The Agenda

Caterpillar and Market Monetarism

Mina Kimes profiles Doug Oberhelman, CEO of Caterpillar, one of the most successful U.S. manufacturing firms, in the new Bloomberg Businessweek, and in doing so she illustrates a number of important economic ideas. In the hands of a lesser journalist, one suspects that the article would become a tirade against corporate greed. And there is fodder in the article for readers eager to draw the conclusion that Caterpillar’s efforts to fight wage increases even as its profits have reached new heights are somehow sinister. Mina contrasts Oberhelman’s compensation with the hourly wages of production workers, and she conveys the anxieties and concerns of Caterpillar employees who fear that manufacturing employment will never give them the middle-class prosperity they badly want. But she also situates the Caterpillar story in the larger context of slack labor demand:

In 2005, long before recession loomed, Oberhelman oversaw the company’s plan to prepare for a steep financial downturn—a task that made him unpopular, he says, but proved invaluable. After laying off 30,000 people in 2009, Caterpillar made it through the crisis without losing money. Last year, Caterpillar made $45,000 per employee, up from $12,000 in 2007. “The argument they make is, at a time when we’re very profitable, we can’t afford to more equitably distribute the wealth, because there may come a time when we won’t be,” says Robert Bruno, a professor at the University of Illinois at Urbana-Champaign’s school of labor and employment relations. “So when is it appropriate to share the wealth?”

Caterpillar employees know that the answer to this question is up to Oberhelman. The dwindling number of manufacturing jobs combined with the decline of unions has weakened workers’ leverage. When Caterpillar offers jobs in nonunion Southern states that pay $12 an hour, applicants line up around the block. “You’re basically expendable,” says Emily Young, a welder who has worked at Caterpillar’s Decatur plant for eight years. “For every one person who doesn’t work, there’s five waiting in line.”

The root cause of Caterpillar’s unwillingness to make concessions to organized labor, as Young understands, is that Caterpillar has the option of shifting production to lower-cost locations. Caterpillar could raise compensation for its legacy workforce and in doing so reduce its profits, but this would lead to an investor revolt and it might also strengthen the relative position of Caterpillar’s competitors or encourage new firm entry. The only durable solution to the problem of stagnant manufacturing wages is, according to Oberhelman, a stronger economy and a tighter labor market:

If Caterpillar refused to pay its executives high salaries, they could probably find other jobs, whereas hourly workers have much less mobility. Oberhelman acknowledges this dynamic, though he tends to characterize Caterpillar’s role as a passive one, as though the company lacks the power to choose how it disburses its profits.

When will workers’ wages rise? Oberhelman exhales sharply. “The answer to that is: when we start to see economic growth through GDP,” he says. “Part of the reason we’re seeing no inflation is because there’s no growth. Inflation was driven by higher labor costs, not higher goods costs. Frankly, I’d love to see a little bit of that. Because I’d love to pay people more. I’d love to see rising wages for everybody.” [Emphasis added]

I found Oberhelman’s statement, which strikes me as correct, intriguing in its potential political implications. Stronger economic growth would presumably increase demand for Caterpillar’s products and those of its competitors, like Komatsu. It might even spur other firms to enter the market, thus putting pressure on Caterpillar’s profits and increasing demand for workers with the relevant set of specialized skills. One issue, of course, is that as manufacturing becomes more capital-intensive, it leads to a bifurcation of the workforce, with some job functions demanding higher skill levels and others demanding the same or lower skill levels. But stronger growth will tend to raise labor demand for workers of both types, albeit unevenly, and so firms like Caterpillar would have little choice but to raise compensation levels. So while it is tempting to demonize Caterpillar in a climate of slack labor demand, the real blame lies, I would argue, with policymakers who have failed to deliver the conditions for higher growth. 

Moreover, Oberhelman seems to be suggesting that he is not averse to somewhat higher inflation if it is part of a package with higher real GDP growth, a view that is not dissimilar to that of market monetarists like Scott Sumner. I’m reminded of hedge fund manager Daniel Loeb’s recent letter to senior Sony executives, as described by Andrew Ross Sorkin and Michael J. De La Merced earlier this week. Loeb offered fulsome praise for Japanese Prime Minister Shinzo Abe, claiming that Abe’s leadership might allow Japan to “regain its position as one of the world’s pre-eminent economic powerhouses and manufacturing engines”:

Mr. Loeb has recently expressed his interest in Japan. Referring to the changes by the Abe government, he called it “a huge game change” at an industry conference last week. “And there’s a lot more room to go,” he added.

Mr. Abe has called his revival effort a plan of “three arrows,” including aggressive monetary easing by the Bank of Japan and enormous stimulus spending by the government.

So far, that effort appears to have drawn investor plaudits. The yen weakened in value last week, to 100 to the dollar, a level unseen in four years, helping local companies like Sony and Toyota. And the Nikkei 225-stock index has risen 43 percent so far this year. At the same time two years ago, the Nikkei was down 5.7 percent.

This is particularly interesting because leading hedge fund managers have tended to be very critical of aggressive monetary easying, which has been the main arrow in Abe’s quiver. Might influential business leaders like Oberhelman and Loeb embrace the idea that hitting 2 percent inflation might prove an economic boon, and press their allies in Congress to respond accordingly? That is, will they embrace what we might call the Sumner-Pethokoukis thesis — that what the U.S. needs are free markets and NGDP targeting? I wouldn’t hold my breath, but the idea isn’t crazy. 


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