Krugman: notice the desperate effort to find some number, any number

Wednesday, September 13, 2006 at 05:15 PM

In his column last week titled Whining Over Discontent, Paul Krugman noted the desperate effort by conservatives to:

..find some number, any number, to support claims that increasing inequality is just a matter of a rising payoff to education and skill...More broadly, right-wing commentators would like you to believe that the economy's winners are a large group, like college graduates or people with agreeable personalities. But the winners' circle is actually very small.

The bulk of the column is available here; at the NY Times site, you need a subscription to Times Select.

Right wingers, especially the free marketeers, have conniptions when respectable people say things like that in public, of course.  It calls into question the entire mythology of the Reagan free marketeer club that allowing the business elites and the wealthy generally to do whatever the hell they want will Cause a rising tide that will lift all boats (also known as trickle down, also known as freeing the productive and imaginative to care for the rest of us dullards, also known as...crap).

And, of course, as Krugman knows these free marketeers just love to take some very general government stats and spin them just the right way, in just the right light, so that the under-informed can believe that a rising tide is lifting all boats, etc.

But today's NY Times offers up a sober editorial titled Look Who Got a Raise, which supports Krugman and strongly refutes the Pollyanna claims of the free marketeers, including the Times's other columnist David Brooks.

According to the Times editorial:

Fearing inflation, investors were spooked recently by a government report showing that companies have spent a lot of money of late on their employees. Annual labor costs were up in the second quarter by 4.9 percent, nearly a point higher than initially estimated. That came on top of a much bigger than expected increase in the first quarter.

Compensation is business's biggest expense, so rising labor costs -- if passed on to consumers -- could certainly push up prices. But so far, there are no clear signs of that happening. Instead, today's rising labor costs seem to reflect a different economic phenomenon: growing income inequality.

The big jump in labor costs in the first quarter appears to be driven by fat bonuses and stock options -- not hefty increases in wages and salaries, the financial lifeblood of most Americans. One-off shots of income do not portend higher inflation because they reflect activity that already happened. And they don't translate into more money for most people. According to David A. Rosenberg, an economist for Merrill Lynch, the huge upward revision in first-quarter labor costs worked out to some $80 billion on an annual basis that flowed to "a lot of well-heeled folks cashing in their stocks."

Rising labor costs also reflect the high cost of employees' health insurance. Unfortunately, that expense doesn't imply better coverage, only higher prices for even a bare-bones plan. The more insurance costs, the more it eats into take-home pay, without making up for the loss with better benefits.

When statisticians talk about "labor costs" and economists -- and politicians -- talk about "compensation," they mean all forms of earned income, like wages, salaries, bonuses and stock options, plus benefits, like insurance and pensions. Measured that way, employees don't look too terribly squeezed. But for most workers, increases in wages or salaries, if any, have been steadily eroded by inflation while health insurance, if any, costs more and covers less.

Good stuff.  Good enough that I checked out the claim by David A. Rosenberg, just to see the context and if there were any invisible qualifications.  He writes for Merrill Lynch's online Morning Market Memo.  In the September 7 edition of that publication, he had this to say:

Unit Labor Cost Spike Less Than Meets the Eye
Yesterday's 2Q productivity and unit labor cost revisions seemed to have caught a few investors off guard, but there was nothing too surprising in the numbers when benchmarked against expectations. Both productivity and
unit labor costs for the last quarter were marked higher, as was broadly anticipated - productivity was taken up in 2Q to a 1.6% annual rate, from 1.1% initially; and unit labor costs were revised up to 4.9% annualized from 4.2%. Of course, we had already known that there was a huge upward adjustment to personal income (as much as $80 billion at an annual rate) to the first quarter and this took unit labor costs up at a 9% annual rate as opposed to the earlier release of 2.5%.

That does seem startling, but it basically had nothing to do with how tight the labor market is or anything to do with underlying inflation since all that 'delta' reflected were expensing of stock options and other forms of compensation reflecting either economic or financial activity from several quarters ago as opposed to current production. (The change in the 'statistical discrepancy' between the expenditure and income accounts suggest that the compensation revision from non-current production was over $80 billion in the first quarter, so there were a lot of well-heeled folks cashing in their stocks.) And that is an important distinction to make from a Fed policy standpoint.

Now on a year-over-year basis, nonfarm business productivity is running at a very healthy 2.5% pace. The revisions have taken the trend in unit labor costs up to 5.0%, which has raised some eyebrows, but it is important to note that the underlying pace is really south of 3.5% after accounting for the onetime and non-inflationary stock option expensing that boosted compensation more than expected in 1Q. Keep in mind that the underlying trend in unit labor costs was running at 5.0% just before the onset of recession in 2001 and a year later a slowing economy and additional labor market slack dragged it down to below 1%. And we are now tracking unit labor cost at around a 2% quarter-on-quarter pace for 3Q, which would pull the y/y trend in the headline down to 4.7% and the underlying pace down closer to 3%.

The Fed likes to pay attention to productivity and costs in the nonfarm nonfinancial business sector, and the data remain quite healthy too, despite a mild upward drift in unit labor costs, which were also affected by the 1Q distortion - productivity growth at +4.8% y/y as of 2Q is actually a tad stronger than the +4.4% average of the prior four quarters. Unit labor costs have picked up to 2.6% year-on-year from 0.7% in 1Q, but again the underlying trend is likely closer to 1%. The latest income expectation data from the confidence surveys, the sluggish payroll report, sharp erosion in the Challenger layoff/hiring announcements and the +0.1% print on average hourly earnings tell us that the macro landscape has not changed one iota because of yesterday's revisions.

The most important part is the "it basically had nothing to do with how tight the labor market is or anything to do with underlying inflation since all that 'delta' reflected were expensing of stock options and other forms of compensation reflecting either economic or financial activity from several quarters ago as opposed to current production."

Talk about a shell game.  You overpay executives while underpaying ordinary workers.  Part of the executive overpayment is stock options.  Over time, this results in the gap between executives and ordinary workers becoming huge.  To keep the public from getting sufficient detail in the government statistics to know what's going on, "labor costs" are reported in the aggregate, including peons, upper level peons, privileged execs, etc.  When the privileged execs finally cash in on those stock options (ahead of the burgeoning scandal over backdating those suckers), this produces a spike in overall "labor costs," and this spike is pitched to the public as proof that the ordinary worker is, in fact, sharing in the massive increase of wealth.

Is it safe to say that these people are somewhat "light" in the conscience department?