The Rich Get Richer

I am a fan of the online news and opinion publication Vox. This might seem surprising to you if you know my background and personal beliefs. I think that it is very efficient at creating and educating people on center-left talking points. They lay out arguments very efficiently. They do a good job of presenting various statistics and framing them in a context to argue for a point. The issue is of course whether the framing is correct. 

We should recognize that stories about the data can mislead us. A lot of science measures a variable and attempts to establish a causal relationship. The specifics of the phenomenon being measured can confuse us. We can show that non whites make less money per capita as a population compared to whites. The question then becomes what are the major factors driving this. I could talk about how non-whites as a population are younger overall, compared to whites. Then I could talk about how people earn more money as they get older. I could conclude this point by stating that of course non-whites earn less, they are not as old. 

In U.S., most common age for whites is much older than for minorities

Knowing this fact might help you better contextualize the situation, but I have biased you towards the idea that there might not be racial discrimination. There is of course evidence to argue for the racial discrimination case. The issue is not the data, but how it is presented and combined with other facts. We have created a story:

  • Non-whites earn less.
  • Non-whites are younger.
  • Younger people make less money.
  • Non-whites make less money, because they are younger.

That being said, we haven’t done anything to excuse or downplay racism. I have just verbalized the idea of controlling for age. This is not magic, it is just basic statistical thinking. The real question is revisiting and auditing these stories. The above reasoning while it does not disprove racism in employment, it certainly critiques the alarmist rhetoric of certain people on the left. 

How American CEOs Got So Rich

Vox decided to publish a video in critique of the idea of a stock buyback. The issue with this video is not that stock buybacks are actually a good idea. I personally think that they made a few good arguments against stock buybacks. Considering the bulk of the evidence, I am personally against stock buybacks. They just add irrelevant facts and attempt to manipulate the audience. Two things happened at the exact same time, this means that they are causally linked. In essence, they blame neoliberal economics and changes to financial regulations for increased income inequality. They have essentially poisoned their case with spurious accusations which do not fit the facts.

The essence of a stock buyback is that a corporation believes that their stock price is too low, they then offer to exchange some of their cash held in reserves to remove shares from circulation. This could be a good decision from a profitability standpoint. Let us say that you could use the same quantity of money to pay a $5 dividend or you could increase your share price by $10. In this case a stock buyback would make a lot of sense. It is the optimal way to increase the value for your shareholders. 

The issue is that you can easily abuse this process. People at a corporation who are compensated in shares or by the share price of the company, could try to waste money by driving up prices. Vox correctly points out how stock buybacks can enable insider trading and make it harder to combat people who are trying to commit fraud. This is not by the nature of the corporation, but the incentive structures that were created by the rules of the market. There are no default rules for how a market ought to operate. I think it is fair to say that we should not incentivize corporations to do stock buybacks when they could invest in growing their company or paying dividends. 

The issue here is that they want to claim that this has caused CEOs to become rich at the expense of the common man. They talk about how productivity has increased, but wages have remained stagnant. Well is there any alternative explanation that explains why wages have been stagnant, other than greedy CEOs and corporate stock buybacks.

Americans' paychecks are bigger than 40 years ago, but their purchasing power has hardly budged

It has become common knowledge for many that wages have been stagnant. There are a number of statistics to represent this, but this statistic deals with an individual worker and what they earn as wages. Statistics such as median household earnings focus on what a household earns. This can be misleading, because there has been a decline in the number of people who are working in a household. This is probably caused by the numbers of divorce and lower marriage rates. However you cut the data, it seems that it is true that wages are stagnant. This is however a misleading statistic.

People present a narrative based on this statistic when they combine it with some sort of measure of productivity. They will claim that we are more productive, we are adding more value to a firm. Economics apparently teaches that workers are paid their marginal revenue product of labor to the firm. This means in simpler terms that if hiring another worker generates $50,000 per year in revenue for the firm, the wages will tend to be approximately $50,000 per year. This relationship is not necessarily causal. Assuming you can hire people at $50,000, you will hire them until more employees will not earn you more money. If you will only earn $50,000 by hiring another employee, then there’s no reason to hire them if you have to pay $50,000. 

This bit of basic economics wisdom is being critiqued. Apparently people are adding more value, but we are not seeing more wages. This is an empirical critique of the theoretical framing of how wages are determined. The real issue here is that they are critiquing a simplified explanation of how wages are set. This is like critiquing science by poking holes in “dumbed down” explanations for highschoolers or the general public. This still leads to the important question: what is the real theory of the labor market? 

Employees are compensated their marginal revenue product of labor. Notice the word compensated! This is crucial. When you look for work, you don’t merely consider the wage you are paid. You consider the whole package. Is it a nice place to work? What benefits do they offer? What is the commute like? Is there room for advancement? All of these including, what are they paying me? This is called compensating differential theory. A lot of these variables are hard to measure, but a few concrete variables labor economists can measure are things such as wages and benefits.

