The Reality of Theories

In theory, there is no difference between theory and practice; In practice, there is. --Chuck Reid

We received a very thoughtful letter from Brian Murphy (who listens to our BizRadio Network affiliate in Galveston, BizRadio1320) which contained a newspaper clipping headlined, “Less of National Income Funnels Down to Workers." This piece whined that the percentage of national income that went to wages and salaries in the first half of this year was the lowest since the Commerce Department started keeping track of these things in 1929.

Brian wondered how this trend might impact businesses, in conjunction with additional information about bankruptcies, delinquent payments, levels of consumer debt, and national housing prices.

The newspaper article, which was written by Diane Stafford at the Kansas City Star, also noted that the share of national income going to corporate profits was at its highest level since the ‘50’s.

What’s my take?

For starters, you have to decide from which perspective you wish to view this news; how do you want to filter it; how important is it to you personally. I think it’s pretty telling that the article was carried in the Houston Chronical on page D-4 of the Business Section; not exactly where you put screaming headline stories.

Secondly, what is the real take-away from this column? Is it a subtle piece of slightly-yellowed journalism in an election year that is designed to drive a wedge between pro-business and pro-labor factions? (Note that I did not make that demo-political division between business and consumer; there’s a reason.)

Thirdly, how does this story really resonate with you? Is it simply a parsing of government data to spin a story, or does it really matter? Most importantly, what are you going to do about it?

We discussed earlier this week the notion of whether we were better off in 2006 than we were in 2000, a question that was triggered by our buddy, Tobin Smith, who quoted some pretty interesting statistics in his ChangeWave e-newsletter earlier this week:

We have millions more employed, the average household income is up more than 11% and personal tax rates are down 8% for the average household. Our GDP is almost 20% higher in 2006 than 2000.

• Home mortgage rates at 5%-6% and not 7%-8%
• Payroll taxes eliminated for most households under $50,000 (excluding Social Security -- the biggest tax for a majority of American households)
• Tax credits for children at $500 for lower-income households
• Employment rates realistically at 96% for all employable U.S. residents Household cash flow -- the money left after paying mortgages and taxes -- is up more than 10% from the good old days of 2000, even with property taxes up 25% in most areas of the U.S.
  

I think one key piece of information you must remember when digesting government numbers is that for many of these metrics, the methodology is primarily flawed because the federal bean counters are stuck in the 1950’s. They’re not keeping up with the times.

Tobin takes to task the numbers the Bureau of Labor Statistics released showing year-over-year payroll gains are 40% higher than reported, and that the BLS Establishment Survey—which was created in the ‘50’s—actually undercounted three-quarters of a million jobs.

Tobin can tell you better than I:

The key disconnect in the erroneous BLS Establishment Survey of 400,000 employers vs. the direct communication with 60,000 households in the BLS Household Survey is simple. The Establishment Survey does not count jobs created by very small business, small-business startups or self-employed professionals, and it does not count independent contractors or most limited-liability corporations (LLCs).

What’s wrong with that?

At least half of new workers added to the labor and service provider market are self-employed, independent contractors, or LLC service providers. What that means is that anyone not paying into the unemployment insurance system is not being counted in the BLS survey, which is thus rendered totally inaccurate and obsolete as an objective metric of what’s really going on. The Household Survey asks only how many in the home are working; never mind how or for whom.

How much is this intellectual disconnect worth in real dollars? $200-billion in uncounted annual personal income between the 261,000 jobs in the Household Survey and 120,000 in the Establishment Survey.

Might this math discrepancy explain the 12% boost in tax revenues in fiscal 2005, and an 11.8% increase this year? Add this "lost income" with the 20% higher rate of corporate taxes collected during 2000, and you have total federal revenues up $410 BILLION from the record year of 2000! Why is this story not being told--especially by politicians who need some positive grist for the mill (instead of homosexual pedophilia stories. I mean, really.)

The point of all this?

Headlines seeking to diminish the earnings of workers vs corporations is a divisive tool of media outlets with an agenda. Remember, this is an election year. Whether you’re a worker bee or a corporate queen, you’re in a better place, statistically, that you were six years ago.

Bankruptcies, late-pay issues and consumer debt issues are symptoms of personal accountability issues that must be calculated as the risk of doing business by companies that extend credit. There will always be an element of bad luck involved on a personal level.

The key is to better educate, and better insulate against such financial down turns, and in an environment where wages are up, taxes are down, and GDP is amazing…the odds are in favor of more individuals being able to earn their way out of trouble.