Henry Ford wage hike: boon or bust?

January 12, 2014 Leave a comment

A Rube Goldberg machine may be more efficient than a Henry Ford wage hike. | Profound Whatever / Foter.com / CC BY-NC-SA

One hundred years ago, Henry Ford defied his fellow capitalists by doubling his workers’ wages.  It was a profitable boon, enabling his employees to finally afford the product they produced, the automobile.  Daniel Gross at the Daily Beast suggests that employees today should emulate Ford’s wage hike.  Is this a sound recommendation?

“All else being equal”–ceteris paribus–is an indispensable caveat to all economic theories.  A little scrutiny reveals that nothing is equal in comparing Henry Ford to employers today.

Gross literally describes Ford as a “dictator.”  He’s right.  Back then, Ford answered to a few private investors, but major employers today are accountable to open market shareholders.  Ford Motor Company eventually went public in 1956, and it was a good thing, too.  Market accountability makes the difference between CEO-approved assembly lines and Politburo-inflicted bread lines.

Differing labor market conditions also advise against a Ford-like wage increase.  Turnover and its associated costs were higher in 1914.  HR departments have learned a lot since then.  Significant overhead savings have already been captured, unlike in Ford’s pioneering days.  High turnover remains the norm for low-value added jobs like fast food service.  Still, crack open the Wall street Journal, which Gross dismisses as “revanchist,” and one will learn that employers are far from uninterested in improving work conditions.  Think of Google’s work site barbershop and sleep pods.

Not only do market conditions make the Ford wage hike inadvisable, but its accomplishments are oversold with a rhetorical sleight of hand.  Gross credits Ford with achieving an economy of scale, enabling the first “democratic car.”  But prior to the wage hike, the company was already moving 250, 000 cars a year, hardly an elite clientele.

Missing from the heart of Gross’ s case are findings that Ford’s own employees significantly broadened the consumer base.  It may as well have been an exogenous factor; perhaps instead it was World War I that boosted demand and decisively convinced Americans of the automobile’s utility.

In debunking an earlier incarnation of the Ford myth, Forbes writer Tim Worstoll notes another major deficiency.  Take Boeing, another durable goods manufacturer.  Paying a worker more there will not enable her to buy her own 777 airliner to enjoy on the weekend.

The Ford hike is a shot in the dark, an indirect Rube Goldberg way to increase demand.  Not to mention a blunt instrument.  Employers have more precise methods for such ends, like commercial advertising.  Some loathe ads as vacuous and soul crushing, but they increase demand by raising the value of the product in the mind of the consumer.  And the ad industry employs many thousands.

Other ways of increasing consumption include the tried and true coupon, the sales discount, and the rebate.  These only induce voluntary transactions.  Even if government wanted to raise consumption on a macro level, these inducements are much more equitable than the job killing minimum wage increase, which 85% of economists opposed in one recent survey (h/t Wintery Knight).

So it seems there’s no substance to recommend Ford’s wage hike.  What is Gross accomplishing with this piece, then?  He paints a straw man of inexplicably stubborn industrialists, saying that “. . . bosses have been choosing not to raise wages even when they can.”  If Henry Ford saw what employers are doing now, he’d be “shocked and dismayed.”

The straw man ultimately issues from a pervasive, unnamed menace:

There’s something deep in our contemporary and political culture, in the public and private sectors, that supports the proposition that employers should pay as little as possible at all times, at every point in the economic cycle.

He doesn’t say it, but he may be alluding to the misleading Keynesian bogeyman known unflatteringly as “trickle down economics.”

Employers are diverse and face many different circumstances.  Rather than acting as some monolithic cabal, each pays what their market and their bottom line allows.  Second-guessing employers is bad policy, and shaming market competitors into “doing their part” is harmful politics.

Certainly, there are often times when workers should get raises.  And cost of living adjustments are a good way to make sure that a rising tide keeps lifting all boats.  But the Henry Ford wage hike is more like income redistribution agitprop than good business advice.

