Diatribes of Jay: Does Henry Ford Yet Live? Trump’s Deal with Mexico

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Henry Ford was a brilliant and visionary engineer, the Elon Musk of his day. He was also an elitist, an industrial tyrant and an anti-Semite. He brooked no interference with his absolute control of his creation, the Ford Motor Company.

Industrial history credits Ford with inventing the assembly line. He also introduced many smaller innovations that made the “horseless carriages” of his time look more like automobiles of today. But economic history largely ignores the fact that Ford was a social as well as a mechanical engineer. His greatest “invention”—and his greatest contribution to our species’ advancement by far—was our modern consumer society and large middle class.

Ford’s contribution to that result was simple. “On Jan. 5, 1914, [he] introduced a minimum wage scale of $5 per day, more than doubling the wages for most employees.” Inflated to 2018 dollars, that wage would be $126 per day today. That’s $15.76 per hour for an eight-hour day, just about double today’s federal minimum wage of $7.25.

One effect of Ford’s wage increase was allowing him to retain workers with ease. Another was allowing them to buy the cars they produced. The increase in salary alone, from $2.25 per day, would have amounted to $2.75 x 5 x = $13.75 per five-day week. So, after a mere 37 weeks, or 3/4 of a year, a worker could accumulate the average price of a Model T Ford from the pay raise alone. That compares to three to five years of payments that workers make today when they buy cars on time.

A revisionist historian writing in Forbes Magazine thinks Ford’s sole motive was employee retention. I debunk that view in an endnote. But in the end Ford’s personal motivation doesn’t matter. What matters is the effect of the unilateral, voluntary wage raise.

Whether Ford was an inadvertent or deliberate social engineer, his raise jump-started our modern consumer society. It didn’t do so immediately, of course. It took years for Ford’s initiative to propagate through society under the pressures of competition, labor unions, the instinct of imitation, and the regulations of a society that came to value a large middle class.

For a time (our nation’s best years so far) Ford’s impetus solved an age-old puzzle: how do you build business empires that cater only to the elite, our fabled 1%? Those “empires” won’t be very big because the elite are small in number.

Are firms that make yachts and private planes the industrial giants of today? Not by a long shot. The car companies are still among the largest because they make vehicles that people of all classes buy to get to work or school, travel, and live their daily lives. Apple is the world’s most valuable company, worth over a trillion dollars, because people of all social classes have iPhones in their pockets or purses.

So like Steve Jobs, Ford help prove a simple proposition. You can become fabulously wealthy by making things for the masses, as long as you and your fellow plutocrats pay the masses enough so they can afford the good life.

You don’t have to speculate in finance. You don’t have to lie, cheat or steal. All you have to do is make things that work and that better the average Joe’s and Mary’s lives. Then you can sell to millions or even billions and live a life of luxury beyond Genghis Khan’s wildest dreams. But there’s a caveat: Joe and Mary have to earn enough to buy those things at prices that secure your profits.

It’s a pretty simple formula, isn’t it? But somehow the plutocrats of our Second Gilded Age forgot the caveat. It all depends on consumers’ ability to pay, which depends on their wages as workers and their prosperity as citizens.

What’s amazing is how our supposed “deep thinkers”—economists and business schools—got it so wrong. They all focused on corporate profit alone, ignoring employees, customers and communities. Shift production to China and Mexico, they thought, and you can cut labor and land costs dramatically. The raw materials or parts will cost the same, with just a small increase for transportation. So your profits will explode, and they did.

But mirabile dictu, Americans can’t live on the wages that Chinese or Mexicans will accept. So our factories closed, and our factory towns dried up. Our middle class “downsized” its homes, its towns, its dreams and its standard of living. We ended up with an opioid epidemic, a lot of disgruntled people and Donald Trump as our president.

All this came about because we put Henry Ford’s Model T in reverse. We paid the workers less so the plutocrats could make more profit. (In China and Mexico, our “less” became “more” for workers, so there the Model T is plunging ahead. But’s that not America’s side of the story.)

So how do we fix it? As usual, we Americans begin with a lusty brawl. “Cut the taxes on the rich!” the plutocrats scream. “They’ll build more plants and wealth will trickle down!” But the plants they are building are not here at home. There’s a seemingly infinite supply of poor, hungry countries out there. As our managers take greater and greater advantage of their low-cost labor and land, not to mention their needy markets, our middle class sinks deeper and deeper into the mire.

