Russell Roberts's Blog, page 22

Oren Cass Again Grossly Understates the Rise In Ordinary Americans’ Wages

(Don Boudreaux)

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Here’s a letter to a frequent correspondent, Nolan McKinney:

Mr. McKinney:

As it happens, I did see the new report by Oren Cass released yesterday by American Compass. Although I’ve yet to study it carefully, skimming it reveals countless reasons for skepticism of its conclusions. One fact alone warns me that his analysis is too flawed to take seriously.

Oren claims that over the half-century from 1972 through 2022, after adjusting for inflation, “[t]he average hourly wage for production and nonsupervisory workers rose 1%,” thus suggesting that the wages paid to ordinary American workers stagnated for a half-century. This suggestion is mistaken, outlandishly so. Digging into his data reveals that Oren arrived at this conclusion by using the data shown in this Bureau of Labor Statistics graph. (You have to set the start year at 1964.) According to these data, this wage in 2022 does indeed appear to be just barely higher than it was in 1972. But this appearance is utterly deceptive.

First, looking at this figure and taking it at face value, notice that 1972 is the year in which this wage peaked before falling to a post-1972 low in June 1995. Had Oren compared the December 2022 wage to the June 1995 wage, he’d have discovered that the 2022 wage was 25 percent higher than the 1995 wage. A 25-percent wage increase, of course, is a far less arresting finding than is that of a paltry 1 percent rise. Oren also can’t fail to have noticed that these data show a quite steady rise in this wage over the 27-year period from 1995 through 2022. But reporting this steady real-wage increase over the course of more than a quarter century – and during a time that included China’s entry into the World Trade Organization – would have prevented the “Wow, that’s terrible!” reaction that Oren no doubt seeks to stir in his readers.

Second, these data on changes in the average real wage of production and nonsupervisory employees should not be taken at face value.

As Oren himself reports, wages in the data he uses are adjusted for inflation using the Consumer Price Index, but the CPI is an adjustor that notoriously overstates the inflation rate. A more accurate inflation adjustor than the CPI is the Personal Consumption Expenditure price index (PCE); the PCE, for example, updates more frequently than does the CPI the weights that are attached to different items in the basket of goods used for calculating expenditures. Adjusting nominal wage rates for inflation using the PCE rather than the CPI, economist Michael Strain in 2020 found that

[o]ver the past three decades, wages for typical workers [i.e., production and nonsupervisory employees] have grown by 20 percent using the CPI. And using the PCE – the better measure of inflation – finds a one-third increase in wages.”*

A 33 percent increase in the real wages of these workers from 1990 to 2019 obviously drains, rather than adds, credence to the tale that Oren tells.

But the news is even better than that conveyed by Strain. Here’s Phil Gramm, along with Robert Ekelund (my PhD thesis advisor) and John Early, writing in 2022:

If the inflation adjustment for real average hourly earnings for production and nonsupervisory employees were to incorporate both the Chained CPI to remove the substitution bias and more accurate adjustments for new and improved products, real average hourly earnings would have risen 74.0 percent over the last 50 years [1967-2017] rather than the official reported number of 8.7 percent.**

Because the source of data used by Oren shows that the hourly wage in 1967 was about ten percent higher than what it was in 1995, we can say that over the past 27 years – since 1995 – the real hourly wage of production and nonsupervisory workers rose by about 92 percent. This real-wage increase is unambiguously impressive and severely undermines Oren’s tale of middle-class woe.

I’ll mention here one additional problem with the real-wage figure used by Oren: It excludes many employer-paid benefits, which, according to Gramm, Ekelund, and Early, in 2017 compared to 1967 “add 25 percent more compensation to basic wages and salaries.” If we add (as we should) these benefits to the wages, the increase over the past few decades in the real income earned by production and nonsupervisory workers is revealed to be even more impressive.

There are additional reasons why Oren’s claim that the pay of ordinary workers over the past half century has increased by a mere one percent is so mistaken as to be laughable. Perhaps in a follow-up letter I’ll detail some of these other reasons. But what is established above should suffice to cast grave doubt on the credibility of Oren Cass’s empirical claims – and, hence, on his policy recommendations.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

* Michael R. Strain, The American Dream Is Not Dead (But Populism Could Kill It) (West Conshohocken, PA: Templeton Press, 2020), page 45.

