WTF Happened in 1971? (2019)

So, if the productivity-wage divergence is simply a reflection of US healthcare costs, how does that chart look for other countries where healthcare doesn't glue itself to employment?

So the rebuttal is basically agreeing to everything except from exact timing.

Cool.

See also this analysis that brings up trends that (e.g.) started in the 1960s:

* https://www.yesigiveafig.com/p/what-really-happened-in-1971

Also:

* https://old.reddit.com/r/badeconomics/comments/i9ycy9/the_br...

Updated by the same author a few years later:

* https://old.reddit.com/r/AskEconomics/comments/sccs74/so_wtf...

I agree with the rebuttal that the site seems to conflate economical developments with changes to social norms without any reasonable connection.

E.g. apart from the end of Bretton Woods, the beginning of the 70s also had the ongoing civil rights movement and the protests against the Vietnam war, both events that caused large-scale change of social norms.

...but I also had to stop reading the rebuttal when he got to the wage growth chart: He argues that inequality was rising (no objection) which causes the average income, pulled up by a small number of extremely high earners, to be overestimated vs the median income (no objection), which means... we should ditch the median and rely only on the average (wtf). Because I guess then the wage stagnation doesn't look as striking as it does otherwise?

It also doesn't debunk the "what happened in 1971?" question: If he doesn't want to talk about wage growth, fine, let's talk about inequality. Why did that increase so much after 1971 then that it starts to affect other statistics?

Websites that want to push a narrative should spell out their narrative (the WTF one). This website cannot have been up for this long without having a narrative.

Another "inflation good, deflation bad" repeater robot. Opinions, meet garbage.

Weren't there a bunch of discussions about what happened in other years, or is it all 1971's fault?

All sorts of inputs and outputs were disconnected from each other around that time. Executive compensation is just yet another thing to put on the list.

But that's a "be careful what you wish for" observation. I mean, obviously it prompts the question of why executive compensation grew so fast.

Well, executives are paid a ton because they need to compete in an environment where other executives of successful companies are already filthy rich. And why is that? Well, it's actually not because of compensation policy at all.

Those other executives are rich because they were founders who hit an exit. That is, it's all HN's fault (and the fault of the VC-based startup money engine more generally).

We created an environment where to staff a successful C suite you need to hire away senior people from FAANGs. And you can't do that unless you pay them crazy numbers. And that means the rest of your executive staff, and your board, need to see the same numbers. And so on, across the rest of the economy.

You can't have an economy producing huge numbers in the stock market without handing those dollars out, in proportion, to the senior staff, basically. The same analysis does not hold to the regular employees, who don't compete against people getting that exit money.

How would that work practically if executives are getting paid in equity at various points in time? All the employees get options and RSUs too when the executives get them?

This was a direct consequence of asset-backed currency being converted to fiat currency unleashing the stock market and the creation of new money at will.

Sorry, but the numbers for that simply don't work out.

Pick any public company and divide CEO pay by headcount and it'll come out to a dollar figure way, way, way too small to account for the reduced share that workers are getting. There's something (likely multiple things) else sucking up all the money that was formerly shared with workers.

> executive compensation became wholly disconnected from worker compensation

The "Celler–Kefauver Act is a United States federal law passed in 1950 that reformed and strengthened the Clayton Antitrust Act of 1914" [1]. It kicked off the conglomerate boom in the 1960s by incentivising buying "companies in unrelated fields" [2]. (Conglomerates were nudged along "thanks to low-interest rates and a market that fluctuated between bullish and bearish, providing good buyout opportunities for acquiring companies.")

That ended with Volcker's early 80s recession [3], which co-incided with (a) computers in finance enabling new entrants to (i) create new financial instruments, e.g. high-yield bonds [4], and (ii) circumvent banks to distribute them [4]; and (b) a multi-decade decline in rates [5].

Herego, my pet theory: since the 1960s we've been in a series of corporate regime changes, each which created demand for a new type of leader (about once a decade), said leader being scarce and thus valuable at the beginning of each shift. (The internet also gives executives unprecedented direct access to investors, customers and employees, current and potential.)

[1] https://en.wikipedia.org/wiki/Celler%E2%80%93Kefauver_Act

[2] https://www.investopedia.com/terms/c/conglomerate-boom.asp

[3] https://en.wikipedia.org/wiki/Early_1980s_recession

[4] https://www.thegentlemansjournal.com/article/story-michael-m...

[5] https://fred.stlouisfed.org/series/FEDFUNDS

Looks like among other things this one is leaning on a lot of economic trends that started in the 80s and hoping if you draw an arrow to the 70s no one will notice.

Most economists date the big breakdown in real gdp vs real median wages to have started in the 80s.

It's not exactly what you're suggesting, but Spurious Correlations is great fun: https://www.tylervigen.com/spurious-correlations

If you limit the analysis to the context of the USA then it’s definitely true that some years are more consequential than others. 2007 was more consequential than 2002, even though there were huge geopolitical machinations ongoing in 02. I imagine this discourse would turn into a “well actually” circus though lol

This author didn't even pick ones where there was a change in 1971. A lot of them have an arrow pointing to nothing special.

