Editore"s Note
Tilting at Windmills

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September 18, 2006
By: Kevin Drum

THE RICH GET RICHER, PART ONE ZILLION....A few weeks ago the BEA reported that wage-and-salary income had risen in the first half of the year more than they had initially estimated. Pay was up about 7%, a pretty healthy number.

But who was getting all this extra dough? The average worker sure didn't seem to be seeing much of it. Something seemed fishy about the numbers, and today the Wall Street Journal says the BEA thinks it's figured out what happened:

The likely explanation: stock options. The income earned when employees cash in stock options is counted in both gross domestic income and the Labor Department's productivity-adjusted labor-cost measures, but not in most of the other wage measures.

"The stock market was strong in the first quarter, so that suggests probably quite a bit of stock-option exercise," says Brent Moulton, associate BEA director for national economic accounts. Because higher-paid employees are more likely to have stock options, this helps explain why the advance in labor income doesn't reflect the average worker's experience.

So total income was up, but a big part of it was corporate executives cashing in stock options. This also explains why corporate profits were strong despite the higher pay numbers: companies weren't actually paying out more money to their workers. All that exercising of stock options barely affected the bottom line at all.

So that's that. I just thought you'd all like to know why you weren't seeing any of that pot of gold the BEA told us about. It's the usual reason: you're not rich enough. Tough luck.

Kevin Drum 1:13 AM Permalink | Trackbacks | Comments (51)

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Comments

A certain Richard B. Cheney cashed in $7.5m of stock options in the last tax year, donated the proceeds to a bunch of charities, and then took advantage of a new law (passed to increase the threshold of charitable giving in Katrina's wake) to claim $6.8m in deductions and a $2m refund.

Did I mention that none of the charities benefitting from Dick's munificence were related to Katrina relief?

Posted by: ahem on September 18, 2006 at 1:20 AM | PERMALINK

Well, that's a reasonable explanation, and I thank you and the BEA for it.

But perhaps we could get this back to the BEA: I figured out long ago that I wasn't rich enough!

Posted by: clio on September 18, 2006 at 1:22 AM | PERMALINK

Did I mention that none of the charities benefitting from Dick's munificence were related to Katrina relief?

Was one of them the Americans United to Destroy the Constitution? I think I've seen their ads.

Posted by: craigie on September 18, 2006 at 1:25 AM | PERMALINK

My monthly income is up, my net worth is up, my disposable income is healthy.

But according to Kevin "Doom and Gloom" Drum, American workers are just scraping by. So maybe I'm in bad shape after all. Maybe the country is tanking and the sky is falling and maybe I should vote for Phil Angelides for governor.

Posted by: Frequency Kenneth on September 18, 2006 at 1:30 AM | PERMALINK

So total income was up, but a big part of it was corporate executives cashing in stock options. This also explains why corporate profits were strong despite the higher pay numbers: companies weren't actually paying out more money to their workers. All that exercising of stock options barely affected the bottom line at all.

But if there weren't the stock options going to executives, wages might have actually DECREASED. The extra stock options caused executives to work extra hard causing the higher profits. If there were no stock options, executives would not have worked extra hard and companies would have lost money. Companies losing money would mean wages would go down and workers would have to be laid off which would be much worse. So the money going to executives from stock options actually helped workers.

Posted by: Al on September 18, 2006 at 1:38 AM | PERMALINK

maybe I should vote for Phil Angelides for governor.
Posted by: Frequency Kenneth

you have to be 18 to vote.

Posted by: Nads on September 18, 2006 at 1:42 AM | PERMALINK

umm. a lot of these options had a ten year vesting period.

Please, Kevin. Tell us how to blame Bush for this?

Posted by: am on September 18, 2006 at 1:44 AM | PERMALINK

Why is it that a lot of people do not see the corralation between a healthy democracy and keeping control of the income gap? I am glad that individuals like kenneth are doing well, so am I, but being a true patriot means wanting the whole country to do well not just your own self interest.

Posted by: wish people would wake up on September 18, 2006 at 1:45 AM | PERMALINK

you have to be 18 to vote.

Ha, that made me laugh.

