Paul Krugman: Progress or Regress

Paul Krugman clarifies the debate over how conditions for the middle class have changed over time:

Progress or Regress?, by Paul Krugman, Middle Class Commentary, NY Times: Is the typical American family better off than it was a generation ago? That’s the subject of an intense debate these days, as commentators try to understand the sour mood of the American public.

But it’s the wrong debate. For one thing, there probably isn’t a right answer. Most Americans are better off in some ways, worse off in others, than they were in the early 1970’s. It’s a subjective judgment whether the good outweighs the bad. And as I’ll explain, that ambiguity is actually the real message. ...

From the end of World War II until 1973, ... the U.S. economy delivered a huge, broad-based rise in living standards: family income adjusted for inflation roughly doubled for the poor, the middle class, and the elite alike. Nobody debated whether families were better off...; it was obvious that they were...

Since 1973, however, the picture has been mixed. Real median household income ... rose a modest 16 percent between 1973 and 2005. ... The typical full-time male worker saw his wages, adjusted for inflation, actually fall; the typical household’s real income was up only because women’s wages rose (although by far less than everyone’s wages rose...) and because more women were working.

The debate..., for the most part, is about whether these numbers understate or overstate the true progress achieved by typical families. The optimists point to technological advances that, they argue, don’t get reflected in official estimates of the standard of living. In 1973, you couldn’t chat on a cellphone, watch a video or surf the Internet; many medical conditions that are now easily managed ... were untreatable; and so on.

The pessimists point to ways in which life has deteriorated, things that also aren’t counted by the official statistics. Traffic has gotten far worse... The economic riskiness of life has increased: ... fluctuations in family income have grown... The rat race has intensified... [F]amilies, no longer confident in the quality of public education, stretch to buy houses in good school districts — and often go bankrupt when misfortune strikes in the form of a layoff for either spouse or high medical bills.

Does the good outweigh the bad? Never mind. As I said, the ambiguity is the message.

Consider this: The United States economy is far richer and more productive than it was a generation ago. ... Yet in spite of all this technological progress..., we’re not sure whether there was any rise in the typical worker’s pay. Only those at the upper end of the income distribution saw clear gains — gains that were enormous for the lucky few at the very top.

That’s why the debate over whether the middle class is a bit better off or a bit worse off ... misses the point. What we should be debating is why technological and economic progress has done so little for most Americans, and what changes in government policies would spread the benefits of progress more widely. An effort to shore up middle-class health insurance, paid for by a rollback of recent tax cuts for the wealthiest Americans ... would be a good place to start.

Instead, the people running our government are fixated on cutting tax rates for the wealthy even further. And their solution to Americans’ justified economic anxiety is a public relations campaign, an effort to convince middle-class families that their problems are a figment of their imagination.

_________________________
Previous (9/11) column: Paul Krugman: Promises Not Kept
Next (9/18) column: Paul Krugman: King of Pain

Comments

[alex norman]

One of the greatest accomplishments of the Rove-led Bush Domestic "Policy" has been a criminal feat of psychological misdirection on a massive scale: convincing the white american middle class, whose sense of insecurity has increased over the last decade as they have seen their safety net disappear and well-paying jobs disappear, that what was making them feel so deeply anxious was not an economy that was bifurcating America into "have" and "have nots", but instead other, more threatening issues, like gay people wanting to get married.

[Ninjaplease]

The Future's So Bright... I gotta wear shades...

Seriously Nero, Rome is burning down all around you.

"as commentators try to understand the sour mood of the American public."

http://today.reuters.com/summit/summitarticle.aspx?
type=summitNews&summit=AutosSummit06&storyid=
2006-09-14T175256Z_01_N14239681_RTRUKOC_0_US-AUTOS
-SUMMIT-SUPPLIERS-CONSOLIDATION.xml&src=091406_1419
_INVESTING_reuters_summit%3A_autos

http://today.reuters.com/business/newsarticle.aspx?
type=ousiv&storyID=2006-09-15T023621Z_01_N14292163_
RTRIDST_0_BUSINESSPRO-AUTOS-FORD-BUYOUT-DC.XML&WTmodLoc=
Home-C4-Business-ousiv-2

From Blogsource:
"September 13, 2006
Bio-outsourcing is Booming

The bio-outsourcing market is booming, thanks to the benefits of outsourcing for the biomanufacturing organizations. Many biomanufacturing companies are outsourcing their operations to offshore destinations. According to estimates, over 50 percent of biopharma companies will outsource at least some aspect of their biomanufacturing activities. The reason is clear. Biomanufacturing is a complex, costly and labor-intensive process. Ongoing labor shortages and increasing costs of building biomanufacturing facilities have forced many biopharma firms to turn to outsourcing for help. "

Also from Blogsource:
"Hospital Outsourcing

Bangalore-based research BPO firm BrickWork has taken a project that is entirely a new concept in India. The project is outsourcing of hospital management and administration. The company has signed a contract for a 300-bed hospital project called the Cauvery Medical Center in Bangalore.

Under the terms of the contract, BrickWork will manage the hospital, recruit doctors and nurses, put in IT systems, procure medical equipment and run the hospital for five years. The US-based investors are putting in Rs 150 crore into the project. BrickWork is expecting that its network of 175 medical professionals can refer the patients to this hospital in Bangalore.

To know more about mid pharma outsourcing, read my previous post titled "Mid pharma Outsourcing Pipeline"."

Nero, you'd better hope that the Air Force hurries up with that intense EM weapon:
http://www.chron.com/disp/story.mpl/
chronicle/4182615.html

I mean how are we going to fend off all those hungry poor people within our own borders that we've created with our economic policies?

http://today.reuters.com/news/newsArticle.aspx?
type=domesticNews&storyID=2006-09-14T210644Z_01_
N12475520_RTRUKOC_0_US-INSURANCE-STUDY.xml&archived=
False

Lets all join hands... Close our eyes, clear our minds of unpure, isolationist thoughts, and pray for the invisible hand to create high value local jobs.

