Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

20 December 2008

A Season for Workers?

We are sliding into the most depressing holiday season in memory. Millions have lost or are losing their jobs, their homes or both. Health care for many workers is still a dream. Every economic trend is down.

Our Masters of the Universe crippled our economy in an orgy of greed. Now our stalwart worker and consumer—battered, abused and confused—may be giving up. He and she may be abandoning the Race to Acquire Stuff, on which 70% of our economy depends. Their dropout might improve our abysmal national savings rate, but the price might be a decade or more of economic stagnation.

Whatever awaits us, the odd term “worker-consumer” holds the key to any hope.

Henry Ford understood. He made his cars cheap enough—and his workers’ salaries high enough—so they could afford to buy the cars they made. The textbooks credit him with inventing a new industrial tool, the assembly line. But the textbooks are wrong. What Ford really discovered was a new social order.

For most of human history, skilled workers had designed and built things for the rich and powerful. First they worked for nobles under a system of royal patronage. Then the corporation’s advent brought a class of nonhereditary private owners, and laborers worked at their beck and call.

But with Ford’s insight, workers began to make things for themselves. They were (and are!) far more numerous than owners. So they became the “market.” Through their collective buying decisions, they determined what to make. Then, under the supervision of their managers, they made it.

This change in the regime of human production was unimaginably consequential. Standardization of design, assembly-line production and mass markets led to economies of scale unheard of in human history. In one year our auto plants turned out more technologically advanced vehicles than all the Conestoga wagons ever made. And workers’ high salaries let them afford these advanced creations. Thus was a uniquely American prosperity born.

That uniquely American regime of industrial production helped win humanity’s greatest and most dangerous war. It began an era of unprecedented social cohesion and prosperity, which is only now ending. The only other great, democratic empire to achieve a similar feat was ancient Rome’s, nearly two millennia before.

So what has gone so wrong? Ford had a key economic insight. Giving workers a fair shake expands the market, builds productivity and prosperity, and makes owners richer. It’s a classic win-win-win. You might call it “trickle up.” Ford’s insight still has enormous resonance today, if anyone would heed it.

But no one ever solved the governance problem. Some one has to run things, including industrial companies. Our economic vehicle is in a ditch because greedy morons took the wheel. For them, Ford’s enlightened self-interest would be an enormous improvement.

Although a visionary, Ford himself remained an unconscionable autocrat. His most famous remark (apropos of his Model T) was “you can have any color you want, as long as it’s black.” He was willing to pay workers a fair wage only when it suited him. Despite his extraordinary insight into the real source of wealth and prosperity in industrial society, he never broke with his self-obsessed social class.

Our problem today is not who’s winning the class struggle. Most of the time, we’ve managed it better than most other countries in most of human history. We Americans understand that “Which Side Are You On” is a nice, stirring union song but no recipe for real social or political progress. We have to make the pie bigger, not fight over scraps.

The public did not elect Barack Obama by decisive margins—and does not now support him by even greater margins—just to restore the divisions of the sixties, let alone the last century’s thirties. Our problem is something else: a shortage of excellence and innovation, plus the loss of basic competence.

We could squeeze our auto workers to Asian levels of pay and benefits and beyond, and still our cars wouldn’t sell, although they’d be cheaper. We need better industrial leaders to make better decisions and take the right risks. We need market-leading innovation, not heavier weight, new body styles on old platforms, or incomprehensible financial instruments to support yet more credit.

How do we get good industrial leaders? That’s the $ 64 trillion question. The Russian revolution collectivized and politicized everything and failed spectacularly. China is leaving Russia in the dust after abandoning that rotten system earlier and more decisively. Germany has had some success with labor representatives on corporate boards of directors, but its system has made its industry less agile. Japan has been the most successful in heavy industry, with “quality circles” that get real ideas from real workers and give them real attention and real rewards (both psychic and monetary) in return. Not coincidentally, Japan has the “flattest” pay scale, i.e., the lowest ratio between CEO pay and worker pay in the industrialized world.

Despite Peter Drucker and his proselytizing for excellent companies, we’ve had no real revolution in industrial management in America since Henry Ford. We copied Japan’s kanban system of “just in time” supply, but we failed to adopt fully Japan’s quality circles and respectful treatment of workers’ ideas. Our car industry’s obsolete Detroit culture still operates under a modified system of owner autocracy established by Henry Ford.

So what do we do? Do we wage yet another class struggle? Do we sit around while our economy completes its self-destruction, waiting for a new, better incarnation of Henry Ford—a Barack Obama of industry?

What we should do is think hard about institutional changes to encourage innovation, maintain industrial agility and make better use of workers’ minds, as well as their hands. A flatter, more horizontal management structure is an obvious desideratum, but how to get it and whether politics can force it are not easy questions.

While thinking about these fundamental issues, we can do three things. First, we can restore specialization, i.e., the division of labor that came with the industrial age.

