Liars Can Figure: How James Sherk made poverty disappear (Part 1)

by Jehu

Have workers’ wages risen or fallen since the 1970s? This is the question posed to me on

“The left likes to throw the “real wages have depreciated greatly since the 1970s” argument around a lot. What would you say to this article that sets out to debunk that?”

The questioner offered a paper by the bourgeois simpleton economist, James Sherk, Productivity and Compensation: Growing Together, as a refutation of the dominant Left opinion that wages have depreciated greatly since the 1970s. Sherk argues:

“Conventional wisdom holds that worker productivity has risen sharply since the 1970s while worker compensation has stagnated. This belief rests on misinterpreted economic data. Accurate and careful comparisons show that over the past 40 years measured productivity has increased 100 percent and average compensation has risen 77 percent. Inflated productivity measurements account for most of the remaining 23 percentage point difference. An apples-to-apples comparison shows that employee compensation continues to closely follow productivity. American workers continue to earn more as they become more productive. To help Americans advance economically, policymakers should seek policies that will increase productivity.”

richal 04To be sure, the argument made by James Sherk is not entirely silly. It even has some support among a small group of Marxist labor theorists. The Marxist scholar, Andrew Kliman, has written a book, The Failure of Capitalist Production: Underlying Causes of the Great Recession, making the very controversial assertion that total compensation paid for labor power, including non-cash benefits, have more or less not fallen since the 1970s.

However, what no one disputes, at least so far as I have read, is that real wages have fallen during this period; in fact, even Sherk admits wages have fallen over the period by 7 percent. Instead the author examines another, perhaps related, question: has total compensation for workers increased since the 1970s as the productivity of labor has increased?

What is total compensation?

Sherk is, therefore, like Kliman engaged in a subtle redefinition of the terms of the debate taking place here. It does not make sense to go any further in this discussion without asking why this redefinition occurred and what it means for analysis. There is a reason why this redefinition takes place: even by his own flawed measure workers wages have sharply depreciated since the 1970s. The fascists want to avoid admitting wages have fallen, so they now prefer to talk about wages plus so-called “non-cash” compensation given to workers in exchange for their labor power.

We all know what is meant by wages, but what does total compensation mean? Interesting enough, at no point does the author provide a crystal clear definition of what he refers to as total compensation, but, rather, simply offers us partial examples. Under the heading of compensation are such “benefits” as retirement, health insurance, paid leave, bonuses and even performance pay. Since the author provides no comprehensive definition of what constitutes total compensation, how does he arrive at his conclusion that this total compensation has risen? Indeed, the author admits,

“Different data sources covering different employees and measuring different types of compensation produce different results.”

Do the bonuses paid to corporate executives count as compensation? Does maternity or family leave count? What about snow days? How about 401Ks? Do they count as part of compensation? Does your 401k count even when, as has happened to millions of workers in 2001 and 2008, almost your entire retirement savings were wiped out in the dotcom and housing bubble crashes?

For sure, in the years preceding those bubble bursts capitalist firms matched the worker’s contribution and, in this sense, paid “compensation”. And it is not the concern of the firm that after this Fidelity stole all of this compensation through hundreds of small fees and Wall Street banks made the worker a bagholder when the market crashed.

Moreover, let us not forget that a benefit like health insurance is not paid to the worker. Instead this “benefit” is paid to another capitalist firm ostensibly to insure the worker in case of sickness. There is nothing that says the actual benefit to the worker is in any real sense equal to the payment made to the health insurance firm. This is especially the case for the working class as a whole, since the healthcare firm only makes a profit if it pays out in benefits less than it receives in premiums.

To put this in less delicate terms: it appears the author wants to offer no real definition of what he means by the term total compensation, but to stuff as much into the category as possible to hopefully offset the decline in real wages.

To be sure, there is no question your wages have fallen. However, as the chart provided by the author shows, once we add in the rather nebulous category of non-wage compensation the fall wages magically becomes a rise.

Wages versus Total Compensation 1973-2015

Wages versus Total Compensation 1973-2015

Although the fall in wages has now magically been converted into a rise in total compensation, this is not enough for Sherk. He has to show the increase in productivity mostly made its way into the wages of the working class. And this requires still another sleight of hand.

Measuring inflation

While offering no real definition of what measure of total compensation he is using, there is an even stickier problem: how does one measure the depreciation of the purchasing power of the currency?

This is a contentious issue, because, although most people don’t realize it, an economist can essentially eliminate most inflation in his data simply by changing the method he uses to calculate it. By one measure a nominal wage of $100 in 1970 may now buy only $75 worth of goods in 2016, while, by another measure, a nominal wage of $100 in 1970 may now buy only $50 worth of goods in 2016.

Depending on whether he wants to increase the impact of inflation on wages or reduce that impact, the economist can choose between measures of inflation to suit his agenda.

It turns out that if the depreciating purchasing power of the dollar is measured by the consumer price index (CPI) inflation is significantly higher than if it is measured by the more obscure implicit price deflator (IPD). This is because the CPI typically shows a higher rate of inflation than the IPD. And if the rate of inflation is higher by one measure, the actual purchasing power of currency wages has fallen faster.

Since our Heritage Foundation economist is trying to argue against the view wages have deteriorated as some on the Left argue, he has chosen to use a measure of inflation that shows the least amount of inflation between 1973 and 2015: the IPD. Thus while the CPI shows “total compensation” has risen by only 30%, the IPD — which understates inflation relative to the CPI, shows total compensation has risen by a whopping 77%.

Inflation and total compensation 1973-2015: Consumer Price Index versus Implicit Price Deflator

Inflation and total compensation 1973-2015: Consumer Price Index versus Implicit Price Deflator

So, let’s recap:

First, there is absolutely no question that wages have fallen since the 1970s by every measure. To conceal this fact from his readers, James Sherk replaces a transparent measure of worker income, wages, by a rather more obscure category, “total compensation”, that he fails to adequately define.

Next, having replaced the reality of falling wages with rising total compensation, Sherk then tries to define away the rate at which the currency is depreciating, i.e., he wants to minimize how inflation is eating into real wages. To be sure, having spent the last forty years warning of the imminent danger of hyperinflation should wages rise even a little, the Heritage Foundation flacks now reverse themselves and show us why inflation was so insignificant “total compensation” rose by 77%.

This is how James Sherk  and the folks at the Heritage Foundation do economics. The question is how this clearly bogus argument manages to hold sway in Washington? I mean, it is so patently fabricated to arrive at a purely ideologically-driven result you cannot read it even once without laughing. Why does the Heritage Foundation even waste the money to hire a talentless flack like this to fabricate data, when most people will never read it in the first place?

If you really try to think this puzzle through, and I try all the time, sooner or later you realize the argument is not about wages. The argument is actually about productivity. A point to which I will return later.