Lots of people have now noticed that the economy seems to have settled in to a period of slow growth and stagnant wages, but nobody is quite sure why. Here in Washington, not surprisingly, the instinct is to look for an economic policy solution — tax reform, immigration reform, trade liberalization, deregulation. To a hammer, everything looks like a nail.
But what if the problem and the solution have little to do with public policy and everything to do with the way private companies compete in the free market?
That thought occurred to me as I was walking the factory last week at Marlin Steel Wire Products, located in a nondescript industrial park on the south side of Baltimore. Since he bought the business 16 years ago, owner Drew Greenblatt has turned Marlin from a sleepy maker of wire baskets for bagel retailers such as Einstein’s and Bruegger’s into a fast-growing manufacturer of specialty precision metal fabrications used in production processes by companies such as Toyota, BAE Systems, Cummins Engine and Becton Dickinson. And the way he’s done it is by investing in his front-line employees, providing them with the tools, training and incentives to improve quality, boost productivity and earn a good, middle-class living.
At the heart of the transformation at Marlin is “the matrix,” a color-coded chart that hangs on the bulletin board just off the noisy factory floor. There’s a column for each of the company’s 32 employees (engineers, machine operators, office workers) and 125 rows listing all of the various tasks involved in operating the business (things like generating a cost estimate, performing a stress analysis, operating a fork lift, programming a laser). In each cell is a number from 0-4, signifying the proficiency each employee has achieved in that skill. The higher your total score, the higher your pay. And it’s all there for everyone to see.
The original idea behind the matrix, Greenblatt says, was to have as many employees cross-trained in as many skills as possible, to give the company greater flexibility in responding to the ebb and flow of work. It’s also become a source of pride and self-respect for many employees and some healthy competition besides. Greenblatt backs it up by setting aside 5 percent of payroll for employee training. And he makes it clear he’s thrilled to give out $1.50-per-hour raises every time one of his blue-collar employees learns how to operate one of the computer-controlled routers and presses and robots that now do most of the cutting, bending and soldering on Marlin’s factory floor.
“When I bought the company in 1998, the newest piece of equipment had been purchased in 1950. Everyone other than the foreman was making minimum wage. There was no health insurance, no pension,” Greenblatt said. “Nobody owned a car and everyone rented.”
Today, he says, blue-collar employees earn $35,000 to $110,000 annually with overtime and bonuses; salesmen and engineers earn more. Bonuses are paid every two weeks based on production targets for each work cell, with cells exceeding targets about half of the time. Everyone has health insurance and a 401(k) plan with a company match up to 4 percent of base pay. Some workers invest more than that, and Greenblatt claims there are already four or five paper millionaires on the factory floor. Every employee owns a car and more than half own their own homes.
“We don’t look at employees as a variable cost,” Greenblatt says. “For us, they are a fixed cost. And what that means is that we train the heck out of them. We incentivize them. We coddle them because we know they’re going to be with us for 30 years. They do well, we do well; we do well, they do well. That’s the deal.”
There’s nothing particularly special about the people who come to work at Marlin. The engineers are recruited straight from the University of Maryland. And like many small businesses, he uses temporary employment agencies to recruit blue-collar workers, giving permanent jobs to those who show promise. The guys running those new $400,000 precision tooling machines are high school graduates from Baltimore schools.
What they’ve accomplished, however, is special. In the past 15 years, after moving from Brooklyn to Baltimore, Marlin has not quite doubled its workforce, but it has increased its annual sales seven times, to around $5.5 million. Instead of turning out low-margin commodity baskets for retailers, the company now custom designs and produces small, high-margin batches of precision metal fabrications for large global manufacturers. It competes not so much on price as on engineering, production quality and speed. Tolerances are often measured in 1/1000th of an inch. Turnaround time, from order through design, production and shipping, is often as little as two weeks.
Greenblatt, a Silver Spring native, learned business strategy and management as an MBA student at Tulane and from his father, a rocket scientist turned serial entrepreneur. But in truth, there is nothing particularly new about his approach. In fact, it’s straight out of the best-selling management books of the ’80s and ’90s.
What’s noteworthy, however, is how far removed they are from today’s standard management practice, which is all about competing on price, driving down wages and benefits for frontline workers and managing the business for cash. Employees are thought of as replaceable cogs in a global machine in which all the intelligence and value-creation resides in the software or the production system or the minds of headquarters personnel. From that perspective, it’s perfectly rational to invest as little as possible in research and new machinery and employee training. (Not surprisingly, employee loyalty and engagement have plummeted.) Outside of sectors such as high tech and finance, the idea of sharing profits and productivity gains with front-line employees is widely viewed as a paternalistic relic of a less-competitive era.
What struck me up in Baltimore is that the reason we now have a low-growth, stagnant-wage, high-profit economy is because this is the way leading businesses have chosen to compete. It is the new competitive equilibrium — not because it is the only possible equilibrium, or even the welfare-maximizing equilibrium, but because corporate executives believe it to be and have collectively convinced themselves that anyone who doesn’t compete that way will be driven out of business or taken over by an “activist” investor.
But as Drew Greenblatt and others have demonstrated, that’s just a free-market fable. It’s perfectly possible to compete on the basis of value rather than price; on the basis of how much you can pay your frontline employees, not how little; on the basis of how much you can rely on their ingenuity and motivation, not how little; on the basis of how much you can invest in their skills, not how little.
If those were the prevailing norms, the terms of competition, the middle class would be growing, not shrinking, and it would be demanding more goods and services, providing more tax revenue for public infrastructure, investing more in their own human capital, all of it creating the kind of virtuous cycle that leads to still-higher incomes and profits.
It’s not unions or regulations or taxes or trade and immigrant barriers that have brought us “secular stagnation,” as the economists now call it. It’s the profoundly unimaginative, herd-like behavior of corporate executives and directors, cheered on by their short-sighted investors on Wall Street. And as long as profits and share prices remain at record levels, they don’t see any reason to change.