Brad DeLong's Semi-Daily Journal (2004)

There may be some limited good news on the distribution of recent output between labor compensation and profits. Recent official revisions to growth and corporate profits data seem to have brought profits share of GDP down from a prior report of 12% at the end of 2003 to something like 10.5%, I understand. Labor compensation has been correspondingly adjusted higher. With employment roughly 2 standard deviations below the post-1980 trend (can that be right?), labor compensation’s failure to take its accustomed share of GDP is no surprise, but at least it appears to be less shabby than we thought. Mr. Greenspan can also stop fretting about the prospects for corporate profits, at least based on the view that 12% is unsustainable.

It's interesting how comments about the "two class recovery" so consistently omit any reference to the nature of the uniquely "two class recession" being recovered from.

Have profits risen faster than wages during the recovery, after the recession? Yes.

Did profits *plunge* relative to wages during the recession, while wages as a percentage of NI actually rose? So that the "surging profits" since were only getting back to their starting point in the good old Clinton days? Yes, too.

http://www.mindspring.com/~jimglass/profitsandpay.htm

But how often do we hear that for context? Next to never.

As for consumers and "the rich", it's truly remarkable how in this recession the middle class and wage earners had their incomes rise throughout -- thus the remarkable continuation of consumer spending through a recession -- while "the rich" got *wiped*.

Wages and incomes from $25k to $200k rose, while everyone with income over $200k lost, the higher the more, down 10% at the $200k to $500k level, with those awful folk in the "top 1%" losing an unprecedented-since-the-Depression 63% of their income.

But I haven't seen a single word about that here yet -- which is kinda funny, given how when the 2000 bubble year data was being commented upon here a while back, it was all wailing about how the Top 1% were becoming the "New Plutocracy", as the income gap exploded between them and the rest of us poor folk.

I said at the time: When this year's data comes out two years from now and shows the gap has collapsed, what is everyone here going to say?

Now we know: nothing. The income gap rises and it is the disaster of a New Plutocracy. That's *bad*. But if that was true, then when the same income gap collapses, that's got to be *good*, right? And we should be talking about the good news just as much. A 63% drop wipes out almost 200% of gains! But ... shhhhh, don't tell anyone. ;-)

Or be like the NY Times and have the very same reporters and experts who talked endlessly about the "Top 1%" and the "income gap" on the way up instead forget about them entirely when top income collapses, not mention them *at all*, and instead report about how "Americans' total income fell" for the first time since whenever.

Aw, has anyone ever wondered why can't we have a better press corps? ;-)

I preferred the 50's, 60's and 70's economy. It wasn't as good for rich people, but it was pretty good for me. The 80's, 90's, and earlies were not good for me at all.
Well, when our balance of payments renormalises, it's going to be the 50's, 60's, and 70's all over again, I hope.

The White House has done its "best" to increase "take-home pay" through tax cuts?

They are actualy arguing the tax cuts were the best possible design to increase take home pay across the board?

Brad writes: How Long Can a Two-Class Recovery Be Sustained?

why, for as long as the lawn mower considers himself to be in the same "middle class" as the millionaire he works for.

Jim Glass, while salaries for the top 1% were dropping, what was happening to their other sources of income?

Remember, it's very easy for someone in the top 1% to shift income from salary to dividends and back. If the tax structure starts to reward shifting income to dividends, then it makes sense that salary will fall, because he's going to shift income out of salary into dividends.

Brad, with respect and without sarcasm, you have not quite asked the right question.

The right question would be, how long can a two-class society be sustained?

Maybe I do not understand the data, but my view of the IRS data on the drop in top
income groups income stemmed from a large increase in realized capital losses. In other words their income drop fell because they realized capital loses in the stock market. Consequently, the owner had loses they could report to the IRS to offset other income. I do not think the comment by Fred above that top income "salaries" actually fell is correct.

This problem partially stems partially from out using income data to define wealth because we have income data. But in reality income does not define wealth -- assets really define wealth. The old story among Wall Street type is what is your drop dead wealth -- when do you have enough that you can take this job and shove it and live off of the income your assets generate.

