The vast majority of this increase was due to the aging of the baby boomers into the peak disability years and the increase in the normal retirement age to 66. (Disability beneficiaries stay on disability insurance until they reach the normal retirement age.)
Since these factors were known before the recession, the Social Security Trustees were able to predict in their 2007 report that the number of disability beneficiaries would be 1.8 million higher in 2015 than in 2006. One item that the Trustees may not have incorporated into their projections was the tightening of state worker compensation program eligibility requirements. As a result, many people who might have otherwise been getting worker compensation benefits are instead collecting disability benefits.
The characterization of Speaker Ryan as a forward looking moderate is also questionable. He has repeatedly advocated extreme positions that are far outside of the mainstream of both parties. He has called for privatizing Social Security and Medicare and shutting down the non-military portion of the government by the middle of the century.
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In his recent book, former Fed chair Ben Bernanke claimed that the Fed did not choose to let Lehman fail, he said that it had no choice because it could not bail it out. The NYT is insisting that this account is true.
“During his remarks, Mr. Bernanke sought to dispel a perception that the Fed and other policy makers made a conscious decision to let Lehman Brothers fail. Even today, nearly a decade after the financial crisis, the view still persists among some.
“‘The tools we had were inadequate’ to save Lehman, Mr. Bernanke said. Early efforts to line up a buyer for Lehman – first Bank of America and then the British bank Barclays — failed. The only remaining option was for the Fed to lend Lehman money. But Mr. Bernanke said that Lehman was ‘so deeply in the red’ that the Fed did not have the financial muscle to bail it out.”
The Fed absolutely did have the financial muscle to bail out Lehman. It could have lent the bank as much as it wanted. Legally, the Fed is not supposed to lend to an insolvent bank, but it almost certainly ignored this restriction in lending to Citigroup and Bank of America, as well as other banks, during the crisis.
Had the Fed opted to lend to Lehman, in spite of its being insolvent, it is difficult to imagine who would have stopped it. It is unlikely that the courts would grant legal standing to anyone trying to sue and even if they did, a suit would likely take years to resolve, at which point we would have been through the worst of the crisis.
The decision to let Lehman fail was a decision. It is unfortunate that the NYT is working to help Bernanke rewrite history on this issue.
Note: Typo corrected.
In his recent book, former Fed chair Ben Bernanke claimed that the Fed did not choose to let Lehman fail, he said that it had no choice because it could not bail it out. The NYT is insisting that this account is true.
“During his remarks, Mr. Bernanke sought to dispel a perception that the Fed and other policy makers made a conscious decision to let Lehman Brothers fail. Even today, nearly a decade after the financial crisis, the view still persists among some.
“‘The tools we had were inadequate’ to save Lehman, Mr. Bernanke said. Early efforts to line up a buyer for Lehman – first Bank of America and then the British bank Barclays — failed. The only remaining option was for the Fed to lend Lehman money. But Mr. Bernanke said that Lehman was ‘so deeply in the red’ that the Fed did not have the financial muscle to bail it out.”
The Fed absolutely did have the financial muscle to bail out Lehman. It could have lent the bank as much as it wanted. Legally, the Fed is not supposed to lend to an insolvent bank, but it almost certainly ignored this restriction in lending to Citigroup and Bank of America, as well as other banks, during the crisis.
Had the Fed opted to lend to Lehman, in spite of its being insolvent, it is difficult to imagine who would have stopped it. It is unlikely that the courts would grant legal standing to anyone trying to sue and even if they did, a suit would likely take years to resolve, at which point we would have been through the worst of the crisis.
The decision to let Lehman fail was a decision. It is unfortunate that the NYT is working to help Bernanke rewrite history on this issue.
Note: Typo corrected.
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A NYT article on the prospects of an interest rate hike by the Federal Reserve Board at its December meeting told readers:
“The case for raising rates hinges in part on the Fed’s forecast that the economy will continue to add jobs at a healthy pace and that inflation will begin to rise more quickly. Moreover, some analysts argue that maintaining near-zero interest rates is now doing more harm than good by encouraging businesses to invest in things like share buybacks to lift their stock price, rather than long-term investments in equipment and developing new products.”
It’s difficult to see how low interest rates would cause firms to prefer share buybacks to long-term investment. Low interest rates make the cost of borrowing lower. This could lead some firms to carry more debt and use cash for share buybacks or dividends. But low interest rates also make it easier to borrow for long-term investment. There is no obvious mechanism through which low interest rates would lead firms to divert money from investment to share buybacks.
If low interest rates eventually led to enough growth that it pushed up the rate of inflation, then they could provide a boost to investment at the expense of buybacks (higher inflation means that the output will sell for more, raising profits, other things equal). It is difficult to see how low interest rates could cause buybacks to increase at the expense of investment.
A NYT article on the prospects of an interest rate hike by the Federal Reserve Board at its December meeting told readers:
“The case for raising rates hinges in part on the Fed’s forecast that the economy will continue to add jobs at a healthy pace and that inflation will begin to rise more quickly. Moreover, some analysts argue that maintaining near-zero interest rates is now doing more harm than good by encouraging businesses to invest in things like share buybacks to lift their stock price, rather than long-term investments in equipment and developing new products.”
It’s difficult to see how low interest rates would cause firms to prefer share buybacks to long-term investment. Low interest rates make the cost of borrowing lower. This could lead some firms to carry more debt and use cash for share buybacks or dividends. But low interest rates also make it easier to borrow for long-term investment. There is no obvious mechanism through which low interest rates would lead firms to divert money from investment to share buybacks.
