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The Rise and Fall of the American Middle Class

November 29, 2010
Penny Sleuth

Daily Reckoning

3 followers
There’s a sturdy old building in the east end of Pittsburgh. It’s located between two major streets, Centre Avenue and Baum Boulevard. It backs up into a hollow where there’s a railroad spur. From the train tracks in the hollow to the roof, the structure is about 125 feet tall. The building covers a city block. It was constructed in 1914 by the Ford Motor Co.

The Old Ford Plant — in Pittsburgh

Ford Motor Co. Henry Ford’s car company is certainly associated with Detroit. But there’s another story. Mr. Ford cranked out cars in Pittsburgh, too.

RiseAndFall_1.png

Ford Plant, 5000 Baum Blvd., Pittsburgh; image courtesy of Ford Motor Co.


In the early 1910s, the market for Ford cars was growing. But there was a problem. Fully assembled cars were difficult and expensive to move by rail. Also, there was quite a bit of damage in transit. So Ford came up with a better idea.

Ford built satellite assembly plants. It was easier just to move parts — “knock-down kits” — to distant sites by rail. Ford shipped parts to Pittsburgh and hired local workers to put vehicles together near the point of sale.

A Vertical Factory

From the rail siding, far below street level, an elevator lifted bins of parts to different floors. On the top floor, workers started by connecting the chassis and wheels. The assembly line then operated by gravity. Workers rolled the chassis down a ramp to the floor below, where other workers installed additional components and built out the car.

On each floor, at each stage, workers added value. Then they rolled the car down another ramp. The finished car ended up in a parking area behind the building, at street level. There was even a well-appointed showroom on the first floor, where customers came to kick the tires and buy the vehicles.

Producing Cars and Jobs

From 1915–32, Ford’s Pittsburgh plant assembled about 40 cars per day. The plant closed during the depths of the Great Depression. By modern standards, 40 cars per day seems like a low production volume. But for many years, this idea worked for Ford.

According to tax records, the Pittsburgh Ford plant continuously employed 400–600 workers, at remarkably good wages. The plant also created a thriving network of vendors that employed thousands of other people. This included railway workers up and down the Pennsylvania Railroad line between Michigan and Pittsburgh.

Plus, there were employees at smaller nearby factories and machine shops in Pittsburgh. These workers made components like hoses, springs, seats, electric wire bundles, etc.

The job chain of the Ford plant extended straight out the front door. There were transit workers of the old Pittsburgh Railway Co. driving electric trolley cars and carrying people to and fro.

Down the street from the Ford plant was one 
of the world’s first modern gasoline stations. It was the brainchild of the marketing department of the old Gulf Oil Co. At the filling station, attendants pumped gas, checked tires, washed windows and established an iconic image of service that’s still burnt deep into the heart and soul of America.

Creating an American Middle Class

The Ford plant in Pittsburgh was a site of productive urban manufacturing jobs that paid well — at least the pay wasn’t bad by the standards of the time. Plus, the Ford plant created nearby pockets of technology, industry and service that led to more jobs and more wages.

Directly and indirectly, the Ford plant in Pittsburgh supported quite a large population. Tens of thousands of people lived in nearby neighborhoods. Not far from the Ford plant, streets were lined with food stores, dry goods stores, restaurants, churches, schools, hospitals, movie theaters and much more.

How do I know this? Well, many of the old buildings are still there today, in the Bloomfield, East Liberty and Shadyside parts of town. There are even a few really old-timers who can tell the tale, based on their personal recollections and family histories. (Full disclosure — the old Ford plant is not far from where I grew up.)

One Plant of Many, Like Many Others…

To be sure, Henry Ford’s plant didn’t change Pittsburgh, let alone the nation, all by itself. The Ford plant helped transform one area of Pittsburgh into a wealth-creating hub. And as I mentioned above, the plant lasted only until 1932.