[cm]

What (or rather who) actually constitutes the middle class, if there is at all a cogent definition of the term? Or is the very concept of middle-class membership a figment of the imagination, and perhaps more a propaganda than a decriptive term?

I'm a software engineer, and by broad standards probably "middle class", and "white collar" (even though I'm often not wearing collar shirts). What precisely makes me that? I'm spending X hours on the job (quite more than 40 each week, without overtime pay but with a bonus so far), albeit I sit on a chair instead of having to stand all day, and my physical handling of equipment is essentially pounding a keyboard and staring on a screen -- which is perhaps physically less tiring than working a shovel but mentally/emotionally possibly more so.

[Movie Guy]

Increased business competition

Paul Krugman: "That’s why the debate over whether the middle class is a bit better off or a bit worse off ... misses the point. What we should be debating is why technological and economic progress has done so little for most Americans, and what changes in government policies would spread the benefits of progress more widely."

The overriding issue is increased business competition and all that it implies.

It is essential to understand and address the entire U.S. business model: Increased business competition, U.S. trade policy, other U.S. government policies and regulatory requirements as well as competing foreign policies and requirements, and local lean business operating practices and costs all play roles in impacting the wage earnings and employer-provided compensation benefits provided to U.S. Middle Class and Lower Class employees.

Contrary to what Paul has said previously, advanced global trade is having a much broader impact on the U.S. work force than he and others have acknowledged. It is not enough to only study the direct effects of offshoring. One has to take the broader view of what increased business competition entails in light of WTO policy, U.S. trade policy - domestic and international, and all other factors that affect the U.S. business model. Such an analysis should further recognize the role that key technologies improvements have provided greater levels of support to global competition, whether affecting manufacturing sourcing, or services outsourcing and offshoring.

The income inequality subject needs to be framed around the broadest issues first.

Start with the effects of increased business competition and work out from there.

[Movie Guy]

Examples of economists' remarks:

September 2006: Surprise! The Rich Get Richer and . . ., Paul Krugman's Money Talks: "...There's a dispute about how much of a role international trade has played in the disconnect between productivity and wages; standard economic models say that trade has played some role, but not the dominant one. It's worth pointing out that Wal-Mart — to pick a non-random example — while it sells a lot of imports, must use U.S. workers to operate its stores, so it really isn't in a position to outsource. Nonetheless, it pays low wages and offers minimal benefits. That's not a conclusive proof that trade isn't the villain, but it's a reminder that stories about manufacturing don't easily generalize to the economy. (And imagine how different things would be if service workers were members of strong unions, received universal health care, etc.)..."

August 28, 2006: Brad DeLong: James Galbraith on "Dean Baker on Judges Behaving Badly" - "I would say there are five things going on: (a) income and wealth at the top end, driven by changes in finance; (b) the effects of unemployment on the wage share; (c) skill-biased technological change; (d) declining union power; and (e) shifts in policy that erode equality-supporting measures like the minimum wage. I can't untangle them."

August 2006: An email from Paul Krugman (posted by Mark): "Hi guys: I think it's really important to realize that we have only a modest amount of direct evidence that technological change is driving increased income inequality. That is, while there have been a few studies showing some connection between increased use of IT and changes in the wage structure, very little of the conventional wisdom that technology is the culprit is based on those studies. ..."

July 17, 2006: Mark Thoma post - Do Economists Have Any Answers?: "I think part of the silence is that economists have no instant cure for problems that occur with globalization. We think it's necessary for our long-run health, and we can recommend policies that aid the recovery process, but perhaps our silence is because we've been waiting for some economist working hard to have a "Eureka" moment and announce to all of us a cure is at hand. Until that happens, we will be stuck with less satisfying rehabilitative solutions. ...So, smart economists everywhere, what do we tell people when they look to us for answers to the problems that come with globalization and rising inequality? Do we say we can help some, but not all that much and it's a long, hard road to recovery, or do we have a more positive message to deliver? If so, how do we get the message out? Some of you will deny a problem exists and assert this is just a matter of public perception and the workings of a free market rewarding the most productive among us, and you can argue that position, but I think there is evidence of justfiable discord."

Good post, Mark.

March 2006: A Few Notes on Income Inequality - Krugman - NYT Web Journal: Paul Krugman - "growing international trade plays some role in growing inequality, but it is, literally, a fraction of a fraction of the story. That's cold comfort for the factory worker whose plant has just been closed because it couldn't compete with imports from China, or the software engineer whose job has just been outsourced to India-- and unless we can do something to provide more economic security, protectionist forces will become unstoppable. But I still believe that we can increase economic security and reduce inequality without shutting down international trade."

[Movie Guy]

INCREASED BUSINESS COMPETITION IMPACTS ON U.S. EMPLOYMENT AND EMPLOYEE COMPENSATION

Paul Krugman is only addressing limited considerations affecting the growing wage and income problem in the United States. Valuable considerations, but not the entire picture.

Paul's income inequality pieces do NOT address the full role that advanced global trade plays in shaping the U.S. wage and total compensation picture.

Advanced global trade and technology improvements related to such are having a much larger effects on the U.S. economy and American workers beyond those workers directly displaced from jobs outsourced or relocated offshore. Such considerations also extend beyond the remaining direct employment by competing companies and corporations.

The advanced global trade impact zone extends to the shrinking support services base of employment and associated wage levels for those company operations that lose support contracts for corporations and companies that either reduce or eliminate domestic plant and facility operations in the United States. Meanwhile, the remaining American-based employees are facing new pressures directly related to advanced global trade.

Internal corporate pressures to remain cost competitive in the global economy have resulted in multiple initiatives to suppress wage increases and benefit package increases.

The evidence of such initiatives is widespread and growing among corporations and companies with operations in the United States. If all else fails, some corporations file for federal bankruptcy to divest themselves of pension plan obligations.

