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

Interested Observer

September 19th, 2012
12:35 pm

Of course, food stamps stimulate the economy.

It’s not complicated. If you buy a hamburger off the value menu at McDonald’s, you just grew the economy, specifically Gross Domestic Product, by $1.00. The economy doesn’t care if that dollar came from a private employee or a government employee. It doesn’t care if that dollar came out of an unemployment check or a paycheck. I guarantee you, McDonald’s doesn’t care either.

By the same token, food stamp money is money that is spent. And when it is spent, by definition, the economy is stimulated. There’s no denying that simple fact.

Paps Mear

September 19th, 2012
12:42 pm

Amazing. Will someone please send “Interested Observer” a copy of one of Sowell’s books? No wonder we’re in this mess.

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

September 19th, 2012
12:42 pm

From the “It’s ok when we do it but not when you do it.”

Buzzfeed dug up this clip from a 1962 Romney for Governor informercial, in which Mitt Romney’s mother, Lenore, talks about his father being on “welfare relief” when he was younger.

“We’ve only owned our home for the last four years,” Lenore Romney says. “He was a refugee from Mexico. He was on relief – welfare relief – for the first years of his life. but this great country gave him opportunities.”

Mitt’s family used the welfare to get ahead so hey, I guess Mitt is cool with that. But those 47% of AMericans who use it? everyone of them is a deadbeat loser moocher?

We understand, Mitt, we understand.

http://www.buzzfeed.com/andrewkaczynski/before-ann-and-mitt-lenore-and-george

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

September 19th, 2012
12:49 pm

Observer is correct. A family that has $1 to spend is contributing more to the economy that a family that has $0 to spend. Sure it pales in comparison to what the working class and middle class to for the economy when they spend money but still, it is going to be spent (last time I checked a person with a food stamp isn’t putting those stamps in a a savngs account or int o the stock market – exactly what would happen with a tax break for the wealthy.)

What the family with $0 to spend will contribute to is crime.

Not Blind

September 19th, 2012
12:52 pm

Interested Observer. For the goobermint to put that $1.00 foodstamp or unemployment check into the hands of the consumer the TAXPAYER is hit for far more than $1.00.

Kyle Wingfield

September 19th, 2012
1:00 pm

Interested: Then why don’t we give everyone $50,000 worth of food stamps to use every year? We’d have the greatest economy in history!

Lil' Barry Bailout - Vote American

September 19th, 2012
1:05 pm

Of course, food stamps stimulate the economy.
———-

Wrong. The food stamp money first has to be taken away from someone else who would have spent it, too, so there’s no net increase in spending.

JamVet

September 19th, 2012
1:07 pm

$5 a day?

Too bad the Titans of Industry can’t get away with that now.

But forty years of flat-lined wages for the vast percentage of American workers is illustrative of the sentiment, is it not?

Lil' Barry Bailout - Vote American

September 19th, 2012
1:09 pm

Wages haven’t “flat lined” (well, except for the last three years, in which they’ve gone DOWN.)

JF McNamara

September 19th, 2012
1:11 pm

What do food stamps have to do with the article? No one wants to increase food stamps and an economic boost. Even if it did help, its just bad policy and Democrats, Republicans, and the majority of people on food stamps agree. Is it just an Easter egg to incite your base or something?

Thulsa Doom

September 19th, 2012
1:16 pm

No serious economist worth his salt believes that food stamps are an economic multiplier. Food stamps are simply a transfer program. And transferring monies back and forth between different groups in and of itself is not an economic multiplier. If it were we could just transfer monies back and forth between different groups of people, sit on our collective duffs, and watch the economy boom. What an absurdly ridiculous notion. Hard to believe people fall for this kind of utter nonsense.

I Report (-: You Whine )-: mmm, mmmm, mmmmm! Just sayin...

September 19th, 2012
1:19 pm

It’s pretty obvious the libs have no idea that workers create wealth and non workers do not.

