The Economics of Killing the Golden Goose, Part 1

We recently started following and engaging with #QU4ARK, a radio show on WIRN: World Internet Radio Network, and have been asked by two of the hosts about money and economic sustainability. When I thought about this, I was reminded of Aesop’s fable, The Goose with the Golden Eggs, and how it parallels what’s happening today in the US and in many other developed countries.

If you don’t remember the fable, here’s a summary:

A poor man wakes one morning to find a golden egg in his favorite goose’s nest. The once poor man is thrilled with his new wealth. The next morning he rushed to the nest and found a second golden egg. This continued each morning as he went from being very poor to very wealthy. As his wealth amassed, he changed. He became greedier. He desired more than one egg a day. He thought there must be more gold inside the goose. In an attempt to have it all now, the man killed the goose to get all the gold only to learn he killed the source of his riches.

The man no longer had a steady stream of income, but his spending continued until he was broke.

The reason I’m reminded of this story when I think about money and economic sustainability is due to the manner in which companies, CEOs, shareholders and activist investors act towards the goose that today lays their golden eggs.

Their golden eggs are the revenue and profits they reap from their businesses and investments. Their goose is their employees who make up their businesses and the consumers who are their customers.

We’re witnessing today relentless attempts to suck as much profit out of businesses as possible. I don’t fault business owners, managers or investors for reaping just rewards for their efforts, risks or investments. In many ways, I’m a capitalist. I want businesses to grow and believe a free-market is the best means to spread prosperity. I do, however, worry about the pursuit of profits at all costs. Over the next few weeks, I’ll examine these pursuits and their effects on the shrinking middle-class.

Dividends and Stock Buybacks

Dividends and stock buybacks can be good for businesses. They allow successful companies to return the wealth it created to company owners and employees. It’s the same as a sole proprietor who sells a product or service and takes some of that money as personal compensation.

The slaying of the golden goose happens when companies either decide or are forced to increase dividend payments or increase stock buybacks at the expense of business reinvestment, such as research and development and wages.

According to CNBC, $900 billion was returned to shareholders in the form of stock buybacks and dividends in 2014. That’s nearly a trillion dollars. What kind of impact would there be if that money was spent on something other than shareholders? What if half of that money was invested in research and development? How many jobs would be created? What if brains were hired to create new, more desirable products, such as Apple has done with the iPhone and iPad?

What if half of that $450 billion was used to create jobs that cost companies, including benefits, $75,000 per job per year? Most large companies pay about 20-30% of total salary in benefits. In other words, a job that pays $60,000 costs a company between $72,000 and $78,000.

How many jobs would be created? At $75,000 a year, 6,000,000 jobs would be created in one year. What would happen to the US economy if 6,000,000 jobs (500,000 a month) that paid $60,000 a year in take-home pay were created?

Jobs shouldn’t be created just to create jobs. Jobs should meet a business need. Imagine the business needs that would be created if there was an additional one to six million people earning an above average salary? What kind of economic growth would be created?

The Economics of Jobs versus Shareholders

Some may argue that shareholders put money back into the economy, but I don’t entirely agree.  I know a portion of the money that comes in the form of dividends and buybacks goes back into the economy. The majority, however, buys more stock. Most dividends are reinvested.

Most wealthy people can’t spend all their money. They invest more than they make and wisely make their money work for them. On the other hand, someone who makes $60,000 a year spends most of their money on everyday living expenses.

How is the economy affected when shareholders take most of a company’s profits? The economy shrinks. The profits buy more stock. The opposite is true when a company invests profits into research and development and employees.

What do you think? Is business killing the goose? Is business employing smart or poor economics? Is there an accidental or intentional starving of the goose?

David Auten and John Schneider are The Debt Free Guys. After paying off over $51,000 in credit card debt, they have dedicated themselves to helping people live debt free, have fun and be Money Conscious. They are the authors of 4 books including 4: The Four Principles of a Debt Free Life available on Amazon now.

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