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By Saving on Cheap Goods and Services, Do We Pay More in the End?

street market; avlxyz via Flickr

Question: During a recent story about the demise of the auto industry, there was clip of a Model T Ford driving through the Ford Museum. The narration made the point that one of the things that made Henry Ford successful was that he intentionally built a car that the workers in his factory could afford to buy.

That got me to thinking about recent trends in the current economy. Increasingly, it seems, people are employed making goods and providing services they themselves cannot afford.

We move manufacturing facilities offshore in search of cheap labor, and some companies move them from country to country as living standards rise overseas. In many cases, the workers there will likely never be in a position to purchase the products they help make.

Even in this country, many service economy jobs (e.g. at high-end hotels and restaurants) are filled by people who could not afford to be customers of those establishments.

What’s worrisome is not that this occurs, but that it appears to occur more often than in the past. Have we really reversed the trend that Henry Ford started? If we push an ever larger portion of the country into underemployment, is it even possible to have a consumer-driven economy?

Being able to produce a shoe or a shirt or a car at a lower cost with a higher margin, doesn’t help if there’s nobody able to purchase the product. What tools do economists have to help decide what’s “efficient” from a “systems” perspective?

We need a discussion about optimizing the results for the country, and since we’re too far down the globalization path to stop, we need to think about optimizing the results for the planet. Where do we start?

Paul Solman: One place to start, at the moment, is Ellen Shell’s book Cheap, which makes your point quite explicitly. Her basic thesis, in fact, is that by “saving money” on cheap goods and services, we may wind up paying more in the end. And she uses your example: Henry Ford paying his workers an at-the-time-unheard-of wage so that they could afford the cars they produced. “Fordism,” this approach has been dubbed, and it is often pointed to as the alternative to the discount “race to the bottom.”

Another starting point might be a Harvard inequality project that political science professor Bob (Bowling Alone) Putnam helps lead. He and fellow researchers blame the financial crisis, in part, on the well-documented economic split between the haves and have-nots (or, as President Bush II put it, the haves and have-mores). The logic: The greater the inequality, the less money the bottoms have to spend on goods and services provided by the tops. So what makes sense? The tops lend to the bottoms, and “make their money” thus. And again, everyone winds up worse off than they otherwise might be when the bottoms can’t pay their debts.

Inequality is also bad for our collective health, which brings with it various costs to the society as a whole. See our piece with British epidemiologist Michael Marmot for the argument.

The problem, of course, is what to DO about inequality — how to mitigate it. Here, the progressive consumption tax of Bob Frank is thought-provoking. A brief write-up of the idea, from Frank, appeared on this page last month.