Leef ponders the president’s misuse of a Henry Ford analogy

George Leef devotes his latest Forbes column to President Obama’s misreading of an economic history lesson from famed automaker Henry Ford.

In one of his typical efforts at whipping up public support for himself by promising the impossible, President Obama has been touting the supposed benefits of mandatory wage increases. He has already decreed an increase in the minimum hourly pay for workers employed on federal projects and wants Congress to increase the federal minimum wage for most other workers from $7.25 to $10.10 per hour.

He and his handlers are aware, however, that quite a few Americans have enough economic sense between their ears to wonder if mandatory wage increases won’t cause some workers at the bottom of the wage scale to lose their jobs. In an attempt at deflecting such arguments, Obama has been resorting to a piece of economic disinformation – the notion that Henry Ford raised wages for his assembly line workers in 1914 so that they could “afford to buy the product.”

In a recent speech in Maryland, Obama told his audience, “Henry Ford realized he could sell more cars if his workers made enough money to buy the cars. He had started this – factories and mass production and all that, but then he realized, if my workers aren’t getting paid, they won’t be able to buy the cars. And then I can’t make a profit….But if I pay my workers a good wage, they can buy my product, I make more cars. Ultimately… it’s a win-win for everybody.”

The idea that because Ford benefited from a large increase in pay for some of his workers, it therefore must be true that all companies would benefit from a mandated increase in pay for their lowest skill workers is such a stupendous non-sequitur that only a politician who is sure he will never be called on it would advance this argument.

First, let’s look at the truth regarding Ford’s famous wage increase. It simply isn’t true that his motive was to enable his workers to buy his cars. Instead, Ford calculated that by making his wages more attractive than his competitors in the market for industrial labor, he would gain by reducing turnover costs. In 1913, to maintain a factory workforce of about 14,000, Ford had to hire more than 52,000 men. The assembly line jobs were very tiresome and repetitive. Workers often quit, sometimes even in the middle of a shift. (Forbes contributor Tim Worstall exploded the Ford myth in this March, 2012 piece.)

With his business experience and the logic of human action as his guide, Ford concluded that the cost of additional pay would be more than offset by the reduced costs of labor turnover. His decision on worker pay was emphatically not done because he thought that if he paid out more in wages, at least that amount would be returned to the company through added purchases of his cars. Nobody who runs a business would ever think that paying more than necessary to suppliers (whether workers or other firms) could make the business more profitable merely because that “puts money back into the economy.”

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