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The New, Ruthless Economy

1.

The US economy is about to enter its sixth year of recovery from the recession of 1990–1991. Even though the economy’s many “restructurings” and “downsizings” have been a cause of great anxiety for Americans, the economy’s leading indicators between 1992 and 1995 showed strength rarely seen since the 1950s. Investment has been growing swiftly, productivity has been rising at twice the rate of the 1970s and 1980s, and inflation has remained low. At the beginning of 1996, despite the economy’s slow start, the consensus of economists polled by The Wall Street Journal is for steady growth without inflation during the coming year.1

The growth of investment has been particularly impressive, rising at its steepest rate since World War II.2 Spending by private business on information technology, mainly computers and software, has been leading this investment boom. In 1993, spending on computers alone grew at the phenomenal rate of 52 percent; it grew by 27 percent in 1994, and was projected to grow by 23 percent in 1995.3 This very rapid growth of investment during the 1990s has also boosted the growth of productivity—the output per head of private-sector employees.

Productivity is a basic measure of economic efficiency, and its growth rate reveals how effectively such components of investment as new plants and equipment are actually being used. In the view of many economists, including those of the Clinton administration, the rate of productivity growth also largely determines the living standard of most Americans. According to the Administration, productivity is “the primary source of income growth” and its increase “is the answer to stagnant real wages.”4 It ought to be a positive sign that the growth of productivity continued to accelerate in 1995 even though the economy’s rate of growth was slowing down.5

But amid this news of productivity growth, one set of statistics has not recovered since the recession that ended in 1991: the living standard of most Americans. According to the Census Bureau, median family income in 1994, adjusted for inflation, was $38,782, one percent below the level of 1991. Preliminary data suggests that there was no significant increase in median family income during 1995.6 Moreover, this recent stagnation is part of a larger downward trend that has been taking place since the early 1970s.

Government statisticians lump the 80 percent of working Americans whose jobs fall below the higher executive, managerial, and technical levels under the heading “production and non-supervisory workers.” The average weekly earnings of these mostly rank-and-file workers, again adjusted for inflation, fell by 18 percent between 1973 and 1995, from $315 per week to $258 per week. By contrast, between 1979 and 1989 the real annual pay of corporate chief executives increased by 19 percent, and by 66 percent after taxes.7 For the other eight out of ten workers in America, the renewed growth of productivity during the 1990s has not brought a renewed growth of real wages.

During the 1970s and 1980s US productivity grew at less than half its pace in the 1950s. Nevertheless, between 1973 and 1995 output per person of all non-farm workers in the private sector still rose by 25 percent, while the real hourly earnings of production and other non-supervisory workers fell by 12 percent.8 During the present recovery, increases in real wages have not matched increases in productivity. Between 1990 and 1995 the productivity of all non-farm private sector employees increased by 10.3 percent, while during the same period the real hourly wages of rank and file workers were unchanged.9 This is the first time in American postwar history that the real wages of most workers have failed to increase during a recovery.

Alan Greenspan warned Congress in July 1995 that the growing inequality of income in the United States could become a “major threat to our society” (though, characteristically, he went on to say that solving the problem was “beyond the power of the Fed”).10 Commenting on the same trends, Robert Solow of MIT, a winner of the Nobel Prize for Economics, has warned of a society “which might turn mean and crabbed, limited in what it can do, worried about the future. 11 Felix Rohatyn, senior partner of the Wall Street investment bankers Lazard Frères, has spoken of an “advanced capitalism” whose “harsh and cruel climate” imposes “stringent discipline on its participants”:

What is occurring is a huge transfer of wealth from lower skilled, middle-class American workers to the owners of capital assets and to a new technological aristocracy with a large element of compensation tied to stock values.12

2.

From the time of the industrial revolution onward, one kind of middle-income worker, the skilled craftsman, has been consistently under threat from the mass-production economy, with its automated production and standardized products. But today a much broader variety of middle-income workers finds itself threatened by a new mass-production economy, one shaped by the application of information technology both to manufacturing and to service industries.