Even the most simple concepts elude them.

geez

Kyle Wingfield

September 19th, 2012
1:20 pm

JF: Did you read the article? He mentions them as another example of misguided Obama policies.

Thulsa Doom

September 19th, 2012
1:20 pm

“For the goobermint to put that $1.00 foodstamp or unemployment check into the hands of the consumer the TAXPAYER is hit for far more than $1.00.”

Exactly. If anything that transfer payment and the bureaucracy needed to administer it is an inefficient allocation of resources. That money would be more efficiently spent investing in plant, equipment, human capital, you know- all the things that actually produce jobs, as opposed to an inefficient transfer payment that produces nothing.

Kyle Wingfield

September 19th, 2012
1:20 pm

JamVet: Are you including benefits in that figure? Higher employer payroll taxes?

Interested Observer

September 19th, 2012
1:23 pm

Then why don’t we give everyone $50,000 worth of food stamps to use every year?

Do you eat $50,000 worth of food every year, Kyle? If so,…

Food stamps are more stimulative than the Bush tax cuts, for example, because nearly every food stamp dollar is spent. I doubt that woull be true if give everyone $50,000 worth of food stamps every year.

Also, to be able to afford $50,000 of benefits, we’d likely have to tax money that would otherwise be spent anyway. If we’re taxing money that would otherwise be spent, then there’s no stimulus.

While I’m on the subject, the idea behind is progressive income tax is not to punish the rich, but to limit taxation to money that is sitting on the sidelines…that is money that isn’t being spent and, therefore, isn’t growing the economy.

JDW

September 19th, 2012
1:28 pm

Point is anything that contributes to spending increases growth to some extent. Things that keep spending the same tend to forestall decline.

Food Stamps and Unemployment limit GDP decline to some extent while providing some help to those that need it…see that is important as well.

Tax cuts that are then in turn spent…read to the middle class…have a tendency to generate growth that would not have otherwise existed. Government spending does exactly the same thing and has the benefit of allowing you to target where the growth is stimulated.

Tax cuts for the rich that go into investments and savings accounts…waste of money.

As for Henry Ford…raising wages to $5 a day increased spending by those workers leading to growth…and some number of new car sales.

As for Charlie Bethel…if he had any sense he would be wondering what the loss of those checks would mean to his constituents and the businesses they support because on the flip side if tax cuts created jobs Duhbya’s Administration would have been the best in history…not the worst.

Kyle Wingfield

September 19th, 2012
1:29 pm

Interested: Ah, I see you subscribe to the Scrooge McDuck theory of economics, in which all these rich people have so much money it’s just sitting in a vault for them to swim in.

Linda

September 19th, 2012
1:29 pm

interested@12:35, Did you skip over the first 11 chapters of the book? I’ll try to explain it to you.
The $1 the food stamp recipient received did not magically materialize out of thin air. It was mine.
The govt. took it from me on April 15th. When it arrived in DC, they gave a little of it to the GSA so they could go to a convention in Las Vegas, to Solyndra so they could make solar panels no one wanted, to Egypt so they could stock up on American flags to burn, etc.
Anyway, only 60 cents of my $1 was left. Since DC borrows 40 cents of ever dollar it spends, the food stamp recipient got 60 cents from me & 40 cents from China.
The food stamp recipient’s McDonald’s was stimulated, but my McDonald’s had to lay off an employee. The USA’s credit rating was downgraded again & our unborn grandchildrens’ VISA card was charged another 40 cents

Kyle Wingfield

September 19th, 2012
1:31 pm

JDW: Growth comes from more efficient use of resources. Consumption is a byproduct of growth, not a spur of it.

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

September 19th, 2012
1:32 pm

The food stamp money first has to be taken away from someone else who would have spent it, too

Not necessarily. There is a good chance that $1 would have gone into the stock market or a savings account to be unproductive for generations.