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Pope pontificates unprofitably on free markets

November 30, 2013 1 Comment

Photo credit: Catholic Church (England and Wales) / Foter.com / CC BY-NC-SA

Pope Francis’s recently released exhortation, The Joy of the Gospel (pdf), has made the news and elicited commentary for its admonitions against the free market economy.  This is not a new stance for the Catholic Church.  Still, this latest iteration of qualified praise (hat tip First Thoughts blog) from commentators across the political spectrum led me to study the primary source itself.  After reviewing the text, I can only conclude that on free markets and the poor, Francis is tragically mistaken.  He gets it wrong.

In a section titled “Some challenges of today’s world,” Francis calls Christians to say “no to an economy of exclusion.”  Consider this passage:

… today we have to say ‘thou shalt not’ to an economy of exclusion and inequality. Such an economy kills.  How can it be that it is not a news item when an elderly homeless person dies of exposure, but it is news when the stock market loses two points?  This is a case of exclusion.  Can we continue to stand by when food is thrown away while people are starving?  This is a case of inequality.  Today everything comes under the laws of competition and survival of the fittest, where the powerful feed upon the powerless.  As a consequence, masses of people find themselves excluded and marginalized: without work, without possibilities, without any means of escape.

Herein we get a good sample of the main vehicle of discourse: platitudes.  Pope Francis doesn’t try to marshal any facts or hard evidence that the world is as he says; he takes it for granted that we share in a worldview where the powerful crush the weak and eat them for breakfast.  But is this really the world we live in?

Writing for the Daily Caller, conservative and Christian Matt K. Lewis affirms Francis’s warning against greed.  To me, his acknowledgment of the “tension” between conservatism and markets comes off as a little too contrite.  Lewis appeals to pure speculation by otherwise venerable Christian writer and apologist Francis Schaeffer.  He supposed that employers who sacrificed profits to pay their employees more would demonstrate Christ’s love better than by giving those profits to charity.  This obsession with profits is beyond misguided; it’s destructive to lend credence to the notion that not giving away profits is inherently bad.

Jesus warns us all to refrain from judging our neighbors.  He warns us to remove the log from our own eye before removing the speck from our neighbor’s.  Accordingly, who am I to say that my neighbor is greedy?  It is one thing if I know my neighbor intimately.  But it is uncharitable and an overreach to attribute greed to a general class of people whose trade circumstances I know little about.

As I see it, Francis’s social teaching remains too mired in a Eurocentric, Old World conception of human society.  The Pope himself hails from Argentina, a poster child for the economic development frustrations that are the norm in Latin America.  At one point, Francis sharply rebuts the efficacy of supply-side economic theory:

In this context, some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world.  This opinion, which has never been confirmed by the facts, expresses a crude and naive trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system.  Meanwhile, the excluded are still waiting.

But to say that supply-side stimulation has never been confirmed by the facts is untrue!  In America, Kennedy’s 1964 tax cuts, along with Reagan’s 1986 and Bush’s 2002 and 2003 tax cuts, helped everyday Americans greatly.  Over at National Review, Kevin Williamson details some more of Francis’s economic shortsightedness, particularly his trust of government to ameliorate inequality.

If Pope Francis really wants to lift up the “excluded,” he should look no further than to the tiger economies of South Korea, Taiwan, and most recently, China.  There, real people have been lifted out of poverty and brought into purpose, productivity, and prosperity, thanks to the free market.

Elswhere in his treatise, the Pope offers a thesis that violence will continue as long as inequality prevails.  What supports this idea, given that we’ve always had economic inequality, and there is no political mechanism to eliminate it on the horizon?  We could call upon Stephen Pinker’s book The Better Angels of Our Nature to see how violence has declined precipetously over the history of civilization.  We can lay this against our background knowledge that inequality is increasing to say that violence has shown itself to be inversely proportional to inequality.  Truely, may the rich get richer!