But even after it closed, the legacy of the Ford plant lived on. It’s as if the Ford plant sowed seeds of perennial industry and commerce, which took deep root. Many of the nearby supporting businesses survived and outlasted the Depression.

Pittsburgh’s Ford plant makes for interesting history. Indeed, if you ever wondered how the American middle class came about, it helps to know something like this story of one particular urban site. But I don’t want to dwell on just this one plant in just one locale.

The larger point is that the Ford facility was 
one of many industrial plants that sprang up in Pittsburgh, across Pennsylvania and across the country through the early part of the 20th century. Multiply this particular Ford/Pittsburgh story by 
the tens of thousands.

Think of “Ford plants” — or something along those lines, built and run by many other companies — popping up in cities and towns all across the U.S. Then let this process play out over many decades. Every place had one or more plants and factories.

Now you’re getting a sense of the long, complex arc of history that created America’s manufacturing backbone, as well as the country’s industrial-based middle class. It drives home the idea — the historical fact — that creating a middle class is no mean feat. There’s nothing easy about it. It takes entrepreneurship, investment, technology and hard work. Oh, and it takes time.

A Great Phenomenon, Now Vanished — A Dozen Factories per Day

In a tragic turn of events, however, the American middle class has peaked. The industrial middle class is now declining, if not vanishing.

Indeed, between 1999–2009, over 45,000 plants and factories closed across the U.S. That’s 
an average of over 84 plants per week, or about a dozen per day. The average job loss was over 200 direct employees from each locale, with countless other workers affected indirectly.

You can see how the process of decline played out on a simple chart below of the falling numbers of U.S. industrial workers.

RiseAndFall_2.png

If you travel across the U.S. — as I’ve done a couple of times in the past three years as editor of Outstanding Investments — you’ll see many places where the heartland, and by extension the American middle class, is a basket case.

The most shocking, eye-catching evidence comes when you visit Detroit, Cleveland, Buffalo or any of hundreds of other old manufacturing centers and factory towns across the land. There, you can drive mile after mile, observing declining, if not vacant, houses, as well as now-abandoned factories and workshops of the lost American middle class.

Go to these kind of places, look around and ask a few questions. You’ll encounter a former middle class that’s idled by serial plant closures and no longer able to gain economic traction.

Or look past the physical ruins, and into the courthouse filings. The legal documents paint a picture of countless broken hopes and dreams. Within the court records you’ll see the declining American middle class. You’ll see the problem — clinically, but starkly — in the data for repossessions caused by unemployment, or mortgage foreclosures and bankruptcy filings.

Changing Times

Times have changed in the U.S., and not for the better for many. It’s not overstating the case to say that something great has been lost. So what’s the answer? Can the U.S. somehow rebuild and restore its former industrial middle class?

Should we — or could we if we wanted to — go back to the good old days, of building Ford cars out of kit parts in factory buildings like that one I described in Pittsburgh? Oh, if only it were that simple. No, we can’t go back to living in that now-vanished industrial past. Too much has changed.

Today, the U.S. work force competes against newly built parts of the world, from Brazil to Singapore, from Turkey to the far reaches of China. Other locales have their own “Ford plants,” so to speak. These plants may actually build cars, just like Ford. Or perhaps they fabricate microchips, computers, pharmaceuticals, oil field equipment, airliners or many other things. Whatever they make, these other sites, across the globe, now create jobs and support their own wealth creation.

Get Friendly to Capital Investment

While other parts of the world are building out, the U.S. has arrived at its sorry predicament through its own actions. The country has spent several decades pursuing a lot of bad economic ideas, starting with a general debasement of the dollar. It’s as if the Federal Reserve is simply incapable of respecting the monetary signals that certain items send, particularly gold and silver.

Now add in more bad policy. The U.S. has abandoned capital-friendly ideas that used to work and adopted other ideas that are designed and destined to fail. The simple way of stating it is to say that local, state and federal governments tax, spend and control things way too much.