When we look at data like the IRS data it can be
significantly distorted because the wealthy can
manipilate when they realize income while people that depend on their salary can not. So the drop in the income in the top income groups largely stemmed from them taking stock loses to offset other income to reduce their tax bills.

So the data really reflects that the top income groups suffered a drop in their stock market assts but not a drop in their current income and standards of living. If the wealthy had really suffered that severe a drop in their income we would have known about it before this data was reported and Larry Kudlow would have been screaming it from the rooftops.

Not to be awful or anything, but this kind of "restratification" didn't start happening this year or last year, and it's the kind of thing that Marxists harp about a lot.

Presumably the Economist cheered the top-end-weighted tax cuts when they were enacted, when a lot of people knew that they were an inefficient and unfair means of providing stimulus.

"Of course, through its tax cuts, the White House has done its best to provide what employers will not—a substantial boost to take-home pay."
Wha?

while "the rich" got *wiped*.
Jim glass can you name one? I mean Gates, Ellison, Bush, Snow, Cheney, Ken Lay, Sullivan, Ebbers?

I like the concept of a two-class recovery. For the life of me I don't know why economists don't have more to say about the self-defeating quality of fiscal policy featuring tax cuts directed to the wealthy. (Of course, we all know stimulus was the farthest thing from the Bushies mind)

I'm relatively new here so I don't know all Brad has said before. But isn't it common sense that rich people save too much to be an efficient conduit for demand stimulus? Why can't this be refined into a compelling Kerry soundbite?

ftm -- to find a good size soundbite on this topic go see what President Ford said on the advice of Greenspan about a tax cut not making any difference in his own decisions to buy a car
as to why he passed a tax cut that favored the middle class.

It is no longer your fathers republican party.

"Of course, through its tax cuts, the White House has done its best to provide what employers will not—a substantial boost to take-home pay."

Why, oh why, can't we have an *honest* press corps? *The Economist* has no excuse for getting this wrong--getting economics right is its damn *job*. So they're repeating the Bushy spin because...why, exactly?

Jim Glass: When you include the healthcare paycheck deductions that are conveniently not reported as part of the income figures, then your ostensible gains will look either less favorable, or likely become a loss. How much these deductions have changed generally I don't know (data, anybody?), but I estimate hikes in annual deductions in the range of $500-$1000 are not an unreasonable assumption (note: I'm talking not annual, but cumulative over the past few years, hikes).

Furthermore, those deductions are typically a fixed amount, not a percent of the income, so it hits lower incomes "relatively" harder.

And don't forget those copays & out-of-pocket hikes, coverage reductions, and increased cost of service. They are not part of the income picture, but are expenses that affect disposable income, a concept I find more useful than take-home pay. (Now please nobody give me the line about increased quality of healthcare.)

Tax deduction for these outlays is subject to thresholds, so for many people they will be after-tax (despite FSA arrangements, which cover only out-of-pocket, but not insurance premiums).

After we are through with that, you may consider price inflation in non-healthcare areas, especially for the basics (food, housing, transportation).

How much these deductions have changed generally I don't know (data, anybody?), but I estimate hikes in annual deductions in the range of $500-$1000 are not an unreasonable assumption.

cm just one persons's experience.in 1999 at AT&T we were paying nothing for healthcare and paid 410 per name brand perscription.

We ere outsourced to IBM and immediately began paying $86 per month and I do not recall the prescriptions at that transition time.

In 2004 the helathcarer deduction in $175 per month and you have to mail away for 3 months prescriptions and the brand name is capped at $50 per 3 months.

Copays increased 13.5% this year.

http://www.nytimes.com/2004/08/08/business/yourmoney/08rall.html?pagewanted=all&position=

Seeing Signs of a Stock Recovery in Some Obscure Tea Leaves
By CONRAD DE AENLLE

STOCKS are likely to rebound, at least for a while, if one obscure indicator, reflecting the investment patterns of an important Wall Street constituency, proves as accurate a forecasting tool as it has for the last 60 years.

The buy signal comes from the eight-week moving average of the weekly New York Stock Exchange specialist short-sale ratio. The ratio fell on July 23 to its lowest level, 22 percent, since at least 1943, when reliable records of the indicator were first compiled. That means specialist firms - brokers appointed by the exchange to maintain orderly markets in individual stocks, often by buying and selling shares themselves - accounted for about 22 percent of all N.Y.S.E shares sold short in the eight weeks through July 23. Selling short is a way to bet on declining prices, and the lower the ratio, the less short-selling the specialists are doing compared with other investors.

