About the legend of Henry Ford and the middle class

Andy Kessler has a great op-ed in today’s Wall Street Journal explaining why President Obama’s policies regarding government handouts and tax rates on wealthy investors are wrong-headed. It’s worth reading in its entirety. But along the way, he dispenses with a popular myth about Henry Ford, wages and the middle class:

In his acceptance speech at the Democratic convention in Charlotte, N.C., this month, President Obama said, “We believe that when a CEO pays his auto workers enough to buy the cars that they build, the whole company does better.” …

This myth — that you can just give money to the middle class and good things happen — is widely shared and is at the basis of a lot of government policy. And it is why the recovery is stuck between lack and luster.

Let’s go back. Henry Ford is popularly credited with inventing the middle class by doubling his workers’ salaries to $5 per day in 1914. A multiplier for the economy, right? Wrong.

The year before, Ford revolutionized manufacturing with the moving assembly line, slashing automobile build times to just 90 minutes from 14 hours. That’s productivity. It allowed Ford to reduce the price over time of his Model T to $290 from $950. Demand took off because it was far cheaper than the cars made by his 88 competitors.

By 1927, 15 million Model Ts were sold to people (most of whom did not work for Ford) and businesses that retired their horses and used these new automobiles productively to lower their own costs, fueling a boom. Raising wages was a byproduct, not a cause. From Ford Motor’s corporate website about the wage increase: “While Henry’s primary objective was to reduce worker attrition — labor turnover from monotonous assembly line work was high — newspapers from all over the world reported the story as an extraordinary gesture of goodwill.”

As they say, read the whole thing. (Here is the page from Ford’s website to which he refers.)

Btw, one of Kessler’s other points is about the folly that food stamps represent a kind of economic stimulus. You’ll have to read his piece to see his treatment of that notion, but it brought to my mind a statement by state Sen. Charlie Bethel, R-Dalton, during the debate about state unemployment benefits in this year’s legislative session. Taking on the argument that unemployment checks boost economic growth, Bethel noted his town’s extraordinarily high number of people on unemployment and said, “If it were true that unemployment checks stimulated local economies, we’d be doing great in Northwest Georgia. We’ve cashed a lot.”

– By Kyle Wingfield

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339 comments Add your comment

EJ Moosa

September 19th, 2012
1:59 pm

“There may not be any resources freed up.”

There does not necessarily need to be any resources freed up for a transaction to be beneficial.

Prices, in theory, work as follows. You buy something because it offers more value, or is worth more to you than the price you pay for it. Otherwise you would keep your cash.

The difference is the benefit you receive from the transaction. If there was no benefit, you would not spend the cash.

We already understand the motives for the seller.

They BOTH suck

September 19th, 2012
1:59 pm

Kyle

Please note, I am not saying that it is a Republican problem. If anything it could be blamed do a degree on both parties, but even that blame only goes so far.

The world has shrunk with the increase in competition and that drives cost and pricing pressures.

Del

September 19th, 2012
2:00 pm

The problem with socialism is that sooner or later you run out of other peoples money.

Interested Observer

September 19th, 2012
2:01 pm

“The U.S. Department of Agriculture calculates that for every $5 of food-stamp spending, there is $9.20 of total economic activity, as grocers and farmers pay their employees and suppliers, who in turn shop and pay their bills.

While other stimulus money has been slow to circulate, the food-stamp boost is almost immediate, with 80% of the benefits being redeemed within two weeks of receipt and 97% within a month, the USDA says.”

Boost in Food-Stamp Funding Percolates Through Economy: http://online.wsj.com/article/SB124691958931402479.html

Kyle Wingfield

September 19th, 2012
2:02 pm

JDW: So why not outlaw stock trading? Just a one-time sale, to people who will do…what exactly with it, I don’t know. But I’m sure they’ll spend a lot of money to get it!

JamVet

September 19th, 2012
2:02 pm

The problem with slogans is pretty soon you run out of bumper stickers.

