The Economics Of Henry Ford May Be Passé

HENRY FORD was 50 years old, and not all that different from a lot of other successful businessmen, when he summoned the Detroit press corps to his company's offices on Jan. 5, 1914. What he did that day made him a household name. Mr. Ford announced that he was doubling the pay of thousands of his employees, to at least $5 a day. With his company selling Model T's as fast as it could make them, his workers deserved to share in the profits, he said. His rivals were horrified. The Wall Street Journal accused him of injecting ''Biblical or spiritual principles into a field where they do not belong.'' The New York Times correspondent who traveled to Detroit to interview him that week asked him if he was a socialist. But the public loved it. The country was then suffering a deep recession, and the Ford news seemed to offer hope. Within 24 hours, 10,000 men were lined up outside the Ford employment office in Michigan. The following year, Mr. Ford was mentioned as a future presidential contender. The mythology around this story holds that Mr. Ford wanted to pay his workers enough so they could afford the products they were making. In fact, that wasn't his original reasoning. But others made the point, and, in time, it became part of Mr. Ford's rationale as well. The idea became a linchpin in an industrial philosophy known as Fordism. More production could lead to better wages, which in turn would lead to more spending by the public, yet more production and eventually even higher wages. ''One's own employees ought to be one's own best customers,'' Mr. Ford said years later. ''Paying high wages,'' he concluded, ''is behind the prosperity of this country.'' This turned into a pillar of 20th-century economic wisdom. It's time to ask, though, whether Mr. Ford's big idea is as ill suited to this century as his car company seems to be. By any reasonable standard, the last few years have been bad ones for most people's paychecks. The average hourly wage of rank-and-file workers -- a group that makes up 80 percent of the work force -- is slightly lower than it was four years ago, once inflation is taken into account. That's right: Most Americans have taken a pay cut since 2002. But you would never know it by looking at the headline numbers on economic growth. From the standpoint of the broad national economy -- the value of the goods and services the country produces -- the last few years have been stellar. Despite two wars, soaring oil prices and business scandals, the economy has been growing more than 3 percent a year. Henry Ford would have no idea what to make of this. What was so comforting about Fordism was that it suggested that the economy operated on a virtuous, self-reinforcing cycle. Only when the middle class did well could the country do well. And as the country grew ever richer, so would the middle class. In the last few years, however, the economy has kept growing in large part because high-income families -- the top 20 percent, roughly -- have done so well and have been such devoted spenders. Globalization and new technology have helped many white-collar workers make more money, even as those same changes have closed factories and depressed wages for others. Stock portfolios and houses on the coasts, meanwhile, are much more valuable than they once were, making their owners more willing to spend. In fact, well-off families, not cash-short ones, have been the ones increasing their borrowing and cutting their savings the most in recent years, according to the Federal Reserve. In 1992, the top fifth of households, as ranked by income, accounted for 42 percent of consumer spending. By 2000, the share had grown to almost 46 percent, and it is probably not much different today. That may sound like a small change, but it's an enormous amount of money, a shift of $300 billion a year in spending from the poor and middle class to the affluent. In Michigan, Ford and General Motors have been cutting thousands of jobs, creating the country's sickest local economy and hurting even well-to-do suburbs. Yet the Suburban Collection, a car dealership north of Detroit, sold 90 Bentleys last year, up from 70 in 2004. David Butler, a manager there, said he expected to sell more than 100 Bentleys this year. The car costs at least $180,000. The dealership also opened a Lamborghini showroom in January. It is true that Rolls-Royces aren't selling very well, but the main reason seems to be that Mr. Butler's customers don't feel comfortable being seen in a $300,000 car when the state is suffering so badly. ''It's not that they can't afford it,'' he said. ''It's because of the image it would give.'' Wages are likely to rise slightly in 2006, but stagnation seems to be the norm over the long term. Except for a span of a few years in the late 1990's, the hourly pay of most workers has done no better than inflation for the last 30 years. Even some Democrats, who have long embraced Fordism, are coming to the conclusion that Mr. Ford's reassuring cycle is not the only thing that can keep the American economy humming. ''You don't need an equitable distribution to have a sustainable recovery,'' said Jared Bernstein, a liberal economist in Washington. Politically, though, I am not so sure that the current trends are sustainable. Before the 1990's boom lifted wages, stagnating pay had helped cause a series of upheavals: Bill Clinton's election, the Ross Perot and Pat Buchanan phenomena, the Republican takeover of Congress. Today, with the boom fading from memory, protectionism is on the rise, and President Bush's approval ratings are miserable. So it seems as if now would be a good time to start talking about what to do. There has never been a shortage of ideas: helping more teenagers to finish college, training middle-age workers to switch careers, embarking on public projects like better highways and high-speed trains. Or we could pretend it's still 1914. http://www.nytimes.com/2006/04/05/business/05leonhardt.html

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