Adam Davidson on Standard Motor Products

March 27, 2012 – 2:10 pm by John

I loved this EconTalk podcast with guest Adam Davidson, who co-founded NPR's Planet Money and writes the It's the Economy column for the New York Times Magazine. The subject of the podcast was Davidson's recent article in The Atlantic, Making It in America, about the Greenville, SC factory of Standard Motor Products.

Naturally, because it's the EconTalk podcast and Russ Roberts is an economist, they focused more on the microeconomics that Davidson learned in his visit to Standard Motor Products and also to factories in China, rather than on the human-interest aspect of his Atlantic article, although the latter wasn't ignored. Here are some segments of the podcast that especially piqued my interest from either an economic or other point of view:

From about 6:50 through about half of the podcast, Davidson and Roberts talk about "skilled blue-collar workers" and less skilled entry-level machine operators whom we usually think of as typical factory workers. The skilled blue-collar workers probably have a high-school diploma and a two-year associate's degree but are fairly smart and have gained a lot of knowledge about metallurgy, computer programming, electronics, chemistry, and even calculus. In contrast, the basic, low-level machine operators learn their menial jobs in a day, are unlikely to advance their careers much, and their jobs are almost guaranteed to be replaced by machines before they retire. The latter are people like Maddie, whom he focused on in his Atlantic article, and Davidson's own grandfather, who populated assembly line floors in factories in the 1920s–1960s. Davidson muses, "I think there's no question—certainly for me, I think for most people—you'd rather be a skilled worker now than an unskilled worker when there were lots of jobs. It's just much more interesting. You're doing lots of different things every day, you're using your brain, you probably will not get carpal tunnel."

Davidson says those low-level machine operators, who used their muscles more than their brains to perform menial, repetitive tasks, were often replaced by the hundreds by a single robot and a computer, which are only operated by one person now. Considering the output that this one person and his machine are responsible for, the labor of this skilled blue-collar machinist is now hundreds of times more productive than a single low-level machine operator was. This comes at the expense of hundreds of jobs, but that labor is now freed up to do other work that serves some other of humanity's infinite set of unsatisfied wants and needs.

Russ Roberts reminds us that this is called "creative destruction" and that this is an important foundation of economic progress and our material well-being. This is nothing new, but old truths often seem to need frequent repeating. He summarizes the four major benefits of this creative destruction: increased productivity/labor ratio; more and better products for lower prices for all of society; freeing people from having to do menial, back-breaking work and instead making machines do it (faster and with less wear and tear); and enabling the displaced labor to do different work that serves other unsatisfied human wants and needs. This is the very essence of wealth creation and should be celebrated at every chance. One place that that displaced labor (not the actual laid-off machine operators, but the potential or hypothetical labor that would have filled their spots in the future) can go is, of course, to making the machines and computers that replaced the machine operators of old. This is higher-level work requiring more education, more critical thinking, more mathematical reasoning, more creativity, and less physically taxing labor than manual labor does. Such replacement and progression is considered absolutely crucial to the advancement of human civilization and the creation of new and additional wealth.

When mercantalists, protectionists, and other economic ignoramuses decry the loss of jobs to inanimate machines that serve the heartless profit motive of evil industrialists and greedy shareholders, they forget about the jobs of the robot manufacturers and computer engineers and programmers who make those robots and computers. What about those jobs? What would they say if the robot makers all lost their jobs? Should those jobs just not exist? Should those companies never have been founded and their employees just gone into menial manual labor instead? What sense does it make to protect a less productive job over a more productive one? The 100 lost machine operator jobs are that which is seen, the gained robot/computer maker jobs are that which is less often seen, and the yet uncreated or unsaturated job niches that an additional 100 people can now fill are that which is very rarely seen. The increased wealth and well-being that we enjoy as a result of advances in technology that make labor more productive and make menial, dangerous jobs unnecessary can be seen everywhere all the time, yet we don't always take notice of what we see.

(As I quote below, Roberts later says, "I'm extremely excited about my job getting destroyed by technology.")

The skilled blue-collar workers are represented by Standard Motor Products' Luke Hutchins, whom Davidson also highlights in his Atlantic article. He is no mere machine operator but rather a machinist. He has a lot of math ability and says calculus is particularly helpful for his job. I loved it when, after Davidson said that, Roberts interjected, saying, "That's so wild, though! I gotta stop there! Because I read that. It got like a sentence...part of me wanted the entire article to be about that. My wife teaches high-school math, and we talk all the time about the value of various skills and who can use them, and...is it just good for your brain to learn these skills in math or does it actually come in handy? And certainly if you were going to be an engineer, then it's good to know math, but a machinist needs to know calculus? Why?!" Davidson then explains how Hutchins has to deal with three sets of x-, y-, and z-coordinates to make adjustments to the machine, typing them into a DOS-like command-line interface. He likened it to string theory, thinking in nine dimensions all the time. I also got a kick out of that segment. This has nothing to do with politics or economics; it's just fascinating how beneficial math is and how crucial calculus is to almost everything about our lives. The world runs on calculus.