Thulsa Doom

September 19th, 2012
2:02 pm

“take a company of 1000 people and say they come up with a way to produce the same number of widgets with 950 people. Now you have 50 unemployed people which is a contraction.”

If that were true then any advancement in technology or productivity gains at the micro level such as your example would lead to more unemployment and contraction. That may be true in a very short term example such as your micro example but in the long term and on the macroeconomic level the consumer is much better off and his resources are freed up to make other purchases. And the employer’s resources are also freed up to expand or invest elsewhere.

For example when refrigeration came about tens of thousands of ice and milk delivery men were put out of business. Did the economy suffer? No. The productivity gains that refrigeration brought about allowed for other economic advances and expansion- an expansion that quickly swallowed up the unemployed ice and milk delivery men.

Same with with the example of Ford’s Model T. A lot of horse carriage and buggy whip makers went under and their employees were out of a job. But they found jobs in other sectors of the economy as overall productivity gains advanced us collectively.

3 other fallacies in your example that are common with liberal thinkers. In your example you’re looking at it from a static viewpoint and thinking only of the 50 people who lost jobs. You have to look at it in the overall macro sense and from the dynamic perspective of what happens to the economy- it expands.

Annother fallacy is that you are ignoring with your example the fact that overall productivity gains is what helps drive economic growth even if the 50 people lost jobs in the very short run.

And last you are only looking at what is seen- the 50 people losing their jobs. You did not look at the unseen events such as the increased worker productivity and the freeing up up more resources both on the consumer end and on the employer end where they now can invest in more projects or expansion.

Kyle Wingfield

September 19th, 2012
2:03 pm

They Both: My point with the 2-year comment was that the conditions which led in large part to that stagnation have been changing.

Kyle Wingfield

September 19th, 2012
2:04 pm

JamVet: And how has purchasing power changed over that time? Does the median household today have only more or less what it had 40 years ago?

Finn McCool (The System isn't Broken; It's Fixed)

September 19th, 2012
2:04 pm

We’re not saying welfare is the only way to stimulate the economy. What we are saying is that , like investing, it has several benefits – it helps those who need it and it does get spent which puts the spend back into circulation.

the folly that food stamps represent a kind of economic stimulus.

This is like saying investing in machinery is only going to provide one benefit: to the seller of the equipment. That’s it, end of story.

You folks are short sighted when it suits your prejudices.

EJ Moosa

September 19th, 2012
2:04 pm

“The U.S. Department of Agriculture calculates that for every $5 of food-stamp spending, there is $9.20 of total economic activity, as grocers and farmers pay their employees and suppliers, who in turn shop and pay their bills.”

Yet they have not accounted for where those funds come from, if money has been borrowed to be able to distribute those funds, or what the cost of administration is, and assume the money would have not been invested or spent otherwise.

How convenient.

They BOTH suck

September 19th, 2012
2:05 pm

TD

Great points, but you have to take into account off shoring of jobs. It is a huge variable when you consider not just the manufacturing, but also the IT / programming, engineering, customer service, etc that have done bye bye. Some of come back, but no where at the rate they have left…….

They BOTH suck

September 19th, 2012
2:07 pm

Kyle

Got you. We will see and I hope you are correct. There has been companies who have brought operations back to the US.

Would be great to see more it, but of course that must be balanced with cost and pricing pressures.

Kyle Wingfield

September 19th, 2012
2:07 pm

Finn: Food stamps have a purpose — keeping people from starving. There is a benefit from that, for them and for society, economic and otherwise.

But let’s not kid ourselves that *on net*, accounting for where that money came from and all of its possible alternative uses, food stamps are the most efficient and productive use of that money. If that were true, then, as I said earlier, we should make sure as many people as possible get as many food stamps as possible.

JamVet

September 19th, 2012
2:08 pm

Kyle, more. But not where it counts.

Americans in larger percentages than ever can no longer afford their medical insurance, their children’s college tuition or their utility bills. They certainly can’t afford a vacation to anywhere other than the closes national park. (Run by the hated Uncle Sam!)

But they sure can afford more neat little, cheaply made electronics from China and Korea.

