Henry Ford was 50 years old, and not all that different from a lot of
other successful businessmen, when he summoned the Detroit press corps
to his company’s offices on Jan. 5, 1914. What he did that day made him
a household name.

Ford announced that he was doubling the pay of thousands of his
employees, to at least $5 a day. With his company selling Model T’s as
fast as it could make them, his workers deserved to share in the
profits, he said.

His rivals were horrified. The Wall Street Journal accused him of
injecting "Biblical or spiritual principles into a field where they do
not belong." The New York Times correspondent who traveled to Detroit
to interview him that week asked him if he was a socialist.

But the public loved it. America was then suffering a deep recession,
and the Ford news seemed to offer hope. Within 24 hours, 10,000 men
were lined up outside the Ford employment office in Michigan. The
following year, Henry Ford was mentioned as a future presidential
contender.

The mythology around this story holds that Ford wanted to pay his
workers well enough so they could afford the products they were making.
In fact, that wasn’t his original reasoning. But others made the point,
and, in time, it became part of Ford’s rationale as well. The idea
became a linchpin in an industrial philosophy known as Fordism.

More production could lead to better wages, which in turn would lead to
more spending by the public, yet more production, and eventually even
higher wages. "One’s own employees ought to be one’s own best
customers," Ford said years later. "Paying high wages is behind the
prosperity of this country."

This was one of the pillars of 20th century economic wisdom. It is time
to ask, though, whether Ford’s big idea is as ill-suited to this
century as his car company seems to be.

By any reasonable standard, the last few years have been bad ones for
most people’s paychecks. The average hourly wage of rank-and-file
workers – a group that makes up 80 percent of the work force – is
slightly lower than it was four years ago, once inflation is taken into
account. That’s right: most Americans have taken a pay cut since 2002.

But you would never know it by looking at the headline numbers on
economic growth. From the standpoint of the broad national economy –
the value of the goods and services the country produces – the last few
years have been stellar. Despite two wars, soaring oil prices, business
scandals and a stock market crash, the economy has been growing more
than 3 percent a year.

Henry Ford would have no idea what to make of this. What was so
comforting about Fordism was that it suggested the economy operated on
a virtuous, self-reinforcing cycle. Only when the middle class did well
could the country do well. And as the country grew ever richer, so
would the middle class.

In the last few years, however, the economy has kept growing in large
part because high-income families – the top 20 percent, roughly – have
done so well and have been such devoted spenders. Globalization and new
technology have helped many white-collar workers make more money, even
as those same changes have closed factories and depressed wages for
others.

Stock portfolios and houses on the East and West coasts, meanwhile, are
much more valuable than they once were, making their owners more
willing to spend.

In fact, well-off families, not cash- strapped ones, have been the ones
increasing their borrowing and cutting their savings the most in recent
years, according to the Federal Reserve Board. In 1992, the top fifth
of U.S. households, as ranked by income, accounted for 42 percent of
consumer spending. By 2000, that share had grown to almost 46 percent,
and it is probably not much different today. That may sound like a
small change, but it is an enormous amount of money, a shift of $300
billion a year in spending from the poor and middle class to the
affluent.

By David Leonhardt
The New York Times