Similarly, other corporations and companies are capping their health care share responsibilities by using a given year (2006, as an example) as the last corporate supported cost increase supplement for existing worker health plans. Some corporations and companies are simply reducing their health care plan coverage in terms of corporate/company share funding of such plans.

Corporations engaged in advanced global trade are pressuring domestic suppliers to rein in costs and trim profit margins to avoid additional offshore sourcing. Some corporations are directly advising their suppliers to move component and parts production offshore.

While not all corporations and companies are fully integrated into the global economy, there is evidence that many of the remaining corporations and companies are using the 'global corporate lean model' as a blueprint for also reining in such employee compensation costs. Such business models serve as benchmarks for local market pricing of wages and benefit packages.

It's my judgment that the more important issues are the economic effects of real wage and real compensation declines that are impacting a growing proportion of American employees in a wide spectrum of industries resulting from increased business competition considerations, and benchmarks established by transnational corporations, whether in manufacturing, general services, or retail. It's all related.

The decreasing purchasing power less credit extension for many income groups is not sustainable as measured against existing standards of living. The economic implications of declining real wages and real total compensation for American workers are significant.

Advanced global trade and increased business competition are most certainly having major impacts on a growing number of American industries and related employment wages and total compensation.

If economists and analysts intend to have any credibility on the subjects of advanced global trade and increased business competition, and the impacts on U.S. employment, real wages, and real total compensation, then they need to piece together the entire puzzle.

Start with increased business competition and its effects. See the whole chess board.

[Movie Guy]

Speaking of Middle Class impacts:

Ford Motor Company's Black Friday kicks off at 7 AM (EDT).

More general news here. And sales information.

[a]

"Internal corporate pressures to remain cost competitive in the global economy have resulted in multiple initiatives to suppress wage increases and benefit package increases."

Execept for the CEOs and like.

[reason]

MG..
I think the picture is more complicated than just increased business competition. If that was the case, as Brad Delong pointed out, why haven't prices fallen enough to pass the reduced costs on to consumers. Traditional economic theory would hold that profits should fall to normal profits due to competition and push down prices. But profits are at record levels. So why isn't this fierce competition driving down profits.

Part of the answer is that it is, in manufacturing. The profits are being made elsewhere, in finance, in resource extraction, in pharmaceuticals etc. Licence (or patent) based monopolies are drawing unprecedented amounts of rent. We have also seen innovations in packaging risk that haven't yet played out. Profits may be inflated by overvalued assets due to underestimated risk levels (i.e. too low bad debt provisions).

[save_the_rustbelt]

Krugman always has solutions for just about everything, except this issue. And no mentionof trade, ...again.

As of the end of the year Ford will be about 1/2 its current size. Blood is running in the streets of Detroit today.

[Movie Guy]

reason,

Let's go back to what I originally stated:

The overriding issue is increased business competition and all that it implies.

It is essential to understand and address the entire U.S. business model: Increased business competition, U.S. trade policy, other U.S. government policies and regulatory requirements as well as competing foreign policies and requirements, and local lean business operating practices and costs all play roles in impacting the wage earnings and employer-provided compensation benefits provided to U.S. Middle Class and Lower Class employees.

----

I believe that I covered the bases in the above statement.

The missing piece of the discussion as relates to advanced global trade and income inequality is the issue of increased business competition, regardless of any chicken and egg considerations. It's important to focus attention on the U.S. corporate/company business model and the role that increased business competition plays.

The U.S. corporations and companies have been through this drill before. Absent the full range of global vehicles to provide a level playing field, such businesses have sought other means to improve their economic performances and competitive positions. Foreign competition has frequently been the driver that resulted in improved U.S. corporate/company based efficiencies. And quite frequently, those efficiencies improvements weren't enough to insure one's corporate success. Therein comes the problem. So, the full range of possible solutions, including U.S. trade policy changes, other federal and state/county/municipal policy and compliance changes, wage and benefit reductions, and other methods to improve (minimize) productivity costs (which are not necessarily actual efficiency improvements) have been sought.

Once the NAFTA and WTO rules kicked into play, corporations and companies had to seek internal market share protections and advances in order to remain competitive both domestically and internationally. Such measures included outsourcing domestically and offshoring, whether for manufacturing production or provision of services. If other global corporations were seeking the opportunities to manufacture or assemble goods in China, as an example, then the U.S.-based corporations and companies had to consider pursuing such opportunities in order to remain competitive. And, as we know, they pursued the opportunities.

The vast global labor pool is now available for many tasks, due to pricing considerations, and improvements in communication and transportation costs resulting, in part, from technology improvements. Failures to take advantage of the vastly larger and cheaper labor pool based on available work skill sets, absent domestic operations technology improvement offsets, fail to maximize improved corporate/company operations focused on profits. So, yes, offshoring was an option very much on the table.

We are also observing further mergers and consolidations, all part of the increased business competition considerations of the U.S. business model (and foreign business models).

To your point about consumer price savings, we see evidence of those savings every day. While we may not see actual price reductions across the board on any given group of products, we note the retailers, suppliers, and corporate/company manufacturers collective abilities to hold the line on pricing (and costs). In the longer term, those efforts should be viewed as consumer cost savings. Corporate/company profits are, in many cases, at record levels due to the obvious pricing/costing advantages of offshoring, as well as other net cost reduction initiatives. The available competitive advantages that resulted from the global (WTO) and U.S. trade policy changes which lowered the tariffs dams, along with communication and transportation efficiency improvements, is why offshoring took off.

So, yes, increased business competition (some self inflicted) is driving the ongoing reduction of operating costs, including holding the line on wages and benefits. The scope of business competition is increasingly being felt on a global scale.

I raised the issues of the U.S. business model and increased business competition because I have reviewed far too articles, papers, and blog posts that do not mention the specific issues, yet such are driving forces of what we are observing.

[reason]

MG

I respect your views but you are not thinking about this as an economist would. If you believe in market economics then you believe competition is what ensures that the benefits are spread. But the opposite is happening.

And then you mention mergers and takeovers in the same breath as increased competition. Mergers are a reduction in competition.

