Too many American business people these days have forgotten the lessons of Henry Ford. He was the founder of Ford Motors and he recognized a key fact of both human nature and business that helped him and his company to prosper.
He realized that better-paid workers were more likely to stick around, reducing his turnover costs. He also recognized that by paying better wages, his workers could actually afford to buy his products, thereby growing his customer base.
It was a lesson that came to fuel the greatest economic expansion in world history, and built an American middle class that comprised roughly 70 percent of all Americans by the 1960s and ‘70s.
What Ford recognized was that the U.S., even a century ago, was rapidly transitioning to what economists call a “demand economy,” meaning that the bulk (about two-thirds) of new economic activity was generated by consumer demand for goods and services. The more demand in the economy, the more that businesses could sell, the more people they could employ, and the more profits they could make.
But who fuels that demand? The poor are struggling just to get by, so they have little money for anything but basic food and shelter. The wealthy spend a lot more, but can’t possibly spend all that they make, so much of it ends up as savings. It’s the middle class that really fuels demand, or consumption, of goods and services. It’s the middle class that, for generations, kept the economy perking along.
Trouble is, there are so many fewer people in the middle class today than there once were. Millions of Americans took a huge financial hit in the 2008 housing collapse, and millions more good-paying manufacturing jobs, that were created to meet our once-strong consumer demand, have disappeared over the past 25 years as top corporate executives shifted that production overseas. Union busting added further pressure to workers and has helped keep average wages flat for the longest period in American history.
It all took a toll. Today, most estimates put the percentage of the middle class at about 50 percent of the country, down from 70 percent 40 years ago. That’s about 60 million people who have dropped out of the middle class. Some of them have undoubtedly moved into the ranks of the rich, but the vast majority moved down into the ranks of the poor. And that means fewer people with the means to participate meaningfully in the economy.
Corporate profits soared for a time, as workers’ wages stagnated, but that did nothing to fuel consumer demand, since the profits mostly went to those already at the top, who often simply don’t have time to spend all their money.
These trends weren’t helped by Republican tax policies, which have consistently slashed taxes for the already-rich. That meant more money, that might otherwise fuel demand if it was in the hands of middle class workers, wound up sitting in the already overstuffed bank accounts of millionaires and billionaires, rather than being used by governments to fix our crumbling infrastructure, or hire teachers, firefighters, public health nurses, etc., creating more middle class consumers at the same time.
The theory behind all those tax cuts was that the wealthy would invest all that extra cash in new businesses that would create jobs and further grow the economy. But the theory hasn’t worked in recent decades, in part because businesses need customers and the decline of the American middle class has hollowed out the pool of potential consumers.
And that’s where we sit today, with an economy that no longer seems to work for far too many people. Those with all the money aren’t investing in job-creating industries here in America, nor even in places like China more recently, because the demand for their products just isn’t there like it used to be. As we’ve learned in recent years, much of that tax windfall for the wealthy— trillions of dollars, in fact— today sits largely idle in offshore bank accounts—essentially hoarded— serving no purpose at all from an economic standpoint.
Today, the biggest challenge to economic growth is the lack of consumer demand, and there’s little reason to think the situation will get better any time soon. The baby boom generation is entering retirement, when most people tend to consume less. And today’s twenty-somethings are wallowing in more than a trillion dollars in student debt, a situation which will likely hobble their purchasing power for years to come.
Which gets me back to Henry Ford and the lessons that American business has apparently forgotten. If we’re going to spark a real and shared economic expansion, we need to grow the middle class once again. And the only way to do that is to put more money into the hands of those who currently earn too little to achieve middle class status in America.
The best way to do that is by increasing the minimum wage, and by a lot. The current fight for a $15 minimum wage (most likely phased in over a few years) is not only realistic it would be a boon to the economy. Some have argued that such a wage increase would reduce employment, but there’s precious little evidence of that. Most low-wage jobs are in the service sector, like a fast food worker or a maid at a hotel. These jobs can’t be outsourced, because, at least for now, they still require a person to do them. And these businesses don’t hire people they don’t need, regardless of the wages involved. If you increase the minimum wage, low-wage workers will earn more money, and that will fuel demand because fewer of them will be forced to live paycheck-to-paycheck and limit their spending to the bare essentials.
In some cases, the higher wage will result in higher prices for goods and services, but only marginally. If a maid can clean three hotel rooms in an hour, a pay increase from $7.50 an hour to $15, would add $2.50 a night to the hotel owner’s cost of offering a room. On a room that already costs more than $100 a night, who’d even notice?
If the higher wages cut into company profits, that would be a good thing in many cases. How many more billions does the Walton family need, after all? If more of their profits went to their workers, it would be a great thing for America, and it would probably increase sales at Walmart at the same time.
Rather than fighting against a minimum wage increase, American businesses need remember the lesson taught by Henry Ford. They need to recognize the fight for a $15 minimum wage as a chance to restore the fortunes of millions of American families and to get our demand economy back on track.