When The Government Allowed the Capitalists to Care

In the 9/2/12 New York Times, Hedrick Smith wrote When Capitalists Cared. The article centered on Henry Ford's bold move to pay workers $5 a day, a high sum well above the market rates at the time, as an example of social justice missing from today's corporate leaders. .  Smith's refrains against a widening income gap have been often repeated, but rarely clarified, and remain largely inaccurate and misleading.  Like Paul Krugman in The Conscience of a Liberal, Smith believes that if we just return to the period of union growth and high tax rates, and just ignore all other economic and historical factors,  we can repeat the economic growth of a bygone era. 

Hedrick and other critics of capitalism ignore many examples of high paying jobs in the corporate world today. The largest steel  company in America today is no longer US Steel, Bethlehem, LTV, or Republic -- all of whom were unionized manufacturing leviathans  who are either gone, acquired by foreign concerns, or downsized considerably. The largest steel company is Nucor, which is largely nonunion, but pays its workers very well with production incentives.  There are numerous examples of manufacturing concerns with very progressive policies towards their workers; in fact it is probably the rule more than the exception.

The reason Henry Ford was able to pay the high wages, while possibly motivated out of sense of social justice, was because he was able to generate the profits to do so.  Yet when the public tired of black Model Ts and he was reluctant to change, he had to face layoffs like every other company that gets out of sync with its markets.

While the author praises Henry Ford for his "social justice," it is worth remembering that he was the most notorious anti-Semite in modern American industrial history.  He published The Dearborn Independent newspaper which included a series of articles called   The International Jew, as vile an anti-Semitic screed as the Protocols of the Elders of Zion.  Henry Ford's portrait hung in Hitler's office and his factories in Germany continued to pour out vehicles for the Germans throughout the war.  He even asked for reparations for a factory in Cologne that was damaged by Allied bombing.  Henry Ford died from a stroke he incurred while watching film footage of the death camps in his private screening room.  That, Mr. Smith, is my idea of "social justice."

America was able to expand post WWII was not because of unionized workers or high tax rates, but because we transitioned from a pent up demand from war production to a strong consumer demand from the returning soldiers building families. At the same time we faced this huge growth in demand we were protected from the foreign competition because our manufacturing infrastructure, secured by two oceans, had remain unharmed while the infrastructure of Europe and Asia had been devastated by the war.  When the overseas competition had rebuilt itself, the competition kicked in and we realized our cars built by those same high paid union workers and companies, burdened with huge legacy costs of bloated pensions,  could not compete.  The quality revolution in auto production was compelled by this 'new' competition.

The growing disparity in wealth, an observation accepted uncritically by the NYT and others more interested in supporting the ideology of corrupt capitalism than providing useful information, is an example of a creative use of statistics.  The statistical story varies greatly depending on when you start and end the data.  The Reagan tax reductions caused the growth of Subchapter S corporations in the late 1980's.  Income previously reported in Chapter C tax returns now flowed through personal tax returns, giving the appearance of a much higher growth in income in the higher brackets.  By ending the data period in 2007 instead of 2010 where the number of millionaires fell by over 30% from the recession, the growth in inequality is further distorted.  The data often excludes transfer payments to the bottom quintile, and also excludes taxes on the upper quintile.  It focuses on families rather than individuals and often ignores hours worked.  But the most glaring distortion is the absence of mobility.  By examining categories instead of real human beings the data ignores the rise and fall of individuals within the brackets.  If income redistribution is the ultimate goal then should we praise Bernie Madoff for removing so many from the upper income strata?  Is our economy better off today with fewer millionaires than we had five years ago?

To the extent we do have inequality of income it is largely a by-product of economic growth. In our current stage of production the biggest gap is in the extreme end, the one tenth of one percent. The internet billionaires such as Facebook's Mark  Zuckerberg and Google founder Sergi Brin, not to mention Bill Gates, Sam Walton, or the late Steve Jobs are examples of the huge success at the highest end of the income scale.  While their wealth is enormous I would propose that we are all better off as a result of their success.  Germany, which Hedrick Smith holds out as a model, produced none of these successes and their unemployment history  is certainly not an admirable example. The vast majority of job growth in the United States today is dependent on the working wealthy, the non publicly listed private companies that are currently on capital strike because of the uncertainty and regulations that Henry Ford could not have dreamed of in his worst nightmares.

Smith also confuses the high tax rates of the post war era with the effective (actual ) taxes paid by the wealthy.  Lower tax rates, especially on investment income, has increased the revenue substantially while the distribution of actual tax dollars paid has grown far more progressive.  The economically ignorant may express their disdain of 'trickle down',  but lower rates increased tax revenue under Coolidge, Kennedy, Reagan, and Clinton.  Clinton raised the rates on earned income and lowered the rates on capital gains and dividends: he raised the taxes on the middle class and cut the rates for the rich, and his party considers his reign to be a model of fiscal responsibility.  Today we have the most progressive income tax payments and the highest corporate tax rate in the industrialized world.  Would Smith suggest these taxes should be raised to the astronomical post WWII levels in a recession?

Hedrick Smith reaches back well over a half century  to find a prescription to cure our social ills, while ignoring all of the real factors hindering our current economy today. But he stumbled on a real truth that he unsurprisingly missed: That the private sector is quite capable of attaining social justice when it is freed of the burdensome restrictions and friction costs imposed by the excessive central planning of the state that we now face.

Henry Oliner blogs at www.rebelyid.com