Give Them a Raise

Henry Ford, that lion of industrial innovation, was also a champion of the men in his employ. In 1914, to the chagrin of many within America's moneyed elite, he more than doubled the hourly compensation paid to the workers then bolting together Model T's on his assembly lines in Michigan to $5 per day, enacting what he called "the most advanced labor policy in the world." Ford's reasoning: "We believe in making 20,000 men prosperous and contented rather than follow the plan of making a few slave drivers," he said. Over the subsequent decades, thousands bore testament to that logic as they purchased homes, raised families, sent kids to college and even dashed about town in shiny new Fords.

Ford's "welfare capitalism" presaged the rise of a blue-collar middle in America's economy that, from the end of World War II until the early 1970s, delivered stable growth. It has since broken down, of course, and the crisis America's Big Three automakers now find themselves in owes much to the exorbitant cost of unionized labor. Yet in today's global economy, one plagued by overcapacity and a shortfall in demand, Asia's ultralow factory wages are a big part of the problem—laborers there simply can't afford to buy much. Which is why it makes sense to pay the legions of factory workers more than the $120 per month they now fetch if only to address the imbalance between China's trade surplus and America's indebtedness.

Back in 2003, financial analyst Richard Duncan made that case in his prescient book, "The Dollar Crisis." It forecast America's subprime-led financial bust and argued that the global economy's well- being rests heavily upon Asia's ability to consume more of what it manufactures. To halt the "race to the bottom" typical among manufacturers seeking ever-cheaper production bases in emerging Asia, Duncan proposed establishment of a $5 per day minimum wage for the region, which is marginally higher than starting pay in Southern China and more than double the day rate in the textile mills of Bangladesh. Further, he suggested that the minimum be raised by $1 per day every year—thereby tripling the consumption of Asia's vast working class in a decade.

Duncan, now a partner at Blackhorse Asset Management in Singapore, believes that kind of government intervention—undertaken within Asia or imposed by the U.S. via import tarrifs for any nation not following set minimums—is more important today than ever, as the region's deep pools of labor effectively thwart the market from pushing up wages fast or far enough on it own. He calls it a "trickle up" strategy, arguing that the knock-on effect of Asia's manufacturing class earning more would create a new nexus of global consumption and thereby save free trade.

Radical in 2003, the idea is less so today. Policymakers in China and India are already struggling to boost domestic demand, and across the Pacific the U.S. is poised to inaugurate a new president who as a candidate said he might reinterpret existing trade agreements to impose higher labor standards internationally. With government intervention now back in fashion, leaving wage rates to the whims of the marketplace could be disastrous, Duncan argues. "If all the jobs go to people making $5 a day we'll be back where we were in the 1850s," he warns, referring to the chaotic first phase of the Industrial Revolution, "with the ability to manufacture a great deal of stuff but nobody with enough money to buy it."

That government-mandated wage hikes could mitigate Asia's downturn flies in the face of the conventional wisdom in a region that still views low labor costs as its chief competitive advantage. Economics theory holds that minimum wages don't work at a national—let alone international—level. Yet it also suggests that countries, even those as advanced as the United States, can't consume beyond their means forever. Americans are learning that lesson now, but the potential bill—equal to the annual U.S. trade deficit of about $800 billion—will fall disproportionately on countries with the largest trade surpluses, all of which are in Asia.

Ninety-five years ago this month, Henry Ford adopted labor practices aimed at sharing his firm's prosperity with its workers. That laid the foundation for a modern consumer society that has begun only recently to go global. He would, one suspects, approve of measures aimed at perpetuating that trend—especially those first tested on his original assembly lines during the heyday of American manufacturing. "Why not raise the pay scale?" he would ask. It's still a great question.