Ford’s Better Idea

Wage Wars. There’s a very fine essay at Down With Tyranny (DWT) discussing and roundly criticizing the growth of the distorted claim that auto workers, on average, make $70.00 per hour. As you can see by reading DWT’s reporting, this claim is scurrilous, at best, as it is based upon some rather “fancy,” i.e. dishonest arithmetic. In short, to reach the $70.00 per hour figure the proponents of this baloney add up each present worker’s hourly pay and benefit costs and then add in the costs of all retirees’ benefits as well. They then divide that massive total by the number of hours worked by present workers while excluding the retirees. In fact, the average pay of so-called “Detroit” auto workers is $28.00 per hour. In addition, union health and pension benefits add another $10.00 per hour to the total cost per worker. The pay of non-union auto workers for primarily foreign auto makers, as in Alabama Senator Richard Shelby’s “right to work” state and other southern states, is between $20.00 and $26.00 per hour. The difference in actual wages, therefore, is relatively small (except, one might guess, in the opinion of the Honda and Toyota workers who make $2.00 – $6.00 less per hour than the unionized “Detroit” workers). The anti-union crowd mendaciously tries to massively expand the resulting gap by adding in the retiree and surviving spouse benefits. This does indeed result in a $70.00 per hour figure for union employees. Those nasty money hungry Detroiters.

Surely, it is true, as Jonathan Cohn points out, retiree benefits are a cost to the Big Three auto makers, and a large one indeed. He explains, however:

Of course, the cost of benefits for those retirees–you may have heard people refer to them as “legacy costs”–do represent an extra cost burden that only the Big Three shoulder. And, yes, it makes it difficult for the Big Three to compete with foreign-owned automakers that don’t have to pay the same costs. But don’t forget why those costs are so high. While the transplants don’t offer the same kind of benefits that the Big Three do, the main reason for their present cost advantage is that they just don’t have many retirees.

The first foreign-owned plants didn’t start up here until the 1980s; many of the existing ones came well after that. As of a year ago, Toyota’s entire U.S. operation had less than 1,000 retirees. Compare that to a company like General Motors, which has been around for more than a century and which supports literally hundreds of thousands of former workers and spouses. As you might expect, many of these have the sorts of advanced medical problems you expect from people to develop in old age. And, it should go without saying, those conditions cost a ton of money to treat.

Felix Salmon at Portfolio.com’s Market Movers writes “As of 2007, the UAW represented 180,681 members at Chrysler, Ford and General Motors; it also represented 419,621 retired members and 120,723 surviving spouses. If you take the costs associated with 721,025 individuals and then divide those costs by the hours worked by 180,681 individuals, you’re going to end up with a very large hourly rate. But it won’t mean anything, unless you’re trying to be deceptive.” And they are.

Jonathan Cohn further explains that in 2006 the Big Three and the United Auto Workers (UAW) negotiated an historic new agreement whereby the UAW would take over the management of retiree benefits following an initial deposit by the Big Three to fund the UAW trust that will be created and self-funding thereafter. Also, the union agreed to a change in health benefits for all active or retired workers, a change that will result in significant cost savings for the Big Three. Finally, the union agreed to a two-tiered salary scale that will also mean cost savings for the companies. All these changes will result in a radically closing of the gap between the costs of the operation of Big Three companies and their non-union counterparts.

The Eternal War on Wages. The recent furor over the Big Three and the supposed money hungry UAW and, in particular, the now debunked “$70.00 per hour” distortion represents a desperate attempt of the predominantly Republican and Blue Dog Democratic anti-union forces to continue a decades long war against unions, and against income distribution fairness in general. The conscious or unconscious agenda of the WalMart ownership families of the world is to create a society where the population consists of working families who share five important characteristics:

(1) they work for the lowest wage that can be offered that when supplemented by debt will provide enough disposable income to support purchases of consumer products and services consistent with maximization of profit that enrich the business class industries, services, and familial lifestyles;

(2) they accrue debt that becomes consistently larger as a percentage of disposable income and consequently becomes increasingly difficult to repay until families exist primarily to work well into old age primarily to pay interest on debt;

(3) they have little or no publicly financed “safe harbors” to rely upon in times of unemployment so that families may not make reasoned decisions about offering their labor nor may they feel safe in organizing to seek greater benefits or rights;

(4) they rely upon a for-profit health care system that is minimally supported by public finance or public services so that a significant portion of family earnings is regularly apportioned to the inflationary health care industry and the business class that owns it; and

(4) they have their scant savings, after debt payments, if any, invested for their short retirements principally in the equities and debt markets, and as often as is possible in the companies they work for, and with little or no publicly financed pension plans or protections from pension reductions or destruction due to corporate bankruptcy.

