Date: Sun, 10 Aug 1997 10:50:24 -0400 (EDT)
From: Louis N Proyect <lnp3-AT-columbia.edu>
Subject: M-TH: New York Times on the American economic boom


What Goes Up Must Usually, Well, Stop Going Up

By LOUIS UCHITELLE

When the history of America's mid-1990s economic boom is written, a fat
chapter will certainly be devoted to the mystifying strength of corporate
profits -- how they were able to rise so fast for so long. 

But there must also be a chapter that describes what happened when this
extraordinary performance became ordinary, or worse. And the material for
this second chapter seems to be falling into place now. 

Part of the foundation undergirding the boom is quietly being eaten away.
Stagnant wages -- the workers' contribution to their bosses' profits --
are beginning to rise. And there is agitation for more improvement.
Workers for the United Parcel Service began a nationwide strike last week
that was partly a protest against the insecurities of the Age of
Downsizing. 

As if on cue, stock prices fell sharply Thursday and Friday, suggesting
the vulnerability of another engine of prosperity to shifting
circumstances. 

That's not to say that the profits, the equally spectacular stock market
and the thriving economy -- all of them interconnected -- won't be able to
continue their upward climb. But even if they do, the good times seem
likely to take on a different, more precarious character. 

The keys to this story are corporate profits and wages. More than usual,
the market and the economy have fed off the strength of profits at the
expense of wages. For every $100 in new production -- the assembly of a
car, the services of a doctor, the dry cleaning of a suit -- nearly $10 is
going into profits. Not since 1968 has the percentage been so high. From
then until the mid-1990s, it rarely rose above $8.50. And much of the rise
has come out of wages and benefits, which, according to new Commerce
Department numbers, have declined as a percentage of national output to
their lowest level in more than a decade. 

The record-breaking stock market is the offspring of the profits squeezed
from this process. The rising stock prices, in turn, feed the economy by
encouraging spending. But there is a problem. Not often in history has the
Dow Jones industrial average, which closed at 8,031 Friday, gotten so high
in relation to earnings, even unusual earnings. And that leaves a lot of
experts casting about for ways to make what is happening sound rational
and lasting. 

If profits can't keep rising at the expense of wages -- and many experts
think that vein has played out -- then some more enduring engine will have
to kick in soon. 

"People are looking for an easy explanation of why profits are doing
well," said David Wyss, director of research at DRI-McGraw Hill, a
consulting firm. 

And not surprisingly, one has been summoned. The heartening explanation,
the one that would keep profits and stock prices rising if it turns out to
be true, depicts the U.S. economy as having entered, in the last year or
two, a new, robust era. 

The main characteristic of this new era is rising productivity. The new
technologies, particularly computers and telecommunications, are finally
making workers more productive, the story goes. Using the new tools,
workers are producing more in each hour on the job. Already, they may be
keeping some of this extra revenue from their production, while the rest
goes into profits. 

And the stock market -- the great indicator of American prosperity -- will
continue upward, reinforcing the process. 

"Evidence of higher productivity abounds," said Jerry J. Jasinowski,
president of the National Association of Manufacturers. "You may not
accept it, because it does not show up in the official government
statistics. We think most of the statistics are out of date." 

There are problems, however, with  the rosy productivity scenario,  which
has attracted varying degrees  of endorsement from a range of  business
executives and  economists. One is that it may not  be happening, although
it certainly  sounds logical. Indeed, it fits neatly  with the well
documented rise in  profits. Consider this example: 

 A carpenter is paid $25 an hour to  make one birdhouse every hour,  which
is sold for $35. The profit from that hour of work is $10. If the price
does not change and the carpenter's wage does not either, but the profit
rises to $20 an hour, then it must be that, having finally mastered some
cutting-edge technology, the carpenter is turning out two birdhouses an
hour. Or so the rosy scenario goes, by deductive reasoning. 

Maybe. But as Jasinowski acknowledges, the improvement has not shown up in
government statistics that measure the rate of productivity growth across
the nation's private businesses. Quite the contrary, these statistics show
productivity rising more slowly in the 1990s than they did in the 1980s. 

The believers say the statistics don't tell the story. 

"We have good theoretical reasons to believe that productivity is higher
than what is measured in the aggregate numbers," said Bennett Harrison, an
economist at the New School for Social Research in New York, joining
Jasinowski in this view. 

Their productivity thesis -- and the accuracy of the government's
statistics -- is likely to be tested soon. Tight labor markets give the
hypothetical carpenter, like the real UPS drivers, leverage to demand a
higher wage. If his productivity has in fact not risen to two birdhouses
an hour, then the higher wage he gets will squeeze profits. Either that or
companies will raise prices to preserve profits, pushing up the until- now
languid inflation rate. 

And if that happens, stock prices seem destined to fall, puncturing the
larger economic boom. For workers, the world shakes. The very act of
earning more threatens to consign them to doing worse. 

Whatever the outcome, let the test begin. Indeed, it has begun. The first
tentative signs that wages may be trending upward are starting to appear
in Labor Department data. What's more, company payments to provide health
insurance for employees, which had been held down as a result of
cost-cutting among hospitals and doctors, are beginning to rise again,
adding gradually to labor compensation. 

"All this upward pressure on labor costs means that profits can no longer
grow as much as they have," Wyss said. "If productivity does not kick in,
profits slow down." 

Other factors have helped to postpone this showdown. In hindsight, they
contribute to an understanding of how corporate profits could have grown
so much over the last three years without a boost from productivity. 

Interest rates on corporate debt have declined, and the savings have gone
into profits. The debt itself has been paid down, further reducing
corporate America's monthly installment payments, and this saving, too,
has gone into profits rather than raises. Constant downsizing has cut
costs, and again, the savings have fed into profits. 

The thriving economy has also helped. Many companies have stepped up
production from existing machinery and personnel. Simply by eliminating
the slack in their operations, they have been able to sell more without
adding much to their cost. 

It is as if the carpenter actually turned out a birdhouse in 30 minutes
and spent the other half-hour relaxing at the water cooler -- until a
foreman got on his case. And the extra sales revenue from his harder work
once again has gone mainly into profits rather than wages. 

But all these lucky circumstances are wearing out. The final episodes in
this particular history are just ahead. Either the new age of rising
productivity shows itself, saving the day. Or that does not happen and, as
profits fall back to more ordinary levels, stock prices fall back, too,
and the economy weakens. 

Or, alas, some inconclusive middle course unfolds. Jasinowski sees that
possibility. Any number of companies, he says, still have room to fatten
profits through cost-cutting, particularly downsizing. 

"The overwhelming reality of so many companies," he said, "is that you
can't raise prices. So you eliminate waste, you downsize. Cost-cutting is
still a big opportunity." 

Copyright 1997 The New York Times Company





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