“Socialize and regulate!” say the left. But how to do that? It’s one thing to “socialize” health insurance. It’s a non-industry of paper pushers that makes and invents absolutely nothing. And putting everyone into a single-payer risk pool satisfies the prime directive of insurance generally: make the risk pool as big as possible, and the premiums will go down. A single pool also minimizes the astronomical costs of accounting for every patient, doctor, dentist and hospital separately, not to mention profits. That’s why Medicare for All is not really “socialism;” it’s just economic common sense.

But health insurance is not a real “industry;” it has no factories. It produces nothing but reams of duplicative forms, only some of them digital. China, Cuba and Russia all tried socializing their real industry. All failed miserably to keep up with the standard of living, let alone the level of innovation, in capitalist countries. All are trying to dump their socialist/communist systems. All are now profiting in direct proportion to, and in the precise order of, their success in doing so. China is first, Russia second, and Cuba is still limping along. We won’t even mention Venezuela!

So the solution is neither to reward the plutocrats for being yet more selfish (if that were possible), nor to adopt a system that has failed dramatically everywhere it’s been tried. There’s got to be a third way, a middle ground. Somehow, some way, we’ve got to become like Henry Ford and boost our own American middle class. That’s the only historically proven way to build a strong and healthy economy. We’ve got to put the Model T back in forward drive again.

We got this way by letting things roll along, letting boys be boys and the plutocrats do what they want. So less regulation and more libertarianism are not the answers. The Koch Brothers may have lots of money, but they don’t have a clue.

One clue arises from FDR’s success. In his four terms as president, stretching from the Great Depression near to victory in World War II, he sought a middle ground. Communism then seemed to be sweeping the globe, after the horribly bloody Russian Revolution. On the other hand laissez faire capitalism had tortured American workers into forming unions, flirting with Communism and taking to the streets. FDR avoided both extremes. He invented what became known as “regulated capitalism.” It involved strong unions and nimble government regulators. And it produced the wealthiest, strongest, and happiest middle class in human history.

So how do we translate regulated capitalism to today’s global economy? How, in other words, can we make the regulation global? The United Nations can’t seem to regulate even violent conflict, and anyway it has only dabbled in economics. The WTO was a great achievement, but it’s like our judicial branch. It can only resolve issues on a case-by-case basis, and resolving a single case takes years. If we wait for the WTO to act, we could have real fascism in parts of Europe and the United States before any decision.

So we’ve got to act in the only way that sovereign, democratic nations can act, short of war. We’ve got to regulate by agreement. And we can’t (yet) rely on unions and collective bargaining because the workers involved are spread across the globe in different countries with vastly differing systems, conditions, and standards of living.

For all Trump’s personal emulation of Nero and Caligula, that’s what his “United States-Mexico Trade Agreement” is all about. The heart of the deal is pure Henry Ford: according to the NYT, it requires “40 to 45 percent of [each regulated] car [to be] made by workers earning at least $16 an hour[.]” Not coincidentally, that’s just a bit more than Henry Ford’s $5 a day, inflated up to 2018.

Otherwise, the agreement’s zero-tariff regime does not apply. Mexico can export cars assembled in Mexico into the US tariff-free only if the cars’ parts meet that criterion. But Mexico presumably can export cars to Africa, Asia, Europe and all of South America using parts made anywhere at any price.

A second key provision limits that freedom considerably. It requires that car companies make cars with at least 75 percent of their value made in North America, up from 62.5 percent in NAFTA. This provision works to the benefit of the United States (and of Canada if it eventually joins), because the predominant expertise in designing and making parts now lies in the US and Canada. Mexican factories mostly assemble complete cars and light trucks from parts made elsewhere, mostly in North America.

Trump’s gloating, as usual, is premature. The Senate must ratify this treaty. Our Congress must adopt, and the president must sign, detailed implementing legislation. And of course negotiations with Canada will slow the whole process down.

Yet even now, the preliminary deal offers some good news and some bad news. The good news is that the deal is mostly to Mexico’s disadvantage. That’s not surprising, for the United States has the capital, the brands and expertise, and the intellectual property (including “know-how” and trade secrets) behind both the assembled cars and most of the parts. The only bargaining leverage Mexico has is cheap labor and land, and the first is in direct competition with Trump’s political base.