** Phil Gramm, Robert Ekelund, and John Early, The Myth of American Inequality (Lanham, MD: Rowman & Littlefield, 2022), page 84.

Quotation of the Day…

(Don Boudreaux)

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… is from pages 8-9 of Phil Magness’s superb 2020 book, The 1619 Project: A Critique (footnote deleted; link added):

As Harvard economist Nathan Nunn has demonstrated, a strong negative relationship exists between the historical existence of slavery in a county or state and its level of income, persisting to the present day.

Some Links

(Don Boudreaux)

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Industrial-policy enthusiasts take note: The Wall Street Journal‘s Editorial Board reports further evidence that politicians – in this case, Trump – “are lousy at picking business winners and losers.” Here’s the conclusion:

Translation: Workers will be collateral damage in the transition to EVs as they lose their jobs making gas-powered cars. President Biden flogs the jobs created at EV factories, but he never mentions the losers elsewhere owing to government mandates and subsidies that distort investment. Lordstown is a poster child of the new Washington consensus in favor of government industrial policy, and it won’t be the last casualty of the hubris.

Matthew Lau, writing at Canada’s Financial Post, counsels conservatives to lose their infatuation with industrial policy. A slice:

Parallel thinking on the alleged benefits of employment regulation and government industrial planning, particularly to boost manufacturing, is being pursued by various putative conservatives in the United States, including Florida Senator Marco Rubio, American Compass founder Oren Cass, and the Heritage Foundation, a once robustly free-market think tank. For example, the Heritage Foundation’s recently published “Mandate for Leadership” includes a chapter on the Department of Labor that says “federal labour and employment agencies have an important role to play by protecting workers, setting boundaries for the healthy functioning of labour markets, and ultimately encouraging wages and conditions for jobs that can support a family.”

The “important role” the Heritage publication envisions includes, among other things, banning private sector employers from including a bachelor’s degree requirement in job descriptions and government action aimed at pushing for worker representation on corporate boards. Oren Cass cited the Heritage publication as “proof the New Right really cares about worker power.” But whatever your view of individual companies’ hiring policies or governance structures, this proposed government takeover of corporate decision-making is not something any serious conservative or free-marketer can abide. Ask a real free-market economist and he will say the U.S. Department of Labor, far from having an “important role,” should be abolished.

My intrepid Mercatus Center colleague, Veronique de Rugy, decries the Biden administration’s effort to cap credit-card late fees, concluding correctly that such a cap will hurt most the poor. A slice:

Late fees are already capped at a maximum $30 for a first late payment and $41 for any subsequent violations. Although the current rules impose what are essentially price controls, a large enough difference in degree becomes a difference in kind. The much stricter $8 cap can be expected to have much more pronounced negative consequences, especially for low-income consumers. Economic history is replete with examples of price controls leading to shortages. In this case, putting a ceiling on the price card issuers can charge for late payments will inflict most of its damage on low-income consumers who can least afford to lose credit.

The Biden administration, wanting a cheap political win, is counting on consumers being overjoyed with the sugary treat of lower late fees. But we see again that wanting something does not mean that it’s good for you. Preventing or severely limiting the ability of financial institutions to assess appropriate late fees will hurt consumers who can least afford it.

Fraser Myers describes how the authoritarianism at the heart of wokeness is manifesting itself now in Ireland.

George Leef applauds Dr. Miguel Faria’s new book, Controversies in Medicine and Neuroscience. A slice:

Faria next devotes two chapters to refuting false claims that we often hear from the statists about the supposed need for government activism in medical care. For one thing, leftist politicians and their media allies like to claim that government must intervene to bring down the high cost of medical care so that it will be “affordable.” Faria counters that it’s government meddling that has made healthcare so unaffordable, and observes that we have enormous administrative costs in the system that are wholly attributable to government interference in the market.