Benefit costs have risen faster than wages in recent years

This graph measures costs that employers pay. What we see is that while wages have remained stagnant, we have seen a large growth in compensation paid in benefits. It is quite uncontroversial to state that increases in the cost of employer provided benefits have contributed to the stagnation of wages.

Rising costs for basic necessities present a larger burden on the poor. We have seen large increases in the cost of items such as healthcare. This makes wages a poor measure of how workers are compensated. People are receiving wages with their ever increasing benefits packages. Of course employers are not going to raise wages if they have to compensate their employees in other ways. All your employers care about is how much money they spend on you. It does not matter if it is wages or benefits. It is all money. 

https://www.nber.org/digest/oct08/w13953.html

Regardless of the causation behind the growth in non-wage expenses for firms. Research from the national bureau of economic research confirms that in 1970 total employee compensation was 66% of national income and in 2006 it was 64% of national income. These statistics factor in total expenses for compensating employees. We could say there has been a slight decline, but certainly not the claim that compensation has not for the most part kept up with economic growth over the period. The whole rhetorical point of referencing graphs showing stagnant income is to imply that all the gains of economic growth have not gone to labor. This simply can’t be true, since we know that total compensation is essentially the same share of national income. 

Taking some time to revisit the story Vox Presents:

  • Stock buybacks increase share prices.
  • CEOs often can use stock buybacks to increase their bonuses.
  • Look at stagnant wages! (misleading)
  • More money spent on stock buybacks!
  • Companies are using stock buybacks to make themselves rich instead of paying their employees. 

This story is not true, companies are spending essentially the same amount of money compensating their employees. They don’t even go out of their way to show declining company expenditures on employees. The statistics seem related to the untrained eye, but are not actually what they are being implied. If companies are not raising their employee expenses and instead using them for buybacks, then we would want to actually measure how much money companies are spending on their employees. They only presented the numbers for stock buybacks. I presented numbers that would be needed to correctly make this argument. It does not play into their narrative. As we have seen people can form arguments that are highly convincing based on the equivocation of types of data. 

Click to access understanding-the-labor-productivity-and-compensation-gap.pdf

What else are we taking for granted and equivocating? Well what is meant by productivity? There isn’t just something called general productivity. Different industries can have different rates of productivity and it is dependent on various factors. Also what is being produced in an industry can fundamentally change. Over the last 50 years, we have had a massive change in the role of what consumer telecommunications does. Home phone service has largely been abandoned and we have cellphones which are primarily used to connect to the internet. While we still see extreme divergence in compensation from productivity in some industries. The above graph is one example. The actual trend is still closer when we try to account for how industries change overtime. 

What we see in the graph above, is that productivity gains do strongly correlate with increased compensation. This is when we consider each industry and how it changes over time. There is in fact a slow divergence where productivity is generally growing faster than compensation. I would argue that looking at the data the larger driver of inequality is the fact that for most industries productivity is not substantially increasing. Most of the increased productivity is coming from industries which employ a small portion of the population. 

More interesting is the fact that industries with the highest increase in productivity are contributing more to the productivity compensation gap. This would imply that industries with slower growing compensation are even less affected by the slightly growing productivity compensation gap. The issue it seems is that for many people, there is hardly any productivity growth. The industries where workers are really losing productivity are the ones which are seeing the highest growth in compensation. 

Historically there is often unequal growth in productivity of industries from a technical perspective. A maid does not need to be able to clean houses more productively. If waitresses become more productive and thus have a pay increase, then it may tempt some people to choose being a waitress instead. Thus increasing the productivity and pay of maids. As people become more productive at work, people will want to work and be willing to compensate people more in order to do the housework so they can stay at work. 

What maybe is concerning for some with the gap is that this economic principle which allows productivity to grow together does not necessarily apply here. People can not just, as the meme goes, learn to code. The most intelligent and educated can collect a type of rent, because even as wages rise it is hard to compete with them for their jobs.

As I have shown, a lot of the rhetorical appeal of the argument is false. I will quickly go over the remainder of the gish gallop. Inequality actually shrank during the great depression; Wages fell much less than profits. The fact that GM closed a facility has nothing necessarily to do with stock buybacks. If the facility was profitable enough, then they most certainly would have kept it open. I mean if you think it is immoral for a company to care about making a profit, then I would see your point. The point of capitalism is to make a profit and efficiently allocate resources. The profit that is paid will be allocated towards new projects in different industries. 

The reason why they pile on all of these points is because Vox wants to gish gallop. They have constructed a full on assault of misleading claims and emotional appeals. How can you think clearly when presented with great depression causing, wage stealing, and community destroying stock buybacks. I have presented an alternative story and additional facts to explain the correct reason behind alleged negative phenomenon in the economy. I have for the most part been played a fool for doing this presentation. The entire point of the piece is to shame corporations by stringing together a bunch of left wing boilerplate. They don’t actually attempt to make any serious arguments in favor of any of their points. The fact is that when talking about strictly historical data, they have not necessarily been wrong. As we have discussed before, they are just misleadingly presenting data to prove apparent causation and build their narrative. A lot of the leg work for the argument is extremely based on commitment to the ideology which the viewer already believes to be true.

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