A Reality-Based David Brooks

By Lee Russ

Thursday, July 26, 2007 at 02:12 PM

David Brooks is one of the few people in the world who has the New York Times editorial page for a platform. Why he has it is anybody's guess, but it probably isn't because of his economic acumen, honesty or openness, judging from his latest column A Reality-Based Economy.

Brooks is beating his usual drum here: things are soooo much better than us glooms naysayers say. In this case, he's nominally taking to task the Democratic presidential candidates:

If you’ve paid attention to the presidential campaign, you’ve heard the neopopulist story line. C.E.O.’s are seeing their incomes skyrocket while the middle class gets squeezed. The tides of globalization work against average Americans while most of the benefits go to the top 1 percent.

This story is not entirely wrong, but it is incredibly simple-minded. To believe it, you have to suppress a whole string of complicating facts.

Not "entirely wrong." That's an understatement if I ever heard one.

What complicating "facts" do I have to suppress in order to think that CEO's are seeing their incomes skyrocket while the middle class gets squeezed? These, essentially:

• After a lag, average wages are rising sharply. Real average wages rose by 2 percent in 2006, the second fastest rise in 30 years
• Earnings for the poorest fifth of Americans are also on the increase,
• Despite years of scare stories, income volatility is probably not trending upward
• Recent rises in inequality have less to do with the grinding unfairness of globalization than with the reality that the market increasingly rewards education and hard work
• Companies are getting more efficient at singling out and rewarding productive workers
• Another reason for rising inequality is that upper income workers are putting in more hours, while lower income workers are putting in less
• It’s "not at all clear that the big winners in this economy are self-dealing corporate greedheads who are bilking shareholders" (he cites a study showing that “the top 25 hedge fund managers combined appear to have earned more than all 500 S.&P. 500 C.E.O.’s combined.”)
• To the extent that C.E.O. pay packets have thickened (and they have), there may be good economic reasons (the bigger a company gets, the more a talented C.E.O. can do to increase earnings)
• We’re in the middle of one of the greatest economic eras ever: global poverty has declined at astounding rates; globalization boosts each American household’s income by about $10,000 a year; thanks to all the growth, tax revenues are at 18.8 percent of G.D.P., higher than the historical average and the deficit is down to about 1.5 percent of G.D.P., below the historical average)

You know, if all that's true....but then how in the world would Brooks or anyone else know that "globalization boosts each American household’s income by about $10,000 a year?" And what do a lot of those things have to do with whetehr the top is getting rich and the middle is getting squeezed? Does it really matter, for example, whether the people getting the richest the fastest are hedge fund managers or CEOs?

Then there's the sly little attempt to make you think that real wages are going great guns. I took the time and effort to check that one out, and if that claim is representative of how he arrived at his other "inconvenient facts," then he deliberately misrepresenting at worst and grossly incompetent at best.

Here's the story on real wages. He's right about the 2+ % rise in 2006. But there's a reason he chose 2006, leaving out the several years before it and the performance so far in 2007.

All the following figures are from the BLS Archived News Releases r.e. Real Earnings.

Monthly 2007 changes in real earnings show a significant net loss of purchasing power so far this year:

Jan...............-.3

Feb..............-.3

Mar.............+.1

Apr............. -.5

May.............-.4

June.............+.5

And here are the year-end statements as to changes in real earnings for 1995 through 2006:

Average weekly earnings rose by 4.5 percent, seasonally adjusted, from December 2005 to December 2006. After deflation by the CPI-W, average weekly earnings increased by 2.1 percent.

Average weekly earnings rose by 3.1 percent, seasonally adjusted, from December 2004 to December 2005. After deflation by the CPI-W, average weekly earnings decreased by 0.4 percent.

Average weekly earnings rose by 3.3 percent, seasonally adjusted, from December 2003 to December 2004. After deflation by the CPI-W, average weekly earnings decreased by 0.2 percent.

Average weekly earnings rose by 1.7 percent, seasonally adjusted, from December 2002 to December 2003. After deflation by the CPI-W, average weekly earnings were unchanged.

