It's what you believe that ain't so that matters

Mark Twain pointed out to us that it’s not what you don’t know that’s dangerous, it’s what you insist is true but ain’t that is. And example of which in this opening from a Guardian piece:

For the past 45 years, just about all of the income gains of America’s increasing productivity have gone to the elite and upper-middle class, while real worker wages have remained roughly flat.

This links to this calculation by the EPI. The problem with the calculation being that Paul Krugman explained why it’s not true, in detail - in fact in any of its details - well over a decade before it was first constructed. As Krugman pointed out about an earlier attempt to make the same claim:

"Many advocates of free trade claim that higher productivity growth in the United States will offset pressure on wages caused by the global sweatshop economy, but the appealing theory falls victim to an unpleasant fact. Productivity has been going up, without resulting wage gains for American workers. Between 1977 and 1992, the average productivity of American workers increased by more than 30 percent, while the average real wage fell by 13 percent. The logic is inescapable. No matter how much productivity increases, wages will fall if there is an abundance of workers competing for a scarcity of jobs -- an abundance of the sort created by the globalization of the labor pool for US-based corporations."

What is so remarkable about this passage? It is certainly a very abrupt, confident rejection of the case for free trade; it is also noticeable that the passage could almost have come out of a campaign speech by Patrick Buchanan. But the really striking thing, if you are an economist with any familiarity with this area, is that when Lind writes about how the beautiful theory of free trade is refuted by an unpleasant fact, the fact he cites is completely untrue.

More specifically: the 30 percent productivity increase he cites was achieved only in the manufacturing sector; in the business sector as a whole the increase was only 13 percent. The 13 percent decline in real wages was true only for production workers, and ignores the increase in their benefits: total compensation of the average worker actually rose 2 percent. And even that remaining gap turns out to be a statistical quirk: it is entirely due to a difference in the price indexes used to deflate business output and consumption (probably reflecting overstatement of both productivity growth and consumer price inflation). When the same price index is used, the increases in productivity and compensation have been almost exactly equal. But then how could it be otherwise? Any difference in the rates of growth of productivity and compensation would necessarily show up as a fall in labor's share of national income -- and as everyone who is even slightly familiar with the numbers knows, the share of compensation in U.S. national income has been quite stable in recent decades, and actually rose slightly over the period Lind describes.

The question here is not why Lind got these numbers wrong. It takes considerable experience to know where to look and what to worry about in economic statistics, and one should not expect someone who does not work in the field to be able to get it right without some guidance.

The thing being that the people at the EPI do have considerable experience, do know where to look and what to worry about. They even have guidance - Krugman has just provided it - and yet they still charged off down the path of telling us something that is completely untrue. Which goes on to be widely believed and widely cited.

That is, having been told how not to compose an informative statistic they went off and composed the entirely misleading one. For they compare wages, not compensation, use different inflation indices and so on. They also fail to make that balancing check against the labour share of the economy.

This, of course, being just another one of those reasons why political management of an economy is so inefficient. It is so often guided by beliefs that just ain’t so.