In manufacturing there has been the advent of “lean production,” the techniques of mass production originating mostly in Japan and now diffused throughout the industrialized world. In industries such as automobiles, electronics, and machine tools, lean production has three main requirements: products must be easy to assemble (“manufacturability”); workers must be less specialized in their skills (“flexibility of labor”); and stocks of inventory must be less costly to maintain (components arrive at the assembly plant “just in time,” and so save on both warehousing and financing costs).

The second big change has been in service industries such as banking, communications, and insurance, where “reengineering” has transformed the work of many employees, costing large numbers of them their jobs. Just as Henry Ford once found a substitute for skilled craftsmen in rows of machines arranged along an assembly line, so the experts called reengineers have combined the skills of specialist clerks and middle managers into software packages that are attached to desktop computers.

We have no exact measure of the percentage of the US Gross Domestic Product (GDP), or of the total US work force, that has been subject to reengineering or to lean production. But there is no doubt that these two innovations have already radically changed the main manufacturing industries such as automobiles and electronics and the largest service industries such as banking and insurance.

Martin Kenney’s and Richard Florida’s Beyond Mass Production: The Japanese System and Its Transfer to the US (1993) describes how lean production methods have been adopted by virtually every leading industry: autos, auto parts, steel, computers, consumer electronics, and machine tools among them. As for reengineering, in his book The Reengineering Revolution (1995)13 Michael Hammer quotes two separate 1994 surveys, conducted by “Big Six” accounting firms, which showed that between 75 and 80 percent of America’s largest companies “had already begun reengineering and would be increasing their commitment to it over the next few years.”

The McKinsey Global Institute’s exhaustive study, Manufacturing Productivity (1993), gives perhaps the best recent account of lean production and its effects throughout the world.14 The report assesses US, Japanese, and German industrial performance both in the big unfashionable industries like food processing as well as in the more sophisticated industries examined by Kenney and Florida—autos, computers, and machine tools. The report’s most startling findings concern the relationship between productivity and skills in Japanese manufacturing. In industries such as automobiles and machine tools, McKinsey reached the familiar conclusion that Japanese productivity was well ahead of that achieved by US and German competitors such as GM and Volkswagen.

But McKinsey also found that when Japanese corporations achieved higher rates of productivity, their need for skilled labor declined, particularly on the shop floor. In industry after industry, according to McKinsey, “ease of production” was a prime factor in explaining the differences in labor productivity between the Japanese and their foreign competitors—differences which persist despite the current problems of the Japanese banks and other financial institutions.15 In designing automobiles, for example, Japanese manufacturers “remain very conscious of how such designs affect the manufacturing function, and attempt to specify them so that they are easier to produce and assemble.’16

In the machine-tool industry, McKinsey found that by streamlining production Japanese companies used one tenth the number of parts and tools—ball bearings, high speed drills—required in German craft production.17 McKinsey, therefore, repeatedly criticizes German industry and its arduously trained engineering Meisters and Technikers, since such reliance on craft labor can foster rigidity and “compartmentalization” on the line and so undermine productivity.18

Instead McKinsey praises what it calls the “integrated worker” of Japanese lean production, where a worker fits easily into a work “team.” In fact the “integrated worker” employed by Japanese industrial corporations need have few recognizable skills at all, as I found during my own visits to the European plants of Nissan and Honda. I asked personnel managers at both plants what importance they gave to the educational and vocational qualifications of most of their prospective shop floor employees. In both cases the answer was “very little.” What they were looking for, they explained, were dexterity, enthusiasm, and an ability to “fit into the team.” In one job test, candidates were shown piles of nuts and screws of various sizes and were asked to match up the fitting pairs as quickly as they could.

In a well-known account of lean production in the world auto industry, the economists James Womack, David Jones, and David Roos argued that increased reliance on less-skilled and lower-paid workers was one of the chief selling points of the new system. One advantage of lean production, they write, is that it

dramatically lowers the amount of high-wage effort needed to produce a product of a given description, and it keeps reducing it through continuous incremental improvement.19

These aspects of lean production help to explain why the rising productivity of blue-collar workers is not being matched by the rising value of their paychecks: corporations that can achieve higher productivity while dispensing with entire categories of skilled labor are unlikely to pass those savings on to their remaining, and less-skilled, workers.

