Ammon News - By HEDRICK SMITH

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 highwages was also smart business. When wages are low, uncertainty dogs themarketplace and growth is weak. But when pay is high and steady, Fordasserted, business is more secure because workers earn enough to becomegood 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 articulat ewhat economists call “the virtuous circle of growth”: well-paid workers generating consumer demand that in turn promotes business expansion andhiring. Other executives bought his logic, and just as important, strongunions 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 WarII.from 1945 to 1973, even though income tax rates were far higher than today.It created not only unprecedented middle-class prosperity but also fargreater economic equality than today. The chief executives of the long postwar boom believed that businesssuccess and workers’ well-being ran in tandem. Frank W. Abrams, chairman of Standard Oil of New Jersey, voiced thecorporate mantra of “stakeholder capitalism”: the need to balance the interests of all the stake holders 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,” whichhe 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 withreasonable 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 dramaticallystarting in the late 1970s. Although productivity increased by 80.1 percentfrom 1973 to 2011, average wages rose only 4.2 percent and hourlycompensation (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 salariessank to the lowest level since 1929. In the recession’s aftermath,corporate profits have bounced back while middle-class incomes havestagnated. Today the prevailing cut-to-the-bone business ethos means that a companylike Caterpillar demands a wage freeze and lower health benefits from itsworkers, while posting record profits. Globalization, including the rise of Asia, and technological innovationcan’t explain all or even most of today’s gaping inequality; if they did,we would see in other advanced economies the same hyperconcentration ofwealth and the same stagnation of middle-class wages as in the UnitedStates. 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 companyAlcoa in 2008, is “the social contract: the willingness of business, laborand political leaders to put aside some of their differences and makeagreements in the national interest.” In short, German leaders have practiced stakeholder capitalism and followedthe century-old wisdom of Henry Ford, while American business and politicalleaders have dismantled the dynamics of the “virtuous circle” in pursuit ofdownsizing, offshoring and short-term profit and big dividends for theirinvestors. Today, we are all paying the price for this shift. As Ford recognized, ifaverage Americans do not have secure jobs with steady and rising pay, theeconomy will be sluggish. Since the early 1990s, we have been mired threetimes in “jobless recoveries.” It’s time for America’s business elites tostep beyond political rhetoric about protecting wealthy “job creators” and grasp Ford’s insight: Give the middle class a better share of the nation’seconomic gains, and the economy will grow faster. Our history shows that.




*The New York Times