David Henderson describes the American Economic Association’s award of the once-prestigious John Bates Clark Medal to Gabriel Zucman as “a new low.” A slice:

The American Economics Association has awarded the prestigious John Bates Clark medal to University of California, Berkeley economist Gabriel Zucman. At the link you’ll find what the AEA decision makers thought made him deserving.

What’s missing? The shoddy work he did to make the data fit his story that in 2018 the tax rate on the “super-rich” fell below the tax rate on the bottom 50 percent. That contradicted one of his own findings in a previous academic article.

Economic historian Phil Magness, who was one of a number of people who caught the problem at the time, explained the details in a February 25, 2020 article titled “Harvard Finally Stands Up to Academic Duplicity“….

Alexander Nazaryan reports that “Earlier this year, Germany’s health minister, Karl Lauterbach, admitted that school closures had been a “big mistake.” There has been no such acknowledgment in the United States.” (HT Jay Bhattacharya)

Quotation of the Day…

(Don Boudreaux)

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… is from page 23 of the late Paul Heyne’s lovely 2000 monograph, A Student’s Guide to Economics (original emphasis; link added):

[Thomas] Sowell used a quotation from Walter Lippmann as the epigraph of Knowledge and Decisions: “Man is no Aristotelean god contemplating all existence at one glance.” Who could disagree? And yet many do disagree, regularly and persistently, by presenting analyses of social problems and proposing remedies for these problems that implicitly assume we are or ought to be Aristotelean gods. they grossly underestimate the amount of detailed knowledge that has to be used to provide food and housing for the inhabitants of a city; to assure enough but not too many physicians, plumbers, poets, and airline pilots; to make electricity and telephone service available to everyone; to maintain processes of discovery that will provide new and valuable answers to old problems of discomfort, disease, and disaster.

DBx: Proponents of industrial policy fancy themselves to be Aristotelian gods.

Common-‘Good’ Statism

(Don Boudreaux)

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Here’s a letter to Newsweek:

Editor:

Alexander Salter argues that we must “realign free enterprise with the common good” (“Hilaire Belloc Points the Way to Common-Good Capitalism,” May 1st). To make his case, he approvingly describes Hilaire Belloc’s belief that the low prices of consumer goods made possible by capitalism are the result of what Mr. Salter calls “political externalities.” Although the precise nature of these externalities isn’t made clear, they seem to consist of larger, more-efficient firms displacing smaller enterprises and thereby changing the economic make-up and tenor of communities in ways that even the customers of the large firms find unfortunate.

Yet what evidence is there that most or even many Americans would prefer to pay higher prices for consumer goods in exchange for their communities being populated with smaller or different sorts of merchants? None. And not only is there no evidence, there’s also nothing in economic theory to support the conclusion that these community-level consequences of free-market capitalism are ‘negative externalities’ that must be ‘corrected’ by a ‘realignment’ of free enterprise with the common good. Literally, all we have here is Mr. Salter’s assertion that consumers’ preferences are as he and Belloc suppose them to be.

What is being peddled as “common-good capitalism” turns out, on inspection, to be not capitalism to promote the actual common good but, instead, interference with capitalism to promote particular persons’ ideas of the good.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

Negative-Productivity Administration Officials

(Don Boudreaux)

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Here’s a letter to the Wall Street Journal:

Editor:

Walter Russsell Mead rightly criticizes the Biden administration’s scheme to restructure America’s economy in the image of those who are nostalgic for the 1950s (“‘Progressives’ Want to Go Back to the 1950s,” May 2). This scheme is rooted in ignorance of basic economic realities, not the least of which is that, despite its many problems, the U.S. economy today generates real per-capita income at an all-time high. Today it’s 236 percent greater than its peak (in the second quarter of 1959) in the 1950s, and 30 percent greater than it was in 2001, the year China joined the WTO.

