[Vision2020] When Capitalists Cared

[Art Deco]

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September 2, 2012
When Capitalists Cared By HEDRICK SMITH

Washington

IN the rancorous debate over how to get the sluggish economy moving, we
have forgotten the wisdom of Henry Ford. In 1914, not long after the Ford
Motor Company came out with the Model T, Ford made the startling
announcement that he would pay his workers the unheard-of wage of $5 a day.

Not only was it a matter of social justice, Ford wrote, but paying high
wages was also smart business. When wages are low, uncertainty dogs the
marketplace and growth is weak. But when pay is high and steady, Ford
asserted, business is more secure because workers earn enough to become
good customers. They can afford to buy Model Ts.

This is not to suggest that Ford single-handedly created the American
middle class. But he was one of the first business leaders to articulate
what economists call “the virtuous circle of growth”: well-paid workers
generating consumer demand that in turn promotes business expansion and
hiring. Other executives bought his logic, and just as important, strong
unions fought for rising pay and good benefits in contracts like the 1950
“Treaty of Detroit” between General Motors and the United Auto Workers.

Riding the dynamics of the virtuous circle, America enjoyed its best period
of sustained growth in the decades after World War
II<http://topics.nytimes.com/top/reference/timestopics/subjects/w/world_war_ii_/index.html?inline=nyt-classifier>,
from 1945 to 1973, even though income tax rates were far higher than today.
It created not only unprecedented middle-class prosperity but also far
greater economic equality than today.

The chief executives of the long postwar boom believed that business
success and workers’ well-being ran in tandem.

Frank W. Abrams, chairman of Standard Oil of New Jersey, voiced the
corporate mantra of “stakeholder capitalism”: the need to balance the
interests of all the stakeholders in the corporate family. “The job of
management,” he wrote, “is to maintain an equitable and working balance
among the claims of the various directly affected interest groups,” which
he defined as “stockholders, employees, customers and the public at large.”

Earl S. Willis, a manager of employee benefits at General Electric,
declared that “the employee who can plan his economic future with
reasonable certainty is an employer’s most productive asset.”

>From 1948 to 1973, the productivity of all nonfarm workers nearly doubled,
as did average hourly compensation. But things changed dramatically
starting in the late 1970s. Although productivity increased by 80.1 percent
from 1973 to 2011, average wages rose only 4.2 percent and hourly
compensation (wages plus benefits) rose only 10 percent over that time,
according to government data analyzed by the Economic Policy Institute.

At the same time, corporate profits were booming. In 2006, the year before
the Great Recession began, corporate profits garnered the largest share of
national income since 1942, while the share going to wages and salaries
sank to the lowest level since 1929. In the recession’s aftermath,
corporate profits have bounced back while middle-class incomes have
stagnated.

Today the prevailing cut-to-the-bone business ethos means that a company
like Caterpillar demands a wage freeze and lower health benefits from its
workers, while posting record profits.

Globalization, including the rise of Asia, and technological innovation
can’t explain all or even most of today’s gaping inequality; if they did,
we would see in other advanced economies the same hyperconcentration of
wealth and the same stagnation of middle-class wages as in the United
States. But we don’t.

In Germany, still a manufacturing and export powerhouse, average hourly pay
has risen five times faster since 1985 than in the United States. The
secret of Germany’s success, says Klaus Kleinfeld, who ran the German
electrical giant Siemens before taking over the American aluminum company
Alcoa in 2008, is “the social contract: the willingness of business, labor
and political leaders to put aside some of their differences and make
agreements in the national interests.”

In short, German leaders have practiced stakeholder capitalism and followed
the century-old wisdom of Henry Ford, while American business and political
leaders have dismantled the dynamics of the “virtuous circle” in pursuit of
downsizing, offshoring and short-term profit and big dividends for their
investors.

Today, we are all paying the price for this shift. As Ford recognized, if
average Americans do not have secure jobs with steady and rising pay, the
economy will be sluggish. Since the early 1990s, we have been mired three
times in “jobless recoveries.” It’s time for America’s business elites to
step beyond political rhetoric about protecting wealthy “job creators” and
grasp Ford’s insight: Give the middle class a better share of the nation’s
economic gains, and the economy will grow faster. Our history shows that.

Hedrick Smith <http://hedricksmith.com/>, a former correspondent and
Washington bureau chief of The New York Times, is the author of “Who Stole
the American Dream?”


-- 
Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
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