Look around at your communities.

We have gotten trickle down decimated…

Kyle Wingfield

September 19th, 2012
2:10 pm

JamVet @ 2:08: Isn’t that more a reflection of their priorities than their purchasing power?

JamVet

September 19th, 2012
2:15 pm

No, it is a factor of skyrocketing costs for certain necessities and decreasing costs for others.

From the Rand Institute:

Fast-rising health care costs have eaten nearly all the income gains made by a median-income American family of four over the past decade, leaving them with just $95 per month in extra income.

Thulsa Doom

September 19th, 2012
2:18 pm

they both suck,

I understand that it sucks to see jobs offshored. But keep in mind that this isn’t anything new. This has been going on for a long time to a lesser degree and has been going on to a more marked degree over the last few decades as the world becomes smaller.

A basic principle of economics is that we are all better off in the long term with free trade. There will be short term losers in the way of people who lose jobs but the overall benefit to consumers offsets these losses.

Now I have a lot of friends in IT who I would hate to see lose their jobs and it actually went on for awhile. Their co. would bring over 5 to 7 Indians to the corporate campus and train them for 3 months and then send them home. Then 5-7 American programmers would get laid off. Made em mad as hell. I can see both sides of that equation. It sucks to see those Americans lose good paying jobs but on the other hand according to common economics principles overall we will all be better off in the long term. Its just hard to stomach in the short term.

Gravy Train

September 19th, 2012
2:18 pm

Kyle, I’m not going to read the comments to see if you addressed this already, but here goes. You are aware that Henry Ford was a Nazi sympathizer who contributed tons of money to promote Nazism in Europe and The United States? Were you aware that his buddy Hitler even gave him an Iron Cross? Do you wing nuts ever consider the sources of which you site?

Also, if you are so interested in promoting the conservative ideology and so forth, wouldn’t it be in your best interest to boot the plutocrats out of your “movement?” I’m still waiting for you to champion the middle class that you are trying to persuade every day. When will you get real about the plutocrats that are ruining the GOP? Perhaps you are like me and eager to see the GOP explode?

Kyle Wingfield

September 19th, 2012
2:20 pm

Gravy Train: What in the world do Henry Ford’s sympathies 80 years ago have to do with the question of whether economic growth comes from increased productivity or spending financed by government handouts?

Kyle Wingfield

September 19th, 2012
2:24 pm

JamVet: You keep focusing on one side of the equation: income. The question I’m asking has to do with whether people are materially richer or poorer in spite of stagnant wages. For example, for most of the past 20 years inflation has been at historically tame levels; that’s had a positive effect on people’s purchasing power.

jd

September 19th, 2012
2:25 pm

Kyle,

The Ford site says this:

“Henry Ford had reasoned that since it was now possible to build inexpensive cars in volume, more of them could be sold if employees could afford to buy them. The $5 day helped better the lot of all American workers and contributed to the emergence of the American middle class. In the process, Henry Ford had changed manufacturing forever.”

Ford’s logic went further than the retention issue.

By the way, tax credits to the poor expanded under Republican presidents following Friedman’s advice…

Del

September 19th, 2012
2:26 pm

Obama has increased food stamps 100%, since he took office. This building from the bottom up sure has been successful.

I demand to see Cheesy Grits Birth Certificate- Long Form Please

September 19th, 2012
2:27 pm

Sure, but they sure as heck don’t make up 47% of the population

Thats dang right. Where are these freeloaders ?

Where are the moochers ? I dont see them.

Most poor people I know work their tails off sometimes at 2 or 3 jobs

Interested Observer

September 19th, 2012
2:29 pm

RE: “why don’t we shut down the equity markets, outlaw savings accounts, and mandate that everyone spend every dollar they earn? Wouldn’t that lead us to the most prosperity, according to you?”

Kyle,

The answer to your question is no, and the question itself is a misunderstanding of what I’m saying. Nor am I saying that rich people keep their money lying around unproductively. I’m am saying, however, that savings aren’t included in the measure of economic growth, spending is. Again, not an opinion.