Posted by: craigie on September 18, 2006 at 1:47 AM | PERMALINK

The BEA shows that "Contributions for government social insurance" were up 18% in Q1 and 7% in Q2 (annual rates). This includes stock options but not benefits and is mostly capped at 90k (except for the small Medicare portion). So it is not just rich executives, the non-rich (below cap) have definitely gotten a big pot of gold.

Posted by: TDM on September 18, 2006 at 2:20 AM | PERMALINK

"Please, Kevin. Tell us how to blame Bush for this?"

You can blame Bush for everything. That's why they call it Bush Derangement Syndrome.

Stock options now are the Evil Rich crushing the poor. On the other hand, the huge fortunes made in the stock markets in the late 1990s are now touted by liberals as the Great Clinton Economic Boom. Yeah, I don't get it either.

Posted by: bart on September 18, 2006 at 2:25 AM | PERMALINK

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Posted by: blog on September 18, 2006 at 2:44 AM | PERMALINK

Bedwetter's doing okay, everyone. So how can anybody be complaining about anything?

(Meanwhile, cue voice of Chinese economist in background: "Excellent. The foolish Americans cinsistently fail to observe their own leading indicators. This is working much more quickly than we ever anticipated.")

Posted by: Kenji on September 18, 2006 at 2:58 AM | PERMALINK

Bart now you tell me. Your friends had me convinced me that the Clinton era prosperity was all an illusion, and as a result I had trashed all the assets that I acquired during the boom.

Now you tell me that it was all ok. Damn!

Posted by: gregor on September 18, 2006 at 3:01 AM | PERMALINK

"Meanwhile, cue voice of Chinese economist in background.."

Yeah, a few years back it was Japan that was going to buy up the U.S. and take everything over. Nothing new here.

Posted by: carter on September 18, 2006 at 3:01 AM | PERMALINK

"Please, Kevin. Tell us how to blame Bush for this?"

You can blame Bush for everything. That's why they call it Bush Derangement Syndrome.

Considering I don't see Bush or his Administration mentioned in Kevin's post at all, perhaps he's not the one suffering from BDS here.

Posted by: Dustbin Of History on September 18, 2006 at 3:44 AM | PERMALINK

P.S. There actually is no gold in that golden shower you're taking.

Posted by: Dustbin Of History on September 18, 2006 at 3:46 AM | PERMALINK

Dustbin:

:)

Bob

Posted by: rmck1 on September 18, 2006 at 3:48 AM | PERMALINK

repubs are emotionally stunted ... "bush derangement syndrome" is simply their defensive (and pathetic) justification for their worship of all things bush ... bush fellatio syndrome, if you will.

Posted by: Nads on September 18, 2006 at 3:52 AM | PERMALINK

I see Bart, am, Frequency Kenneth's parents, and the interns who program the Albot are all cashing in...

Posted by: dr sardonicus on September 18, 2006 at 4:36 AM | PERMALINK
umm. a lot of these options had a ten year vesting period. Please, Kevin. Tell us how to blame Bush for this?

I live in the world capital for stock options (Silicon Valley), and though I've heard of ten-year vesting schedules, usually some fraction (say, 1/10th, or more generally 1/Nth for N-year vesting) of the options vest after the first year. Also, most of the option packages I've heard about take a lot less than ten years to fully vest (usually four), but have a ten-year limit on exercise (i.e. they become worthless after ten years).

Posted by: modus potus on September 18, 2006 at 4:44 AM | PERMALINK

carter, it's not about the Chinese buying up real estate and companies, as the Japanese were doing a while back, but about the federal government getting paper notes from the "Communists"ones they can call in during a financial crisis when the U.S. is already weak. Good thing that's not coming, right?

Posted by: Kenji on September 18, 2006 at 5:49 AM | PERMALINK

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Posted by: qq on September 18, 2006 at 6:03 AM | PERMALINK

the critical is readly indeed. make it www.yaotiao.net as a reference

Posted by: washington on September 18, 2006 at 6:03 AM | PERMALINK

Shouldn't economists get all exercised about the wage increase and want to cut, or at least not raise,workers' pay to avoid inflation?

It usually works that way. The get richer and the less rich are targeted for inflation control.

