New Math, Same Story

SYNOPSIS: The Boskin report shows that productivity is still the most important determinant of wages. But the productivity slowdown remains a fact

Twice in the last year, experts on America's economic statistics startled the public by suddenly declaring some well-known truths about our economy to be, in the immortal pronoucement of Ron Ziegler, Richard Nixon's press secretary during Watergate, "inoperative."

This is not a technical matter, of interest only to policy wonks. Economic statistics have a direct impact on the Governmetn budget - most notably, Social Security benefits, which are linked to the Consumer Price Index.

But perhaps even more important, statistics play a crucial role in the stories we tell ourselves about ourselves - in the portraits we paint of the state of the nation. With a sweep of their magic wand, it seemed to many commentators, statisticians had changed economic history, turning poverty into plenitude and overturning whole ideologies about where America is going and why.

Until last year many people - but not most economists - thought that the economic datas told simple tale. On one side, productivity - the output of an average worker - was rising. And although the rate of productivity increase was very slow during the 1970's and early 1980's, the official numbers said that it had accelerated significantly in the 1990's. By 1994 an average worker was producing about 20 percent more than his or her counterpart in 1978.

On the other hand, other statistics said that real, inflation-adjusted wages had not been rising at anything like the same rate. In fact, some of the most commonly cited numbers showed real wages actually falling over the last 25 years. Those who did their homework knew that the gloomiest numbers overstated the case - for example, because they covered only blue-collar workers, whose pay increasingly lags that of other employees, or neglected the rising share of health and retirement benefits in total compensation.

Still, even the most optimistic measure, the total hourly compensation of the average worker, rose only 3 percent between 1978 and 1994.

And so to many commentators, from Pat Buchanan to Robert Reich, the story seemed obvious. In an age of rapid technological progress and corporate re-engineering, they told us, the output of the average worker was rapidly rising; but because workers were cowed by downsizing and job insecurity, the bosses no longer felt any need to share these gains with their employees. Even solid pillars of the establishment, like Business Week magazine, joined the chorus with a cover story in 1995 titled "Wages: They're Stagnant While Profits Are Soaring. Are We Headed for Trouble?"

But now the experts are telling us that the whole thing may have been a figment of our statistical imaginations.

The first about-face came at the beginning of the year, when the Bureau of Economic Analysis, the Government agency that calculates Gross Domestic Product, shifted from a "fixed-weight" to a "chain-linked" measure of economic growth. (You don't want to know.) The change had the effect of sharply reducing the estimated rate of productivity growth over the last few years. Then in December a blue-ribbon panel of economists headed by Michael Boskin of Stanford declared that the Consumer Price Index had been systematically overstating inflation, probably by more than 1 percent per year for the last two decades, mainly by failing to take account of changes in the patterns of consumption and improvements in product quality.

Even the bureau's technical adjustment was controversial, because it seemed to deflate business boasts about a "productivity revolution" in recent years. The Boskin report, however, ignited a firestorm of criticism. Partly this was because of the link between the C.P.I. and Social Security payments, which meant that any downward revision in the index would strike directly at retirees. Many of the Boskin report's harshest critics, however, were outraged because it repudiated a view of the economy on which they had staked their reputations and built their careers. For if inflation has been exaggerated, then the growth in real wages has been understated - and so the whole story about how companies are not sharing productivity gains with their workers evaporates.

To be fair, there are not many professional economists among those who are wailing and rending their garments. On the contrary, most economists who study the relationship between productivity and wages are relieved at the more or less official admission that some of the published numbers may have been way off, because they already knew there had to be something wrong. When you tried to put the data together into a consistent story about what has been happening to America, you discovered that the supposed facts just didn't fit together.

As these economists pointed out, if the popular story were true - if the average worker really were producing more and being paid less - then wages must, as a simple matter of arithmetic, have declined as a share of the total economic pie. (Actually, there are some technical qualifications to that arithmetic, but they are not worth worrying about.) The Government, however, collects data on the distribution of income by type - data that are not subject to the technical problems of productivity and inflation estimates. And the implied decline in labor's overall share just hasn't happened - in fact, the share of wages and benefits in national income was just about the same (73 percent) in 1994 that it was in 1978.

As robot used to say in old science fiction movies, "Does not compute." Like astronomers - whose current estimates indicate that the oldest stars are older than the universe in which they reside - economists knew that at least one of their numbers had to be wrong; either productivity wasn't up that much, or wages were doing better than reported, or the share of labor in national income was being grossly overstated.

There are still many details to settle. The Boskin report, in particular, is not an official document - it will be quite a while before the Government actually issues a revised C.P.I., and the eventual revision may be smaller than Boskin and his colleagues propose. Still, the general outline of the resolution is pretty clear. When all the revisions are taken into account, productivity growth will probably look somewhat higher than it did before, because some of the revisions being proposed to the way we measure consumer prices will also affect the way we calculate growth. But the rate of growth of real wages will look much higher - and so it will now be roughly in line with productivity and wages with data that show a roughly unchanged distribution of income between capital and labor. In other words, the whole story about workers not sharing in productivity gains will turn out to have been based on a statistical illusion.

It is important not to go overboard on this point. There are real problems in America, and our previous concerns were by no means pure hypochondria. For one thing, it remains true that the rate of economic progress over the past 25 years has been much slower than it was in the previous 25. Even if Boskin's numbers are right, the income of the median family - which officially has experience virtually no gain since 1973 - has risen by only about 35 percent over the past 25 years, compared with 100 percent over the previous 25. Furthermore, it is quite likely that if we "Boskinized" the old data - that is, if we tried to adjust the C.P.I. for the 50's and 60's to take account of changing consumption patterns and rising product quality - we would find that official numbers understated the rate of progress just as much if not more than they did in recent decades. (Many observers would argue that the qualitative changes in the way ordinary people lived were far greater between 1945 and 1970 than between 1970 and the present.) The popular impression that the first postwar generation experienced an immense improvement in living standards, while the second did not, is still correct; the American dream may not be dead, but it is certainly not what it was.

Moreover, while workers as a group have shared fully in national productivity gains, they have not done so equally. The overwhelming evidence of a huge increase in income inequality in America has nothing to do with price indexes and is therefore unaffected by recent statistical revelations. It is still true that families in the bottom fifth, who had 5.4 percent of total income in 1970, had only 4.2 percent in 1994; and that over the same period the share of the top 5 percent went from 15.6 to 20.1. And it is still true that corporate C.E.O.'s, who used to make about 35 times as much as their employees, now make 120 times as much or more. The living standards of most people may be up in absolute terms, but these growing disparities still make it increasingly questionable whether it makes any sense to think of ourselves as a middle-class society. And despite the revisions, there is not much question that the incidence of really severe poverty in America has increased, not fallen, over the past generation. While these are real and serious prolems, however, one thing is now clear: the truth about what is happening in America is more subtle than the simplistic morality play about greedy capitalists and oppressed workers that so many would-be sophisticates accepted only a few months ago. There was little excuse for buying into that simplistic view then; there is no excuse now.

Originally published in The New York Times, 1.05.97