Yes, I know I am being a bit dumb here, because what you really mean is foreign competition. See I really believe that in a way you are right, the economists have forgotten their theory of second best again. They moved one part of the environment towards the optimum without remembering that other problems (in international finance for instance) can result in the result being counterproductive.

[Movie Guy]

reason,

Right. I am addressing this from a corporate business perspective. It's a missing consideration from many of our discussions.

The purpose of doing this is to help broaden the presentation on these issues.

Very few if any of the economist voices we are hearing in main blog posts are from individuals who have lead midsize or large manufacturing corporations, as an example. They have not dealt with the full range of considerations in such manufacturing business models to include wages, benefits, product pricing considerations, production costing and location analysis at the plant, regional, or global levels.

As an example, when an individual is responsible for determining wage and benefit compensation for 2,500 to 25,000 or 100,000 employees, among other business operation considerations, the scope of issues takes on a whole different dimension. The corporate lean model comes into clear focus, and you apply all of its considerations.

Any meaningful analysis of wage and benefits analysis should involve a firm appreciation for the U.S. business model and the domestic and international business market considerations.

We have listened to the confusion on a few issues from the Federal Reserve level down in the past few years as relates to unanticipated outcomes in the advanced global trade model - real world outcomes, that is. It's clear that some key economists are still struggling to grasp the dynamics of some changes. Theory is fine, as far as it goes, but it doesn't explain away the real outcomes that have baffled key economists recently. If theory models need to be adjusted, so be it.

If the outcomes aren't falling in line with the theory, then the very least that any economist could do is to push away from the desk, get up, and go visit some hands-on corporate leaders to gain a better understanding of what is happening and what is being considered in their decisionmaking processes.

You're correct that I am giving due consideration to foreign competition, particular with regard to the WTO developments. That's another general subject that doesn't appear to be receiving adequate attention at the moment.

Yes, I raised the issue of mergers and consolidations. They are in play around the world. I am suggesting that the merger activity along with other forms of consolidation are being undertaken to improve corporate/company competitiveness positions.

The growing availability of a larger labor pool, concurrently improving its skill sets, with regard to the changes in U.S. and WTO trade policy is having a profound effect on global competition considerations and actions by corporations.

Interestingly, it is apparent that the larger labor may be masking some of the further potential improvements in technology applications that could be underway. The decisions are based on cost benefit analysis, of course, but the decisions may be focused on short term gain considerations. That might not be the wisest course of action for some corporations, but those decisions may be within the ready reach of the financial capabilities of the corporations involved.

On the academic side of the globalization and income inequality discussions, there appears to a potential disconnect between business reality being applied on the ground and theory in the cubicle or office. If the business model and current business competition issues of corporate concern are not primary focuses or considerations in discussions regarding advanced global trade and/or income inequality, then why should we expect that the econ presentations are adequately addressing the issues?

If you want to know how something is really working, you go ask the individuals who are on the ground undertaking the task at hand. If we want to understand why wages and benefits are not growing in real terms, then we should step out of the theory box and discuss the business models in use by the corporate and company leaders. They won't dance around and act like irresponsible teenagers. They will answer our questions as business leaders who have to make the decisions involved. Then we can plug their guidance into the ongoing discussions, filling in some of the voids in econ thinking.

If we aren't demonstrating a true appreciation for and firm understanding of the U.S. business model and the role that business competition plays in determining wage and benefit compensation, then perhaps we don't know what we're talking on these blogs. The absence of mentioning the U.S. business model and increased business competition is a shortcoming in some discussions as reflected in main blog posts on various econ blogs. It may demonstrate a lack of fundamental business knowledge and personal experience by such speakers. How would we know if we don't raise the subject(s)?

[Bruce Wilder]

Weirdly off-topic question:

What do you suppose the origin of the Indian fascination with "crore" (used in the post) is?

The difference between the long and short scales -- an American trillion is a British billion kind of thing, I understand as an arbitrary thing, like driving on the left instead of the right, but what would the ancients have had to do that would have led them to a special word for 10 million?

Just curious.

[greg]

I don't think that businesses are increasing their competition against each other. This would mean that the changes we see are supply driven. It is rather the consummers (corporations and individuals) that, due to information technology, can now effciently query an expanded range of vendors.

The walls between local, regional and global markets are evaporating due to the actions of consummers. I'm a programmer in Wisconsin. Our department has 6 individuals and yet this morning the word came down from above to "find a software house in a developing country" to start out sourcing our work to.

No company came to knock on our doors and in a firm of 800 people, 6 is a pretty small number. Yet the knowledge that deals are "out there" is leading to a upper management directive to outsource work.

I'm 7 to 10 years from retirement (if I'm lucky).

[im1dc]

Krugman says "What we should be debating is why technological and economic progress has done so little for most Americans, and what changes in government policies would spread the benefits of progress more widely."

And he's right.

[ken]

Has it benefited the American consumer/worker? Probably not. My view is somewhat skewed due to the fact that I live in Michigan. When I look down the street when i leave for work in the morning and see 10% of the neighborhood up for sale not to mention the sheriff sales, I am a bit skeptical about how the consumer has benefited from increased and unfair competition. I have been a cost accountant for the last 15 years. I’ve worked in both high tech and mass production automotive. What I have seen is nothing short of stupidity. Satisfy the stockholder in the short term while destroying your long term prospects.

Ford is just another example of this new millennia battle cry but that’s another discussion.

Sure we have for the most part kept inflation in check but we have also kept wages for the most part stagnant. As Mandel wrote a few months back we've made staggering gains in productivity. We have built 1.2 trillion in output we can’t consume with wages and we have a trade deficit. Go figure.

My view is that through currency manipulation we have benefited in the short run. Much of the retail sector is dependant on the peg and that peg and currency recycling has prevented any substantial discounting in the primary and secondary debt markets. So it follows that the housing market depends on it too. And yes China has allowed the Yuan to appreciate but that was merely window dressing. In our present condition (twin deficits) a freely floating Yuan would only cause more damage. But that addresses only recent history and not the overall trend.

