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David Brooks Sets Record for Most Economic Errors in An Oped Column!
It looks like David Brooks is training for an Olympic event, he can really stuff a great volume of misinformation into a 750 word oped.
Let's see what we've got:
1) Brooks says "after a lag, average wages are rising sharply. Real average wages rose by 2 percent in 2006, the second fastest rise in 30 years." The Bureau of Labor Statistics shows that the average hourly wage is 1.2 percent higher than its year ago level and still below its December 2002 level. That's almost five years of zero growth. In the late 90s, real wages were growing 1.6 percent annually.
2) Brooks then cites Brookings economist Ron Haskins' assertion based on data from the Congressional Budget Office that "between 1991 and 2005, 'the bottom fifth increased its earnings by 80 percent'." If we turn to the CBO study (Figure 2), we find that earnings for the bottom fifth of families with children actually increased by 120 percent (welfare reform), but this was between 1991 and 2000. Earnings for this group has fallen by about 20 percent in the last five years.
[I am reminded by Mark Greenberg that Brooks refers to all households, whereas the CBO analysis only examines families with children. The CBO analysis found no income gain for the bottom quintile of families without children. Also, the income gain for families with children over the whole period from 1991-2004 was 35 percent, not 80 percent. Most of the increase in earnings was offset by a loss in benefits. More work also means higher work related expenses (e.g. child care and transportation), so the picture even from 1991 to 2000 is not as bright as Brooks leads readers to believe.]
3) Brooks comments that "the third complicating fact is that despite years of scare stories, income volatility is probably not trending upward. A study by the C.B.O. has found that incomes are no more unstable now than they were in the 1980s and 1990s." This is partly right in the sense that CBO did not find an upward trend, although it did find that income has been more volatile in the post-1980 era than in the pre-1980 era.
4) Brooks asserts that "that recent rises in inequality have less to do with the grinding unfairness of globalization than with the reality that the market increasingly rewards education and hard work. A few years ago, the rewards for people earning college degrees seemed to flatten out. But more recent data from the Bureau of Labor Statistics suggests that the education premium is again on the rise."
I haven't seen data for the last month, but between 2001 and 2005, analysis from the Economic Policy Institute (EPI) there was a considerable rise in wage inequality, but no increase in the gap between workers with college degrees (but not advanced degrees) and without degrees.
5) Brooks tells us that the increase in inequality is due to the more frequent use of "performance pay" -- yes, like the $200 million that Home Depot CEO Bob Nardelli got paid to leave after mismanaging the company for two and a half years.
6) He tells readers that "inequality is also rising in part because people up the income scale work longer hours." Actually, most of the economists I know focus on the increasing inequality in hourly earnings, as in pay per hour, not total pay (see EPI's State of Working America).
7) The filthy rich are hedge fund managers and not CEOs, and therefore the problem is not a breakdown in social norms. Actually, my bet is that once the current bubble bursts, and it turns out that many hedge fund managers were paid hundreds of millions of dollars for some really poor returns, there will be an effort to string up the bozos who run pension funds for giving away vast sums of money for nothing, talk about a breakdown in social norms.
8) "Globalization boosts each American household’s income by about $10,000 a year." What does this mean? Is this compared to a world in which we can't get coffee from Brazil or oil from the Middle East, but rather have a completely autarkic economy?
It will be great when the proponents of the current trade agenda stop arguing against straw men in making their case. No one is advocating autarky. Suppose we had globalization with complete free trade in intellectual products (e.g. no more patent and copyright protection) and huge efforts to eliminate the barriers that sustain the wages for highly paid professionals in the United States (e.g doctors, lawyers, accountants, and economists). This would lead to huge economic gains and greater equality.
In his celebration of the economy Brooks doesn't mention the $700 billion trade deficit, the housing bubble and meltdowns in the mortgage market, and the productivity slowdown that the Fed is now projecting to continue at least through 2008. No doubt these items will appear in Part II.
--Dean Baker
COMMENTS (13)
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Posted by: Anonymous | July 24, 2007 6:30 PM
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Posted by: Anonymous | July 24, 2007 6:42 PM
We have two trends going on simultaneously in several industrial countries (not only the US, but also the UK and Germany, for instance).
1. Increasing wgae dispersion (inequality)
2. Increasing over-education
The first trend is usually attributed by a rising demand for advanced skills, but this interpretation conflicts with the second trend.
