Wealth and Wages

When the Federal Reserve’s Survey of Current Finances for 2004 was released, the leading newspapers naturally indulged their propensity to make the news look as bad as possible.

 "U.S. families’ wealth stagnated during the economy’s recession and recovery from 2001 through 2004, as lackluster wage growth, sagging stock prices and rising debt levels offset the gains from higher home values," wrote The Washington Post. "For the typical American household," added The New York Times, "net worth — the sum of all assets less debts — barely increased, to $93,100 from $91,700."

The figures are for median wealth, not for typical households (whatever that means). Median just means half had more and half less. Young people always start with less, but don’t stay young forever. What is surprising is not that median wealth did not rise much from 2001 to 2004, but that it rose at all. The Fed’s survey for 2001 was taken before September 11, which makes wealth that year look much better than it was after the disaster. But even for the year as a whole, the S&P 500 averaged 1194.2 in 2001 compared with 1130.7 in 2004. The NASDAQ fell from 2035 to 1986.5 from 2001 to 2004. But this is 2006, not 2004. Household wealth did indeed fall dramatically from March 2000 to March 2003, but has since rebounded quite impressively.

After the previous recession in 1990-91, it took longer for real household net worth to recover. Median net worth was virtually unchanged from 1989 to 1995, but rose more than 31 percent by 2004. The mean average of wealth fell from $270,000 in 1989 (in 2004 dollars) to $260,800 in 1995, but reached $448,200 in 2004. When the news came out during the election year of 1996 that household net worth had fallen for the past six years, do you suppose The Washington Post and New York Times wrote about that with the same sense of despair and tragedy they just used to describe a three-year increase?

This year, even The Wall Street Journal’s urge to be politically correct apparently overcame all caution about being statistically correct. The Journal imagined the Fed’s report "found a widening gap between households at the top and the bottom of the economic ladder," because "the net worth of the typical family in the bottom 25 percent fell 1.5 percent." A correction the next day mentioned that net worth among the bottom 25 percent had increased by 41.7 percent. But facts won’t keep true believers from believing in a widening gap.

In a 1998 speech, Alan Greenspan concluded that since at least 1989, and perhaps since 1963, "inequality of household wealth . . . remained little changed in terms of the broad measures." Edward Wolf, who once made a big fuss about a modest cyclical change in wealth distribution from 1983 to 1989, recently found "wealth inequality . . . remained virtually unchanged from 1989 to 2001." Ownership of stocks, homes and college degrees is more widely dispersed than ever before — there is less concentration of financial, physical and human capital, not more.

The Fed’s wealth survey was also transformed into a soapbox for an entirely different complaint. "Many economists, including some Fed policymakers," wrote The Washington Post, "are puzzled by the relatively weak wage growth of recent years despite strong productivity growth." If so, those economists should take up another occupation.

The Economist jumped on board, saying that "compensation has trailed productivity by only a little since 2001. Put another way, labor’s share of national income has fallen." But that always happens after recessions. Employees’ share of business income is highest in recessions because profits are depressed. When labor’s share is highest many employees lose their jobs and many investors (often the same people) also lose their wealth. As a share of the net value added of nonfinancial corporations, employee compensation hit a postwar record of 77.4 percent in 2001 — even higher than previous records set in 1974 and 1980. By 2003-2004, employee compensation was back to a 74.3 percent share, which was still relatively high.

What is surprising is not that real wages and benefits grew by "only" 1.8 percent a year in 2004 and 2005, but that they increased at all. Real hourly compensation fell for three years in a row at the start of President Clinton’s first term, from 1993 to 1995, and then rose only 0.8 percent in 1996. During the 1996 election, do you suppose The Washington Post and New York Times wrote about the prolonged drop in workers’ compensation with the same sense of despair and tragedy they now use to describe a 1.8 percent yearly increase?

Real compensation has always fallen whenever there were big spikes in energy prices — such as 1974, 1980 and 1989. Why that didn’t happen this time is a miracle — a productivity miracle.

Energy prices in the consumer price index rose 17 percent last year, after rising by 10.9 percent in 2004 and 12.2 percent in 2003. It would be irrational to expect wages and salaries to be increased enough to make such huge energy costs painless. Higher energy prices did not provide domestic non-energy industries with more money to pay workers. On the contrary, higher energy costs are a foreign tax on both employers and employees.

We have been extremely fortunate in the past three years that many of those corporate executives we love to hate have made their businesses so much more efficient (productive) that the latest energy cost squeeze has been much less painful to both workers and investors than any previous energy price spike. That has been a remarkable accomplishment, which may explain why our major newspapers have been looking so hard for bad statistics amid the good news.