JDW

September 19th, 2012
1:34 pm

@Thusla…”That money would be more efficiently spent investing in plant, equipment, human capital, you know- all the things that actually produce jobs,”

That money is producing jobs…15% to 20% of the workforce is employed in government.

cc

September 19th, 2012
1:35 pm

Interested Observer@12:35 pm:
Where does the money come from to buy and distribute the food stamps? It would appear that you’ve done nothing to increase the GDP; you’ve only transferred that money from one pocket to the other . . .

Finn McCool@12:42 pm:
“But those 47% of AMericans who use it? everyone of them is a deadbeat loser moocher”
Could you please furnish me with a link or source that can verify that Romney made that statement using those exact words? Thanks . . .

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

September 19th, 2012
1:36 pm

No serious economist worth his salt believes that food stamps are an economic multiplier.

I just don’t understand why Thulsa isn’t paid the big bucks for his big economics brain.

Thulsa Doom

September 19th, 2012
1:36 pm

Interested observer,

I just read the article and suggest that you do the same. It has to do with taking money out of the productive economy, the misallocating of resources that I alluded to, and the thing that drives economic growth the most- worker productivity. Since you don’t have an economics background just read it and it will explain things and its an easy read.

George P. Burdell

September 19th, 2012
1:36 pm

Kyle:

You haven’t learned much about how the liberals like to look at payroll taxes. When they want to argue that low income workers pay taxes, they are more than happy to include that cost, including the cost of the employer match, as taxes paid by the worker. However, when they want to argue that wages have been flat, they fight hard to make sure the fact that SS and Medicare percentages have increased greatly since the 1960’s. I know it can be hard to keep up, but you have to make sure you apply the limited logic to a very specific situation and make sure that same argument is not used on a different topic that might weaken your argument.

George P. Burdell

September 19th, 2012
1:37 pm

And don’t dare mention that the $1 hamburger from McDonalds would be even cheaper if labor costs had not risen due to SS and Medicare.

Kyle Wingfield

September 19th, 2012
1:37 pm

Finn: Right, because there is nooooooooo value in money that’s invested or saved.

Folks, do y’all really believe the economy would be better off if everyone just kept maxing out credit cards? That there’s no value in saving money, which gives banks the wherewithal to make loans to growing businesses? That there’s no value in investing money in the equity markets, which sends signals to entrepreneurs about the incentives of putting money to its most productive uses? That’s the upshot of the theories you’re espousing.

cc

September 19th, 2012
1:39 pm

JDW@1:34 pm:
“15% to 20% of the workforce is employed in government.”
. . . and who pays their salaries?

JDW

September 19th, 2012
1:39 pm

@Kyle…”Growth comes from more efficient use of resources. Consumption is a byproduct of growth, not a spur of it.”

Actually no…more efficient use of resources only produces growth if the resulting savings are redeployed in a manner that creates more growth. If those resources are not redeployed you get decline….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. Any resulting growth is dependent on their ability to do something else of value.

Consumption of products and services ALWAYS produces growth for those entities that produce them.

Four more years

September 19th, 2012
1:40 pm

Kyle, you’re just contributing to the shibboleth that someone’s (mainly, Obama’s) goal is simply to give away money to the moochers out there. It’s not, but that’s what Romnuts is running on and, with your help and that of Fox (should be “foxy” – growlllll at those hot blondes) “news” he’s got people helping spread the lie. While claiming Obama is dividing America, they preach that their crowd is the only crowd that wants to work and all others are just out to be freeloaders. What a bunch of bull. Are there freeloaders? Sure, but they sure as heck don’t make up 47% of the population. Why don’t you go preach birth control to some of the folks who can’t afford to have kids? That would be more productive than just stirring up resentment.

Logical Dude

September 19th, 2012
1:42 pm

Finn: There is a good chance that $1 would have gone into the stock market or a savings account to be unproductive for generations.

But that dollar in the stock market goes to a company that uses it.
That dollar in the savings account is used as a loan for someone else.
It doesn’t just sit there doing nothing.

cc

September 19th, 2012
1:43 pm

A nation, just like an individual, can’t borrow its way out of debt and it can’t spend itself to wealth. Am I the only person who sees it that way?

