Does America Still Work?

Interview with Dan Luria: Part II

Q: You seem to be saying that because of global competition and because of Wall Street many of these companies simply don't have the choice to do what you think would be good for them and for the rest of us.

Luria: That's right. There's no question that it's harder to take the risk of doing the right thing if you face those pressures, but what makes it worse in some ways is that most government policies are actually discouraging them from doing the right thing as well. So Wall Street is enjoined in this case by the government. It makes no sense that we permit cities and states to offer companies generous tax breaks to close their mature plants in the cities and go build identical plants somewhere in a "greenfield," in a semi-rural area. That makes absolutely no sense for anybody.

Second, of course it's more tempting to avoid making capital investments if you can go out and get an almost unlimited source of labor at six or seven dollars an hour. A higher minimum wage would obviously make that more difficult to do.

Q: I'm going to ask you a little more about government policy, but I also want you again to answer the first question. Because of global competition, because of Wall Street -- it sounds to me like you're saying a lot of these companies simply have no choice to do the right thing, to do what's good for them or for the rest of us.

Luria: Most companies do have a choice. Most companies could do the right thing, but to do so would entail risks.

Q: And the risks are?

Luria: The risks are that they would not be able to generate a return quickly enough to satisfy the capital markets.

Q: We'll get back to government policy in a second. Let's talk a little bit about specific products. Some products are more given to being able to adopt this high investment, sophisticated worker policy than others. What are the differences?

Luria: That's right.. Products that are complex to manufacture and in which it would be harder for a new competitor to enter and to compete away the business are obviously those that are the most likely to be made with a high wage, high investment, high technology recipe. But the vast majority of products out there are in fact relatively complex, and in almost every industry and with almost every product, there are examples of manufacturers who are doing the right thing.

Q: Is, for example, a Briggs & Stratton lawn mower engine so much less sophisticated than a Chrysler automobile engine that it makes some sense not to develop -- not to utilize all these sophisticated techniques?

Luria: Well, lawn mower engines are an interesting case. It is a fairly complex product, although not as complex as an automobile engine. What has to happen for a company like Briggs & Stratton is they have to make a decision about whether or not they are going to continue to produce low cost basic lawn mower engines, or whether or not they are going to continuously innovate the design of lawn mower engines in order to establish a premium position in that market.

Q: Now, a lot of companies have just been making the basic product -- saying let's compete on price.

Luria: That's right.

Q: In the end, is that damaging for the country? For them and the country?

Luria: I think it is. I think that what happens if a company like Briggs & Stratton -- not to pick on them -- decides to continue to produce engines with designs that are ten, fifteen, twenty years old, it's not surprising that in the current policy atmosphere they can probably go build a new plant in Kentucky or Tennessee or North Carolina that can make those standard engines more efficiently than a high-cost unionized plant in Milwaukee. But if Briggs & Stratton really wants to be positioned as the top global lawn mower engine company, it needs to be thinking about what is the lawn mower market going to look like fifteen, twenty, thirty years out. For example, are there going to be requirements for a green lawn mower engine that has lower emissions -- that's going to require qualitatively new designs and tighter tolerances. Developing that kind of an engine will be done better by a mature, skilled union-represented labor force in Milwaukee than it is in some "greenfield" location in Kentucky or North Carolina.

Q: What about a Masterlock? Looks like an awfully simple product., but they have developed some sophisticated ways of producing their locks. They stayed in Milwaukee. The retained an experienced high wage labor force. Why were they able to do that?

Luria: Well, that really makes my point. Even though a padlock is a much simpler device than a lawn mower engine or an automotive engine -- even in that case there was a recipe in which more sophisticated machinery, more technology, more training could offset the disadvantages of relatively high cost labor in a northern urban area.

Q: Explain -- how are they able to utilize sophisticated production methods and keep a high wage work force going making such a simple product?

Luria: It looks like a simple product, but it's very important for Masterlock -- if it wishes to have a premium position in the market -- to be sure that those locks are made with very, very high quality -- a bullet can be fired into that lock and yet it won't disengage, yet simply turn the key and it will disengage it. It's actually a much more sophisticated product than it looks and that's actually the case for an awful lot of manufactured goods.

Q: But let me ask again, why is it valuable for them to develop sophisticated production methods, utilize a high wage sophisticated work horse?

Luria: In the short run, it's a higher risk strategy than the low road, but in the long run it's the only insurance that they'll be in business ten, twenty, thirty years down the road, and that's simply because at some point the best companies -- those with the most technology, the best design in engineering and the best work force -- are going to figure out new things that need to be locked. New designs for locks and it's a sure bet that if all you're doing is making locks today the same way you were making them twenty years age, you are not going to be around when things are done in a different way in the future. You're not going to be able to export locks to Europe, to Asia, if your locks are just like everybody else's. You're going to constantly find yourself defending a position at the low end of the market, and that's where producers in Mexico and Singapore and Malaysia are simply going to eat your lunch.

Q: Now can Chrysler, which outsources so many of its parts -- that is to say buys so many of its parts from non-Chrysler companies -- can they begin to build and make their own parts in-house for the very same reasons?