Republicans aren’t anarchists, so we all agree that we do need a government of some form and that the goods and services provided need to be paid for. We also agree, whether you know it or not, that we should limit taxes to those needed to pay for those good or services (and, at this point, pay off the debt). The question is, how do we tax?

Yes, savings and investments contribute to the economy. But the contribution is indirect and limited. The entire dollar that I put in a savings account doesn’t get loaned out. And the fraction that does get loaned out doesn’t always get spent. And if it does get spent, it might not get spent for quite a while. On the other hand, a dollar spent for goods and services today has, by definition, a definite and immediate effect on the economy.

So, all I’m saying, is that to the extent that we must tax (and we both agree that we must), we should avoid taxing money that is being spent–hence progressive income taxes.

They BOTH suck

September 19th, 2012
2:30 pm

TD

I’m with you, but my point about using “older examples” is that there wasn’t much off shoring during those times so the majority if not all of the “newer jobs” stayed here in the US.

Bottom line is that all of this off shoring has caught up. Sorry dude, but it has. It is a double edged sword.

I’m fully aware that technology has driven job creation. Not arguing those facts. but when you take into account all the jobs off shored, technology and efficiency improvements, it takes a toll. Again not saying, we should stay stuck in the 50s, but everything whether it is free market or government is not a “win win” over time.

I do not have the answers, but I can say that we can neither spend and tax our way to prosperity nor will just another tax cut get us there either

Thulsa Doom

September 19th, 2012
2:31 pm

Gravy Train,

Henry Ford was anti-Semitic from what I understand. So was the patriarch of the Kennedy clan. His stated business goal everyday was to screw a Jew in a business dealing. A lot of people back in that day were anti-Semitic. Did you know that most of the elite Eastern universities had quotas on how many Jews that they would accept into their universities back then? That is a serious personal failing on the part of Henry Ford as well as many other men of his era. But it doesn’t have much to do with the fact that he revolutionized mfging with the assembly line process or that he built a great car for millions of Americans.

I demand to see Cheesy Grits Birth Certificate- Long Form Please

September 19th, 2012
2:32 pm

Plus the 47 percent number is waaay overblown.

On an average year nowhere near 47 percent of people dont pay income taxes.

You see the Republicans just cherry picked one year and repeat it like its that way every year.

Of course their lemmings just repeat it and repeat it.

And EVERYONE pays taxes. Sales Tax. FICA.

Heck the sales tax where I live is 10 percent. That means poor people are taxed 10 cents on every dollar they spend.

Gravy Train

September 19th, 2012
2:33 pm

Oh, I don’t know Kyle. There is this little thing about association that you’re failing to see. I would think it would be far better not to associate yourself with treasonous plutocrats. I guess this goes back to the GOP’s modern definition of success: profit by any means necessary. Like Willard for example, you consider him successful because he has lots of money and you gloss over how he got it. So then, Henry Ford’s promotion of Nazism doesn’t matter because he had lots of money? What about the millions he spent promoting antisemitism also?

cc

September 19th, 2012
2:33 pm

Del@2:26 pm:
“This building from the bottom up sure has been successful.”
Yes, it has been extremely successful . . . for Obama . . . if you understand his plan.

Gravy Train

September 19th, 2012
2:36 pm

Also, you keep avoiding my question. What about the plutocrats who control the GOP? They have turned the old conservative ideology into a myth. Conservative is nothing more than a catch phrase to convince middle class folks to vote for them. Are you pretending like this isn’t happening?

GFY

September 19th, 2012
2:36 pm

Facts don’t interest you…….you have an agenda and will argue with a fence post. I say good luck to the fence post.

Thulsa Doom

September 19th, 2012
2:36 pm

they both suck,

Well you also have to take into account that after WW2 all of the major mfging nations in the world were devastated- Japan, Europe, the industrial heartland of China- Manchuria. We pretty much enjoyed standing as the world’s foremost economic and mfging power for at least a decade or 2 as the other powers rebuilt. That is a one time event that we greatly prospered from until they caught back up with us which was inevitable. We got fat and happy right through the 60s and in the last few decades now that we’ve had to compete head to head with rebuilt industrial powers we don’t like it very much. And that’s not a partisan point either. Just sayin that things are different nowadays than from the late 40s, 50s, and even into the 60s.