Much of what has happened to US industry has been the result of technological innovation and an anti union political shift. Machining, Milling and other industrial processes have become automated. A single operator can manage multiple machines but that same operator has less and less bargaining power when it comes to wages. It shouldn’t come as any surprise that the drop in union membership coincides with the decline in real wages. The decrease in demand for these workers and the Reagan era anti-union propaganda removed the counter balance to the formation of capital. We have temporarily balanced that formation with deficit financing in the private and public sector

The problem is that our latest recessions have been deflationary in nature and consumer spending has been bolstered by the tech bubble in the late 90's and the housing bubble in the current expansion (which is coming to an end). With a vast educated labor pool on the global front and increasing technological innovation the real pressures on the economy are deflationary. Sure we have had some inflationary scares with fuel prices but the retail sector had little pricing power. The WalMart inventory management model relies heavily on transferring goods to areas of high demand and that requires fuel. Their press releases complained of their inability to pass on those price increases. My point here is that for the most part, retailers ate those price increases and that hurt profits. Deflation is, after all, a decline in profits whether it’s an inability to clear inventories or costs the results are the same.

Supply Side Tax cuts can and do expand productive capacity however that investment is not necessarily domestic and that investment provides little or no return in a deflationary environment. It tends to follow the path of lowest cost and taxation (ATBE)

My view is that we should look at the 73 to present as a grand cycle that will run its course in the next 12 months. It won't be a "soft" landing. On the other side the US will see a lower standard of living as corporations look to the billions in Asia as their new markets. The US will play a less dominant role. Central Banks will diversify reserves and leveraging out of economic troughs will be a little more expensive.

[cm]

greg: No snark intended, but part of the "savings" from your salaries would make for a nice "outsourcing commision" bonus for the person executing the move (or more likely their boss). Corporate behaviors are in the end a combination of individual behaviors, which are driven by individual incentives. The corporate pocketbook is just an accounting artefact, whereas individual pocketbooks are far more real.

[anne]

http://delong.typepad.com/sdj/2006/09/why_oh_why_cant_12.html#comment-22450908

September 15, 2006

Why Oh Why Can't We Have a Better Press Corps? (CJR Daily Jumps the Shark Edition)

UPDATE: Bree Nordenson of Columbia Journalism Review says that she will explain her side of the story about why she wrote that Paul Krugman's references to median earnings of households headed by college graduates was "partisan slipperiness." But she says that she will do so "only if it's off the record."

I argued her into "Let me speak to my editor and see if he thinks if it's a good idea for me to explain myself."

And we have an email from Mark Mitchell, assistant managing editor of CJR Daily, which reads, in full: "Thank you for your comments."

--------------------------------------------------------------------------------

Who will watch the watchdogs? I had hopes when the Columbia Journalism Review got into the real-time media watchdog business. But now I find CJR Daily committing all the standard sins--a snarky ignorance of where genuine expertise is to be found, an addiction to "he said, she said" journalism, a stubborn insistence on splitting the middle and poxing both houses driven by an uncuriosity or an inability to recognize when one side is right and the other is wrong, a laziness that keeps them from making phone calls to get the real story, et cetera, et cetera.

You get the picture.

Here we have Bree Nordenson writing:

CJR Daily: The Dogma Behind the Pay Wall: The left-wing Krugman, while not as flagrant as Brooks, coats his column with a similar sort of partisan slipperiness. While he criticizes "conservative commentators [who] tell us about wage gains for one-eyed bearded men with 2.5 years of college of whatever -- and conveniently forget to adjust for inflation" he chooses somewhat specific data himself, suggesting that there has been a decrease between 2000 and 2005 of incomes for a "typical household headed by a college graduate." This is not a widely published statistic, and Krugman doesn't tell us where he got it. He also fails to reveal the meaning of "typical," so we are left to guess who exactly these desperate college graduates might be....

[anne]

http://delong.typepad.com/sdj/2006/09/why_oh_why_cant_12.html#comment-22450908

So I wrote back to its boss, Columbia Journalism Dean Nicholas Lemann:

Dear Dean Lemann:

You have a problem at CJR Daily....

"Typical" means "median"--Paul is using "typical" to try to reach that part of the audience that doesn't understand "median". No slipperiness there.

The complaint about "specific" data rips the phrase from the context in which Krugman explains why he is presenting information about this measure--only by doing so can Nordenson falsely accuse him of cherry-picking.

Krugman's full sentence is:

In fact, the data refute any suggestion that education is a guarantee of income gains: once you adjust for inflation, you find that the income of a typical household headed by a college graduate was lower in 2005 than in 2000.

The idea is to rebut the claim that the American economy is still offering rapidly increasing rewards to those in middle America who have bettered themselves by getting a college education. Paul chose it not because it was one of the few statistics that goes his way, but because it is one of the statistics that would be expected to show income gains if the principal factor at work were rising rewards to education.

With respect to where the data comes from...

The standard reference on income figures is Income, Poverty, and Health Insurance Coverage in the United States:, published by the Bureau of the Census. The latest edition was published in in August, 2006, including data collected in 2005.... The URL for the Census Bureau report is http://www.census.gov/prod/2006pubs/p60-231.pdf....

Meanwhile, Paul Krugman writes that the exact source for his column is http://www.census.gov/hhes/www/income/histinc/h13.html....

[Lord]

To a large extent this is what you would expect to see. Productivity growth wasn't very good until recently so there hasn't been that much more to divy up. Higher pay would have resulted in higher inflation. More people working simply meant less for each one. We traded pay for work as China is now doing. Productivity is up now but the distribution of benefits has been exceedingly narrow. It will either have to broaden out to provide a wider consumer base or these benefits will disappear through competition.

[im1dc]

ken, some more on the Ford fallout in buying out the UAW and cutting plants and staff.

Officially announced at noon today my city of 50K lost 500 jobs.