The progressive may ask, how could anyone say that?  Well, if life is anything more than a zero sum game, where the only way forward is government enforced redistribution, then that’s something we need to know and lay hold of.  In a Wall Street Journal opinion from 2012, Rabbi Aryeh Spero makes the case:

At the opening bell, Genesis announces: “Man is created in the image of God”—in other words, like Him, with individuality and creative intelligence. Unlike animals, the human being is not only a hunter and gatherer but a creative dreamer with the potential of unlocking all the hidden treasures implanted by God in our universe. The mechanism of capitalism, as manifest through investment and reasoned speculation, helps facilitate our partnership with God by bringing to the surface that which the Almighty embedded in nature for our eventual extraction and activation.

Further, seeking to unlock the hidden treasures of creation brings deep joy.  Spero remarks:

Unlike socialism, mired as it is in the static reproduction of things already invented, capitalism is dynamic and energetic. It cheerfully fosters and encourages creativity, unspoken possibilities, and dreams of the individual.

Where the Pope sees dehumanization and a stripping of dignity, a capitalist who understands economic truth in light of the image of God–Imago Dei–sees joy.  To make room for the invisible hand, to allow suppliers to compete for the benefit of the consumer, and to practice capitalism–under the rule of law, not under the unbridled strawman Francis berates–brings very real material and spiritual benefit not just to the capitalist, but to those whom Jesus called “the least of these.”

If we love God with all our mind, as we’re called to do in Matthew 25, then we can heed Francis’s call to serve as ones “bruised, hurting and dirty.”  But that will mean for someone like myself, refuting a simplistic vision of the world that vilifies entrepreneurship, uncritically trusts government to alleviate inequality, and endows dignity as a wealth transfer instead of a mutually beneficial transaction.  If there is joy in the Gospel, it has to be in knowing the world as it actually is.  As for the economic realm, it looks nothing like Pope Francis sees it.

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Remedial economics: Obamacare as teachable moment

November 14, 2013 2 Comments

Photo credit: peasap / Foter.com / CC BY

Here’s a good news article–from AFP of all places–that highlights the problem when government negotiates prices.  The headline says it all: “Secret pricing spikes US healthcare costs.”   The unflattering description of price negotiation, which is a favorite tool of economic liberals, is remarkable.  The article quotes European health policy experts, who advise the US to follow their lead by turning pricing over to market mechanisms. What a concept!

Meanwhile, a blogger at Values and Capitalism reminds us of the importance of basic economic literacy.  Her mention of “price signaling” triggers that part of me that must lecture everyone: prices communicate information about scarcity.  When government offers subsidies or fixes prices, it distorts that information.  These interventions produce illusion and falsehood.  It’s quite arguably immoral.

The spectacular implosion of the Affordable Care Act that we are now going through is a teachable moment.  Many fiscal conservatives spend a lot of time snarkily tweaking liberals and the Obama administration.  It would be a serious waste not to turn aside for a moment, and soberly remind our fellow citizens that no one can wish away immutable economic realities.  Central planning will never beat a free market.

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Is higher education really in crisis?

January 23, 2013 5 Comments

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I received a friendly invitation from Consider Again to comment on his latest post about the higher education bubble.  In making my comment, I found I had a full blown post.

Indeed, the bubble exists.  There is an “irrational exuberance” on the part of consumers with respect to higher education.  For deeply ingrained cultural reasons, demand for the product is highly inelastic.  It would be cathartic for the bubble to burst.  Better yet, for it to gently deflate.

The idea of crisis or a problem with higher education itself is largely illusory.  The real problem is that so many people expect the four year college experience to supplant a maturation process that should have happened while the child was still at home.  The problem will resolve only when our culture accepts that college should not be a necessity for each individual’s success.

It seems consumers value higher education for two distinct purposes.  First is the classic humanist ideal that education helps you become a better person.  Second is the economic utility that comes from enhancing the future marketability of the student’s labor.  Our society suffers needlessly for expecting higher education to deliver these two values together.  We’d do better to ensure that formation of a good citizen comes first, and is effectively carried out by the K-12 system.  Then, if parents and students choose, they may pursue higher education to enhance job prospects or to gain admittance into specialized careers.