EJ Moosa

September 19th, 2012
1:43 pm

“It’s not complicated. If you buy a hamburger off the value menu at McDonald’s, you just grew the economy, specifically Gross Domestic Product, by $1.00″

Not exactly.

You had to take that dollar from somewhere. You had to collect it, and redistribute it. So you took more than a dollar from others that also would have spent it.

So you likely took $1.30, had $1.00 spent, and the other thirty cents is friction, being paid to government agents.

That is a drag on the economy.

Kyle Wingfield

September 19th, 2012
1:44 pm

JDW: With your widget example, you are ignoring the resources freed up for the consumers of those widgets.

Also, you are implying that *any* consumption with those savings = growth. That’s not necessarily true.

They BOTH suck

September 19th, 2012
1:45 pm

Lil Barry & Jam

Productivity-Wages Disconnect

The income story in America is deeply troubling. Inflation-adjusted average hourly earnings for production and nonsupervisory workers (a category that encompasses 80% of the workforce and leaves out higher-paid managers and supervisors) rose by an anemic 0.1% a year from 1979 to 2007, according to the EPI. A potent combination of economic and social forces has conspired to keep wages down for most workers with the exception of a brief period of white-hot economic growth in 1995-2000. Private-sector unions have largely disappeared. Companies have outsourced all kinds of tasks to cheaper places overseas and low-cost contractors at home. The upward spiral in health-care costs has eroded wages. Intense competition unleashed by globalization, deregulation, and technological upheaval has kept a tight lid on compensation.

http://www.businessweek.com/investor/content/feb2010/pi2010025_902249.htm

Centrist

September 19th, 2012
1:46 pm

We keep talking about transfer payments, but that is a misnomer when we don’t get close to balancing a budget. We are giving more benefits to the non-productive by adding debt. Adding debt devalues our currency, makes us beholden to the debt holders, lowers our debt rating which in turn increases the cost of debt service and makes other investments more lucrative in comparison, crowds out other private equity, and destabilizes our economy.

The Chairman of the Federal Reserve, Ben Bernanke Bernanke gave a speech where he said “The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost.” (He referred to a statement made by Milton Friedman about using a “helicopter drop” of money into the economy to fight deflation.) Bernanke’s critics have since referred to him as “Helicopter Ben” or to his “helicopter printing press.”

This is the Obama’s administration strategy for our future, and it is doomed to eventual failure (after buying short term election votes, of course).

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

September 19th, 2012
1:46 pm

Yeah, Kyle – on the one hand you can either use the $1 for investing or you can use the $1 to help a family in need put food on their table.

You simplify it down so I will do the same: Not all welfare goes to a poor black lazy person like you folks are want to believe. Buying food when you are between jobs helps you get by as you look for work. Being able to feed a kid before he/she goes off to school or at school makes the kid more attentive at school which is conducive to learning.

Kyle, you would have been one of the money changers cast out by that lily- white guy with the long beard who lived in the middle east way back when.

Interested Observer

September 19th, 2012
1:48 pm

RE: “you subscribe to the Scrooge McDuck theory of economics, in which all these rich people have so much money it’s just sitting in a vault for them to swim in.”

Seriously, Kyle, what’s with all the snark? Have my comments been disrespectful to you?

The economy is measured by spending. $1.00 spent on goods and services grows the economy by $1.00. That is not my opinion. That is how Gross Domestic Product is measured.

If you deposit $1.00 into a savings account, you did not grow the economy. If you trade in stocks, you did not grow the economy. Who has the most money that isn’t, at any given moment, directly growing the economy? First the wealthy, then the upper middle class, then the lower middle class (if they’re lucky).

The poor? They’re spending every dollar that they can get their hands on. They have no choice. If you tax a poor person, then that’s $1.00 that you took directly out of the economy. Not so, for those whose savings are taxed.

Again, I’m not expressing my opinion here. If you don’t like it, then I guess that’s the reason for the snark. But the bad jokes don’t change the facts.