Superior Industries is closing its wheel plant in one of the industrial parks here. That loss was unexpected, sudden and severe. City industry planners are in shock.

Detroit's troubles have begun to ripple through the economy far faster than perviously.

We must address the effects of 'Free Trade' on the average American family and fast or more and more people are going to be out of work and lose everything.

If the people keep voting for laissez faire free trade politicians they will keep getting what they've been getting.

Einstein said 'doing the same thing over and over and expecting a different result was the definition of insanity.'

Let's hope the Electorate is not insane.

[JRossi]

Krugman writes that we should be debating why technological and economic progress. . . . I say B.S. We the US public shouldn't debate this. Politicians and pundits shouldn't debate this (although they will, with predictably unelucidating results). We are not qualified to debate this. Economists who are specialists in this area should debate this and then give us the correct answers. If there are no known correct answers, then they should tell us so.

[Movie Guy]

JRossi,

The train has already left the station on this one. Those, including supposed "specialists", who do not grasp the dynamics of advanced global trade, increased business competition, the U.S. business model, and other factors are not the ones who will explain the developments of the past decade within a timely manner.

You can wait around at the train terminal, but you may be standing alone.

Did you think that average real wages would be increasing consistently once we ramped up the next phase of the global trade model? Never happen. That some economists didn't get this point and are still confused should be activating alarm bells in your head.

Businesses are responding to the new realities. It's not much more complicated than that.

says...

JRossi,
Yes I do think this should be debated by "specialists" however the argument ultimately becomes down to the electorate and the social impact of globalization. Once again I have to mention that I am biased due to the fact that I live in Michigan and work in the auto market.
I don’t think we should discount the fact that the administration has rather low approval ratings on the economy even with a low unemployment rate and decent GDP growth. The problem is most aren’t enjoying it. Yea we got a raise but the deduction for my co-contribution to healthcare was up another $100 a month and the district needs another millage for the schools.
At the end of the day what really matters is how much if any the 9-5 person has left after the bills are paid. It’s still a taboo in our capitalist culture to admit we have financial troubles. You aren’t successful if can’t afford the latest pair of jeans for junior. I’ve worked for small companies and have answered the phone at work. And many times its a bill collector trying to find an employee. Just look at the rise in the payday loan stores popping up. They wouldn’t be there is there wasn’t a market. Why doesn’t anyone talk about it? Shame! We have a negative savings rate. Somebody out there is in real financial trouble.
I found it interesting that the president brought up the idea of a religious "new awakening" in his latest press briefing. Sure many more are heading for church. Unfortunately I believe they are misreading the trend. In the history of civilizations whether its crop failings, war, plagues, or economic crisis, the populace will always turn to a spiritual source to overcome their troubles. It’s a great card to play in an election year. Whether it buys another election is yet to be seen.

[nedlick]

Norman:

Marx summed it all up years ago. You distract the masses from their sad economic lot by feeding them a lot of religion. Works like a charm. Especially on the Christian Fundamentalists.

[LVTFan]

Over 125 years ago, an astute observer raised the question of why, in light of the awesome technological progress that had taken place in the first century since America's founding, there should be any poverty, much less the deep and widespread poverty that he saw in America's most developed cities.

He sought the explanation for that, and found it, and pretty well proved his case. All the benefits of technological progress, along with all the economic benefits that flow from our common investment in infrastructure (think of the Verrazano Narrows Bridge, or the Tappan Zee Bridge as two examples) and services (good schools, effective emergency services, to name two categories) accrue to the economic benefit of those who own our choicest land.

America's choicest land is not its agricultural land; agricultural land values range from a few hundred dollars per acre to perhaps $10,000 per acre in a few places (and perhaps more in wine grape climates). But urban land values in our healthiest cities can be as high as $250,000,000 per acre -- 100,000 times the value of a typical agricultural acre.

Who benefits from technological progress? The landholder. (Think of air conditioning and fiberglass boats. Think of elevators, or more precisely, elevator brakes. Land in the deep south would not be nearly as valuable in the absence of air conditioning; waterfront property, particularly on lakes and rivers would not be nearly as valuable in the absence of fiberglass boats; and urban land would not be nearly so valuable without elevators and subways and such.)

Where are all the benefits flowing? Landholders. REITS, family trusts, corporations. They get rich, not primarily from income from their buildings themselves, but from the locational value of those sites. But they didn't do more than you or I did to create that locational value.

Capital and labor can only share what's left after the landholder is paid his rent.

The alternative is to recognize land value as our common treasure and treasury, and collect it every month or quarter for the commons. Then we could reduce what we collect on buildings, on sales, on wages.

Both labor (those who work) and capital (those who saved and invested in buildings, equipment, inventory) would benefit hugely were we to shift our tax focus this way.

Of course you might guess there are huge special interests who would not approve of this, which is why few of us -- even economics majors -- ever learned about these ideas.

For more on this, see http://www.wealthandwant.com/

[reason]

LVTFan...
there is another small problem. 70% of the population is some stake in a piece of Land. The value of that land (that underlies the debt a lot of them hold) depends on the tax system. If you change the tax system, those people would lose (at least on paper). Convincing people to change the system in that way and devising a good fair transition plan is awfully difficult.
It is not just good enough to say - look this way is better. You need a roadmap for how to get there.

P.S. You are not alone in that.

P.P.S. I'm actually quite sympathetic.

[LVTFan]

Reason ...

A big obstacle, too, are the mortgage lenders, who today get a huge chunk of the fruits of our labors, and wouldn't like to lose that!

Most of us wear two or three hats. For most of our adult lives, we are certainly labor. If we are able to save, we may be capital. (But recent evidence about the savings rate suggests that on average, this is probably not as much as one might wish it were, at the median and even at the 80th percentile.) And, as you correctly note, 70% of us own some land, as homeowners.

And for many of us, that landholding is our #1 asset. (See the wealth tables linked from the front page of wealthandwant.com for more on that.)