Average weekly earnings rose by 3.0 percent, seasonally adjusted, from December 2001 to December 2002. After deflation by the CPI-W, average weekly earnings rose by 0.5 percent.

Average weekly earnings rose 4.1 percent, seasonally adjusted, from December 2000 to December 2001. After deflation by the CPI-W, average weekly earnings rose 2.9 percent.

Average weekly earnings rose by 3.0 percent, seasonally adjusted, from December 1999 to December 2000. After deflation by the CPI-W, average weekly earnings fell by 0.4 percent.

Average weekly earnings rose by 3.4 percent, seasonally adjusted, between December of 1998 and 1999. After adjustment for inflation, average weekly earnings grew by 0.6 percent.

Average weekly earnings rose by 3.4 percent between December of 1997 and 1998 as a result of a 3.7 percent increase in average hourly earnings which was partially offset by a 0.3 percent decline in average weekly hours. After adjustment for a 1.6 percent increase in the CPI-W over the same period, real average weekly earnings grew by 1.8 percent.

Real average weekly earnings decreased by 0.6 percent from November to December after seasonal adjustment, according to preliminary data released today by the Bureau of Labor Statistics of the U.S.Department of Labor. This loss was due to a 0.6 percent drop in average weekly hours and a 0.1 percent rise in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The decline was partly offset by a 0.1 percent increase in average hourly earnings.

Before seasonal adjustment, average weekly earnings increased by 3.4 percent between December of 1996 and 1997 as a result of a 3.7 percent increase in average hourly earnings and a 0.3 percent loss in average weekly hours. After adjustment for a 1.5 percent gain in the CPI-W over the same period, real average weekly earnings grew by 1.9 percent.

Before seasonal adjustment, average weekly earnings increased by 5.2 percent between December of 1995 and 1996 as a result of a 4.0 percent increase in average hourly earnings and a 1.2 percent increase in average weekly hours. After adjustment for a 3.3 percent gain in the CPI-W over the same period, real average weekly earnings grew by 1.8 percent.

We can compare this to several sources on executive pay. This, for example, from Forbes in:

1. April of 2005: "The heads of America's 500 biggest companies received an aggregate 54% pay raise last year. As a group, their total compensation amounted to $5.1 billion, versus $3.3 billion in fiscal 2003."

2. May of 2007: "The chief executives of America's 500 biggest companies got a collective 38% pay raise last year, to $7.5 billion. That's an average $15.2 million apiece."

Or this, from Lab Manager magazine in April of 2007: "While the median change in CEO total direct compensation (salary, bonus and long-term incentives) was 8.9 percent, corporate net income increased by 14.4 percent, up from 13 percent in 2005, and total shareholder return was 15.1 percent, more than double the 6.8 percent return in 2005."

Then there is this long term chart from Mercer Human Resource Consulting on the year to year percentage change in CEO compensation, exempt employee compensation, corporate profits, and the Consumer Price Index (CPI) covering 1996 to 2005:

Year.............CEO(1).........Exempt employees(1).....Corporate profits........Annual CPI

1996.............5.2%....................4.0%...............................11.0%.......................3.0%

1997............11.7%...................4.2%............................... 8.9%.........................2.3%

1998.............5.2%....................4.2%................................5.0%.........................1.6%

1999............11.0%...................4.2%...............................15.1%........................2.2%

2000............10.0%....................4.2%................................8.9%........................3.4%

2001............-2.8%.....................4.4%..............................-17.8% ......................2.8%

2002.............10.0%....................3.8%...............................14.8%.......................1.6%

2003...............7.2%....................3.6% ..............................19.2%........................2.3%

2004..............14.5%...................3.4%...............................23.0%........................2.7%

2005...............7.1%....................3.6%...............................13.0%........................3.4%

(1) Annual compensation comprised of salary + bonus

Brooks closes his column with the statement that "Whoever gets globalization right will have a bright future, and in the long run, the facts matter." The facts matter, alright. It's too bad he gets so many wrong, so many irrelevant, and so many from undisclosed sources.

Nor is this the first time Brooks has published really questionable stats that make economists scratch their heads (and wonder why he, of all people, merits space on the Times editorial page). Check out this on AlterNet and this on Brad DeLong's blog.