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Many thanks to Tony Adragna and Will Vehrs, still shouting 'cross the Potomac at QuasiPundit. Early Camp Enron material can be found in QP's Dispatches department.
Wednesday, April 10, 2002

 
--- Restating the 90's? As You Were, Everybody! ---

CP appreciates an eyebrow-raising contrarian reassessment as much as the next guy ... well, OK, more than the next guy. We gave pre-publication, sight-unseen notice [2002-03-22] to Business Week's "Restating the 90's" cover story by Michael J. Mandel, suggesting "A lot of things happened that defy the conventional wisdom about the decade". [See article online here ]

As you were, folks ... having read and re-read the article at leisure, CP has to go with CW over BW.

Headline CW-defying eyebrow-raiser: "the real stunner is this: The biggest winners from the faster productivity growth of the 1990s were workers, not investors. In the end, workers reaped most of the gains from the added output generated by the New Economy productivity speedup."

Stunning! Astonishing! Incredible! And we mean incredible in the most literal sense ...

Mandel's "stunner" thesis is not explicitly and falsifiably defined ... nor are the operative terms, or methodologies, or supporting data. Many cites are sourced merely as "BW". As a student paper, this wouldn't be grade-worthy. CP believes most attempts to construct this thesis explicitly and support it empirically will fail.

We won't thrash out all the potential problems in this short piece, but ...
When did the 1990s start and end? (From context, we infer March 1991 through December 2001. We also infer January 1993 through September 2001, among others.) Are the end-of-decade data preliminary or revised? Are we simply comparing endpoints to endpoints of jiggly time series? What do we get from slightly different endpoints? Or weighted aggregates? Or "balance sheet" endpoints? Or regression lines? Are the selected endpoints comparable (or are data appropriately adjusted) in terms of the business cycle? Where is that danged business cycle, anyway?

What's our definition of returns to labor and investment? What's labor? What's investment? By what transmission mechanism do we assert that productivity gains flowed first to labor, and lower interest cost flowed first to profits? Doesn't higher unit productivity reduce labor's scarcity value?
In as far as meanings and methods are disclosed, they are suspect in many dimensions. We went looking for data to support the most specific relevant subordinate claim ("workers received 99% of the gains from faster productivity growth in the 1990s at nonfinancial corporations"). Our surmise is this is derived from this recent BLS release.

Here we find Q3 2001 output per labor hour (productivity) at an index level (where 1992 = 100) of 121.2, unit labor costs at 114.0, and unit profits at 99.6 ... looks like labor cleaned up while investors got soaked! But looking at Q3 2000, we find profits leading at 135.8, productivity at 119.6, and unit labor costs lagging at 108.5. Pick your endpoints, choose your results.

Over here we find output at 142.1, compensation per hour at 141.8 for nonfarm business sector. Is this Mandel's 99%? Hope not ... one's an aggregate, the other's a rate, one's real, the other's nominal. But without definitions, methods and data, we're shooting and/or shouting in the dark.

In other paragraphs we understand that exercised stock options are included as returns to labor, while market appreciation is subsumed in returns to investment. Translation: if I started a dotcom on a shoestring, exercised $1B in options at the top, and (perhaps foolishly) held on while the resulting shares tanked, I've put +$1B in the "returns to labor" column, and a -$1B in the "returns to investment" column.

Taking executive compensation generally as "returns to labor" can be a huge source of distortion. It comprises a not-insignificant share of personal income, whose receipt tends to coincide with ownership, depend on earnings, and otherwise behave more like a return on capital.
In this writer's nonstandard view, most CEO compensation is properly treated as a rent/ransom on franchise, not as a factor price on labor or capital. The CEO's chair is a valuable seat, held king-of-the-hill style by a sole occupant empowered to exact tribute from the enterprise. Price-setting for CEO's is akin to price-setting for shortstops -- pure seller's-market rivalry for the best candidate, rather than proportional competition based on imputed contribution margin.

CEO rivalry in turn is accentuated as enterprises operate in rivalrous (rather than competitive) markets ... again the franchise holders (top 2 or 3 brands) are empowered to extract exceptional gains and crush/assimilate also-rans. The governing dynamic is rivalry for rank (and its privileges), not competition for returns scaled to cost-effectiveness. Subordinate exec's live under the CEO's price umbrella.

Thus the lion's share of US executive comp is properly scored as an interception of returns to capital (or conversely, a fumble of shareholders' gains-in-hand), with displacement effects on returns to ordinary labor.
Mandel's argument jumps around quite a bit. It contrasts the 90s to the 80s, capital to labor, speculative to substantive gains, short to long rates. The home-ownership boom is cited as the "most tangible sign of worker gains", but the narrow demographic segment in which all these gains occurred is not mentioned. Convenient narrowly-selected data are cited to support the thesis of widely-shared gains. The transient nature of Asian and Euro business cycle effects on US jobs, investment, interest rates are shrugged off. Real estate returns seem to be included or excluded as convenient.

Declining S&P appreciation is cited ... is it relevant? The index reflects a subset of prevailing sentiment regarding returns and alternatives in future decades, not the 1990s. Posing non-speculative models of return on capital, we'll face a host of reasonable but ticklish questions. What about real value of book entries? What about all that M&A goodwill overhang, now being furiously written off? What about the fiber and dotcom bubbles, where real streams of capital were extracted and accreted to build real (tangible/intangible) facilities that in retrospect are seen to be worthless? Maybe we had enormous positive returns on capital, offset by enormous negative returns on stupidity.

A number of center-left reviewers have praised Mandel's conclusions as vindication of the Clinton program. [2002-04-16 UPDATE: Mickey Kaus indicates Sid Blumenthal has been scurrying around pushing this interpretation.] From my perspective, the Clinton program restored competitiveness, productivity and growth ... but it has not (yet) conveyed substantive returns to those who worked hard, made concessions, set aside misgivings, and played by the rules.

The 1990s were a great decade, and the US economy is robust enough to support generous returns to capital, labor, pirates, taxmen, irrational exhuberators, retirees, and the war effort. But -- admittedly not having wrung out all the numbers -- CP suspects we can scour NIPA, or household survey balance sheets, or aggregates of OASI covered wages, or post hoc analysis of income tax receipts, or most anywhere else we might look -- including the BW article -- without finding robust confirmation for Mandel's CW-defying thesis.