So we may think that our individual financial interests lie with protecting the landholder's "right" to pocket most of the land rent. And especially since homeownership is generally higher among the large boomer generation because of their current stage of life.

But I see it as a case of special interests hiding behind the widow's skirts. (Check out http://www.wealthandwant.com/themes/Widow%27s_Skirts.html for a couple of references, including a 1909 Winston Churchill one!)

The land we live on is generally far less valuable than the land on which we are employed. (And the difference is becoming more pronounced, leading to longer and longer commutes!) Residential land is downright cheap compared to the land in the central business district (and appreciates more slowly, too, usually).

Who owns that choice urban land? The top 1%'ers. It may be called corporate stock. (See Michael Hudson's "The Lies of the Land," on the wealthandwant website for more on this.) It may be a REIT. It may be private equity. It may be a single family whose grandparents bought that piece of property and passed it down to their children as an annuity. The rent from a single building in midtown Manhattan can keep a family in fine style, even in our toniest resort areas. (Witness the recent NYT article about liquor licenses which referenced rent of $30,000 a month for a bar -- and that's just for the first floor of the building!! The others produce income, too.)

But if you want to know why wealth is so concentrated, you might get to know land value, and how it is really distributed. Some of us are just privileged, and the rest have high hopes that they might somehow benefit from that privilege someday, somehow -- or that their children might. (Something not too different from lottery tickets, one might say. Yes, someone wins, but it probably isn't gonna be you!)

The Federal Reserve Board published a study in the past couple months that points out that single family homes -- the buildings themselves -- depreciate by about 1.5% per year. (They were looking at 46 metro markets, but I assume that would hold for the rest of the country as well.) I'm guessing commercial buildings can't be all that different. Yet rents keep rising -- and the difference is land value, site value, to which the landlord contributed ZIP!

For single family homes in those 46 metro areas, land on average represented about 50% of the value. That ranged from 20% (Oklahoma City?) to 85% or 88% (San Francisco), if memory serves.

The 70% of us who own homes together own a rather small share of the land value in the US. I wish we-the-people gathered the data to show how small.

But having said all that, you are correct. Most of us have little other than our land value. For folks whose work is in our largest cities, their suburban land value may be fairly substantial (if they haven't refinanced repeatedly to finance the rest of their lifestyle!). For the folks who live around our smaller cities and in rural areas, it isn't much. It may still be their #1 asset, but it isn't much.

And then of course there are the 30% who have no land and are paying a landlord for a bit of land on which to rest their heads! And all those people with entrepreneurial dreams which depend on access to a good location, which simply won't come their way under the existing system. So much for the American dream!

Let's squeeze out the land rent which is being soaked up by our best-situated folks, through no action on their part!

[reason]

LVTFan....
OK Let me set this as an exercise. Devise a plan to transition to land (and resource rental and pollution) taxes as the major sources of revenue. Show how it can be in most people's interest. (Particularly reduced debt, greater mobility and a cleaner environment). Work out a voluntary phasing in if you can (people could for instance choose between different forms of tax during a transition period - for instance by making increased land tax a deduction from income tax). Show how you would protect people in retirement who use the investment in housing as an inflation hedge. Show how you can phase it in without causing a financial crisis (this I think is the hardest issue - how to deal with outstanding debt).

Then come back and tell everybody about it on a suitable thread. And you'll get my vote (if I ever have one - you'll get it morally anyway).

[LVTFan]

Well, that's a challenge. Ending chattel slavery was also a challenge (and the analogy is not nearly as strained as it might initially appear -- see the theme "slavery" on the wealthandwant.com website). While there were a lot of people, both in the north and the south, who knew, deep in their hearts, that slavery was wrong and incompatible with being a nation in which we hold it to be self-evident that all are created equal, it took us a long time and a lot of strife to end chattel slavery. Clearly changing hearts and increasing the conscious awareness of the evils that the current system creates is a first step.

The good news about Land Value Taxation is that there would be tremendous benefits for people at virtually every place on the income spectrum and for people at most places on the wealth spectrum, though the benefits for those who are the big winners under our current system are perhaps significantly offset by the loss of privileges they currently take for granted (that is, the privilege of privatizing that which LVT's proponents firmly hold to be our common treasure). Slaveholders privatized others' labor and lives as their own property. Holders of our best land and licenses (e.g., broadcast spectrum, water rights, pollution rights -- see "land includes" and "land different from capital" on the wealthandwant website) have powers over their fellow human beings and the privilege of collecting from their fellow human beings -- and keeping -- economic value that they themselves didn't create and which rightly should be passed through to the commons.

We all have our labor to offer, whether it is our muscle or our minds, or some combination thereof. The return to labor is wages. Some of us, either through saving or through inheritance (and I suppose potentially also through theft!), bring to the party capital as well as labor. (The return to capital is interest.) And some of us have land to bring to the production party. (The return to land is rent.) Most of us have more than one of these, and some of us have all three. Young people's labor may be more muscle than intellect. More experienced workers may bring more intellect and less muscle. Younger people, if they own land at all, generally have less valuable land, and also less equity in it, than their elders. The land we live on is almost always significantly less valuable than the land on which we work. People in red states generally have less land value, per capita, I suspect, because the land value is mostly in blue states (see Mason Gaffney's piece on "The Red and the Blue"). The Federal Reserve Board data on wealth (see the tables referenced below) suggests that capital and the really valuable land are quite concentrated in a relatively small segment of the population -- a third of wealth is in the hands of 1% of us, another 36% is held by the next 9%, and the remaining 31% is held by the bottom 90%.