But the disparity between productivity and real wages has other, deeper, causes as well. The large industrial corporation can cut its costs even further by contracting out (or “outsourcing”) as much production as possible to smaller, independent producers, whose wage costs will be lower than its own. McKinsey found that such outsourcing was taking place in the manufacture not only of automobiles but of machine tools, computers, and consumer electronics as well. And here again the Detroit Big Three have been following the example of their Japanese competitors. Toyota, a pioneer of lean production, farms out no less than 70 percent of its components manufacture. They can do so because, as production becomes simplified, a contract manufacturer can perform most tasks as efficiently as the parent company itself.

In the US, the workers who are hired as a result of outsourcing are usually non-union and among the lower paid. When the parent company awards contracts to various satellite manufacturers, it does so as part of a strategy to keep costs down. Moreover, US companies who do this save more than do companies in Japan, where a good many workers in the satellite companies receive traditional benefits of Japanese industry. The employees of companies such as Nippondenso, Toyota’s main supplier of electrical components and engine computers, often belong to unions and are guaranteed “employment for life.” It is only further down the supply chain, among the small shops that make more basic components such as screws and fasteners, that one can see the full effects of outsourcing on working conditions. In the US, however, there is no well-developed layer of privileged suppliers that can cushion the work force against the effects of outsourcing, particularly the lower wages paid by suppliers competing to charge less.

  1. 1

    The Wall Street Journal, January 2, 1996. Relying on the government’s new methods for calculating GDP, the consensus of the economists polled is for growth of 1.8 to 2 percent for 1996, or 2.4 to 2.6 percent using the previous method of calculation.

  2. 2

    Business Outlook,” Business Week, July 10, 1995. These government figures almost certainly understate the strength of investment; they do not, for example, include software as an investment, and they have found no adequate way of taking account of the vastly enhanced powers of computers, even as their prices fall. Perversely, the new methods of calculation of investment, productivity, and GDP introduced in December make matters worse by further downgrading the real value of computers, along with their price. The prolonged shutdown of parts of the federal government in December and January has delayed these changes, and statistics based on the old methods of calculation will be used here.

  3. 3

    Capital Spending Slows to a Canter,” Business Week, August 14, 1995.

  4. 4

    Economic Report of the President 1994, pp. 127, 129.

  5. 5

    According to the Bureau of Labor Statistics (BLS), productivity grew by 2.55 percent during the first three quarters of 1995.

  6. 6

    For example, in 1995 total compensation for American workers, which includes health and pension benefits as well as wages, rose by approximately 2.7 percent. This was the lowest increase for any year since this statistic was first compiled in 1981. (The New York Times, January 4, 1996.)

  7. 7

    BLS, January 29, 1996. Earnings for 1995 are based on figures for October. Productivity for 1995 is derived from the average of productivity growth during the first three quarters. Figures for CEO earnings are given by Lawrence Mishel and Jared Bernstein, The State of Working America 1994 (Economic Policy Institute, Washington, D.C., 1994). This indispensable work, published biannually, brings together and analyzes all the available data on family income, wages, taxes, employment, and the distribution of wealth.

  8. 8

    BLS, January 29, 1996.

  9. 9

    BLS, January 29, 1996.

  10. 10

    The Wall Street Journal, July 20, 1995.

  11. 11

    Dr. Rivlin’s Diagnosis and Mr. Clinton’s Remedy,” The New York Review, March 25, 1993, p. 12.

  12. 12

    Requiem for a Democrat,” speech delivered at Wake Forest University, Winston-Salem, N.C., March 17, 1995.

  13. 13

    For more on Hammer, see Section 3, below.

  14. 14

    McKinsey Global Institute, Manufacturing Productivity (McKinsey and Company, 1993)

  15. 15

    See for example Eamonn Fingleton, Blindside: Why Japan is Still on Track to Overtake the U.S. by the Year 2000 (Houghton Mifflin, 1995).

  16. 16

    Manufacturing Productivity, Chapter 2A, p. 8.

  17. 17

    Manufacturing Productivity, Chapter 2C, p. 5.

  18. 18

    Manufacturing Productivity, Chapter 2A, p. 8. Recently some German industries have been introducing aspects of lean production; and several large German firms are building plants in the US.

  19. 19

    James P. Womack, Daniel T. Jones, and Daniel Roos, The Machine That Changed the World: The Story of Lean Production (HarperCollins, 1990), p. 260.

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