Friday, April 27, 2012

Why did Henry Ford pay better wages?

[response to Minimum-wage Misconceptions over at, wherein I put on my Pretend Economist Hat.]

Nice article, but I do want to say something about Henry Ford. I've often heard this motivation dismissed as mythical: Ford did not raise wages in order to create demand for automobiles within his company.

I suspect that's true, because when you look at the economics of such a move, it doesn't make any sense. First, there's nothing stopping your workers from spending the wage increase on the many things that aren't automobiles. Second, there's nothing stopping them from buying their autos from your competitors. Finally, even if you ignore those (huge) problems and assume that every dollar you send out in increased wages is applied to the purchase of one of your cars, you're still losing money hand over fist. If your profit margin on an auto is 20%, then for every dollar you put into raising wages, you can't get more than twenty cents back.

If Ford's goal was to use that money to increase demand for automobiles, it would have been much more sensible to use it to lower the selling price of his cars.

Ford's real motivation in raising wages, as I understand it, was to reduce employee turnover, and also to act as a bonus in exchange for some demands that he put on his employees that his competitors didn't (no alcohol, no gambling, learn English).

So if you're a single company, who mostly sells its products to people outside the company, raising is a losing strategy for boosting demand.

But raising wages does make a lot more sense when discussing a national economy, where most of the goods and services being sold are sold to your fellow citizens. In that case, most of the money a company loses in the form of higher wages will come back to it in the form of increased demand for their products.

Friday, April 6, 2012

Mitt Romney is telling the truth about gas prices.

I just heard that Mitt is denying his big oil ties, his support for oil subsidies, his opposition to increased fuel economy standards. Instead, he says, Obama's "attack ad" is simply Obama refusing to take responsibility for the fact that gas prices have doubled under Obama's watch.

At first, I was incensed. Then I realized, he was actually paying Obama a backhanded compliment. Check out this here chart:

Hey, he's right! Gas prices have doubled between December 2008 and the now times. But does that mammoth dip just before Obama took office look a little suspicious?

Obama took office just as the economy bottomed out, and just as gas prices hit their lowest point in several years. These two things are not a coincidence: when the economy struggles, demand for gasoline goes down, so gas prices drop. As the economy has recovered, demand has risen.

So to the extent that Obama can take credit for the economic recovery, he also shares the blame for rising gas prices. I guess Mitt's saying that Obama should have done right by American drivers by keeping the economy hobbled.

Mitt has to know this. He and his economic advisers can't be quite that ignorant, but I'm sure he can imagine that the voting public can be that ignorant.