|From: "Jose G. Perez"
Date: Fri, 19 Nov 1999 23:38:10 -0500
The statistician's sneak attack continues! Having corrected what was
clearly a bias to overstating inflation in the inflation indexes, and having
corrected the effect of this in the GDP figures, the latest set of figures
to be corrected are those corresponding to labor productivity.
And, sho enough, in the labor productivity figures release for the third
quarter, the Labor Department snuck in a revision of the productivity series
going back 4 decades to 1959.
Generally, it raises the estimated year-to-year increase in productivity
by a few tenths of a percent going back to the 1970s; it also confirms that
there has been a significant increase in productivity in the second half of
The revised figures indicate that productivity growth from 1959-1973 was
at an average annual rate of 2.9%. This figure is unchanged.
Then it took a dive, and from 1973 to 1995 was 1.4%-1.6%/year, about
half the previous rate of 2.9%.
But this 1.4-1.6% rate represents a very sharp UPWARD revision of previous
estimates of 1%/year.
Then beginning in 1995 --and coinciding, among other things, with the
rise of the Internet-- productivity zoomed ahead at a 2.6% annual clip,
roughly half again as much as the pre-revision 1.9% figure for the same
What does this tell us:
First, that the great social security bankruptcy debate now showing in
Washington and selected local congressional races is even MORE of a fraud
than had been suspected. As Doug Henning pointed out in a very fine Left
Business Observer analysis, the doom-and-gloom scenarios are based on an
extraordinarily low rate of growth, of the economy, the population, and
labor productivity. It will be interesting to see how the manic depressive
actuaries of the social security system handle this curve ball, for if you
factor in productivity growing by 1/2 a percent MORE each and every year --
roughly the adjustment that's been made -- then it gets real hard to
"bankrupt" the (totally bogus and fictitous, by the way) "trust fund" much
before everyone born yesterday dies 100 or 120 years from now.
Second, that working people have been getting screwed by the capitalists
even more royally than we imagined. One hundred percent or damn close to it
of all the productivity gains have gone to the capitalist class. If you look
at the distribution of national income, the percent of national income paid
out as wages and benefits (after subtracting social security and Medicare
taxes) has gone from 64.2% in 1970 to 54.7% in 1998, a decline of almost
10%. In other words, the average weekly paycheck of $500 or so would be
about $590 if OUR share of the national income --every last penny of which
WE produce by the way-- had stayed the same. And if instead of all the
productivity gains going to the capitalists, they had gone to US, our
paychecks today would be, roughly, 36% fatter. And that even while letting
the capitalist keep as much money in real terms (roughly) as they were
making in 1970!
Third, this explains the extraordinary rise in the stock market, not
just of the past few years, but going back to the early 1980s. Prior to that
for 100 years or so, stock returns had averaged about 10% a year. Since then
the return has been about 15% a year. And since 1995, the return has been
above 20% a year. Where did these extraordinary rates of return come from?
FROM OUR PAYCHECKS. What stock in a company represents is a claim on its
future net income, i.e., profits. Stock prices rise both because the amount
of profit is rising and because the rate at which the amount of profit
increases has been tending to rise also.*
Fourth, the current boom of the U.S. economy is not the result, or not
JUST the result, of a financial "bubble." It is coming from real increases
in labor productivity, virtually all of which are being realized by the
capitalist class as surplus value and then divvied up among them through the
financial markets. (Which is NOT to say, as I've pointed out here before,
that there is no "bubble" in the financial markets at present. There clearly
is, in "dot-com" stocks in the U.S., and it seems to be spreading to
telecoms, especially in Europe.)**
* On the rise of profits, this one caveat: don't trust too much the
officially reported profits, as these are essentially profits for income tax
purposes and therefore subject to all sorts of accounting manipulations. For
example, there are several sectors, such as entertainment, where it is
considered de rigeur NEVER to report a big fat profit (among other reasons
because it is easier to cheat writers, directors, actors, etc., this way).
