Commentary

Classless Warfare Escalates

It is a familiar complaint that newspapers only report the bad news. But that applies to economic news, too — particularly with a presidential year coming up.

By all objective indicators, the news about the American economy has been remarkably good since the summer. But what is good news for ordinary people can be bad news for politicians, just as good health is bad news for morticians.

For some strange reason, recent Democratic candidates have been looking for the dark cloud behind every silver lining. They seem to think voters always want to hear the U.S. economy is fundamentally rotten and brutally unfair, creating conditions that can only be remedied by making even more people even more dependent on taxes extracted from someone else.

This created a demand the New York Times has long been eager to fill by making up new facts. Loyal Lou Uchitelle took up this task again with “A recovery for profits, but not for workers.”

“Profits, it turns out, never stopped rising as a share of national income all through the 2001 recession and in the months afterward of weak economic growth,” Mr. Uchitelle reports. “New data from the Bureau of Economic Analysis erases all doubt on this point.” If it’s blues, it’s news. Mr. Uchitelle alludes to “pretax profits,” yet that new data show pretax profits falling as much as 9.9 percent in 2001. Even after some adjustments for depreciation and inventory, profits fell from $833 billion in the second quarter of 2000 to $713.6 billion in fourth-quarter 2001. Perhaps not as deep a decline as Mr. Uchitelle would have liked, but down just the same.

Employee compensation rose from $5.78 trillion in 2000 to $5.9 trillion in 2001 and $6 trillion in 2002. After adjusting for inflation, real compensation per hour rose 3.6 percent in 2000, but only 0.8 percent in 2001 and 1.2 percent in 2002. The gains were fairly weak in 2001-2002, but so was the economy. Real wages and benefits rose at a 3 percent rate in the second quarter of this year, but the preliminary third-quarter figure shows only a 0.7 percent rise. Looking at the volatile second and third quarters together, it would be distinctly unkind to claim, as Mr. Uchitelle does, that “the economic recovery is distinctly unkind to workers.”

Mr. Uchitelle could not and did not claim the new data “erase all doubt” about profits not falling. On the contrary, they prove profits fell. What he said was profits did not fall as a share of national income. Labor failed to grab a larger share of the pie when the economy stumbled. Even if that were true (it isn’t), that certainly would not mean “labor’s share is shrinking.”

The new data show profits fell in 2001 while labor income rose, so how could even the New York Times claim workers got a smaller share? The trick is to first cite the Bureau of Economic Analysis for authority but then completely ignore the official figures and fabricate an entirely novel definition of profits. Mr. Uchitelle cites Ed Wolff of New York University, who redefines the word “profit” to include “profit from self-employment, rent and interest.” If defining profit to include even self-employment is evidence of anything it is that professors should never get tenure. What on Earth do “profits” from self-employment have to with wages? Self-employed people neither pay nor receive wages.

An enterprising young cousin of mine, laid off by United Airlines, is starting a franchise to sell home blinds. He used to earn “labor’s share” in Mr. Wolff’s old-fashioned Marxist sense — meaning, income from working for capitalists (stockholders) who owned the airplanes. But any income my cousin can now pay himself from the franchise is to be melded with United Airlines’ famously invisible profits, according to Mr. Uchitelle and Mr. Wolff.

My wife’s industrious stepmother, now well into her 90s, pays for her own long-term care from rental properties she actively managed until recently. According to this proposed new definition, she never worked a day in her life. It was all just profit.

Interest income and rental income are returns on invested capital, and so is some portion of the income of self-employed people (e.g., profit from investing in a computer). But most of us work hard to acquire such investments, and it is extremely misleading to lump it all together as profits just to give the false impression that profits of corporations have been much larger and less cyclical than they were.

Even the Bureau of Economic Analysis figures on profits can mislead, because they count thousands of privately held corporations, including professionals and farmers. Profits of the S&P 500 firms, by contrast, fell from $13.71 a share at the end of third-quarter 2000 to $3 a share by the end of 2002. Stocks, of course, collapsed, too. By third-quarter 2003, however, profits had indeed almost recovered their pre-recession level, reaching $12.60 a share. If that recovery of profits bothers you, remember what it was like before profits recovered.

The phrase “class warfare” has been overused to mean merely resentment of people who earn high salaries by managing complicated businesses, rather than by singing, acting or playing golf. In its original meaning, courtesy of Karl Marx, class warfare meant a serious conflict of interest between two supposedly distinct groups of people — those who receive income from owning physical capital (such as a hammer or a sickle) and those who earn their income from physical labor.

That is why frugal people were accused of having “unearned income” during the 1972 presidential race. And it may explain why New York Times Democrats are still trying to revive that old excitement about the investing class profiting unfairly at expense of “working families.”

In reality, the hardest-working families in America are now working almost as hard to be successful investors so they can send their kids to college and finance their own old age. And they just suffered a starting setback in 2001-2002, when profits of large, publicly traded corporations almost vanished.

The New York Times just escalated next year’s rhetoric to authentic class warfare, not mere income envy. Somebody is hoping to pit everyone with an individual retirement account, mutual fund or 401(k) against everyone else. This is dismal economics and disastrous politics. When nice guys like Democratic candidate Dick Gephardt insist on excluding me, my children and most of my relatives from their manta about “working families,” I doubt they have any idea how offensive that is. Class warfare has no class at all.

Alan Reynolds is a senior fellow at the Cato Institute and a nationally syndicated columnist.