Sunday, November 5, 2017

Shitting on the Cato guy

From Cato: Labor’s Share of GDP: Wrong Answers to a Wrong Question by Alan Reynolds.

The opening paragraph:
A recent paper by David Autor of MIT, Lawrence Katz of Harvard and others, “The Fall of the Labor Share and the Rise of Superstar Firms,” begins by posing a mystery: “The fall of labor’s share of GDP in the United States and many other countries in recent decades is well documented but its causes remain uncertain.”  They construct a model to blame it on U.S. businesses that are too successful with consumers.

"They construct a model to blame it on U.S. businesses that are too successful with consumers." The writing reeks of attitude. Attitude often makes for a good read, but it seldom makes for a good argument.

I'm interested because I have trouble understanding what "labor share" represents. I mean, at FRED, Labor Share for the business sector, and also for the nonfarm business sector, are shown as indexes, not as percent of GDP. I can guess that the indexes show changes in labor share as a percent of GDP over time, yes, but I can't tell what the percent values actually are.

There is a "Share of Labour Compensation in GDP" series with "ratio" units. It's a simple thing to get "percent" values from that one. And the overall trend of this series is like the others: downhill. But at a slightly closer glance it doesn't really match either of the "labor share" series. So I'm left hanging. I thought maybe the Cato article would help.


Second paragraph:
Five broad industries, they found, became more dominated by fewer firms between 1982 and 2012: retailing, finance, wholesaling, manufacturing and services. But those aren’t industries at all, much less relevant markets: they’re gigantic, diverse sectors. Is all manufacturing becoming monopolized? Really? Census data ignores imports, but why ruin this bad story with good facts.

So the guy is complaining that Autor and Katz left out the word sectors? Because they said "industries" instead of "industrial sectors"? Really?

And again, attitude: Five gigantic, diverse sectors became more dominated by fewer firms, "but why ruin this bad story with good facts."

At last, in the third paragraph, a possibly useful observation:
Jason Furman and Peter Orszag found “the decline in the labor share of income is not due to an increase in the share of income going to productive capital—which has largely been stable—but instead is due to the increased share of income going to housing capital.”

The useful observation is Orszag and Furman's, not Cato's, but at least the Cato guy provides a link.

In paragraph four, Cato guy is complaining about "industries" versus "industrial sectors" again:
President Obama’s Council of Economic Advisers, under Jason Furman, nonetheless worried that the 50 [!] largest firms in just 10 “industries” (if you can imagine retailing and real estate to be industries) had a larger share of sales in 2012 than in 1997 ...

But yeah, I can imagine retailing and real estate as industries. Cato guy is being ridiculous. Finally, in the rest of paragraph four, he moves on to a different complaint:

They concluded that, “many industries may be becoming more concentrated.” Noah Smith, Paul Krugman and many others have suggested that this nebulous “concentration” allowed monopoly profits to rise at the expense of the working class, supposedly explaining labor’s falling share of GDP during the high-tech boom. A quixotic search for even one actual example of monopoly soon morphed into advice about using unconstrained antitrust to constrain Amazon, which is apparently feared to have monopoly profits invisible to the rest of us.

Now he cannot see the boom in corporate consolidation, and cannot figure out why monopoly might be a problem. And look what he does there at the end: "Invisible to the rest of us," he says. Cato guy takes us, his readers, and imagines we stand with him, blind to the monopoly profits that may or may not exist in the one particular place where my wife does all her shopping: Prime.

But forget that Cato crap about "invisible" profits which are "apparently feared" by some unidentified but obviously stupid bunch of people. Forget that. I'll tell you what really bothers me about Amazon. And it's not the so-called "free" shipping. What bothers me is that Amazon is doing to the rest of the economy what supermarkets and big-box did to Mom and Pop. Nobody even knows anymore what a mom-and-pop is. Amazon is doing the same to everyone else: Putting them out of business.

Paragraph five:
Research that starts with such a meaningless question as “labor’s share of GDP” was never likely to lead us to any profound answers. Workers do not receive shares of GDP – they receive shares of personal or household income.

I thought Cato guy might be on to something with that. Hey, you know? I always figure after a guy has two or three stupid ideas in a row he's bound to come up with a good one, just by dumb luck.

Nah. "Workers do not receive shares of GDP" he says, emphatically. But GDP is a measure of income. And workers do receive income. So it is okay to talk about “labor’s share of GDP”. Sure, to appease Cato guy, you could use GDI instead of GDP. But those two are really supposed to be equal, so Cato guy is complaining about nothing. Again.

That's enough. This Cato guy is not worth reading.

No, I can't let it go. I have to point out one more thing. Cato guy says

Workers do not receive shares of GDP – they receive shares of personal or household income.

Cato guy takes "labor share" and turns it into "worker's share". He takes the relevant macroeconomic concept (the split between labor and capital) and tosses it aside. In its place he puts you and your weekly paycheck. He brings it down to a personal level, and (bad as the argument is) we like him for it. Then he says that our weekly paychecks don't get counted in GDP. That part is just not true.

Cato guy turns "labor share" into a story of "the individual and his paycheck". And he tells us our weekly paychecks don't count in GDP. He mixes up ideas, and he lies.

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