The second bit of good news is that Canada, if it joins, will enjoy much the same advantages as the United States. The United States’ size and industrial heft will give it a relative advantage, but there should be enough benefits to share, given the relative size of the two countries (a fifteen-times-plus difference in population).

The bad news is mostly in the future. This part of the deal is restricted to cars, which are a huge deal but not the whole industrial economy. More important, the entire situation is dynamic and fluid, with a transition to more efficient and smaller cars, including electrics, as oil runs out. There is also nothing in the agreement to stanch the flow of factories and jobs outside of North America—nothing, that is, until the transfer of wealth and technology equalizes the standards of living of workers globally, which will take a long time. All this deal can do is reduce the flow of good jobs into Mexico, possibly exacerbating the pressure to immigrate here.

The deal so far also envisages a “sunset” or renegotiation in six years. But it might be better to set up a permanent body of economists and technocrats from all parties to keep tabs on a very fluid situation. Change in manufacturing is only going to accelerate as automation, the transition from oil to natural gas and then to electricity, and so-called “artificial intelligence” have their effects.

But the skeleton of this deal is a good start. It tries to meet head on the central problem of our age: how to keep Henry Ford’s consumer society and huge middle class viable and happy in an age of warp-speed industrial, technological and social change. If the powers that be keep their eyes on that problem, and on solving it by agreement, not by force or insult, our species, our growing global middle class, and our increasingly beleaguered democratic systems just might muddle through.

Endnote: In what passes for a business-school-level op-ed in Forbes magazine, one Tim Worstall tried to debunk our received history: that Henry Ford’s wage increase created our consumer society by allowing his workers to buy the cars they made. The sentence that best reflects the quality of Worstall’s reasoning is his fourth:

“It should be obvious that this story doesn’t work: Boeing would most certainly be in trouble if they had to pay their workers sufficient to afford a new jetliner.”

Yet not even plutocrats can afford to buy a commercial airliner personally; the most expensive corporate jets cost an order-of-magnitude less. The question is whether workers earn enough to afford to fly on Boeing’s airliners, making the robust air-travel market that we now enjoy possible.

Worstall’s thesis is that Ford increased his workers’ wages to reduce employee turnover in what turned out to be very demanding jobs. His facts and figures make that motivation plausible. But his accountant’s approach to industrial life neglects two vital facts. First, in that era before income tax, Ford’s profits were astronomical; increasing them by bits and pieces was hardly on his radar. Second, Ford was a visionary industrialist like Elon Musk today.

To understand Ford as a visionary, you need only examine one the most important decisions ever rendered in corporate law, which I’ve reviewed in another post. Ford’s company had accumulated enormous profits, which he hoarded for his own corporate purposes and refused to distribute as dividends. One Dodge, a shareholder, wanted to get his hands on that money to start his own car company. Dodge sued and won.

Here’s what the judge of the Supreme Court of Michigan wrote in upholding Dodge’s claim:

“[Henry Ford’s] testimony creates the impression . . . that he thinks the Ford Motor Company has made too much money, has had too large profits, and that, although large profits might be still earned, a sharing of them with the public, by reducing the price of the output of the company, ought to be undertaken. We have no doubt that certain sentiments, philanthropic and altruistic, creditable to Mr. Ford, had large influence in determining the policy to be pursued by the Ford Motor Company . . .”

This decision came down in 1919, just five years after Ford’s spontaneous wage increase. Ford was hardly a dreamy do-gooder. He wanted to stop paying special dividends to shareholders so he could invest the money in new plants, decrease costs, increase sales and lower prices. He wanted the proverbial “everyman” to enjoy the freedom to travel in his cars. The judge understood this vision but ruled that corporate law required distributing the profits to shareholders.

This fateful decision and its narrow view of corporate purpose helped motivate the First Gilded Age and the Great Depression that inevitably followed. One hopes we’ve all gotten smarter since then. At least the law has. Under the modern “business judgment rule,” corporate managers can spend their profits on things as far afield from dividends as fundamental research, going for market share, or lobbying for laws that entrench and reward plutocrats’ selfishness and short-sightedness.

Worstall’s accountant-style “analysis” of Ford’s vision is precisely a step in that latter direction. It’s a misreading of both the man and history and a principal reason why our nation is in decline today.

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Diatribes of Jay

28 August 2018

Does Henry Ford Yet Live? Trump’s Deal with Mexico

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