Kyle Wingfield

September 19th, 2012
2:36 pm

Gravy Train: Who is associating himself — or anyone else — with Henry Ford today? Me, because I mentioned an article that mentioned him? OK, does that mean Obama “associated” with Ford by alluding to him in his speech to the DNC two weeks ago?

You are making one of the most bizarre, out-of-the-blue arguments anyone has ever made on this blog. And that’s saying a lot.

Thulsa Doom

September 19th, 2012
2:37 pm

Gravy Train

September 19th, 2012
2:36 pm
Also, you keep avoiding my question. What about the plutocrats who control the GOP?

Gravy Train,

Are you naive enough to think that plutocrats don’t control the Democratic party?

GFY

September 19th, 2012
2:39 pm

Everyone is taxed on the $ they spend, correct Cheesy? Or are there only “poor” people paying this exorbiant sales tax? BTW…..where do you reside to pay such a large sales tax? Toronto? Paris?

I demand to see Cheesy Grits Birth Certificate- Long Form Please

September 19th, 2012
2:42 pm

Everyone is taxed on the $ they spend, correct Cheesy? Or are there only “poor” people paying this exorbiant sales tax?

Yes they are. It just hurts poor people more.

Montgomery Alabama ( A hotbed of liberalism I assure you )

Thulsa Doom

September 19th, 2012
2:43 pm

“The question I’m asking has to do with whether people are materially richer or poorer in spite of stagnant wages.”- Kyle

In terms of material wealth there is no question that the average American is vastly better off than he was forty years ago. Every modern convenience that the average American owns makes his life far more comfortable than it was back in 1970. I don’t think anyone would disagree with that.

Gravy Train

September 19th, 2012
2:44 pm

Answer the question Kyle. You can do it. Are you willing to fight the plutocrats to rejuvenate the GOP?

Thulsa, how can the Democratic Party be controlled by both plutocrats and the Socialist Marxists that the nimrods are always spouting off about?

They BOTH suck

September 19th, 2012
2:44 pm

TD

Great point. I have been saying for sometime that regardless of D or R, we have been averting today’s economic situation by the skin of our teeth for some years now.

In the early to mid 80s, we saw a tremendous push with technology in terms of the use of computers. That rode us for the most part into the dot.com bubble. Then it was off to the housing and construction bubble.

The whole time jobs were leaving the US and technology along efficiency improvements kept on increasing.

It creates jobs, but it has caught up to us when looking at the “big job picture”

Seems that the government as well as the private sector didn’t do a good job working and pushing education and training to meet the challenges that were right in our faces.

Thulsa Doom

September 19th, 2012
2:46 pm

Cheesy grits,

That 10% might explain why so many people are fleeing Montgomery to Wetumpka, Prattville, Millbrook, and elsewhere thus eroding the tax base further. That and the gang infested schools and the rampant crime in the city. You looked at the murder rate in Montgomery the last few years?

Thulsa Doom

September 19th, 2012
2:48 pm

“Seems that the government as well as the private sector didn’t do a good job working and pushing education and training to meet the challenges that were right in our faces.”

they both suck,

No doubt and our education system shows it. Too many kids pursuing sociology and poly science degrees and not enough pursuing the hard math and science degrees or IT degrees.

They BOTH suck

September 19th, 2012
2:51 pm

TD @ 2:43

That is true, but they are much more in debt as well.

The lowering of credit standards, while increasing the amount that could be borrowed was done to of course increase bottom line of the individual company but also to keep the economy running along. It worked for awhile, but now there is too much debt. People don’t have that ability to buy, so companies are not hiring in many sectors because of the lack of demand. I do understand that people make the choice to take the credit. Banks as well, but Uncle Sam bailed out their stupidity or a good part of it.