But the most valuable 1% of the nation's acreage might represent 50% of the nation's land value. I'm guessing at that figure, but would not be surprised if it underestimated the concentration of land value. Who owns that 1% of the nation's acreage, that 50% of the nation's land value? Individuals own some (luxury condos and co-ops in Manhattan are at least 50% land value, single family homes in SF are 88% land value) -- see http://www.wealthandwant.com/issues/wealth/90-9-1_Tables.html, table 3, line 16, columns 6, 7 and 8) [see also "land share of real estate value"]. Publicly traded corporations (whose ownership is rather concentrated -- see the same table, line 8, same columns) own some of the choice land. Pension funds own some. Real estate investment trusts and mutual funds own some -- see lines 9 and 18, same table. But likely a large share of that choice land sits in the category called "Business Equity" -- line 19. We may picture "business equity" as being plants and equipment and inventory -- but a significant portion of it is likely urban land value. See Michael Hudson's "The Lies of the Land" for more on this. And this privately held "business equity" is extremely concentrated -- 62% of it is owned by 1% of us! 62%! Over 90% of it is owned by just 10% of us!

And think about the value of broadcast spectrum. Radio and TV stations get sold from one owner to another for huge sums of money, without the seller having done anything to enhance the value of the frequency. (Well, perhaps a few car radio pushbuttons, until the listener gets a load of the new format!) What is it we assert? "The airwaves belong to the American people!" Show me some evidence: they belong to corporations, public and private. (Do you know that the NYC metropolitan area has no country/western music stations? Apparently this was so embarrassing that the NYC Board of Ed / NPR station was given over to country music for a week or so before the country music awards were to be broadcast from NYC a couple years ago! Talk about push-button shock! I digress. But one would think that a market as diverse as that one could support one station!)

Reason, this is sort of a detour from your challenge, but it sets the scene. My point is that the "average person" -- actually not just the fellow at the median, but the bottom 90% or so of us -- have far far far more to gain than we have to lose from this shifting of taxes. And those of us who have children or care about the next generation(s) or have a vision of a more just and prosperous society certainly have an incentive to work toward putting this right.

How do we move toward it? Well, mechanisms already exist at the local level for assessing property value and for collecting property taxes. Computer-aided mass assessment and land value mapping can make this process simpler, faster and less expensive. And when we start paying attention to the two components of a property assessment -- land value and depreciated replacement value for the improvements -- the quality of our assessments will improve. So should the frequency. Connecticut, for example, mandates a reassessment every 4 years. Greenwich is considering annual reassessments. (Greenwich, by the way, has the highest grand list in the entire state; Stamford, with several times Greenwich's population, has the second largest; Hartford is way down the list. Proximity to NYC is a major contributor to Greenwich's and Stamford's grand lists.) And as Mason Gaffney has pointed out (See The Taxable Capacity of Land), the difference between where the poor people live and where the rich people live is primarily land value, not building value, "McMansions" notwithstanding!

As I was saying, the mechanism is there for collecting the economic value of land. New York City collects a tiny tiny fraction of it. Were we to start to regard NYC's land value not as the private creation of its residents and commercial occupants, not as simply the creation of New Yorkers, but as the creation of ALL of us, and therefore as the rightful property of all of us, we might collect roughly as much from NYC in land value tax as we do now in income taxes. But while it might be the same amount, collecting it as a function of land value would have very different economic effects from collecting it as a penalty on wage-earning. (See Canons of Taxation, Three-Legged Stool, deadweight loss, distortions, unearned increment, all on the wealthandwant website, for more detail.

By collecting the land rent on that choice urban land, land value taxation would cause that land to be used more intensively -- which would actually be a benefit to those who owned the land. Yes, they'd have to use their capital to make improvements, and collect monthly rent on those structures from many more tenants (highrise) , instead of collecting mostly locational value (from a few tenants in a lowrise building).

WE'd be putting an end to the idea of speculating on land, investing in land, and instead begin to treat land, particularly well-located land, as the scarce commodity it is. We'd all benefit. Wages would be higher, and they would not be taxed. Sales would not be taxed. These two things would be like unleashing a powerful spring. Would-be entrepreneurs could work their business plans that today are merely pipedreams, dependent on the need for a choice location they currently can't afford. Taxing land value would bring down the PRICE of land (just the way rising interest rates do), and we'd all benefit from that. All except the retired-to-fashionable-Florida-on-the-land-rent crowd, that is. And their power and influence is not to be ignored.

But when enough people understand that the economic value of the land is rightly OURS in common, we as a society will be able to move ourselves in that direction.

[reason]

LVTFan...
You have made a start but you still haven't addressed the major issues. I know that raising the tax will bring down the price of land. But that is exactly the issue. That price (incorrectly called value) is collateral for masses of loans, or stored wealth for retirees.

How do you manage the transition without a revolt or a financial collapse? That is the reason it hasn't happened, not that it doesn't make sense. It has always made sense to me, but the reason that most taxes fall on wage income is simply that that is the easiest place to raise them because it has the least effect on asset values. People who have worked for decades to buy their one major investment, don't want its value taxed down to nearly zero, no matter how sensible it might be from a social point of view. You need in the interim a plan to compensate the losers.

You say it is a big challenge, but hell, these ideas have been around for a long while. Isn't it about time you somebody did this most basic political work in selling your ideas, even if it is hard? Otherwise you will remain to me just pie in the sky dreamers.

[georgist]

[taxing wages] has the least effect on asset values.

It does not work like that. As John Stuart Mill clearly states in his Principles of political economy, all taxes ultimately rest upon ground rent, after being shifted throughout the economy. Neoclassical economists say that tax revenue comes from "producers' surplus", but producers' surplus does not really go to producers (under perfect competition), it goes to scarcity rents.

[reason]

Georgist, much as I respect John Stuart Mill I am at heart a skeptic. Have you evidence that he was correct.

I must say at first I surprised that you (I assume you are like LTVFan a follower of Henry George) would say this. Then I realised that what you mean is that changing taxes changes the distributional effects of taxes but not the net result. So reducing (say) wage taxes by x, and increasing LTV taxes by exactly the same total amount would have no net effect on land prices (on average). Tell me if I am interpreting you incorrectly.

I say, it is enough for you to believe that, you have to convince everybody else. Do you really believe that the anouncement effect of such a change would leave land prices untouched? Or builder's shares? I think you need to produce some good evidence. Not everybody has the same touching faith in JSM that you do.