The weekly ratio can be calculated from the "round lot report," found by entering those words in the search box of the exchange's Web site, www.nyse.com (in the search results, look for a document titled "roundlots.html"). Divide specialist short sales (the second figure in the right column) by total short sales (the first figure in the same column) to obtain the ratio. The data issued by the exchange is usually about two weeks out of date.

When the ratio has fallen below 35 percent in the years since 1943, stocks have often rallied.

Analysts who closely follow the indicator argue that investors tend to be most optimistic at market tops and most pessimistic at bottoms, and that the ratio is one way to assess that mood. By contrast, specialists - aside from being regarded as astute traders - are forced to satisfy demand by selling shares in rising markets and to create demand by buying when no one else will.

With the ratio at these low levels, analysts who are otherwise skeptical about the market's ability to climb much further are willing to give stocks the benefit of the doubt.

"We have growing concerns about the long-term outlook for this bull market heading into 2005," said James B. Stack, editor of the investment newsletter InvesTech Market Analyst. But, he said, "there remains a silver lining for 2004."

The specialist short-sale ratio "suggests the public is heavily shorting this market, while the in-the-know pros are not," he said. "Key question: When has the stock market fallen sharply when this ratio has been at such low levels?"

The answer is "never," but some analysts prefer to say "not yet." They say the ratio has become less reliable as an indicator, largely because investors are increasingly using derivative instruments, like stock options, that allow them to benefit from rises or falls in stocks without buying or selling shares.

me: "... paid 410 per name brand perscription."

I guess that would be "... $10 per ...".

"... outsourced to IBM ... $86 per month"
"In 2004 ... $175 per month ..."

Assuming that the annual figure is 12X the monthly, that would be a $1000+ hike on your transition to IBM (when?). Further assuming that happened around Y2K, and generously taking it as "the new baseline", your 2004 premium would be a ($175-$86)*12 = $1068 increase on top of that, for a total of $2100 in 5 years from the initial situation. Wow!

Thanks for sharing.

Jim Glass, what say you to this efficiency & productivity increase!

Spencer

"Maybe I do not understand the data, but my view of the IRS data on the drop in top income groups income stemmed from a large increase in realized capital losses. In other words their income drop fell because they realized capital loses in the stock market. Consequently, the owner had loses they could report to the IRS to offset other income."

Spencer, I think there is much to be said about your argument. For the top earners, even options tended to be re-priced as the market decline wore on. My guess is that top earners used losses for a time to offset income, and even option gains were in the end restored.

The volume of employment is determined by the wage level. Because of immigration and trade with low-wage countries, real hourly wages in this country have to fall significantly for markets to clear. That can happen only under cover of inflation. In a nutshell, this is the dilemma we are in, if you accept Keynes's analysis in the first 30 pages of General Theory which I do.

P.S. OK, labor saving technology is a factor here, too, but that has been a constant for 200 years. Immmigration from Mexico and, especially, factor price equalization are the new kids on the block.

cm,

That is just the healthcare portion. When I added up lost free long distance ($1200/yr) 0 to 3% raises instead of 9% AND BONUSES about $7000 less it was indeed a very costly transition (until we were offshored to India). And the 3 years during the transition until they fired us we had our training and education cancelled every year and college tuition reimbursement became a management discretion, not available to most.

An important aside -

http://www.nytimes.com/2004/08/08/business/yourmoney/08teflon.html

DuPont, Now in the Frying Pan
By AMY CORTESE

TEFLON has been hugely successful for DuPont, which over the last half-century has made the material almost ubiquitous, putting it not just on frying pans but also on carpets, fast-food packaging, clothing, eyeglasses and electrical wires - even the fabric roofs covering football stadiums.

Now DuPont has to worry that Teflon and the materials used to make it have perhaps become a bit too ubiquitous. Teflon constituents have found their way into rivers, soil, wild animals and humans, the company, government environmental officials and others say. Evidence suggests that some of the materials, known to cause cancer and other problems in animals, may be making people sick.

