The American productivity myth — and the real truth about real wages

By Henry C.K. Liu with editorial help from Jina Moore

This article appeared in on
Wednesday, 08/12/2009

Feel like you’re working harder than you used to? It’s not in your head.
Yesterday, the Bureau of Labor Statistics reported a more than 6 percent increase in worker productivity (in business; over 5 percent in manufacturing). In theory, more productivity means more wealth and a healthier economy, right?
Roosevelt Braintruster Henry C.K. Liu says, “Think again…”

The “productivity boom” idea is not new. But in the US, it as much a mirage as the money that drove the apparent boom. There was no productivity boom in the US in the last two decades of the 20th century; there was an import boom that came with productivity fallouts. What’s more, this boom was driven not by the spectacular growth of the American economy; it was driven by debt borrowed from the low-wage countries producing this wealth. The acceleration of productivity was accomplished by someone else doing the producing without getting proper credit for it.  It was called a “bubble” for a reason.

Meanwhile, US wages dropped. Outsourcing has not been the only factor driving US wages down: Even as average worker productivity within the US has surged, average hourly earnings have stagnated, while the nation’s economic elites have prospered with astronomical levels of incomes. The high-tech, information technology and financial services sectors operated on the model of low salaries and high stock options. Even for investors, the trend had been to favor equity appreciation over dividend income. Yet this flies in the face of a basic economic principle: Income is all, and economic growth without income is a fantasy.

So whose incomes did grow? It’s a familiar story: In 2002, Capital One Financial CEO Richard Fairbank exercised 3.6 million options for gains of nearly $250 million, on which he pay tax on the lower capital gain rate rather the income tax rate. His personal take exceeded the annual corporate profits of more than half of the Fortune 1000 companies, including Goodyear Tire and Rubber, Reebok and Pier One. Median pay among chief executives running most of the nation’s 100 largest companies soared 25 percent to $17.9 million in 2005.

The average gain by typical U.S. workers in the same period? A piddling 3.1 percent. A Federal Reserve survey shows that between 2001 and 2004, the median income of US workers with college degrees barely budged, rising from $72,300 to $73,000, after adjusting for inflation. Even former Treasury Secretary Robert Rubin (who spent 26 years at Goldman Sachs) noted during his time in government, “Prosperity has neither trickled down nor rippled outward. Between 1973 and 2003, real GDP per capita in the United States increased 73 percent, while real median hourly compensation rose only 13 percent.”

US corporate earnings reached all-time highs because wages have been stagnant. Corporations were flooded with cash — but they refused to pass it on to their workers. Instead, corporations adopted share buybacks scheme with the surplus cash to raise the market value of the stocks.

The new populists want an alternative, one that register growths by the income received by the middle class. They argue that the national income has increasingly flowed disproportionately into corporate profit and to the rich. They call for a review of US-led globalization and for new terms of trade that do not put the cost of economic expansion entirely on the chronic poor, the newly poor and the powerless both domestically and globally. They call for government regulation in the terms of trade to distribute the benefits more equitably.

They will also need to add an item to that agenda: a call for honesty and transparency in the tools the American government uses to measure national wealth. 

America’s hedonic pleasures

Wages are measured in relation to price indices, but price indices are not as straightforward as they may seem. “Hedonic” pricing methods, used to translate quality improvements in products into price declines even if the actual prices are climbing, are effectively artificially inflating individual and national wealth.

An example: Automobiles that now sell for $30,000 used to sell for $10,000, but the inflation rate of automobiles is registered as declining because cars are technically more sophisticated. The consumer is supposed to be getting more “car” per dollar; nevermind that $10,000 won’t buy anyone a car any more. Rents for apartments are registered as declining even when rent payments rise, because renters get air-conditioning, marble bathrooms granite kitchens and high rise views. 

The takeaway? Prices can rise — with no inflation.  Hedonic pricing keeps wage earners from enjoying any hedonic pleasure with their stagnant wages, because in reality wages are falling faster than prices of goods. So that iPhone may look like a deal, but only if you don’t do the math and figure out how many work hours it now takes to pay for one.

As this measuring technique is being extended to a growing number of goods, it has become an important factor in reducing the US inflation rate, and intrinsically raises nominal GDP growth while the real GDP may actually decline. But its overall effect on monitoring the economy is kept secret from the public. The hedonic price adjustments for computer hardware and software alone went a long way to explain US growth and productivity “miracles” of the past decade. 

Hedonic price indexing, by keeping the official inflation rate significantly lower than reality, not only played a key role in fueling the stock market boom, but also magnified the budget surplus during the Bill Clinton years and understated the George W Bush deficit. Such indexing reduces social security payments and welfare benefits across the board and undercuts inflation-related wage adjustments. And yet essentially, lower hedonic prices in computers and electronic gadgets are paid for by less money for food and housing of the elderly, the unemployed and the indigent as well as the average worker.

Take that to a town hall meeting.

Roosevelt Institute Braintruster Henry C.K. Liu is an independent commentator on culture, economics and politics.