What is definitely true that there are many, significant indicators which see similar behavior.

The website mainly lists economic factors, but if you look at obesity rates you see a similar trend in the 70s, where quite suddenly obesity rates start rising.

https://www.mdpi.com/1660-4601/21/1/73

I think that while there might not be a single common cause, it would be naive to deny that there could be a combination of events, which mark that time period in particular.

The divorce of wages and productivity is real. You can pick any year in the last 40 and the trend will be very evident.

I'm actually curious if this continues through he 2020s. It could have gotten worse or better or been the yardstick by which people were fired or hired.

Considering the number of graphs on this website where it's immediately clear that 1971 wasn't the inflection point (in many cases, it's actually around 1980), it's not hard to make this for any other year, especially if you don't care to make it all that convincing.

What makes 1971 truly special is that only goldbugs who really want the gold standard again are insane enough to believe that deviation from the gold standard single-handedly fucked over everything and have the chutzpah to tell you about it even when their own evidence clearly says they're wrong.

I mean, the whole point of the site is to highlight what the Nixon shock left in its wake since 1971. It truly was special in that regard.

I'd highly recommend reading the book "Broken Money" by Lyn Alden for understanding the dynamics of what played out.

What's more, even without this embargo the era of cheap energy was largely over by the mid 60s, as oil's Energy Return on Investment fell to a fraction of what it used to be:

https://www.mdpi.com/sustainability/sustainability-03-01866/...

Which has nothing to do with this, since all the graphs show divergence in 1971, 2 years prior.

> the global monetary system was completely reorganized, not least to enable large scale exports of oil from peripheral countries to the core

Your source doesn't mention oil once, except when it links to an article about the 1973 Oil Embargo.

Bretton-Woods wasn't ended out of some grand strategy surrounding oil, it was ended because we didn't have enough gold to cover our dollars. Instead of playing the periodic-devaluation game, the monetary equivalent of a debt ceiling, we ended the farce and admitted it was fiat.

Are you saying wages should be tied only to the difficulty of the work and not the value the labor produces?

This is actually a coherent and legitimate argument rooted in objective data. Often you don't really get that when supporting what is not a popular position. People who support unpopular positions generally ignore data. (As do many others. At least most people ignore any data that disagrees with them.) You've taken the basis of the supposition, productivity, quantified it. Attributed it. And argued that income should follow attribution. Bravo.

You could do without the "should get paid less" part, as it puts part of your argument in the realm of subjectivity rather then objectivity for no real reason other than the tendency towards emotional responses I was mentioning earlier. ("Easier" life is completely subjective.) But the first part of this argument is really good.

Working the backhoe requires more skill than shoveling and can command a higher wage. You want to more carefully vet and care for the person driving your expensive equipment. Also you had an engineer to design the backhoe and factory workers to assemble it who are getting paid during this process. It's possible that the net wage per hole dug goes up as a result.

Exactly. There is no reason to pay them more.

(It’s not based on how difficult it is either. It’s really based on the labor pool.)

Then automate the job completely? Don’t need to pay anyone for that particular job.

Then if you own the automization equipment to get rid of all the laborers? Don’t need to pay anyone.

Oh, you have automated protecting your property with robots? Well. Now you own your own fiefdom completely.

The basic Econ answer is that there is a limited supply of labor and firms will raise salaries in order to attract labor and capture more profit from the increased productivity. From that perspective your question is similar to "My product got 10x cheaper to make but customers still experience the same benefit so why should they pay less?" In both cases the simple capitalist theory answer is markets.

You can see a corollary to this across the whole economy in the Baumol effect, where industries with no productivity gains see labor costs rise as a result of competition with more productive industries for scarce labor: https://en.wikipedia.org/wiki/Baumol_effect

Of course it turns out firms do have a lot of power over employees for various reasons which they use to suppress wages as much as possible but its still bounded.

Another perspective is that workers are also consumers and an economy that doesn't increase compensation will have limited ways to capitalize on increased productivity because there will be little increase in domestic consumption. You can't really export a hole you dug so its good for everyone if workers see benefits from productivity gains: https://en.wikipedia.org/wiki/Demand-led_growth

> If productivity increases are driven by capital investments, why should the workers capture any of those benefits?

Simply, there isn't a good reason. That's why we strictly regulate the labour market--we don't like the true price of labour.

The broader reason: while there aren't fundamental reasons for the worker to capture that upside, there are great reasons for citizens to. (I'm using that term broadly.) For a variety of reasons, from Protestant morality to concerns about Communism, modern societies have preferred to reward citizens qua workers than citizens qua citizens.

That "Show GenAI's made-up explanation" option is one of the best application of LLMs since the hype train started chugging

Seems totally unrelated.

Basic screaming-at-your-face statistics, gets traction, specially coupled with the mental gymnasts trying to "disprove" facts, shouting "spurious correlation" when the implied causation is clear... Paper money is nothing new and this is nothing short of expected. The only surprise is people's surprise.