Obviously, this is nothing new in theory, the list above includes many of the underlying unconscious motivations of an “invisible fist” laissez faire economy that, as in the Bush years, also asserted an ever increasing amoral attitude toward workers and the poor. It’s a wealth machine for the few buttressed by a reinforced religious belief system where the working families are convinced that their economic standing is exclusively the result of their own shortcomings and that, conversely, the wealthiest among them deserve their massive good fortune.

The Debt Front. Debt, in this system, has to be kept within certain boundaries. In the Bush years, however, that sensible idea was submerged in a belief that debt could not sink the entire economy. Debt, public and private, was piled upon debt. One of the principle areas where the economy has suffered a systemic and theoretical failure, at least in terms of conservative ideology, is that debt does seem to matter. Remember those days when the Republican party, a la Phil Gramm, warned and raved about debt and deficits? In the W. Bush years they actively shunned such thinking and added monumental amounts of public debt (which, of course, due to their shenanigans and ongoing bailouts, will blossom further under President Obama). In that way they kept much of the cost of the Iraqi war conveniently off budget, for example. Also, consumer debt ballooned to enormous proportions before the present economic downturn, and that, in the present accelerating diminution of GDP, will become an ever greater burden in percentage terms, for the nation, as a percentage of GDP, and for individual families, as a percentage of their shrinking – or disappearing – disposable income (which was already at a pre-recession low point). See the chart below (Source, Federal Reserve), and note, in comparison, how mild was the debt overhang prior to the Great Depression of the ’30s. Witness also the extreme slope of the rise from 1999-2008.
Then, most importantly perhaps, see the charts displaying household debt and disposable income. (Sources, Federal Reserve)

A low wage debt driven system where the vast number of Americans were consigned to the role of permanent worker class, such as what the Republican party hoped to bring about during the nearly 30 year Reagan era, required really careful fine tuning. It literally makes no sense to push their mass of workers into so much debt relative to their incomes that they simply cannot meet their obligations. That could only result in consumer products and services unsold at almost any price. And clearly the deeply indebted U.S. consumer cannot rely on savings, as the chart below indicates (Source, U.S. Bureau of Economic Analysis). (Note, however, that since the beginning of the bank bailouts the savings rate has increased which is consistent with a scenario of consumers hoarding cash as jobs disappear and prices drop.)Ford Really Had A Better Idea. Henry Ford understood that pushing workers into near penury did not serve business interests. How this obvious lesson was lost in the Dubya years simply boggles the mind. In any event, Ford, among of the greater wealth mongers, union haters, and classic meddlers in his worker’s private lives, at least understood, to the harsh criticism of his peers, that the interests of his family, his class, and the country, were best served if his Model T’s were affordable to his own workers. Ford shocked Wall Street by more than doubling the industry standard by paying his workers $5.00 per day, and shortening the workday as well. In the Dubya years, however, the “Fordism” of decent wages was purposely starved continuing with a vengeance decades of Reagan inspired “no holds barred” deregulated vulture capitalism aimed at disabling unions. To keep their wealth machine well oiled they forgot Ford’s advice that the workers need to have both adequate income and the room for debt and debt repayment to fuel economic growth, and thus provide the consequent gargantuan incomes and asset growth required and revered by the supremely wealthy.

Contrarily, it is well known that Bush years laissez faire policies have not added to the income of the vast majority of working families during his tenure even as GDP rose (in fact, these policies have subtracted from average incomes among working families from 2001-2008), see chart at right (Source, Wall Street Journal). As Joe Klein wrote recently at Swampland, “We have had 30 years of class warfare, in which the wealthy strip-mined the middle class. The wealth has been ‘spread’ upward.” Yet, after stoking economic growth by encouraging debt upon debt, vulture capitalists, in their greed, went a “debt too far,” and now must wonder why so many families are actually saving money, or refusing to add to debt (even those who can actually secure loans, higher credit card balances, etc. from suddenly – and understandably – cautious banks). The so-called financial crisis they have created via the cravenly immoral policies of unrestrained capitalism is, in its most dangerous manifestations, not a credit supply problem. In the end, I think, this period will be viewed as a credit demand problem, at least from the viewpoint of the debt swamped consumer. Remember when consumers were merely debt “strapped”?