If low interest rates eventually led to enough growth that it pushed up the rate of inflation, then they could provide a boost to investment at the expense of buybacks (higher inflation means that the output will sell for more, raising profits, other things equal). It is difficult to see how low interest rates could cause buybacks to increase at the expense of investment.
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Economists constantly have difficulties figuring out what problem we are trying to solve. The NYT’s discussion of the Chinese government’s decision to switch to a policy that allows most families to have two children, instead of just one, provides an excellent illustration of this situation. At one point the piece explains the policy shift:
“Now the party leadership has acted more forcefully, apparently in the hope that a burst of children will replenish the nation’s work force and encourage more consumer spending.”
The idea of having more children to increase the size of the labor force implies that the problem facing China is inadequate supply. (This is more than a bit peculiar given the enormous growth in productivity in the last three decades. Productivity growth, means more output per worker. It has the same impact on supply as having more workers.)
However, the concern about boosting spending, expressed repeatedly throughout the article, is a concern about lack of demand. At any point in time an economy can be suffering from either supply shortages stemming from a lack of workers or demand shortages because people don’t spend enough to keep the labor force employed. It doesn’t make sense for it to be suffering from both at the same time.
Economists constantly have difficulties figuring out what problem we are trying to solve. The NYT’s discussion of the Chinese government’s decision to switch to a policy that allows most families to have two children, instead of just one, provides an excellent illustration of this situation. At one point the piece explains the policy shift:
“Now the party leadership has acted more forcefully, apparently in the hope that a burst of children will replenish the nation’s work force and encourage more consumer spending.”
The idea of having more children to increase the size of the labor force implies that the problem facing China is inadequate supply. (This is more than a bit peculiar given the enormous growth in productivity in the last three decades. Productivity growth, means more output per worker. It has the same impact on supply as having more workers.)
However, the concern about boosting spending, expressed repeatedly throughout the article, is a concern about lack of demand. At any point in time an economy can be suffering from either supply shortages stemming from a lack of workers or demand shortages because people don’t spend enough to keep the labor force employed. It doesn’t make sense for it to be suffering from both at the same time.
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Hey, who can blame them? It’s an obscure government program with 60 million beneficiaries, with benefits that are so small that they don’t matter to anyone who is anyone.
I’m actually not joking here. The WSJ ran an article telling readers that the average baby boomer between the ages of 55-64 faces a gap of $36,371 between the $45,000 a year they expect to need as income in retirement and the $9,129 they can expect to get based on the savings they have accumulated. The incredible part of the story is that the piece never once mentions Social Security, nor does the Blackrock study on which the article is based.
While Social Security benefits will not fill this gap, they will be by far the largest part of the retirement income of most middle income retirees. The average worker’s retirement benefit is roughly $16,000 a year. If this is a couple, then the spouse can count a benefit of at least $8,000 unless his work history entitled him to a larger benefit. Together with the savings accumulations estimated by Blackrock, this is still likely to leave most middle income couples well below the $45,000 comfort level that the study found, but they are far closer than the discussion in the WSJ article implied.
Hey, who can blame them? It’s an obscure government program with 60 million beneficiaries, with benefits that are so small that they don’t matter to anyone who is anyone.
I’m actually not joking here. The WSJ ran an article telling readers that the average baby boomer between the ages of 55-64 faces a gap of $36,371 between the $45,000 a year they expect to need as income in retirement and the $9,129 they can expect to get based on the savings they have accumulated. The incredible part of the story is that the piece never once mentions Social Security, nor does the Blackrock study on which the article is based.
While Social Security benefits will not fill this gap, they will be by far the largest part of the retirement income of most middle income retirees. The average worker’s retirement benefit is roughly $16,000 a year. If this is a couple, then the spouse can count a benefit of at least $8,000 unless his work history entitled him to a larger benefit. Together with the savings accumulations estimated by Blackrock, this is still likely to leave most middle income couples well below the $45,000 comfort level that the study found, but they are far closer than the discussion in the WSJ article implied.
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The NYT had a largely negative assessment of Abenomics, implying that it had done little to improve the state of Japan’s economy in the last two and a half years. The piece never mentions the surge in employment in Japan over this period. The overall employment rate for workers age 16-64 rose by 2.4 percentage points since the fourth quarter of 2012. This compares to a rise of 1.2 percentage points in the United States in a period in which the pace of job growth has been widely touted. If the United States had the same growth in employment rates as Japan under Abenomics, it would translate into another 2.4 million jobs.
Employment growth among women has been especially impressive, rising by 3.6 percentage points over this period. The employment rate for women is now a full percentage point higher than in the United States.
The NYT had a largely negative assessment of Abenomics, implying that it had done little to improve the state of Japan’s economy in the last two and a half years. The piece never mentions the surge in employment in Japan over this period. The overall employment rate for workers age 16-64 rose by 2.4 percentage points since the fourth quarter of 2012. This compares to a rise of 1.2 percentage points in the United States in a period in which the pace of job growth has been widely touted. If the United States had the same growth in employment rates as Japan under Abenomics, it would translate into another 2.4 million jobs.
Employment growth among women has been especially impressive, rising by 3.6 percentage points over this period. The employment rate for women is now a full percentage point higher than in the United States.
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