The administration further errs by falling for the protectionist canard that foreign-workers’ low wages give them an advantage over American workers. But low-wage foreign workers are paid low wages because, having less and worse capital to assist them than do American workers, these foreign workers are less productive than are American workers. In China, for example, the average hourly productivity of a worker is a paltry 19 percent of that of the average American worker. If we more accurately called low-wage foreign workers “low-productivity foreign workers” – and called high-wage American workers “high-productivity American workers” – everyone would immediately see the absurdity of asserting that low-productivity foreign workers have an advantage over high-productivity American workers.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

Some Links

(Don Boudreaux)

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Here’s the abstract of a new paper by Katharine Strunk, Bryant Hopkins, Tara Kilbride, Scott Imberman, and Dongming Yu:

Educators and policymakers have been concerned that the COVID-19 pandemic has led to substantial delays in learning due to disruptions, anxiety, and remote schooling. We study student achievement patterns over the pandemic using a combination of state summative and higher frequency benchmark assessments for middle school students in Michigan. Comparing pre-pandemic to post-pandemic cohorts we find that math and ELA achievement growth dropped by 0.22, and 0.03 standard deviations more than expected, respectively, between 2019 and 2022. These drops were larger for Black, Latino, and economically disadvantaged students, as well as students in districts that were at least partially remote in 2021-22. Benchmark assessment results are consistent with summative assessments and show sharp drops in 2020-21 followed by a partial recovery and potential stall-out in 2021-22.

Wall Street Journal columnist William McGurn reports on Randi Weingarten’s “real but crumbling power.” Here’s his conclusion:

“In addition to becoming purveyors of every progressive cause, unions have become downright anti-learning,” says Eva Moskowitz, founder and CEO of Success Academy Charter Schools. “For many Americans, Randi Weingarten is the face of this.”

Johnny Friendly [in On the Waterfront] and his union cronies controlled the docks with the help of the mob—until the workers revolted and took his power away. Randi Weingarten and her union allies maintain power only because of a public monopoly. It would all make a terrific movie.

Jay Bhattacharya tweets:

Evidence based medicine: randomized trials, control groups, cohort studies.

The Science(tm) based medicine: mannequins, “models”, Swiss cheese.

Reason‘s Robby Soave reports welcome news: “the last vestiges of the Biden administration’s pandemic mandates are disappearing on May 11.” A slice:

To the extent there was any justification for COVID-19 vaccine mandates, it rested on the assumption that the vaccines were not merely protective of severe disease and death, but actually prevented the spread of the virus. When public health officials made their case for vaccine requirements, they did so according to the theory that vaccinating Person A would substantially reduce the likelihood of Person B catching COVID-19. Biden wrongly declared that “you’re not going to get COVID-19 if you have these vaccinations.” (He later tested positive, despite being vaccinated.) Mandates were intended to “stem the flood of infections,” The New York Times reported in September of 2021.

But by then, it was already becoming clear that no societal level of vaccination would eliminate the virus. The vaccines have appreciably reduced the risk of severe infections, particularly among the elderly and other vulnerable groups, but do not substantially prevent infection itself. The overwhelming majority of Americans have had COVID-19 at least once, whether they were vaccinated or not. The vaccines may reduce the severity of symptoms, and a jab appears to offer temporary protection—much like so-called natural immunity after recovering from the disease. But COVID-19 has proven itself quite capable of evading protection, which is why many people have contracted it multiple times.

Princess Anne says that lockdowns stole her father’s social connections.

James Hanley urges political scientists to be less sanguine about the state.

My GMU Econ colleague Dan Klein reminds us of David Hume’s warning against forever wars.

David Henderson really likes the movie Air.

George Will admires Gerald Ford. A slice:

His [Ford’s] welcoming of Vietnamese refugees contrasted with the crabbed spirit of some sunshine humanitarians, such as California’s Gov. Jerry Brown: “We have enough people in California and we don’t need any Vietnamese.” Soon California’s high school valedictorians included many named Nguyen, the .

Before Reagan continued Jimmy Carter’s deregulation of entire economic sectors (e.g., airfreight, interstate trucking), Ford initiated the process: “I don’t understand why we have an Interstate Commerce Commission.” We don’t anymore. New York City’s revival from its 1975 insolvency began because Ford insisted: Heal thyself.

My intrepid Mercatus Center colleague, Veronique de Rugy, talks with John Batchelor about industrial policy.