The average Jane and Joe in our country, the debt buried majority, has learned a great deal about debt in the last six months, and the lesson has begun to sink in. As they watch banks, insurance giants, and financial firms go belly up from preposterously over-leveraged financing, now, I believe, Nancy Reagan like, they may have learned to “just say no,” and go on a “debt strike,” refusing to add to family indebtedness. And, ironically, this is what is called the “paradox of thrift” since it occurs precisely at the time when the economy most needs spending to stay above water. But, like the prisoner’s dilemma, it makes sense for individual families to save and repay debt. So, as debt is shed rather than added, a massive buyer’s strike occurs simultaneously, fostering a period of dwindling sales, plummeting profits, and consequent price deflation as millions of families repay debt. Unfortunately, in yet another irony, deflation causes the dollar’s value to “swell,” i.e. debtors are repaying dollars in a scenario where wages and prices are falling, thus making their repayment dollars more valuable to the creditor and more burdensome to the debtor to repay. GDP and employment, in that debt repayment and dollar hoarding scenario, has lately just begun to fall. Like Katrina, what we’ve seen thus far may be the equivalent of the first water cascading over the levees. The recent data on unemployment, spending, and business investment reveals a nation and world rapidly treading water with few life jackets at hand.

Hope We Can Hope Works. President Elect Obama’s plans for massive fiscal stimulus, however, is an exceptionally bright prospect among all this bleak data, and it may pave the way to a softer economic landing by 2011, particularly given his wise economic team choices. Kevin Drum at Mother Jones expanded upon Joe Klein’s previous quote when he wrote, “For three decades we’ve artificially kept middle class wage increases far below the growth rate of the economy, and this trend has been even more pronounced over the past eight years. This has created an enormous pool of extra money that’s been — yes — strip mined and redirected to the rich, and fixing this is Barack Obama’s biggest and longest-term challenge. If we restore the normal growth of middle class wages, it provides a sustainable consumer base for the entire economy; it reduces the demand for endless credit card debt; it brings down income inequality naturally. . .” Economists, however, debate the effects of fiscal stimulus just as they debate the effects of monetary policy, and the clock is ticking with nearly everyone in over their heads. President Elect Obama warned of inaction during the months of the interregnum. Already, the Big Three has been left to flounder as the waters of its own debt rise above its revenue from collapsing sales and combine to overwhelm its dwindling protective financial levees. Also, will House and Senate Republican and Blue Dog Democrats again revert to voodoo economic ideology and stand in the way of fiscal stimulus for the Big Three, and others, when Congress meets again in December’s Special Session, or when the 111th Congress convenes in January 2009? In the absence of congressional action, or deft moves by an apparently flailing Henry Paulson, Federal Reserve monetary policy, the other tool available to our economy, has little to offer during the interregnum. With the fed funds rate at nearly 0% little remaining traction can be applied, if any (see Paul Krugman’s discussions of “liquidity traps,” here and here).

If all the various stimuli fails, come Spring 2009 perhaps we’ll see a dramatic “clear the decks,” a wholesale G-20 mediated trans-government debt holiday. We’re already hearing some of that in the proposals to write down the principal on home mortgages. What would be foremost among other candidates? Credit card debt, student loan debt, even auto debt? Paulson has made noises lately that he intends to try to unstick those understandably sticky credit markets with Troubled Asset Relief Program (TARP) megadollars.

When the waters are flowing around one’s economic neck, well, at that point, “moral hazard” be damned. The wealthy who survive this Lesser Depression (so far), although arguably the least qualified lecturers upon anything containing the word “moral,” will once again sternly lecture American workers about that during the next expansion, well after the Katrina level waters of the present debt tsunami have subsided. For sure, those at the top of the economic ladder will find it hard to avoid their own massive losses as consumers prove that Henry Ford was correct: when you do not pay your workers enough to purchase your company’s products or – a thoughtful Mr. Ford might have added – to service the debt you have rabidly encouraged upon them, then profits collapse, investment ceases, and it’s all hands on deck to hand out the life jackets. Oh, and to them as well, to the regal WalMart ownership families of this world, they too . . . to the lifeboats! Yet, with a new and invigorating Captain at the helm, and his proposal to create millions of new jobs in needed infrastructure and other employment, my bet, despite all my inherent gloom, is that the world economy has a very reasonable chance to avoid a Titanic moment . . .

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