The ongoing failure of the K-12 system to consistently produce well-informed citizens is a major drag on higher education.  There’s misguided pressure on universities to make up for that failure.  The University of California campuses implement some form of a “general education” requirement that is supposed to ensure a well-rounded experience.  But why duplicate what should have been done at the K-12 level?  At least the system could excuse students who grew up in state and should have already met the state’s basic standards.

Consumers aren’t the only ones to overestimate the value of an education.  The producers are just as off-base.  State universities are keen to stay competitive with top private universities that thrive off of massive endowments.  Neither state nor Federal taxpayer dollars can make up the gap for administrator salaries or luxury dorms in the higher ed arms race, let alone keep up with the steadily rising cost of worker health and retirement benefits.

This reality of course irks those who read a progressive sense of fairness and equality into the land grant mission.  But look how land grant universities started.  Only a small fraction of the work force utilized the system.  In the postwar period, that fraction grew remarkably.  Stuck between ever increasing enrollment, a highly competitive environment, and an all around disdain for tuition hikes, land grant schools have become just another victim of rising expectations.  It would take a very brave university president or chancellor to level with his or her community and declare the truth that too much is being offered to too many for too little.  Something has to give.

Then again, remember the higher ed crisis is illusory.  Like the White House’s current gun control drive, this is a propped up anxiety meant as news fodder.  The reality is that any prospective student worth her salt has the ability to take stock of a vast array of potential educational options, earn, borrow, or be awarded money for that end, and set goals accordingly.  A pricey four-year university education may be what she needs.  Then again, some of the happiest and most well off people in our society are those who never went to college.

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Dependency and entitlement: whose head stuck in the sand?

September 22, 2012 4 Comments

The 47% video has highlighted a sharp difference in worldview between conservatives and advocates of fairness/social justice.  The deep outrage we’ve seen within the latter group suggests an unwillingness to accept that entitlement and dependency are real phenomena stemming from human experience.

Just as with Mr. Obama’s “You didn’t build that” snippet, we could get lost in parsing what Mr. Romney meant.  But the stakes are different here.  If Mr. Obama is culpable for his quote, it is more a matter of worldview than of character.  But if Mr. Romney is guilty in the way sensationalists claim, then we must believe that he has a shriveled heart that is little more than a black lump of coal.  This is just absurd given his sacrifices and dedication to family, church, and country.  So we can and ought to dismiss this cartoon version of Romney.

The real question is not whether all of the 47% feel entitled and are dependent, but whether anyone in the group could be characterized as such.  Of course no one really thinks grandma or a worker retired on disability suffer from a sense of entitlement.  But this is precisely the interpretation mainstream journalists have been running with all week.

Such a hard prosecution is one half an insidious double standard.  On the one hand, the commentariat is completely okay suggesting that affluent Mr. Romney is out of touch, doesn’t care or relate to everyday struggles, or even that he wants to “pull the ladder up” behind him.  On the other hand, it’s utterly unthinkable to suggest that even one poor or working class person might be beholden to entitlement or dependency.  Per the dictates of political correctness, to do so would be an unconditional surrender to the worst bias and stigma.

This rule cannot persist.  Lest we go the way of Greece, our public discourse must accommodate some way of talking about these very real problems.  Rich, poor, and middle class folks are created equal in a real sense.  Across the dividing lines, all have intuition and faculties of reason.  The discipline of economics operates on the assumption that we are all rational creatures, agents who, whether consciously or not, respond to incentive.  We couldn’t escape it even if we tried.  Yet, big government politicians and guilt-ridden journalists would rather ditch this common sense understanding of humanity for the comfortable materialist fantasy that they took up at university and never quite abandoned.

There are all sorts of ways to describe the perils of incentive that effect the wide umbrella of welfare and entitlement transfers the federal government offers: rent seeking, moral hazard, tragedy of the commons, crowding out, rising expectations.  People’s behavior changes in response to conditions.  The sputtering, moribund economies of many European social democracies attest to what happens when workers secure the right to too generous a menu of entitlements.

Those who have seized on the 47% comments have highlighted a dangerous state of denial in our country.  Dependency and entitlement are heavy clouds that threaten to burst cultural and economic disaster on us.  The way some react to these words though make it seem as if their heads are stuck in the sand.

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