Posted by: Mudge on September 18, 2006 at 6:22 AM | PERMALINK

Good evening. Working hard and hot, In this most busy time for you which salad I eaten. This is my friend, my boke and Boke just established not long so very good. This time is not long for passing but for break wind. The here issue is no bush. That everybody can see my Boke, Ha-ha, some hat-raising some visibility, all ranch and no poncho which caused troubling for ask to your forgiveness! We all hope see it one soon day. Google, Yahoo. Baidu. Way.

Posted by: more boke on September 18, 2006 at 7:16 AM | PERMALINK

kenji,the Chinese are buying US Treasuries which are not callable.The Chinese could decide to try and sell a lot of them on the open market in an attempt to lower the price or call into question the US' ability to sell more notes/bonds.But then what would they do with all those Wal-Mart $s?

Posted by: TJM on September 18, 2006 at 7:35 AM | PERMALINK

Now there's a frigging MONDAY SURPRISE! Right up there with other manipulation of information to delude and distract the voting public right before an election. From the "what's human dignity mean?" crowd....AND, then there's the miraculous turn down in gas prices...WHOA, who saw that one coming? You know the wonderful part...it WILL work...cause that's just how dimwitted much of our population is. Course they'll need the MSM to keep beating the BUSH RISING IN APPROVAL drum...

Posted by: Dancer on September 18, 2006 at 7:45 AM | PERMALINK

'But if there weren't the stock options going to executives, wages might have actually DECREASED. The extra stock options caused executives to work extra hard causing the higher profits. If there were no stock options, executives would not have worked extra hard and companies would have lost money. Companies losing money would mean wages would go down and workers would have to be laid off which would be much worse. So the money going to executives from stock options actually helped workers.'
--Al

Our dear friend, Al, being the brainwashed little conservative that he is, presumes that all stock option grants are "performance-based". In fact, most are not and are granted simply on the basis of your rank in the company and years of service. Also, stock options harm the long-term shareholders of a company and are not in their best interests. They essentially give executives all the benefits of an increase in share price with none of the risks of a decline in share price. In other words, they reward executives for share price volatility. In some ways they also give executives an incentive to manipulate the stock price, taking the focus away from long-term financial health and sustainability, trading off for short-term concerns.

But, conservatives never care about the long-term, do they? That's pretty obvious from their denial of global warming. Conservatives also wrongly presume that the executives in their mahogany offices work so much harder than say, the single mother working three jobs to feed and clothe her kids. What a bunch of elitist scumbags!

Posted by: The Conservative Deflator on September 18, 2006 at 8:06 AM | PERMALINK

Dancer,

Don't sell Americans short. I haven't run into a single person who doesn't link the decline in gas prices to the election. The MSM has to beat the alleged "rise" in Bush's approval ratings. They want a horse race. Good for ratings. Anyway all those "behind the beltway" types are scared shitless they might have to learn how to spell new names. Their bosses are scared they might have to cultivate new friends.

Just keep plugging away. At some point not even smoke and mirrors Republicans can get away with lying about reality.

Just get out the vote. Go to the polls and take a dozen friends.

Posted by: Ron Byers on September 18, 2006 at 8:12 AM | PERMALINK

What's wrong with stock options?

Posted by: Randy on September 18, 2006 at 8:19 AM | PERMALINK

Whats with the chinese.Anyone else here mystified by that?

Posted by: gandalf on September 18, 2006 at 8:36 AM | PERMALINK

My pot of gold is at the gas pump; $1.98 today! Sorry CA.

Posted by: Orwell on September 18, 2006 at 8:50 AM | PERMALINK

It's just a matter of time before Kevin Drum does a post claiming lower gas prices are actually BAD for American workers.

Posted by: Frequency Kenneth on September 18, 2006 at 9:48 AM | PERMALINK

Al, being the brainwashed little conservative that he is

Al is not a conseravative. Al is a parody troll.

Posted by: cleek on September 18, 2006 at 10:16 AM | PERMALINK

My monthly income is up, my net worth is up, my disposable income is healthy.

THAT'S your argument?
Pathetic.

Posted by: ckelly on September 18, 2006 at 10:33 AM | PERMALINK

When someone notes the huge inequalities in compensation for work, why do I always see someone promulgating the idea that executives need big salaries, stock options, perks, lower taxes, et al. as incentives to work harder and longer to enrich us all? Wouldn't that hold true for the average worker as well? I mean, I know I'd work harder, longer, more efficiently if I had gotten a raise in the past 6 years. My responsibilities have increased, I have garnered more praise for doing good work, but the show me the money isn't there. Geez, I might get demoralized soon and start becoming less productive. Except I don't have a golden parchute in case management takes umbrage at that.