At about 34:00, Davidson explains why he chose Standard Motor Products over some newer, perhaps more cutting-edge manufacturing company that makes high-end technological products and uses even more machines per human than Standard does, or offshores all of its labor. "I wanted a firm that wasn't trying to squeeze every penny of profit out...because I thought it would make for a more interesting, compelling story.... You know, all the stuff about Bain Capital and Mitt Romney—I just didn't want to get into that debate. I wanted a company that almost anyone would look at and say, 'Alright, those are decent people. They would love to hire more people. They would love to justify keeping everyone on and never laying anyone off. But they can't because the market won't let them.' To do that would mean just going bankrupt."

But Roberts and Davidson go on to agree that regardless, Standard basically does have to squeeze every penny of profit out, or at least squeeze every penny out of their production costs, because if another company makes fuel injectors (and other products that Standard makes elsewhere) for a few cents cheaper, then the after-market auto parts retailers aren't going to sell its products anymore, and then it'll have no customers. Standard makes a net 5% profit margin in a great year. It's usually closer to 2% or 3%, which Roberts notes is probably the norm for everyone in that industry, even those trying to squeeze every penny out (and I think probably just about everyone in all of manufacturing).

Roberts then notes that they can't stand still, they have to keep improving, keep lowering the cost of every little input, keep reducing the time it takes to switch a machine over from making one type of fuel injector to another, all in the name of staying afloat and avoiding bankruptcy.

That reminded me of the old adage that liberals and a lot of other leftists never acknowledge: The profit motive is the single strongest driving force keeping prices low, not high.

Taking this drive, this necessity to continue improving little by little into consideration with the improvements in labor productivity and wealth creation exemplified above, this discussion also reminds us that the competition of a free market is not a dog-eat-dog competition to take a piece of the static economic pie from others; rather, it is a competition to create new and additional wealth for the consumers who are your ultimate raison d'être.

However, it can't be denied that there is more than one way to make profit and more than one way to stay competitive, in any industry. Germany has gained a reputation for "making money by making stuff", and I think it also has a reputation for treating its employees a little better and paying them a little more than factories in other countries do or than the German companies could probably get away with. (That's what I gather from reading one of the top comments at Davidson's Atlantic article and hearing things around the radio and internet, anyway.) For some companies, paying employees more actually improves their profits. The story is certainly different in some ways for the retailers profiled in that article than it is for manufacturing companies, but it must be similar in some ways, also. I wish I knew more about their successes and failures and what makes them similar and different. I bet a lot of economists do, too.

At around 48:15, after Davidson and Roberts have discussed the reasons there might be an apparent shortage of skilled labor in the manufacturing industry (the Luke Hutchins types), such as ignorance that the high-skill and medium-skill jobs exist, some sort of snobbery that sours people's opinions of manufacturing and/or small Southern cities, inadequate education to prepare young people for such jobs, and insufficient pay scales, Roberts pontificates on the educational and labor changes that the U.S. might see soon or is in fact already seeing:

I think there's a lot of changes going on in the American labor force that are brought on by this recession, where people are opening their eyes to all kinds of things, especially in what they study in school and where they study it. If we can make our education market a little more flexible, which I think is coming, I think there's going to be a lot of changes in how these worlds work. I'm extremely excited about my job getting destroyed by technology. I think there's a tremendous opportunity for the American college experience and the American high-school experience to be replaced by something that's different. I'm not exactly sure yet what that will be, but it's going to involve technology and online learning and different ways of learning.

... I think we have a crisis in education. A lot of people look at foreign countries and say, "They do it differently and better." Rather than us trying to figure out from the top down what we ought to be doing, I'd allow a little more chaos in the education industry. I'd get government out of it and let private entrepreneurs come up with things that would make the Maddies of the world better prepared for the future.

At about 57:00, Davidson and Roberts got into a very interesting discussion, mostly hypothetical musing on Roberts's part, about how low-skill workers can improve their skills, get higher-level training, make themselves (more) irreplaceable, learn to use their brains instead of their muscles, and add a lot more value to their company in a decision-making, critical-thinking kind of way:

Let's think creatively for a minute. ... I'm going to have a little thought experiment.

