‘How to Succeed in Business’: An Exchange

To the Editors:

Jeff Madrick [NYR, April 18] seems to blame Wall Street for the oft-cited fact that real wages have stagnated since the early 1970s. Just as pundits hailed the global economic hegemony of Japan in the late 1980s, right before Japan went into a five-year tailspin, so is Madrick, like many others, looking in the rearview mirror in decrying wage stagnation. With the labor market tight and no recession visible on the horizon, real wages are starting to increase and should continue to do so.

Furthermore, wages are only a part of the story. Living standards are rising, not stagnating, and Wall Street deserves a fair measure of the credit. For one thing, companies are paying more bonuses, which are not included in average hourly earnings, so total money income is rising faster than wages. (Bonuses can be sizable; in 1994 the average Chrysler worker got $8,000.) Second, because money income is taxed but benefits are not, benefits were rising faster than money income until very recently. Therefore, total compensation per hour (including wages, bonuses, and benefits)has climbed faster than wages.

Third, the compensation of all workers combined has climbed much faster than compensation per hour because employment is increasing nicely. Thanks in part to Wall Street, the US is the job creation champion of the developed world. It is no coincidence that the US has created far more jobs than continental Europe since 1980 and also has much more creative, competitive, and potent securities markets, markets that discipline mediocre firms while pouring capital into vibrant new industries.

Fourth, real disposable personal income has increased faster than aggregate compensation (which accounts for less than 60 percent of personal income) because small business income, dividends, rental income, and transfer payments have all grown faster than compensation. While real wages declined slightly between 1991 and 1995, real disposable income rose 2.7 percent annually, and real disposable income per worker rose a respectable 1.24 percent annually. Living standards, quite simply, are rising, not stagnating. And by the way, they are rising nearly as rapidly today as in the fabled 1950s: real disposable personal income per worker rose 1.44 percent annually between 1956 and 1960, or only 16 percent faster than over the past four years.

A key to rising living standards is low inflation that (as Madrick rightly notes) Wall Street loves. Real wages declined nearly four times as fast when inflation was high (down 1.03 percent annually, 1972-1982) as when it was low (down 0.28 percent annually, 1982-1995). One reason: low inflation means fewer recessions. We have had only one recession in the past 13 years, versus one every 4.1 years between 1950 and 1982. This is particularly good for rank-and-file workers, who were laid off in droves in the nasty recessions of the 1970s and early 1980s. Clearly, the interests of Wall Street and labor converge in important areas.

Thomas M. Doerflinger

Summit, New Jersey

Jeff Madrick replies:

Thomas Doerflinger does not deny that wages after inflation have declined or stagnated for more than twenty years. Rather, he criticizes me for not realizing that the slight gain in wages recently means that we have turned the corner. Forgive me if I remain agnostic on this issue. After all, it is the fifth year of an economic expansion. Wages should be rising handsomely; the gain so far is at best trivial by the standards of business cycles earlier in our history.

But Mr. Doerflinger goes on to say that wages are not the whole story, a claim that has become a mantra among those who maintain that the nation’s economic performance has not been poor since the 1970s. First, he says that including bonuses in income will make a difference. But the government’s main index showing total compensation and employment costs (ECI) includes cash bonuses to workers. What the ECI shows is that average wages and salaries, including bonuses, have fallen slightly over the 17 years since 1979 (when the index was created). For blue-collar workers alone, average wages have fallen fairly sharply since 1979.

Repeating a point often made by some critics, Mr. Doerflinger believes that ignoring pension, health, and other job benefits seriously underestimates gains in the standard of living. But the major increases in benefits occurred in the late 1960s and early 1970s. What has accounted for most of the rise in the value of non-wage benefits since then have been not more benefits but the rising cost of corporate health insurance and the increases in social security taxes paid by employers. I see no reason why these should be taken as increments to the average standard of living.

Even when we include these benefits, however, the growth of total compensation to workers after inflation has been meager. The ECI, including benefits, rose by 7 percent since 1979 or 0.4 percent a year. During the economy’s current expansion, the ECI, with benefits, has risen at 0.5 percent a year. This is a miserable record. During a typical period of economic expansion, employee compensation would be rising at 2 percent a year. (Moreover, the ECI is deflated by consumer prices in general. So the health insurance component, whose prices have risen much faster than inflation overall, is overstated.)

Another argument used by Mr. Doerflinger and others who subscribe to his general view is that per-hour measures of compensation understate the growth in aggregate compensation because so many more people are working. But more people are working because so many more people are of working age in America than ever before, as a result of the bulge in the work force caused by the baby boom. And, of course, many more women work—not because they want to but because they have to. Since the Civil War, I estimate that about 40 percent of the American population traditionally worked. Beginning in the 1970s, the proportion moved up to 50 percent. So income for every man, woman and child—per capita income—should be higher. Yet despite the fact that so many of us work, per capita income since 1973 has not grown nearly as rapidly as it had on average in the hundred preceding years.

Mr. Doerflinger points out that an accurate measure of compensation should also include dividends, rental income, small business income, and transfer payments (most of the latter go to the elderly). He fails to note that the distribution of such non-salary income is skewed toward better-off Americans. He does not seem to realize that the distribution of income in America (including wages as well as transfer payments, self-employment and property income) is now the most unequal in the advanced industrial world. Contrary to what he maintains, for most American workers, salaries and wages are almost the whole story. And compensation has stagnated or fallen for most of them.

Finally, Mr. Doerflinger lacks a sense of history, as do many of those who make similar arguments. He makes much of the fact that disposable income per worker has risen 1.24 percent a year in the current expansion. But such a rate of growth is historically slow for a business expansion. He chooses to compare this rate of growth not to another business expansion, when disposable income invariably rises, but to four years—1956 to 1960—that included a serious recession, in which disposable income invariably falls. He makes a similarly misleading comparison when trying to show that real wages fell more rapidly when inflation was high between 1972 and 1982 than when it was low between 1982 and 1995. The two periods cannot be compared. The first begins in 1972 near a cycle high and ends at a bottom in 1982, and the other begins at the bottom in 1982 and ends near the current high point.

Mr. Doerflinger’s selective use of data has become characteristic of a virtual cottage industry in America that has tried to paint a happy portrait of our economic performance during the past two decades. Recently, this industry seems to be gaining more adherents, notwithstanding the facts that contradict its arguments. Never before since the Civil War have average wages and salaries, no matter how you measure them, stagnated or fallen over a twenty-year period. Even in the expanding 1990s, they have hardly risen at all; and adding benefits to the mix barely changes the performance, especially if they are properly discounted.

No matter how you measure it, poverty worsened in the 1980s and has improved only marginally in the 1990s. The average period of unemployment is longer in the 1990s than it was even in the 1980s. If you get rehired after a lay-off today, you are likely to make less money. Not only does the distribution of income remain highly unequal, but the rate of growth of productivity has not improved in the 1990s from its record low level—a key issue yet one Mr. Doerflinger does not mention.

Denying the economy’s true performance does a serious disservice to the nation. It enables us to avoid making hard choices about how to deal with our problems. I did not state anywhere in my article, as Mr. Doerflinger suggests, that Wall Street was a primary cause of stagnating wages. My recent book, The End of Affluence, makes my position clear on this. But it is more than a little ironic that the soaring stock market of the past dozen or so years, and the making of so many fortunes in the financial markets, have not done more to improve America’s economic performance and the plight of the large majority of American workers. It is true that incomes also became more unequal in the age of the Robber Barons during the late nineteenth century; but the economy and productivity were then growing rapidly, not very slowly, as they have now for more than twenty years.