“It must always be remembered, however, that it is the luxuries, and not the necessary expense of the inferior ranks of people, that ought ever to be taxed.” — ADAM SMITH

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

September 19th, 2012
1:49 pm

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.

Try making those checks a little more substantial?

JDW

September 19th, 2012
1:49 pm

@Kyle…

“That there’s no value in saving money, which gives banks the wherewithal to make loans to growing businesses?”

That does create value. Problem is banks are not using their dollars for that purpose. More and more often they are using those dollars in other investments…say hedge funds or derivatives instead.

That there’s no value in investing money in the equity markets, which sends signals to entrepreneurs about the incentives of putting money to its most productive uses?”

Now that one is a big one. There is value in investing DIRECTLY in a company and giving them capital to use to grow there business. There is NO widespread economic value in buying and selling equities to make a profit. The profits generated by the financial sector in these activities is diverting money that could really be used to drive growth.

“That’s the upshot of the theories you’re espousing.”

The upshot is the money needs to be deployed in productive endeavors…not a Wall Street trading account.

GFY

September 19th, 2012
1:49 pm

Ok…It’s settled science since Finn says (in between studying for classes) Observer is correct. No debating it here…..welfare is the way to go to stimulate our economy. Just look at all those other countries whose economies are growing….I bet the gave away food stamps all the way to prosperity. LOL

Kyle Wingfield

September 19th, 2012
1:51 pm

They Both: That article is 2 years old. The buzzword for 2012 is “re-shoring,” i.e. the return of a lot of those jobs to the U.S. because the difference in labor costs has narrowed.

That said, the increasing bite that health costs take out of compensation accounts for much of the wage stagnation. (And, pre-emptively: Handing it off to the government and paying for it via taxes would not help.)

Kyle Wingfield

September 19th, 2012
1:52 pm

Finn @ 1:46: If you don’t understand how investing works, and why it’s beneficial to more than the investors, just say so.

JDW

September 19th, 2012
1:54 pm

@Kyle…”With your widget example, you are ignoring the resources freed up for the consumers of those widgets.”

There may not be any resources freed up. Only if prices decline which they may or may not. As a tradeoff to keep it simple I also ignored the impact of the 50 workers not having money to spend and drive growth in other areas.

Many if not most times productivity gains will drive growth but it is not an absolute. Increased consumptions will always drive growth, assuming demand does not outstrip the capacity to produce.

Interested Observer

September 19th, 2012
1:54 pm

RE: “just look at all those other countries whose economies are growing….I bet the gave away food stamps all the way to prosperity.”

More snark. No facts.

They BOTH suck

September 19th, 2012
1:56 pm

Kyle

I could careless if it were 5 yrs old. Real wages have been stagnant for almost 30 yrs for the majority in the US. JamVet was correct when he posted that earlier.

Nominal wages have gone up and one must take into account benefits, but real wages are stagnant. In some cases, maybe behind.

JamVet

September 19th, 2012
1:56 pm

Wages haven’t “flat lined”

This is the staggeringly level of ignorance and denial in the far right wing.

In 1967 the median income was $33,338. In 2003 it was $43,318.

A 29.9% increase over a span 36 years.

You do the math. denier.

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

Centrist

September 19th, 2012
1:57 pm

Kyle Wingfield

September 19th, 2012
1:59 pm

Interested: First, consumption is *one* way GDP is measured. Output is another.

Second, what do you think happens when money is deposited in a savings account? What do you think happens when it’s invested in a stock? Don’t just think about the individual — you have to understand the broader picture here. Banks do things with the money deposited with them. Companies and entrepreneurs make decisions based on what the equity markets tell them about the potential return on their investment of time, money, expertise, etc.

Third, I didn’t mean to offend you, just to provide an illustration of what your line of thinking sounds like to me. It was, admittedly, a caricature. But that’s essentially what you’re saying: a) that rich people just keep their money lying around unproductively, and b) that $1 spent on a hamburger at McDonald’s has the same economic value as $1 invested in an effort to find more productive uses of resources.

If you’re right, 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?