Saturday, January 4, 2014

The Centennial of Henry Ford’s Five-dollar Day



One hundred years ago on Sunday, back on January 5th of 1914, Henry Ford strung the industrial world up by its ankles and shook it, winning the instant animosity of his peers and securing the fortunes of the Ford Motor Company. More than doubling the hourly rate of his line-workers, he established a $5 day that was unprecedented in the industry and amounted (in today’s equivalent) to about $120. Ford was not a generous man, not given to altruism. He was trying to solve the problem of workforce turnover and he did, garnering astonishing praise in newspapers across the country in the bargain. An editorial in The Cleveland Plain Dealer said Ford’s announcement "shot like a blinding rocket through the dark clouds of the present industrial depression."

Ford’s is a Centennial we ought not to let slip by. It’s pertinent to the current hand-wringing in government and on the street over America’s shrinking middle class and growing unemployed and under-employed population. Interestingly,
had there been such a thing as a minimum wage in Henry’s day, you can depend upon his resolute fight to the death upon its increase to five dollars. He wanted nothing from government but to be left the hell alone to develop his Model T. Ford’ spectacular wage increase was designed to be first out of the gate, garnering the best employees in Detroit.

He got them by the truckload and of course, his competition was forced to follow, but Henry quickly got the cream of the crop and, perhaps more importantly, a reputation as a leader among a then leaderless class of workers. Ford was the employer of choice for decades to follow and Detroit became the wealthiest city in America until it all came unraveled, seventy years later. Ford himself remains #9 in the list of all-time world’s wealthiest men. It seems sharing the wealth does bring greater wealth, when it’s done for purpose and profit. That’s a strong argument against a federally mandated minimum wage. 

Mitt Romney was both wrong and right in the same moment with his ‘forty-seven percent,’ only because America had broken the rungs of its historic ladder to the middle class, relegating it to the nation’s garage. According to some, that abandoned ladder costs taxpayers close to $1 trillion a year in welfare costs, while a third of the population is at or near poverty levels and continues to sink.

The Ford era recession of 1913-14 saw business activity drop by 26%, trade 11% and unemployment then stood at 12%. Today we’re in the midst of a similar, but modern job recession—not industrial (although it’s there as well), but primarily in the services industries, where wages are stalled and two jobs the norm for survival. If they’re not already there, a third of Americans today are a single job loss or health emergency away from financial collapse. Perhaps not in your neighborhood or mine, but still one in three and no relief in sight. The social cost is as bitter as the circumstances of that ever-growing underclass. Well, maybe not quite—it’s one thing to grouse among your affluent buddies and quite another to depend on food stamps (46 million Americans)—but you get my drift.

Services, a major sector of the low-wage industries, are affected by excessive turnover and training costs as well, and the unintended consequences of Ford’s Five-dollar Day are worth revisiting in a modern context. But modern context would need a powerful force, as was Ford in his day--a company with market-share sufficient to pull it off and make it stick. 

For the sake of this premise, I nominate Wal-Mart, the largest private employer and retailer in the world, with over two million employees. As with Ford, 50% of the company is owned by the Walton family, dropping the sole power to act on their shoulders. Sam Walton might have done it long ago. Son Samuel Robson Walton is Chairman of the Board and, looked at from this perspective, the Walton family could initiate a solution that boosts the economy, brings the walking-wounded back into the consumer economy, trends toward stay-at-home moms for families with children and reduces the welfare burden that increasingly leads us toward class war. 

We’re too good for that, too compassionate and innovative a nation to settle for a social death-spiral in an America that was built by and prospered on opportunity. But it must be profitable for Wal-Mart. That’s the deal, the premise of the premise. Let’s try it on for size, see if we can attach some meaningful numbers to it.

A recent study by wiser men than me claims if Wal-Mart were to raise their lowest wage-rate to $12, it would cost their average customer an additional 47 cents every time they came to the store, while maintaining profits at current levels. But let’s take the increase to $20, a little less than twice Wal-Mart’s average ‘associate’ wage and comparable to Henry’s experiment. Most probably that would raise customer cost to an extra dollar from their pocket in increased prices with each visit. It would likely shave a half percent off Wal-Mart’s profit, reducing 2012 earnings from $15.7 billion to an even $15 billion in what the company already calls a ‘down year.’ 

I don’t doubt we could all live with that, but I want Wal-Mart and all other American retailers to have ‘up years’—a whole string of them. We agreed it must be profitable, so let’s claw back that $700 million and more, way more: 

Expect Wal-Mart to benefit from a significant increase in sales. Ford sold more cars to workers who could afford to buy them and, with spendable income in their pockets, one in three Americans would be better able and more willing to shop Wal-Mart. A 33% increase in customer-base is hard to ignore, when retailers today fight over single-digit percentages. The rest of the retail industry would be forced to follow, just as with Ford, but Wal-Mart would have both the jump and the reputation. Jump is profitable, reputation is priceless.

Consider that $700 million clawed back many times over just by the increase, but the profits increase from there. An absolutely uncontested gain accrues from a sharp decline in worker turnover and training costs. Wal-Mart might further expect welcoming rather than picketing crowds gathered at new locations, as well as pro-growth zoning board decisions. Then there’s the huge increase in employee loyalty to be considered, that worked so well for Ford. Well paid workers stay with their employer and praise the company as a great place to work. You don’t find them on picket lines or thirsting for union representation. Finally, Wal-Mart would no longer be the #1 company America loves to hate, solving an image problem that haunts the largest retailer on the planet.

A win-win for Wal-Mart leadership and profits, as well as those of similar retailers, is motive enough to increase the buying power of 67 million Americans and their additional tens of millions of dependents. A sustainable leg-up to promising futures is too mutually beneficial for low-wage industries to ignore. The ladder to a solid middle class would be hauled back out of the garage, dusted off, repaired, re-painted and made sturdy.

As for welfare, there will always be Americans, who cannot help themselves; the mentally ill or those unable to sustain their lives for reasons of disability, injury or unavoidable circumstance. With our enormous and growing welfare burden reduced by half or more, we’ll be better able to assist them. 

So that’s the conversation I hope America will begin to have with itself on this Centennial of Ford’s Five-dollar Day. I believe far more in business than government to solve social-economic problems and Wal-Mart can lead us there again, if the Walton family cares to and dares to. While an America without Wal-Mart is plausible, a Wal-Mart without America is escapist fiction. 

Even Henry Ford might have smiled at the metaphor and Henry was a famously taciturn man.