Let’s Not Be Bamboozled By Robert Reich’s Stuff

Today we pick a fight with Robert Reich. You remember him, Bill Clinton’s outspoken Labor Secretary, Berkeley professor, political commentator, and, most recently, Occupy protest apologist. Why should we worry about his opinion? Because Reich, unlike shrill Johnny-one-note Paul Krugman, is a master of the art of persuasive writing.

Like most of his work, Reich’s recent piece in The San Francisco Chronicle, “Instead of New Deal, Workers Get Raw Deal,” is very well composed, taking the reader on an emotional journey meant to deliver him into the ranks of the howling mob. It is also stuffed with so much twisted history, economic fallacy, and dangerous recommendations that it cries out to be patiently deconstructed.

Reich promotes the classic Marxist shibboleth that economic downturns are created when employers don’t pay employees enough to “buy their own products.” According to Reich, Exhibit A is Ford Motor. He lauds its founder, Henry Ford, for paying his workers above market wages. In contrast, he castigates today’s Ford for trying to reduce its bloated union labor costs in order to stay competitive with government-subsidized General Motors and Chrysler, which were conveniently allowed to stiff their bond holders and dump their pension obligations when they were guided through bankruptcy and partial nationalization by the Obama administration.

Besides browbeating employers to increase wages, Reich’s broad economic remedy is to juice up “aggregate demand” by extending unemployment benefits and making the federal government the employer of last resort, by creating a new Works Progress Administration and Civilian Conservation Corps. This is all to be paid for by taxing the rich, both individuals and corporations. Doing this, Reich claims, will rescue us from our current malaise by giving consumers more money to spend, bringing back a golden era of prosperity.

Let’s start with Henry Ford, whose most important invention was the assembly line. What Ford did was to dramatically increase the productivity of his workers, allowing him to build more cars than his competitors while using less labor. This helped Ford put many of his competitors out of business, commandeering enough market share to get him branded a monopolist were this to happen today. Over 15 million Model Ts were sold, giving birth to the car culture Americans have come to know and love. This made Ford one of the richest men in the world.

If Robert Reich wants to praise Ford for his relentless effort to reduce labor costs, drive his competitors out of business, make horse-drawn transport obsolete, and become fabulously wealthy by offering the best valued products to the largest number of customers, sign me up. But he doesn’t. Instead he praises Ford’s radical decision to pay his workers $5 a day, more than twice the prevailing wage, claiming that this “higher wage turned Ford’s autoworkers into customers who could afford to buy Model Ts.”

Think about this claim for five seconds. Then spend five minutes taking a Wikipedia history lesson to understand why Ford really paid above-market wages. During the time in which 15 million Model Ts were produced, total company employment never exceeded 100,000.  To what extent could paying his workers higher wages have contributed to booming sales?

Ford raised wages to reduce turnover, which was running at 300% per year during the hypercompetitive infancy of the auto industry. Lower turnover reduced training costs and improved both throughput and quality. Ford was able to afford this higher wage not because he was less greedy but because he figured out how to get more output from each worker. While the rate per hour that Ford paid his assembly line workers was high enough to steal them away from competitors, the rate he paid per car was actually a lot less.

The virtuous circle which Henry Ford mastered—which was driven by, yes, greed—didn’t end there. By relentlessly reducing his costs through increased worker productivity, Ford was able to share his profits with the consumer by cutting prices. Sure, this threw competitors’ workers out on the street, but then the market grew rapidly as more and more customers across the country could afford to buy cars, allowing Ford to hire those displaced workers. All the while Henry plowed his profits back into the company to make it grow bigger and richer.

Compare this supply-side approach to the Keynesian solution recommended by Reich that puts artificial job creation and demand-side government stimulus first. Had Reich been around in Henry Ford’s day, he would have excoriated automation as a threat to the working man. He would have insisted that workers from car companies driven out of business by Ford be given 99 weeks of unemployment insurance. And we can only imagine the antitrust campaign Reich would have unleashed when Ford’s market share passed 50%.

Space does not allow a refutation of Reich’s additional claim that the 1929 stock market crash was caused by a consumer credit bubble—long before credit cards, no-money down home mortgages, debt securitization, and abominations like Fannie and Freddie. Nor his circular reasoning that jacking up corporate taxes will magically create jobs after that money is redistributed to the unemployed, who will rush out to spend it thereby encouraging companies to hire them to accommodate the increased demand. Once the good professor works up a good rant there is no stopping him—except with facts, history, and reason.