For example, the federal corporate tax rate is 35%, which is the second-highest rate in the world (after Japan, if you’re wondering). Then add on numerous state corporate income tax rates, as 
well as many local tax rates. Over the long haul — and because business owners have many other options — these high U.S. tax rates discourage business formation.

We’ll probably never know how many businesses never started up or took root in the U.S. because the federal, state and local business tax rates are too high. But it’s accurate to say that the 35% federal tax rate, applied to nothing, yields nothing. Same thing with the high state and local tax rates.

Or let’s discuss how the country has “financialized” its economy. The biggest part of most discussions of the economy nowadays is about what’s good for Wall Street, versus what helps businesses on Main Street. The idea is that Wall Street somehow has a collective way — financial magic, perhaps — of properly allocating the nation’s capital to the highest and best uses. But that’s not really how it works, is it?

No, with Wall Street benefiting mightily over the past two decades or so, the big picture is that the U.S. economy has lost millions of middle-class industrial jobs. Is the country now better off? I don’t really need to answer that question for you, right?

Where Do We Go From Here?

The bottom line is that the U.S. has to make a conscious, collective national decision to become friendlier to capital investment. That’s where the jobs are. It’s how the wealth of the nation will be created.

In order to prosper, the country has to generate energy, mine things, produce things, make things and sell things. That is, after all, what great nations do. It means that across the U.S., governments need to lower business taxes, reduce regulation, offer a friendlier labor climate and adopt a more open approach to development.

As the story of the old Ford plant illustrates, the rise of the American middle class took many decades. And as the recent data show, the fall of the middle class was precipitous. It’ll require many decades 
to rebuild things, if that’s even possible. But if we want to remain a great and powerful nation, we have to make the effort.

Byron King

for The Daily Reckoning

The Rise and Fall of the American Middle Class originally appeared in the Daily Reckoning.


Rating: 3.6/5 (15 votes)

Comments

roke6362
Roke6362 - 3 years ago
One position that could be taken on this article is that most of the rise in middle class is due to the auto industry. During this time, I wonder how the growth rate in wealth (to shareholders) from the auto industry correlates to the growth rate in wealth/wages for the middle class?

Being from an auto industry town, I can tell you the auto industry is notoriously bad at givng back to its community in order to benefit the community. If you don't believe me, look at the following towns: Detroit, MI / Anderson, IN / Kokomo, IN / Marion, IN / New Castle, IN. The union labor stays, but the salaried employees commute. Hence, monies are generated in town, and then it leaves to support other communities.

In order to stay competitive, American Manufacturing has had to send jobs overseas. Apparantly, it is more profitable to make the product overseas and sell it here than to make it and sell it here. We are still creating a middle class. They are just being created in other emerging markets.

I don't know the answer to my next question, but is there any industry that remains viable when it has established union labor?

Were we really better off when we had all those plants? Does each economic class make the same wage they did 30-40 years ago? Are we living longer? Is technology better?

One thing is pretty obvious to me. And that is the money-motivated people in this world believe more in the foreign worker at a lower wage than the American worker at the wage they demand. This is so, even if it means losing the American worker as a potential customer.
Sivaram
Sivaram - 3 years ago
Very good article... not a fan of Daily Reckoning at times but this was an enjoyable read.

ROKE 362: "I don't know the answer to my next question, but is there any industry that remains viable when it has established union labor?"

Although unions cause some problems, they are not the main issue here. There are many manufacturing companies that don't have unions and are still dissapearing. What you are observing is the declining of manufacturing, union or not!

ROKE 362: "Were we really better off when we had all those plants? Does each economic class make the same wage they did 30-40 years ago? Are we living longer? Is technology better?"

