Posted 9/30/2011

A NATION IN NEED

America is in full entrepreneurial bloom.  Thousands of new products and services are being created.  But incomes are falling and the consumer is not spending.  The economy stalls far below its potential.

Sounds like today, right?

But it's really almost a century ago – December 1913.

In 1908 Henry Ford had introduced his famous "Tin Lizzie" for $895 (about $20,000 today).  The Ford Model T was a huge success with America's upper middle class.

But workers could not make enough money to buy it.  Because of manufacturing's "lay on, lay off" hiring policy, substantial employment uncertainty prevailed, further discouraging consumer spending.

Mr. Ford was very angry that his brilliant new "moving assembly" was being slowed down by a 380 percent labor turnover.  Between low consumer spending and employee turnover, Ford realized that his incredible Model T would never meet his expectations.

Characteristically, he solved both problems with one huge, bold stroke.  He introduced what newspapers headlined as "The Five Dollar A Day Wage!" in the winter of 1913-1914 – which was more than twice what anyone else was paying.  Adding to the excitement, Ford reduced the workday from nine to eight hours.

But it really wasn't a new wage at all.  Ford continued the old $2.34 a day wage while offering any worker who would stay on the job at least 6 months an additional $2.66 a day in profit sharing. 

Tens of thousands of workers traveled far and wide to get the new $5 a day wage.  Almost all those hired stayed at least six months, with most becoming permanent workers.

With very low labor turnover, Ford saw his magic moving assembly line become increasingly efficient.  As his profits soared and he became incredibly rich, Ford began to lower the price of the Model T until the original $895 price reached a low of $232.

Now the average working man could buy a Tin Lizzie with only four months' wages.

Soon Model T's were all over America's landscape and the 30-year-old auto industry was no longer solely the plaything of the rich.

Opposition to the $5 a day wage was severe.  Some newspapers called Ford a Communist or Socialist.  The New York Times warned of "serious disturbances" and ridiculed Ford's wage idea as "distinctly Utopian and against all experience."  The Wall Street Journal accused Ford of "Economic blunders if not crimes...."  Industries' leaders claimed Ford's idea to be "the most foolish thing ever attempted in the industrial world."

But most papers simply blared the good news, some praising Ford as "God like in his goodness."

Ford was soon proved right.  His new high wage system of economics produced an enormous rise in Highland Park's standard of living.  In two years' time, the value of Ford workers' homes leaped from $3.25 million to over $20 million.  The proportion of "poor homes" dropped from 20 percent to two percent.  Wealth in bank accounts and home equities increased from $196 to $700 per worker. 

As Ford propelled Detroit into "Boom Town USA," his competitors began to catch on and catch up.  Wage rates started up throughout America's factories. 

Soon America was no longer a nation made up only of the rich and the poor.  A huge middle class grew out of manufacturing, and it was eager to buy all the exciting things being created by American ingenuity.

Ford showed that his high wage/profit sharing plan could create great spending, which could create great prosperity, which could create even more jobs.

Ford had solved two of America's economic problems because he understood something that no other business man could see in 1913.  A something no corporate CEO seems to be able to see today:

A high consumption economy requires a high wage economy.

Today's CEOs know the cost of everything and the value of nothing.  Especially when it comes to labor.  Today's CEOs do everything in their power to cut labor costs and eliminate jobs because the cost of labor is understood, while its value is not.

When Nike put its factories offshore, the company saved costs, but lost a large potential home market of wage earners.

When Citibank offshores its back office, it loses a large potential market of consumers and depositors.

Every job that goes abroad represents the loss of a spending consumer and a reduction in the size of the American economy.

When computers and robots replace workers, the lost wages cause consumer spending to decline.  (Has your computer bought any corn flakes lately?)

As corporate CEOs put the screws on salaries and wages in the 21st century, family income and purchasing power decline.  With lower real wages, Americans have cut back on their spending, thus curtailing the nation's growth. 

With five people looking for every available job, consumer confidence has been severely damaged.  As a result, even people with good jobs are holding back on spending.

The economists talk of a slowly growing Gross Domestic Product (GDP).

But the population is growing faster than the economy.

Which means that per capita GDP is in recession – and has been for 11 years.

Corporations have screwed down so hard on labor, that they have hurt America and hurt themselves.

If every corporation in America (with over 500 employees) would grant an immediate Henry Ford style wage/profit sharing package, the whole consumer economy could come alive.

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