You have people in the factory who are bright, but through either the choices they've made or bad luck or unawareness of what's going on outside... You'd think there'd be an opportunity to do the following. You'd think the factory could bring in some training into the factory that the workers would pay for, not the factory. Workers might pay for it not out of pocket, but in the form of lower wages. So if you offer $10 an hour or $11 an hour, you don't get those workers to do your job, but you might if you said, "Look, I'm only paying 10, my competitor, I know, is offering you 13...but if you come to work for me for 10, your life's going to be tough for a while, but I've got this program where we're going to take a break for an hour or two a day...and we're going to help you get the skills that you might be able to use elsewhere in our factory....

And I [speaking as a factory owner] realize that maybe many of the workers who'd like to have those skills aren't going to have the capability of acquiring them, and I'm uneasy about bearing that risk, so I'll let the worker bear the risk, in the form of lower wages, and we'll have an in-house training program as one of our fringe benefits. We'll bring in a local community college to teach a class on site, or we'll partner with them to make it easier for you to get off work at certain times. You'd think those kind of things would be desperately helpful to folks who are either eager to get ahead or worried about the fact that they're not going to stay where they are.

I think this sounds like a great idea that could be entirely feasible in more than one manifestation. This could not only help workers get training while still earning money but also would make employees and employers more invested in each other. It would allow employers to train their future higher-skill blue-collar workers for free or very cheaply, while still making relatively sure that the employees would stay at the company for a certain length of time (through a contractual agreement), and it would also make the employees more of an invested, interested partner in the future success of their workplace.

Davidson agrees with me and Russ Roberts about these potential benefits and responded that the CEO of Standard Motor Products was inspired by Davidson's article to start taking training much more seriously.

Davidson notes that this worker training program could be mostly self-selective, meaning each employee would decide for himself whether he wants to enter such a training program. This self-selection would increase the likelihood of each employee finishing the training and actually succeeding in learning the skills required for higher-level employment. He also mentions the German companies in Greenville, particularly the BMW plant, which have inherited the German model of apprenticeships, which helps employees who start at the lowest levels learn valuable skills, make themselves more valuable to the employer(s), and move up in the world.

Davidson then explains that larger companies like Bosch and Michelin do have training programs for their low-level employees via partnerships with the community college, Greenville Tech:

Greenville Tech...will work with the bigger multinationals, like the BMW or Bosch or Michelin, who will say, "We need 50 people who can do blank...." And the school will take care of teaching those people, and those people are guaranteed, "If you finish this course, you will get a job at Michelin."

I'm sure Greenville Tech would love to do what you just described as well. A criticism I've heard is that it's in the company's interest to train people more narrowly than it might be in their interest.

Roberts notes that then it returns to being a question of getting the people to pay for it and invest in their education and future employability themselves.

Putting more of the cost on the employee sounds like one way to strike a balance, although they're already probably suffering financially as it is, so a lot of them might not be willing to sacrifice those wages for one or two years. Maybe another possibility is for the employer to pay much of the cost of the training or pay them a full wage while they aren't working a full workweek, but only in exchange for (in addition to a contractual guarantee that the employee will stay at the company for X number of years) paying the newly trained employee a slightly lower wage than others in that higher position for the first few years.

Davidson summarizes this segment of the podcast nicely:

What I really like is the creative thinking. You know, thinking that the only way to advance does not need to be: you have to leave the workforce or you have to go to night school and go to a two-year technical college and spend money while you're not earning money. I do like that proposal to think more creatively and destroy some of the old models.

I hope new, different, and creative education/training models like those do emerge and flourish, but I wonder why they haven't already. Too much of a government monopoly on education? Too few practical skills taught in high schools? Too much entrenchment in the old student loan/student debt/traditional college model of education and subsequent employment? Too little on-the-job training for manufacturing workers of all kinds (which Davidson laments earlier in the podcast)? Too much pure number-crunching/profit-seeking by corporations and not enough investment in human capital or sort of seeking good karma for fostering good employer–employee relations? Too many corporations and not enough worker-owned collectives? (Note that all or at least most of the cost–benefit trade-offs that impair these non-traditional employee training programs in manufacturing corporations would also exist in any other employment/ownership model.)

Near the very end, Roberts says something that perfectly summarizes what I think about the intersection of labor and education in the United States today:

There are people who struggle to apply those intangible skills [that they have acquired in school, such as with a generic high-school diploma or their liberal arts major], and they'd like some tangible ones. Rather than trying to create that educational system, I'd like to let it emerge. And we need, I think, a lot more creativity in how we let that system run.

Some other interesting aspects of Davidson's article and the podcast, that don't relate too closely with economics but maybe they do with politics, were the story of the founder of Standard Motor Products and the story of Maddie the level-1 worker.