I have proposed a
possible explanation which runs roughtly as follows:
1. Technological change has made indiv idual performance on a given job more important. (On a production line, individual differences do not matter much, but on an engineering job they do).
2. Forms are therefore increasingly interested to select their workers more carefully.
3. In order to do that, firms increase their wage offers relative to the prevailing market wages. This enables them to attract more applicants and impose more demanding hiring standards.
4. This induces increasing wage dispersion.
5. At the same time, the increase in wage inequality renders education more attractive until overeducation has reached such a level to counterbalance the increase in wage differentials.
Posted by: Ekkehart Schlicht | July 25, 2007 4:03 AM
Regarding no. 6 in Mr Brooks list, many of the people I know who are very much at the bottom of the economic ladder (education, immigration status, and just bad luck) work 2 to 3 jobs, and still have problems making ends meet. Some work more than one full time job. However when the minimum wage is where it's at, 3 jobs don't make much difference. Don't tell me about a lawyers' 96 to 100 hours a week at $300+ an hour. I'm sure this is common knowledge but I feel it's a valid comment on Mr. Brooks.
Posted by: Jean | July 25, 2007 2:57 PM
You neglected the most egregious error in item 1: the use of mean instead of median wages when talking about the middle class.
Posted by: Bill | July 26, 2007 1:58 PM
Dean,
On objection 7. Most hedge fund managers are paid on a percentage of returns basis, meaning their pay is by definition proportionaite to their returns. You speculate their will be a hedge fund blowout in the future, and those pension managers who invested in hedge funds will be "strung up". Fine, your free to speculate on the soundness of hedge funds as an investment, but that says nothing about their compensation in proportion to their performance. When their funds collapse, so will their pay.
Even if you were right about hedge fund managers, you don't dispute that his objection is accurate, rather that he's missing the point entirely. As you say, he attacks "straw men". You couldn't be more wrong. This is the first bullet point on inequality from Hillarys website:
"The fruits of our modern global economy are showing up in the corporate bottom line, not in workers’ paychecks. CEOs have seen their pay go from 24 times the typical worker’s in 1965 to 262 times the typical worker’s in 2005. Last year, the share of national income going to corporate profits was the highest since 1929 – while the share going to the salaries of American workers was the lowest."
That is specifically the argument he is attacking. And argument you have failed to disprove. Clearly, CEO pay is hardly a paranoid globalist strawman.
Posted by: AO | July 27, 2007 11:18 AM
Dean,
On objection 7. Most hedge fund managers are paid on a percentage of returns basis, meaning their pay is by definition proportionaite to their returns. You speculate their will be a hedge fund blowout in the future, and those pension managers who invested in hedge funds will be "strung up". Fine, your free to speculate on the soundness of hedge funds as an investment, but that says nothing about their compensation in proportion to their performance. When their funds collapse, so will their pay.
Even if you were right about hedge fund managers, you don't dispute that his objection is accurate, rather that he's missing the point entirely. As you say, he attacks "straw men". You couldn't be more wrong. This is the first bullet point on inequality from Hillarys website:
"The fruits of our modern global economy are showing up in the corporate bottom line, not in workers’ paychecks. CEOs have seen their pay go from 24 times the typical worker’s in 1965 to 262 times the typical worker’s in 2005. Last year, the share of national income going to corporate profits was the highest since 1929 – while the share going to the salaries of American workers was the lowest."
That is specifically the argument he is attacking. An argument you have failed to disprove. Clearly, CEO pay is hardly a paranoid globalist strawman.
Posted by: AO | July 27, 2007 11:18 AM
Dean,
I read Brooks's op-ed on income inequality as a red herring and was aghast. Added to his other simplistic socio-cultural biases how the ... does he keep a job at the NYT? Is he their token born-again idiot simply because he sounds intelligent? I am glad to see someone else noticed the speciousness of this calmly phrased diatribe.
Posted by: censeo | July 29, 2007 6:22 AM
Mr. Baker, not one of your counter-arguments is close to be convincing. Worst, you lean on the EPI, a left-leaning, rigorless bunch of economics ignorants pretending to be a think tank. You lost me right there. I bet you don't even know what a trade deficit is. You probably think it's a 700 billion debt Americans will have to repay. No wonder David Brooks won't waste time answering you.
Posted by: Donnie | July 30, 2007 10:47 PM
Excuse me Donnie, Brooks won't answer any of his critics because he can't.
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