Consumer spending makes up 70% of our economy.

Obama or Romney come November, I hope no one is looking for miracles. When we see consumer debt start to go down, you will see the economy pick get out of its malaise.

I could be wrong, but remember I just gave you the Paul Harvey right here (the rest of the story).

JamVet

September 19th, 2012
2:51 pm

Kyle, inflation has gone up a cumulative 48% since 1993. (Actually more than that with compounding.)

Wage increases since 1993 for80% of Americans? Nowhere near that. I’ll have to do some research to get the exact numbers.

We can have a democratic society or we can have the concentration of great wealth in the hands of the few. We cannot have both.” ~Supreme Court Justice Louis Brandeis, 1941

Welcome to the American plutocracy…

I demand to see Cheesy Grits Birth Certificate- Long Form Please

September 19th, 2012
2:52 pm

That 10% might explain why so many people are fleeing Montgomery to Wetumpka, Prattville, Millbrook, and elsewhere thus eroding the tax base further.

Nope. They are fleeing Montgomery to get away from the black people. Just ask them. They will tell you the same.

White Flight in action. Montgomery is still partly stuck in the 60’s and a very segregated city.

I went to public schools here. They are not gang infested.

I demand to see Cheesy Grits Birth Certificate- Long Form Please

September 19th, 2012
2:53 pm

That 10% might explain why so many people are fleeing Montgomery to Wetumpka, Prattville, Millbrook, and elsewhere thus eroding the tax base further.

Nope. They are fleeing Montgomery to get away from the black people. Just ask them. They will tell you the same.

White Flight in action. Montgomery is still partly stuck in the 60’s and a very segregated city.

I went to public schools here. They are not gang infested.

Gravy Train

September 19th, 2012
2:57 pm

Thulsa, also, if the plutocrats control the Democratic Party, why would they allow a tax hike on themselves to be a major plank of the party’s platform? FYI: Basic economic theories only work in a vacuum. Human greed and corruption tend to taint the results in the real world. Controlled capitalism is the only real world economic theory that accounts for all of the members of the economy in question.
If it weren’t for unions and regulations, there would’ve never been a middle class. See the living conditions of the average worker prior to unions.

Bruno

September 19th, 2012
3:02 pm

There are countless facts, figures, pieces of data and evidence, studies and irrefutable proof that all say the same thing.

America’s middle class has gotten clobbered for 40 plus years.

That you are not interested in knowing about any of that is in and of itself, interesting, but useless

JamVet–You’ve made a blog career out of championing the “fact” that the middle class has been getting screwed for the past 40 years. Yet somehow, some way, the standard of living for ALL Americans, including those at the bottom and in the middle, has risen dramatically in the same time period by any realistic measure you can think of such as average square feet of residential space, access to medical care, access to transportation, access to travel, access to communication, etc. etc.

Just my opinion, of course, but I don’t see how comparing raw income data really means anything, because that’s not how people measure their satisfaction in life. What is important is how well people are living. But, because that particular measure takes all the wind out of your argument, you seem to ignore it time and again.

JamVet

September 19th, 2012
3:12 pm

B, ask Hillbilly D, he is one of a tiny few besides me with the honesty to readily acknowledge that he was better off in the 1970s than he is now.

THAT story can be told by millions and millions and millions of Americans.

Who cannot afford health insurance like they used to take for granted.

Who cannot afford to put their kids in college like they used to take for granted.

Who cannot afford to go to Europe/NYC/wherever like they used to take for granted.

More cheap gizmos and sh*tty furniture is not living better…

wallbanger

September 19th, 2012
3:14 pm

Well, the comments above on this post demonstrate clearly why we are in the current ditch. There is so much ignorance of simple economics in this country. I guess people with government educations can’t be blamed for being ignorant, but it sickens me to know they vote. Maybe they would understand it if you said that when the payments to people from government exceed the capacity of the taxpayers to fund them we collapse. (Well, that is about where we are now but for the $16 Trillion we owe a few other countries who are stupid enough to continue to lend to us).