My guess is that future workers will make as much as they did 20 years ago. What has changed is that the distribution of income has been altered. With manufacturing, low-skilled or semi-skilled workers made a lot of money but I doubt that you can make as much money in the future. Overall, though, I think the labour market will improve. We are observing the collapse of manufacturing--sort of like agriculature in the 1930's--and things look bleak right now. But just like how manufacturing jobs ended up paying more(!) than agricultural jobs, and manufacturing was able to absorb the agricultural workers--some would have said a hundread years ago that manufacturing could never produce as many jobs as was available in agriculture--I am optimistc.

What is happening is not new. A hundread to hundread and fifty years ago, Britain had a dominant manufacturing industry. America, which was an emerging market, pretty much stole that from Britain. Yet, the average British citizen is richer and better off now--and I don't mean in terms of freedoms either--than back then.
roke6362
Roke6362 - 3 years ago
Sivaram: It's like my immigrant uncle says, "it is better for profit when a machine can make something, but the machine can't buy anything to help the economy."

I think the entrepreneurship class that create jobs (in all eras) pay workers an inflated wage in order to create more consumers of their products. When the products mature or decline, entrepreneurs move on. The workers either have to work for less or wait for entrepreneurs to create new jobs.

This is the basis for why an individual willing to work for success is better off than the person who waits for the collective to get their "fair share" of the individual's gain.
hongquan7389
Hongquan7389 - 3 years ago
From the book about Globalization by Bruce Greenwald, the portion of manufacture in GDP has been shrinking, so much as the importance of agriculture in the early 1900s. Therefore, the job losses due to outsourcing to China, India would not be so devastating. I think the American middle class now and in the future will be high skill worker like teachers, health professionals, scientists, social science workers, etc.
sabonis
Sabonis premium member - 3 years ago


Ben Bernanke (who I am not really a fan of) said on 60 Minutes last night that the un-employment rate for college grads is around 5% and for those without a college dipolma its in the double digits, probably in the teens.

Its very difficult to become middle class these days with a sub-par education.

Those with a good education become "upper class" and those without become "lower class".

Fix the education problem in America and you will have a thriving middle class. I really think its as simple as that.
halis
Halis - 3 years ago
I think that the middle class is shrinking, the wealthiest class is growing and the "poor" class is growing. I think that many of the people nearing retirement age, baby boomers, who are solidly middle class, will find at some point in their retirement that they don't have enough money to make it through their retirement.

I feel the reason for this is that trickle down economics do work and that's the problem. You have this huge reservoir of money at the top and a little tiny bit trickles down to the rest of the economy, but it's not enough. Hence the wealthy get wealthier and the middle class get poorer.

When the wealthiest claim that they need lower tax rates b/c it's better for the whole economy, that's just self-serving. It sounds real good in theory, until the rich people decide they don't want to hire a few more people, they'd rather buy a new yacht instead.

I say raise taxes on the wealthiest and if they want to try to "punish" everyone by not hiring anymore, they will just create opportunities for entrepreneurs to start new companies and steal their business. It just won't happen.
Sivaram
Sivaram - 3 years ago




Ben Bernanke (who I am not really a fan of) said on 60 Minutes last night that the un-employment rate for college grads is around 5% and for those without a college dipolma its in the double digits, probably in the teens.

Its very difficult to become middle class these days with a sub-par education.

Those with a good education become "upper class" and those without become "lower class".

Fix the education problem in America and you will have a thriving middle class. I really think its as simple as that.


This problem has nothing to do with education. If Ben Bernanke is using the educational differences, chances are he is looking for an excuse for failed policies. After all, think about this:

Imagine that the vast majority of people went to universities all of a sudden. Do you seriously think that unemployment would drop? Of course not. Only an academic living in a hypothetical world would believe it be true.

The reality is that there are only a finite number of highly skilled jobs. The vast majority of jobs have never been at a level that requires university education and I would argue it never will be otherwise. You can't have everyone be a scientist, or a manager, or doctor, or whatever.

The current unemployment problem, I would argue, has nothing to do with education. If anything, it has to do with the lack of semi-skilled and lowly-skilled workers.

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