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April 17, 2005 - Better Times for Whom? Paris Hilton?

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This article was sitting in the Los Angeles Times on my doorstep Monday as I was thirty-five thousand feet above Kansas, returning from a weekend hanging around Manhattan. No, I’m not rich. I was the guest of a high-powered Wall Street attorney and his family, friends for many decades. (I first met the fellow when he was my student back in the seventies – when I was an English teacher and he was in the tenth grade.)

And what was waiting for me in my copy of the Times on the doorstep?

Wages Lagging Behind Prices
Nicholas Riccardi, Monday, April 11

Something is up.


For the first time in 14 years, the American workforce has in effect gotten an across-the-board pay cut.

The growth in wages in 2004 and the first two months of this year trailed inflation, compounding the squeeze from higher housing, energy and other costs.


Is this a problem? Well, if folks can only buy less and cheaper, perhaps so. That might slow down the economy even more, as if the price of gasoline weren’t enough alone to do that.

The details?


… This is the first time that salaries have increased more slowly than prices since the 1990-91 recession. Though salary growth has been relatively sluggish since the 2001 downturn, inflation also had stayed relatively subdued until last year, when the consumer price index rose 2.7%. But wages rose only 2.5%.

The effective 0.2-percentage-point erosion in workers' living standards occurred while the economy expanded at a healthy 4%, better than the 3% historical average.

Meanwhile, corporate profits hit record highs as companies got more productivity out of workers while keeping pay increases down.

Some see climbing profits and stagnant wages as not only unfair but also ultimately unsustainable.


Who worries about such stuff? Don’t the people with get-up-and-go and the right attitude just become wealthy, and the others have only themselves to blame? That’s what my conservative friend tells me – this erosion in workers' living standards is the fault of the workers themselves.

And too, as the economy recovers, as it will, or so we are told, wages will finally rise again. But should they? Unassertive (lazy) non-entrepreneurial folks getting even meager wages is bad for us all, it seems -


… higher wages could hurt the economy by stoking inflation further. Employers might pass the costs on to consumers in higher prices, and that in turn might prompt the Federal Reserve to raise interest rates more aggressively, possibly slowing the recovery or even triggering a recession.


It seems that keeping folks receiving less and less real income saves us from a recession. Odd.

A writer with the pseudonym Quiddity notes another passage from the Times story that seems to indicate things aren’t really that bad -


Despite the failure of their wages to keep pace with inflation, American consumers have kept shopping. Consumer spending has continued to rise. Analysts say that's partly because some shoppers are thinking less about their paychecks and more about their biggest asset: their homes.

Home prices rose 21.1% in Southern California and 9% nationwide from February 2004 to February 2005, sheltering consumers, and the economy, from much of the pinch of higher prices.


Ah, so the pain is not real, so to speak. Refinance, buy, refinance again. And that works out here in California. Home prices have gone up between twenty and twenty-five percent for the last five years or more. Instant money.

But Quiddity points out -


First of all, not everybody has a home, and those people are really losing. Second, when inflation is being "cured" with rapidly rising home prices, you've got a problem. Nothing is being produced. Nothing is being exported. Nothing of value is generated.

But the rise in home prices will work for a while, but only up to a certain point. When that's reached, there will be no way to keep the economy chugging along at a decent rate. Then comes the stall. Then comes the decline.


Really? Cannot home prices go up like this forever? What did Mark Twain say? Buy land. There’s not making any more of it.

Twain has a point. Out here in La-La Land there’s not just a shortage of affordable housing – only about seventeen percent of working families in Southern California can afford anything for sale in these parts – there’s a shortage of housing, period. Prices rise and rise, on and on, with no end in sight.

So, will the housing bubble ever really burst and send the economy into the weeds? Who knows? It doesn’t seem you’ll hear any bubble popping out here.

But that doesn’t help some people. For someone like me, who rents, by choice, and is retired, things just get more and more expensive – with no access to the one remedy that is saving everyone else in the economy. Oh well. One becomes careful.

Of course, the New York Times delivered, a day late, the same story as my local newspaper, to my friend doing securities law in Lower Manhattan, but with more depth. No colorful anecdotes about this gainfully employed Joe Public or that gainfully employed Joe Public eating cat food or dropping health and car insurance to get by. This was in the business section.

Falling Fortunes of Wage Earners
Steven Greenhouse, Published: April 12, 2005

The same sort of opening -


Beginning in the mid-1990's, pay increases for most workers slowly but steadily outpaced the rate of inflation, improving the living standards for nearly all Americans.

But an unexpected reversal last year in those gains has set off a vigorous debate among economists over whether the decline is just a temporary dip or portends a deeper shift that may cause the pay of average Americans to lag for years to come.

Even though the economy added 2.2 million jobs in 2004 and produced strong growth in corporate profits, wages for the average worker fell for the year, after adjusting for inflation - the first such drop in nearly a decade.