Quotation of the Day…

(Don Boudreaux)

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… is from page 491 of the 5th edition (2015) of Thomas Sowell’s Basic Economics:

At any given time, a protective tariff or other import restriction may provide immediate relief to a particular industry and thus gain the political and financial support of corporations and labor unions in that industry. But, like many political benefits, it comes at the expense of others who may not be as organized, as visible, or as vocal.

DBx: Yes.

You show me a sincere protectionist and I’ll show you someone who – were he or she to act in other parts of life in the same manner that he or she acts regarding trade and trade policy – walks out of a movie after only 15 minutes and then insists on informing others of just what the movie is about and how it ends. Such a person would also read only the first dozen or so pages of a long novel and then believe himself or herself to be fully informed about the novel’s arc and conclusion. This person would constantly interrupt conversations and then leap to conclusions about just what other people are thinking and mean to say.

This protectionist would listen to only the first six seconds of the Beatles’s All You Need Is Love and conclude that it’s simply another recording of “La Marseillaise.”

A New Study of Industrial Policy

(Don Boudreaux)

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I thank Scott Lincicome for alerting me to this new study of Chinese industrial policy. Here’s the abstract:

A relatively mild form of government failure – for example, bureaucrats can count but do not differentiate quality – can significantly affect the efficacy of industrial policy. We investigate this idea in the context of China’s largest pro-innovation industrial policy using a structural model. We find that the return to the subsidy program is -19.7\% (but would be 7.8\% if the mild government failure can be removed). Furthermore, the welfare loss is exacerbated by patent trade.

And here are some highlights of this paper as noted, in an e-mail to me and a few others, by Scott:

“In particular, the 2008 policy shock has induced the initially less innovative firms – those with fewer than six patents – in the targeted industries to rush to achieve the desired level of patents for subsidy applications. In addition, a rising share of the new patents owned by them appears to be of low quality.”

“the share of patents sold to initially less innovative firms in the targeted industries exhibits the fastest growth after 2008. This is especially true for patents sold by either the firms outside the targeted industries, which are not eligible for a subsidy anyway, or by the firms in the targeted industries that already had more than six patents before the policy shock and hence do not need more to compete for a subsidy.”

“After calibrating the model to the data, we find that although the subsidy leads to an increase in the patent count by 33%, 98% of the increase is of low quality. This implies a notable decline in the average quality of the new patents”

“By comparing the welfare levels in the model with and without the subsidy program, we estimate the net social return to the subsidy to be -19.7%. That is, the society would be better off without this subsidy program.”

“the presence of even a mild government failure could convert an otherwise well-justified industrial policy from success to failure… While we focus on mild government failure here, we certainly do not rule out strong or semi-strong forms of government failure in practice. If corruption, lobbying, or incompetence is incorporated into our model, the return to the subsidy program would have been even lower (i.e., more negative). ”

DBx: On pages 36-37 of their paper, the authors observe – no doubt correctly – that to assume away even mild government failure “is not realistic.”

And so I say to those of you who worry that China is ‘unfairly competing’ against America economically by using industrial policy, you are correct! But the unfairness is not to Americans (as Beijing’s interventions make our economy stronger relative to China’s economy); it’s unfair to the Chinese people.

Bonus Quotation of the Day…

(Don Boudreaux)

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… is a reprise from more than nine years ago; specifically, it‘s from page 81 of the late economics Nobel-laureate Douglass North‘s 1990 volume, Institutions, Institutional Change and Economic Performance (links added):

We need to read, again, Armen Alchian (1950) to understand this. In a world of uncertainty, no one knows the correct answer to the problems we confront and no one therefore can, in effect, maximize profits. The society that permits the maximum generation of trials will be the most likely to solve problems through time (a familiar argument of Hayek, 1960). Adaptive efficiency, therefore, provides the incentives to encourage the development of decentralized decision-making processes that will allow societies to maximize the efforts required to explore alternative ways of solving problems.

DBx: Proponents of industrial policy ignore this reality. Each proponent of industrial policy arrogantly supposes that his or her particular vision of what the economy should look like, today and into the future, is ‘correct.’ Each proponent of industrial policy is astonishingly naive about the nature of economic processes and the complexity of modern economies.

…..

Pictured above is Doug North receiving his Nobel Prize in 1993.