Luria: It's very difficult to get back on the high road when you've gotten off it. It's very hard to get out of a business and then get back into it. Part of what's made Chrysler so successful is that as they began in the early 1980's -- when it looked like they might go bankrupt -- to stop making so many things inside and to start letting suppliers do it, they let go the engineers that used to know how to build those things inside. So it would be very difficult for them to get back into it. I think probably the most one can hope for is to keep large companies like Chrysler or Ford or General Motors or General Electric from becoming more hollow than they already are. It's very hard once you've selected the low road to make a switch and go back to the high road.

Q: Roughly how many companies are taking the high road these days?

Luria: No more than twenty percent of American companies are clearly on the high road today. Everyone else has either chosen the low road or is being tempted to take the low road, and that is in large part what's wrong with the American economy; it's what makes us produce too many things that are at the low end of the food chain in manufacturing and not enough at the high end. It is why we are no longer the world's leaders in special machine tools. It's why we are no longer the world's leading producer of steel. It's why we are no longer the world's leading producer in any given year of cars and trucks. In many years Japan outproduces us, and it's because of the fact that more and more companies have taken the low risk, low road and find themselves in a less and less good position to compete. We don't see this as clearly as we will in a few years. The fact that the dollar has been so weak has managed to make a number of not-very-good American companies look better than they are. If and when the dollar begins to strengthen against the currencies of our major trading partners, people will see that American manufacturing is by and large weaker than we believe.

Q: The high investment strategy is a high risk strategy. You could put all this money and you could have the best intentions of the world and you could lose your shirt.

Luria: Absolutely right. But if you don't take the risk, you are not going to be a leader in your field in the long haul.

Q: And you'll lose your shirt anyway.

Luria: And you'll lose your shirt anyway and you'll drag down your nations living standards on the way.

Q: Is that what's happening in America?

Luria: Absolutely. The most significant source of falling living standards for manufacturing workers is the fact that more and more of them work in companies that have chosen the low road.

Q: Let's talk a little bit, very quickly, about government policy. You think government has to step in somehow or other.

Luria: Well, I think government has a role in essentially creating an appropriate set of incentives. And government, it certainly seems to me, should not be providing a set of incentives for companies to do things which are bad for America's living standards, which is what government policy often does.

Q: What should government do?

Luria: Government should have a tax system which provides an advantage for mature, high wage, high capital investment companies and plants vis a vis, new low investment plants. For example, an investment tax credit which is only available for purchases of equipment in plants that have been around for a while -- that would be a very good thing to do. There ought to be higher minimum wage. If you couldn't get workers for five or six dollars an hour, there would be an awful lot more incentive for people to think about investing in labor saving machinery.

Q: Let me ask -- why would an investment incentive to stay in the central city be beneficial.

Luria: Well, because if you look at cities and metropolitan areas generally, that is where the mature, high investment, high wage plants have been. It's partly the history of trade unionism. It's partly because that is where the pools of skilled labor have been. Keeping those plants in business rather than letting them be put out of business by rural companies operating on the low road would obviously be good nationally.

Q: There are several proposals in Washington about giving tax incentives to corporations to retain employees or to hire them. Do you think they're workable?

Luria: I think that they're well-intentioned and some of the specific proposals are better than others. I think that the critical thing is not to have essentially across-the-board entitlements. What we really want to do is target those advantages to companies that are taking the risk of staying on the high road in their existing plants with their existing work force -- in their existing locations, often in cities.

Q: Are we going to solve these problems without some government help?

Luria: Absolutely not. The policy environment is always tremendously important. It's not the whole answer. Things are going to have to be done to reorient--Wall Street has to be more forward looking and less interested in short-term results. But even there, government has a role -- changes in the way in which taxes are accounted, changes in the way in which equipment is depreciated, and so on, can have a major result. It could have a major impact on the way in which Wall Street assesses the profitability and survivability of American businesses.

Q: We spoke to a couple of workers who got rehired after being let go, one at Masterlock, another at Chrysler. They are needless to say ecstatic. Can they breathe easy now?

Luria: I think it depends on the case. I think that the way I generally look at this is for the first several years after a major new investment in your plant, you are probably safe, in the sense that the company is going to be forced to play its cards out after making that investment to at least see how well it's working out. In the long run, as long as the low road is as tempting as it is, and as long as the high road is as risky as it is, no one is safe.

Q: A lot of corporate CEOs are saying, hey, things are now turned around in America. We're on the road to success, to solving the problems and, yes, the American worker can begin to believe in the American Dream again. Is that true?

Luria: Well, 1995 looks like the first year in a long time in which real wages went up rather than down, so there's hope.

Q: We talked to a couple of people who found jobs again. They're ecstatic. Sometimes their management tells them the good old days have returned. Is that really the case?

Luria: Partly, thanks to the weak U.S. dollar. Some good American employers are now being able to expand employment again, and that means that some workers are going to have rising living standards again and be able to, at least for a while, get their piece of the American dream. The problem is that most of the new jobs being created are not the jobs at Masterlock or at Chrysler. Most of the new jobs being created are relatively low wage jobs in companies that are not investing in their workers or in their plants. And the proof of that is this: You can argue that we're close to full employment, but then why is it that anywhere in the United States where somebody announces that they're going to have ten openings at $15.00 per hour, why do 5,000 workers show up and camp overnight in hopes of getting one of those jobs?

Q: Some companies tell us they're having trouble filling those jobs.

Luria: Well, most companies that are having trouble finding labor are having trouble finding it because they're not paying enough for it.

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