Ah! The economists argue.

First, they say problem is not with the jobs themselves – the problem is not very few and very crappy jobs out there - but perhaps with the now global economy, and with too many workers’ benefits -


… Most economists dismiss as overblown the widespread fear that the number of jobs will shrink in the United States because of foreign competition from China, India and other developing nations. But at the same time many of these economists argue that the increasing exposure of the American economy to globalization, along with other forces - including soaring health insurance costs that leave less money for raises - is putting pressure on wages that could leave millions of workers worse off.


Worse off, but as above, keeping inflation in check.

But Greenhouse says there are optimists -


…But some economists are more optimistic, saying that the wage sluggishness is temporary and that real wages have slipped only because a sudden spike in oil prices has briefly left workers behind the curve. These economists assert that wage stagnation will end soon, as normal growth brings a tighter labor market.


Maybe. Let’s blame those middle-easterners with their OPEC nonsense. Everything will get better. No problem.

Some of us aren’t buying that. And we see this too -


… The overall wage figures hide a split, with an elite group getting relatively large gains. In a study of census data, the Economic Policy Institute, a liberal research group, found that for the bottom 95 percent of workers, after-inflation wages were flat or down in 2004, but for the top 5 percent, wages rose by an average of 1 percent, with some gaining much more.

The upper-income group enjoyed strong pay increases largely because of bonuses, stock options and other inducements and because of robust demand in certain fields, like law and investment banking.


Well, my host for the recent New York weekend is doing well. He’s an attorney. His wife is an attorney. For those of us in other fields?

Those of us in systems management know the next shift in priorities, or the next merger, or the new off-shore deal, or a change in technologies, means moving on to the next firm, always at a slight net loss. One gets used to it. Ah, there’s always work out there. It is just a bit irritating. Of course that’s the very top of the “bottom 95 percent of workers” mentioned by Greenhouse. For the bottom 95 percent of workers perhaps it is well beyond irritating. If those folks got beyond being depressed by their slow and steady decline and got, say, angry, there might be a problem.

No, they all voted for Bush because they like is kick-ass style. No revolution this century. It’s a values thing. As long as Lars and Spanky don’t get married and move in down the street, well, that’s just the way it is.

Greenhouse does add more analysis, of course -


J. Bradford DeLong, an economist at the University of California, Berkeley, said that current wage patterns, while perhaps only temporary, did not conform to traditional economic explanations.

… Richard B. Freeman, a Harvard economist, predicted that new competition in the form of millions of skilled Chinese, Indian and other Asian workers entering the global labor market will increasingly pull down American wages.

"Globalization is going to make it harder for American workers to have the wage increases and the benefits that we might have expected," he said.

Facing intense foreign competition, Delphi, the auto parts manufacturer, has decided against any merit raises this year for its salaried workers. And at its air bag and door panel factory in Vandalia, Ohio, it persuaded unionized workers to accept a three-year pay freeze, warning that the plant would be closed otherwise.


Yep, that’s the way it is.

Matthew Yglesias is puzzled by it all and adds this (my emphases) -


Why Low Wages? I'm a little puzzled by Steven Greenhouse's inquiry into the falling wages problem. The bulk of the hypotheses and so forth mooted about seem to suggest that wages are being held down by something or other, with possibilities such as foreign competition, Wal-Mart's low wages, the possibility of substituting technology for labor, etc. being canvassed. That seems to suggest that, in the past, wages went up when productivity went up because bosses were nice and realized that with productivity on the rise they could afford to raise wages. Now thanks to foreign competition, Wal-Mart, and other low wage sources they "can't afford" pay raises. But that's not how the economy works, now or ever. If productivity is growing much faster than wages, then it should be easy to make a lot of money by hiring new workers.

As people do that, wages should start to go up, until it no longer becomes profitable to add new workers, at which point wages will start leveling off. Wages and productivity can't become de-linked because today's businessmen are greedy or because Wal-Mart is cunning, the link between wages and productivity depends on the fact that businessmen are greedy and cunning. You don't raise wages out of altruism, instead you expand your workforce out of greed, and the expanding workforce pushes wages up. So what's going on nowadays? None of the stuff discussed in the article seems relevant to the issue at hand. Professor DeLong is quoted in the article but doesn't have any further comments. I'd be interested to know.


So would we all.

So DeLong replies (again, my emphases) -


Well, there are three hypotheses:

1.) Improvements in firms' ability to squash unions, and thus shift wage bargains toward employers (the Wal-Mart hypothesis).

2.) A slack labor market--much more labor-market slack than the level of the unemployment rate would lead one to expect--in which firms find it easy to hire workers and workers find it hazardous to ask for higher wages.

3.) Changes in the international economy that boost the wages of the skilled and educated (whose products can be sold abroad for more) and put downward pressure on the wages of the less-skilled and less-educated (who now face much stronger competition from abroad).

