Learning from the Model T

November 14, 2008

I believe we’re on the cusp of a dramatic change in consumer behavior. I don’t know exactly how it will play out, but at its core is this undeniable fact: the American consumer is tapped out.

Foreclosures and credit card debt are skyrocketing. The savings rate is zero. The jobless rate hasn’t been this high in almost 20 years. Layaway purchases are making a comeback. Economists are making comparisons to 1929. People are running out of money and they’re cutting back.

This situation won’t turn around quickly. Why? Because the workers of America simply aren’t making enough money. This is not a political observation, merely stating a fact. Wages, adjusted for inflation, are flat or even down slightly over the last 30 years. Meanwhile, the wealthiest people in our nation are raking in amazing sums of money — measured not in six figures, but in eight, nine, even 10.

I always look at the example of Dr. William McGuire, the former chief of United Healthcare. McGuire made more than $1 billion in a 10-year span: an average of more than $100 million a year. Was he really worth that much money? Is anyone? I know such compensation has been explained by pointing to growth in the stock price and the value of the company during his tenure. But that ignores the contributions made by all those United Healthcare workers who weren’t making $100 million a year. Didn’t they have anything to do with the company’s growth?

Again, let me stress: I’m not getting political here. But if the American economy is to thrive, the people who do most of the buying and consuming have to get a bigger share of the pie. To see how that can work, look at the example of pioneering American automaker Henry Ford.

One hundred years ago, in 1908, Ford introduced the Model T. At that time, cars were expensive luxury goods for the well-to-do. Many autos cost upwards of $2,000 — more than the average annual wage of a typical worker.

Ford realized that he could sell more cars if the average worker could afford to buy one. In 1914, Ford announced that he would start paying his assembly line workers $5 a day — more than twice as much as the average factory wage. The news caused a sensation. Now an assembly line worker could buy a Model T with about four months’ pay.

By 1916, Model T sales had more than doubled, to nearly 500,000 cars. And the price dropped from $850 to $360. Other factors were at work; the country was prosperous, the farmers were doing well and the car became a must-have gizmo — the iPod of its day.

But if American companies are looking for ways to turn around their sales, they might start by putting more money in the pockets of their consumers.