a word on the economy
bmon...@gmail.com
perspective.
A Reality-Based Economy
By DAVID BROOKS
Published: July 24, 2007
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.
The first complicating fact is that after a lag, average wages are
rising sharply. Real average wages rose by 2 percent in 2006, the
second fastest rise in 30 years.
The second complicating fact is that according to the Congressional
Budget Office, earnings for the poorest fifth of Americans are also on
the increase. As Ron Haskins of the Brookings Institution noted
recently in The Washington Post, between 1991 and 2005, "the bottom
fifth increased its earnings by 80 percent, compared with around 50
percent for the highest-income group and around 20 percent for each of
the other three groups."
The third complicating fact is that despite years of scare stories,
income volatility is probably not trending upward. A study by the
C.B.O. has found that incomes are no more unstable now than they were
in the 1980s and 1990s.
The fourth complicating fact is that 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.
A few years ago, the rewards for people earning college degrees seemed
to flatten out. But more recent data from the Bureau of Labor
Statistics suggests that the education premium is again on the rise.
Fifth, companies are getting more efficient at singling out and
rewarding productive workers. A study by the economists Thomas
Lemieux, Daniel Parent and W. Bentley MacLeod suggests that as much as
24 percent of the increase in male wage inequality is due to
performance pay.
Sixth, inequality is also rising in part because people up the income
scale work longer hours. In 1965, less educated Americans and more
educated Americans worked the same number of hours a week. But today,
many highly educated people work like dogs while those down the income
scale have seen their leisure time increase by a phenomenal 14 hours a
week.
Seventh, it's not at all clear that the big winners in this economy
are self-dealing corporate greedheads who are bilking shareholders. A
study by Steven N. Kaplan and Joshua Rauh finds that it's not
corporate honchos who are filling up the ranks of the filthy rich.
It's hedge fund managers. Or, as Kaplan and Rauh put it, "the top 25
hedge fund managers combined appear to have earned more than all 500
S.&P. 500 C.E.O.'s combined." The hedge fund guys are profiting not
because there's been a shift in social norms favoring the megarich.
It's just that a few superstars are now handling so much capital.
Eighth, 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. Over the past
two and a half decades, the value of top U.S. companies has increased
500 percent, according to Xavier Gabaix and Augustin Landier. The
compensation for the C.E.O.'s of those companies has also increased
500 percent.
Ninth, 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. The U.S.
economy, despite all the bad-mouthing, is chugging along. Thanks to
all the growth, tax revenues are at 18.8 percent of G.D.P., higher
than the historical average. The deficit is down to about 1.5 percent
of G.D.P., below the historical average.
All of this is not to say everything is hunky-dory. Inequality is
obviously increasing. There's evidence that global trade is producing
more losers.
Instead, the main point is that the Democratic campaign rhetoric is
taking on a life of its own, and drifting further away from reality.
Feeding off pessimism about the war and anger at Washington,
candidates now compete to tell dark, angry and conspiratorial stories
about the economy.
I doubt there's much Republicans can do to salvage their fortunes by
2008. But over the long term a G.O.P. rebound can be built by
capturing the Bill Clinton/Democratic Leadership Council ground that
the Democrats are now abandoning. Whoever gets globalization right
will have a bright future, and in the long run, the facts matter.