I believe that (3) is likely to be a very important factor over the next two generations. But this wage-growth slowdown we have seen since 2000 has hit too rapidly and has been too large to be credibly attributed to "offshoring" or other long-run international factors. (1) is surely a factor, but (1) wouldn't work unless (2) were exerting a powerful downward force on wages. (2) has many causes--a relatively high value of the dollar that switches demand from home to abroad is one of them.

I expect things to turn around as employment expands and as (2) loses its force--unless the Federal Reserve decides that it needs to fight inflation now.

Why hasn't (2) lost its force already? Why, with rapid productivity growth and stagnant wages and cheap money that is easy for firms to borrow, isn't firm demand for workers already through the roof? Well, how much would you like to expand capacity if you knew the country had a large budget deficit, and that either big tax increases or a burst of inflation were likely in the future? When Paul Volcker and Bob Rubin say that a serious financial crisis may well be on the horizon? Wages and productivity can't become de-linked because today's businessmen are greedy or because Wal-Mart is cunning, the link between wages and productivity depends on the fact that businessmen are greedy and cunning. You don't raise wages out of altruism, instead you expand your workforce out of greed, and the expanding workforce pushes wages up.


Wait a second here. I know Professor DeLong used to work in the Clinton administration but is he saying the Bush thing of turning a multi-trillion dollar surplus into a multi-trillion dollar deficits through an expensive war and tax breaks for the ultra-rich was a BAD idea?

Yes. Just how are these guys managing the economy?

Well, they have their priorities.

Ah, and that brings us to Paris Hilton.

"Trust fund babies rejoice!"

In the Washington Post we see this is speeding through the House of Representatives – which one fellow calls legislation designed to keep the Paris Hiltons of the world from ever doing a day of honest work. The house is to permanently repeal the estate tax.

This is class warfare? Perhaps.


Last month, [Michael] Graetz and Yale political scientist Ian Shapiro published "Death By A Thousand Cuts," chronicling the estate tax repeal movement as "a mystery about politics and persuasion."

“For almost a century, the estate tax affected only the richest 1 or 2 percent of citizens, encouraged charity, and placed no burden on the vast majority of Americans," they wrote. "A law that constituted the blandest kind of common sense for most of the twentieth century was transformed, in the space of little more than a decade, into the supposed enemy of hardworking citizens all over this country."

The secret of the repeal movement's success has been its appeal to principle over economics. While repeal opponents bellowed that only the richest of the rich would ever pay the estate tax, proponents appealed to Americans' sense of fairness, that individuals have the natural right to pass on their wealth to their children.

The most recent Internal Revenue Service data back opponents' claims. In 2001, out of 2,363,100 total adult deaths, only 49,911 -- 2.1 percent -- had estates large enough to be hit by the estate tax. That was down from 2.3 percent in 1999. The value of the taxed estates in 2001 averaged nearly $2.7 million.


Hey, that’s a neat trick. Most of us are going to get screwed economically, Social Security must go away, the veterans get their health benefits cuts, the troops don’t get all their armor – but Paris Hilton get another Porsche?

Well, that’s fair.  Not.

And at the Post E.J. Dionne notes this -


In a little-noticed estimate confirmed by his office yesterday, Stephen Goss, the highly respected Social Security actuary, has studied how much of the Social Security financing gap could be filled by a reformed estate tax. What would happen if, instead of repealing the tax, Congress left it in place at a 45 percent rate, and only on fortunes that exceeded $3.5 million -- which would be $7 million for couples? That, by the way, is well below where the estate tax stood when President Bush took office and would eliminate more than 99 percent of estates from the tax. It reflects the substantial reduction that would take effect in 2009 under Bush's tax plan.

According to Goss, a tax at that level would cover one-quarter of the 75-year Social Security shortfall. The Congressional Budget Office has a more modest estimate of the shortfall. Applying Goss's numbers means that if CBO is right, the reformed estate tax would cover one-half of the Social Security shortfall.

This is big news for the Social Security debate. Michael J. Graetz and Ian Shapiro, authors of a new book on the estate tax, "Death by a Thousand Cuts," have referred to its repeal as the "Paris Hilton Benefit Act." To pick up on the metaphor, why should Congress be more concerned about protecting Paris Hilton's inheritance than grandma's Social Security check? How can a member of Congress even think about raising payroll taxes while throwing away so much other revenue?


How? Assume folks know who their betters are and like good serfs they sacrifice for their lords? No, not that exactly.

It’s more like a principle – everyone knows you keep and don’t share. It’s related to the conservative mantras about rugged individualism, personal responsibility, and taking care of yourself and not relying on big government. No community. That’s not the American way.

That’s what we all understand is the way things are now.


That’s the real Republican revolution.


Copyright 2003, 2004, 2005, 2006 - Alan M. Pavlik
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