Posted by: Dan Storms on September 18, 2006 at 10:46 AM | PERMALINK

The key is to understand that inequality works. It works because we live in a luxury economy. Economic expansion will necessarily be in the direction of an ever greater range and depth of luxuries because necessities are now mass produced by a very small percentage of the population. So the rest of us create luxuries. Speeding up the expansion of luxuries speeds up the creation of job opportunities. Slowing down the expansion of luxuries does the opposite. Especially now that much of the production of necessities has shifted to overseas workers, we need the jobs created by the expansion of luxuries. So how does this relate to the subject at hand? The rich drive the expansion of luxuries. To keep the rich from getting richer is to keep the poor from getting richer as well. Bottom line; envy in not only a sin, it is impractical.

Posted by: Randy on September 18, 2006 at 11:09 AM | PERMALINK

Bush Derangement Syndrome is a mutation of a very infectious disease originally called Clinton Derangement Syndrome, which reached pandemic levels in the 90s.

And Kevin, this whole subject is doing nothing but aiding the terrorists and driving down the morale of our troops.

Posted by: Red on September 18, 2006 at 11:23 AM | PERMALINK

Kevin wrongly implies that stock options only go to the rich. Not so. E.g., my daughters work in Silicon Valley -- not in management. They have stock options, some of which have had value, some proved worthless.

Also Kevin continues to ignore the increased dollars of employer contributions to employee health care. Medical care is getting better and better. ISTM that the best thing to spend extra income on is being cured of more ailments.

Would you rather be healthy or would you rather be disabled and have High Definition TV and an ipod?

Posted by: ex-liberal on September 18, 2006 at 12:07 PM | PERMALINK

Would you rather be healthy or would you rather be disabled and have High Definition TV and an ipod?

Excellent, a quiz! Now, don't tell me... I know this one...

Posted by: craigie on September 18, 2006 at 12:12 PM | PERMALINK

"So total income was up, but a big part of it was corporate executives cashing in stock options. This also explains why corporate profits were strong despite the higher pay numbers: companies weren't actually paying out more money to their workers. All that exercising of stock options barely affected the bottom line at all."

Am I missing something? Any spread between the value of the stock issued upon exercise of the option and the strike price paid is compensation income, no?

Why wouldn't this reduce corporate profits? I'm not an accountant, so I can't say necessarily that this compensation expense would affect net, but I guess I assume it would. (I'm pretty sure it reduces the company's taxable income.) I'm not sure KD is right when he says this option-exercise activity doesn't affect the bottom line, but I suppose all that means is we need to find an even more compelling explanation for corporate profitability than we already have.

Posted by: DJ Ninja on September 18, 2006 at 1:00 PM | PERMALINK

"Would you rather be healthy or would you rather be disabled and have High Definition TV and an ipod?"

Dude, what a f**kin stupid question! Get me the Hi Def NOW!

Posted by: Typical Amurican on September 18, 2006 at 2:22 PM | PERMALINK

Ninja,read the story.The explanation is there at the end.

Posted by: TJM on September 18, 2006 at 3:02 PM | PERMALINK

Thanks, TJM. At least I admitted I knew nothing about accounting, although Bob Willens certainly does.

Posted by: DJ Ninja on September 18, 2006 at 4:23 PM | PERMALINK

What's wrong with stock options?

Warren Buffett has a few things to say about them, including a comment on the accounting tricks that DJ Ninja asks about. Read the Berkshire Hathaway chairman's letter from, I think, a couple of years ago, or this op-ed.

Posted by: ahem on September 18, 2006 at 8:29 PM | PERMALINK

"It's class warfare, all right. And my class is winning."

Posted by: Warren Buffet on September 19, 2006 at 10:12 AM | PERMALINK

Hey Kevin, can you go to a "no-comments" format? Or, maybe, just offer full entries in your RSS? Thanks.

Posted by: perianwyr on September 19, 2006 at 10:33 AM | PERMALINK




 

 

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