Conglomerate empire building has been a colossal failure. Everyone from the union hall to the boardroom and Congress now knows this. All should recognize this truth in every policy and deed.

GE is a prime example. One of our excellent industrial companies, it’s floundering because it caught high-finance fever. It makes the world’s best high-technology windmills, medical equipment, water purification equipment, gas turbines and jet engines. Why is it trying to compete with Wall Street ? Its finance arm is dragging it down even more than its century-old commodity light-bulb business, so it’s trying to sell both in a down market. Maybe Warren Buffet, with the leverage of his bridge investment, can help GE relearn how to stick to its knitting.

The auto industry is another case in point. As a condition of any bridge loan or bailout, the best thing the government could do would be to fire all current top management and split GM and Chrysler up.

If necessary, pass antitrust exemptions to allow economies of scale in purchasing and standard part design. But spin off every brand as a separate company. Force each to complete with the others and with rivals in the marketplace. That alone would make room for new industrial leaders unspoiled by stagnation and corruption.

Spun off, some GM brands might even attract private investment. Cadillac has lots of fans for its new, smaller, more agile cars. The Chevy Volt is the only American car enterprise in my lifetime to steal a march on Toyota. Spin it off, and I’ll not only buy a Volt. I’ll buy stock in the company, too. But neither I nor any other sane private investor will invest in GM the conglomerate.

The second thing we can do is find better ways to bring workers’ minds, as well as their hands, to bear on design and production. Who better knows how to improve a car than the man or woman who builds it every day and probably drives one as well?

We need better institutionalization of worker input. We need to do more than either German board representation or half-hearted American attempts to copy Japanese quality circles. Whatever we do, it must reflect American culture, and it must have a visionary and irrepressible champion. Without a champion, any effort to make progress on this politically fraught front will likely fail.

The quid pro quo for genuinely respectful treatment of workers’ minds and ideas is relaxation of counterproductive union work rules. It’s one thing for unions to demand a good wage, decent benefits, and unstressful and safe working conditions. It’s quite another for them to hobble automation and efficient factory management by refusing to allow inefficient plants to be closed, redundant workers to be reassigned or laid off, or whole categories of unnecessary work to be discontinued. Although understandably directed at preserving jobs, rigid work rules ultimately destroy jobs by making producers inefficient and inflexible and therefore uncompetitive. Collective bargaining agreements have to come down from book-length documents to short pacts that focus on the essential conditions that Ford understood: a living wage, decent benefits, and fair and humane working conditions.

Finally, as I’ve written before, we need to take the millstone of legacy costs from around our heavy industry’s neck. It’s no answer to have Big-Three workers take the same pay and benefits as their counterparts in Asian-owned American plants. Those Asian-owned plants aren’t paying for the retirement and health care of our Greatest Generation of workers, who built our prosperity after World War II. Our government has to step up to the plate and take on the social obligations that every other advanced government has willingly accepted. If it doesn’t, our remaining heavy industry will simply complete its flight overseas.

Maybe flight is inevitable when an economic empire like ours decays. But even Britain still has Rolls-Royce, which makes superb jet engines and industrial machinery, in addition to luxury cars. If we act quickly we might preserve even more of our great industrial base for future generations. I’d hate to see Boeing, Caterpillar, or GE go, too.

American workers don’t want handouts. They never have, and they never will. What they want is better institutions that better recognize and use their skills. What they need is better leadership, both industrial and political.

In two respects, time is on American workers’ side. First, as I’ve outlined in another post, scarcity of and inelasticity of supply and demand for energy are going to make intercontinental transport of heavy goods (like steel and cars) less economic. As oil reaches yet unseen prices (which it will as soon as the global economy recovers), the worldwide race for the bottom in worker treatment will cease, at least insofar as heavy industry is concerned. Increasing standards of living and worker aspirations in places like China, India and Vietnam will add political to economic pressure.

The result will be a cessation—or at least a dramatic reduction—in the global squeeze on workers. Unions that understand and exploit these long-term trends will do a better job of protecting their workers by focusing on what really matters: more productive partnerships with management and less pie-splitting. If the last two decades have taught us anything, it’s that workers do not improve their lot by making their employers inefficient or uncompetitive.

On January 20 we’ll have good political leadership. What we lack is industrial leadership of similar quality. Our auto industry is dying. GE is sick. Even Boeing is nearly a year behind on its “Dreamliner.”

So the best our political leadership can do is maximize the chances for good industrial leadership. It can begin by: (1) splitting up failing big firms and spinning off their parts to give industrial leaders more ways to grow and private money more reasons to invest, (2) encouraging new, cooperative relationships between owners and workers and new institutions to exploit their respective talents, and (3) at long last, sparing industry the enormous cost of social obligations that every other advanced society bears collectively.

If the Obama team hits the ground running and begins working toward these goals quickly, the American worker still has a chance. If not, our commanding lead in industry, which began so auspiciously with Henry Ford, may mimic an old soldier or decaying empire. It may just fade away, leaving both workers and owners sadder and poorer.


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