While it remains one of DuPont's most valuable assets, Teflon has also become a potentially huge liability. The Environmental Protection Agency filed a complaint last month charging the company with withholding evidence of its own health and environmental concerns about an important chemical used to manufacture Teflon. That would be a violation of federal environmental law, compounded by the possibility that DuPont covered up the evidence for two decades.

As has been pointed out, co-payments and health insurance premiums have and are continuing to increase, with the latter rising at a more rapid rate. Both increases boost provider incomes significantly. Does anyone know of a research study that estimates the employment impact of the resulting increase in provider income?

me: Free long distance is a perk, not (regular) compensation, as well as free massages or spa/gym facilities; e.g. it cannot be converted to cash, and as opposed to essentials like food or lodging, you may otherwise not have purchased it. (And anyway cannot be valued at face value, i.e. AT&T could not have imputed its rate profits on you.) Still, $1200 in phone minutes, even if at some "deluxe" list price, is something.

On the other hand, bonuses are regular compensation, even if they are subject to restrictions. (This is evidenced by the existence of bonus targets & schedules. I.e., if some financial or other quantifiable target is hit, you usually get an additional percentage of your salary, or a fixed amount based on grade level, or perhaps scaled by "how much" the target has been hit/exceeded etc.).

In fact bonuses are easily overlooked when talking about compensation, and I managed to do so as well. I don't know whether bonuses are reported in worker compensation figures; they should.

So it looks like you have taken somewhere around $10,000 of a hit annually, which is a rather large amount. But then Jim Glass and others will probably be quick in consoling you by pointing out that your salary was unrealistically high before and you are really just suffering from distorted expectations, and that you were perhaps not laid off because your operation was offshored, but because your employer just hired unrealistically many people back then.

Anne,
I am sure some of the raw materials for making Teflon can cause cancer and also some of the products of its combustion. The damm stuff is prety inert otherwise. It would be interesting to know by what pathway the intact material could be a cancer agent. Somewhat like asbestos?

"Recent official revisions to growth and corporate profits data seem to have brought profits share of GDP down from a prior report of 12% at the end of 2003 to something like 10.5%, I understand."

"...official ... seem to have ..., I understand."

3 qualifiers. Any chance this is official unfounded statistics?

J Thomas,

I'm too lazy to do the math (this particular math, anyway) myself. The economic staff at Friedman Billings Ramsey (who've actually done the math) don't use the weasel-words. I just don't like to claim certain knowledge unless I go the math myself. The revisions are to the "official" data. The "seem to" was one too many weasels on my part. Clunky sentence and I already had a weasel in the logically appropriate location. I have no reason to doubt the results, just haven't rung them up myself.

Maybe I missed something, but I thought that the Economist's main point was:

"Household debts grew by more than 10% in the first quarter, and now add up to more than 115% of disposable income. HSBC, a bank, says that the recovery is built on “marshlands of debt”. With interest rates now rising, this ready source of spending power may be about to dry up."

The big question in my mind is, What happens when the American-world-consumer-of-last-resort is no longer playing that role? Having finally fallen victim to their near crack-Cocaine addition to credit, and with the US Government unable to cheapen the fix any further, what happens here and in the rest of the world?

Am I the only one here who believes we are on the brink of yet-another-American-led worldwide crisis?

Dabbler Dave, that's an issue I've been wondering about too. According to the Wall St. J, anecdotal evidence suggests that the rate of bankruptcy filings by individuals in their late 40's/early 50's with a long history of solid (middle to upper middle income) employment has increased significantly. I guess that's one domestic response. What will happen to those economies continued growth depends on US consumer spending is a good question. The EU nations do not seem as willing to run up debt (or as much debt) as people in the US, the British seem to be following the US lead, although not quite as exuberantly (if what I read is true) so I don't know (anyone know and/or have a comment?) if demand from the EU, UK, and perhaps new demand from China and Asia? could compensate for a sharp decrease in demand from the US. I've also wondered if a decrease in US consumer demand (or an inability to maintain consumption of imported goods at current levels) would effect how willing Asian nations/banks/investors are to buy US debt and dollars?