Elias Fife, a Jewish immigrant from Lithuania, founded Standard because he saw a demand that wasn't being filled back in the early days of car ownership: "many people were frustrated with Ford and the other car manufacturers because they never made enough replacement parts" and "The tiny aftermarket auto-parts industry was a mess: countless mechanics and hobbyists made parts by hand in their garages, and many of these parts didn’t fit or would break." So "Fife decided to build a trustworthy, reliable brand whose products met or exceeded the quality of the original parts." That's the epitome of the American dream, right there: come to the land of opportunity and seize upon the first good one you find, even if you know nothing about that market beforehand, and create a company that will grow and profit for decades!

Maddie's story, in contrast, is quite sad in many ways. It's a powerful exemplary warning against teenage pregnancy. In both the article and the podcast, Davidson describes her as smart, quick, young, pretty, and hard-working, but because she graduated high school 6 months pregnant and could never sacrifice potential wages for schooling after that, she is stuck in a low-level job with no future career prospects in which she is completely interchangeable with any other worker and will soon be replaceable with a machine. She was good at math and other subjects in high school and got good grades. She was planning to go to a four-year university and major in criminal justice. But she had to make money immediately to support her baby as a single mother, and there are numerous obstacles to Standard (or any other company) paying for her to go to technical college or some kind of training/certification program to enable her to move up in the future. (Two of them being: How does Standard know her abilities and interests will match those required for a higher-level decision-maker? and, How do they know she won't then be lured away by another company offering higher pay? I wonder how Japan and Germany, which supposedly treat their factory workers better and pay them more and treat them like human beings instead of numbers, would handle a case like hers.)

I have little doubt that Maddie would stand a good chance of benefiting from a technical education program (organized, promoted, or sponsored in some way by her employer) that doesn't fit the mold of any currently existing education/training models, and I have little doubt that eliminating the State-caused regimentation of education and labor markets would give Maddie multiple money-earning and job-training options that aren't available to her (and her employer) now.

Maddie's story also brings up the sad but true fact that while her career prospects were ruined by her teenage motherhood, the father's were not. The father left after high school and is nowhere to be seen. He could go on about his life like any other 18-year-old man. It seems clear that Maddie should have done everything she could and used every resource she could to track him down and force him to pay child support. With all the misguided and unjust laws that pervade our society, it's hard to argue against child support payments when a father just leaves the mother alone to raise both of their child. Maybe she did try, and maybe she still could try.

I wonder why Maddie's family couldn't help raise her child and support her through at least two years of technical school; it seems almost a given that they had no money to do so. This just provides more support for the libertarian position that a wealthier and freer society benefits everyone, particularly the poor and downtrodden. A world of more and cheaper goods, no inflation, no impoverishing government regulations, no wasteful government bureaucracy, more labor mobility and bargaining power, more unconventional employment options, no trillion-dollar defense budget, no wasteful welfare programs, no wasteful stimulus packages, and no pitiful Social Security program might have allowed Maddie's parents and other relatives to save more money and be in a better position to help raise her child. Many economists have argued that extensive government assistance programs make families and communities weaker, an argument I find nearly irrefutable. Absent an overbearing and wasteful State, perhaps Maddie's family, church, and local charities could have helped provide for her child while she spent two years in school. (Maybe in the deep South, they would shun her more than help her, but I would guess not. They would probably shun her a lot more for having an abortion than having a baby.)

Maybe liberals would ask why Maddie didn't claim some type of welfare or other assistance benefit from the state and federal governments. I wonder that, too. Maybe she is against it, maybe her parents persuaded her not to because they're against it, maybe she didn't know about it, maybe she was too caught up with everything else to get around to it, maybe she tried and couldn't get much money. Maddie sounds like exactly the type of person the government "safety net" is supposed to help, yet where was it for her? I'd like to know the whole story.

Maddie's story might also be a good example of how a crappy life in the U.S. today isn't actually all that bad by historical standards. Humanity would be nothing if we didn't always strive for something better and dream about improving our lot in the future, so I would hate for a bright young woman like Maddie to be complacent (which she isn't), but that shouldn't stop us from recognizing that the more productive the world economy is and the more free everyone is to be the master of their own lives, the more life improves for each successive generation. It is not a benevolent State or its welfare programs but rather the exponential increase of wealth, the continuous expansion of the worldwide division of labor, and the continuous creation of economic opportunities that raise the standard of living of the poor. (Besides, without the excesses of a free-ish economy, there would be no welfare to give.) Despite the aforementioned restrictions of her own economic opportunities, Maddie's children will have a great chance to be better off than either she or her parents were, and they already seem to have a decent life in inexpensive Easley, SC. It's just that her job won't last forever, and there's little she can easily do to improve her career prospects now. That's the really sad part.

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