Thus Turner Broadcasting, for example, went from a company valued at 3 or 5
million dollars in 1975 (I forget exactly) to one worth about 12 billion
when it was acquired --was it in 97?-- having reported substantial "losses"
for most of its life and only the teeniest weeniest profits for the rest.
This, of course, depresses the stock price but doesn't really fool anyone:
when Time Warner bought out Turner Broadcasting, it had to pay a very hefty
premium (about 50%) over the nominal Wall Street share price, because the
owners (Ted Turner and other cable magnates) of closely held TBS knew what
it was really making and therefore what it was really worth. Moreover, Time
Warner paid with its OWN stock, which was just as undervalued (and for the
same reason) as Turner Broadcasting's had been. Within a year or so Time
Warner stock went up about 2/3rds, and on this basis Turner would have been
more fairly valued as close to a $20 billion company, which implies profits
of perhaps $1-$2 bn/year. This is basically an un-bubble, the opposite of
the more commented phenomenon of companies whose stock trade for much more
than it could conceivably be worth by any rational standard.]
** (For those that don't know what a "bubble" is, the easiest explanation is
a description (really, a caricature) of how corporate Japan was set up.
Company "A" is worth $1 billion; it has $100 million in real assets, and a
total of $900 million in 10% of the stock of 9 other companies (B, C, D,
etc.) each also worth $1 billion. Company "B" is worth $1 billion, again,
$100 million in real assets and $900 million consisting of 10% of the stock
of 9 other billion dollar companies (A, C, D, etc.). You can see where I am
going with this. By the time you add it all up in all ten companies, you
have $1 billion in real assets, and $9 billion in fictitious capital, which
represents the $900 million overvaluation of each company. If all these
companies traded back to each other the stock in each other they held, soon
we'd be left with ten $100 million companies. And nothing in the REAL
economy need be perturbed: each company keeps on getting the profits of
their $100 million business. BEFORE each company kept 1/10th of its profits,
and sent 9/10ths to the other companies. The only thing that's been
eliminated in eliminating the cross-shareholding is writing each other a
bunch of checks that essentially cancel out (in our ideal example).
(Now, the reason Japan got set up this way was to create, in essence,
monopolies, so that you in company "A" did not get your raw materials from
someone outside the family but from company "B" because your OWN profits
were pooled, so to speak, with those of company "B" and the other members of
the trust through cross-shareholding.
(In principle, all of this works, to all intents and purposes, like a
check-kiting scheme. To make it really work you need to get banks involved
(as they were in Japan), and various other things but the essence of it is
what I laid out above: "financial" assets which, in essence, have no backing
in the real economy. While it remains strictly in one sector, as in my
simplistic example, a "bubble" is easy to unwind (at least in theory!)
without affecting the real economy. When real and fictitious capital become
commingled and inseparable (as happened in the US in the 20s), the economy
as a whole is likely to go to hell. That's because the fictitious capital
isn't involved in the production process; its value cannot be embodied in
commodities placed on the market and thus preserved; and all of a sudden
there isn't enough surplus value to go around to all the owners of capital.
This is one thing that makes the US dot-com bubble fairly benign so far. No
one really believes that, say, one thousand dollars or amazon-dot-com is
going to get the return this year that rentiers demand of one thousand
dollars worth of IBM or Wal Mart. IBM stock is a real claim on the real
profits of a real money-making business. Amazon-dot-com shares are lottery
tickets. As a financial speculator, the trick is to convert your fictitious
capital into real capital, and that's where banks and financial institutions
are key -- for example, lending you a million dollars with a million
dollar's worth of amazon-dot-com as security. No SANE bank in the U.S. will
do that right now on a huge scale, which is why the dot-com bubble is not
yet that malignant, and probably could be unwound without great damage, as
the "bio-tech" bubble of the early 90s, and the electronic bubble of the
early 60s were.
(U.S. laws from the 1930s prevented "retail" banks from being essentially
holding companies of "industrial" companies and "retail" banks, brokerage
and investment houses, insurance companies and "industrial" companies had to
be different entities under these laws precisely as a way to eliminate the
incentives to creation of "fictitious" capital. I'm sure everyone will be
overjoyed to learn these kinds of restrictions have just been gutted by