Revenues v Value-Added: Does the National Review Understand Basic Accounting?

There were a couple of items in the latest Fuzzcharts from Jerry Bowyer that struck me as odd. The first was a reference to a discussion in the New York Times. Bowyer writes:

the Times complained that the American economy, which used to allot 50 percent of its output to wages, now only allots 45 percent. My quick rebuttal to this complaint is that it’s not that people are making less money, it’s that the economy is growing faster than their paychecks.

Here is what Bowyer refers to:

As a result, wages and salaries now make up the lowest share of the nation’s gross domestic product since the government began recording the data in 1947, while corporate profits have climbed to their highest share since the 1960’s … Together, these forces have caused a growing share of the economy to go to companies instead of workers’ paychecks. In the first quarter of 2006, wages and salaries represented 45 percent of gross domestic product, down from almost 50 percent in the first quarter of 2001 and a record 53.6 percent in the first quarter of 1970, according to the Commerce Department.

It would appear that the New York Times did not include fringe benefits in their calculation but their chart does show overall compensation. Real wages have fallen – despite Bowyer’s protestations about a growing overall economy. But many economists would also have us look at the real value of fringe benefits. But this was not Bowyer’s comeback:

But what about the Times itself? How much of its revenue goes to wages? Answer: 38 percent, well below the national average. But it’s even worse than that – the Times number counts benefits while the national statistic does not. Is it fair to attack a mature company in a struggling industry for giving only about a third of its output to workers?

I just looked at their 10-K filing for fiscal year ended December 31, 2005 and it shows $3373 million in revenue, so I presume wages and salaries are around $1282 million. The operating profit was only $481 million so there must be $1610 million in other operating expenses. Some of this might be attributable to worker’s fringe benefits but a lot of these other expenditures accrue to suppliers of newsprint, outside advertisers, and other suppliers of intermediate goods. In other words, the output (that is, value-added) for the New York Times is nowhere close to $3373 million.

Of course, such a simple concept such as the distinction between revenue and value-added is beyond the comprehension of Fuzzcharts.