Are businesses killing the economic engine?
I know this sounds vague, but something I heard on the radio a number of years ago had a profound impact on my economic understanding. I was listening to American Public Radio’s MarketPlace and a biographer was talking about the economic climate at the time (2008 or 2009, the start of the Great Recession). She was being interviewed about a biography she had written of a deceased and well-known economist. I don’t remember the author or the economist’s name, but her point was that there were significant layoffs occurring and she said this economist would be ashamed by what business leaders were doing. Businesses were laying people off in droves to support their bottom lines when the country’s long-term needs should have been put above that of a company’s near-term profits. She surmised that what this economist wrote about would highlight the shortsightedness of businesses afraid to ride out a quarter or two of lower profits and lower stock prices in order to keep the economy going at a macro level. In essence, her subject would have put some blame for the deteriorating economy on business leaders who were quick to lay off workers to prop up stock prices and their own wallets.
In our previous post, The Economics of Killing the Golden Goose Part 1, I outlined how reductions in dividend distributions and stock buybacks could spur millions of jobs and billions in new revenue sources. Rather, companies that are starved for revenue growth focus on balance sheet manipulation.
Are Layoffs Killing the Golden Goose?
Today these same business leaders are increasing stock prices through cost reductions, such as layoffs. This is often done with a short-term focus. These business look to get a quick quarterly stock bump through layoffs. When a company announces layoffs they are typically rewarded by Wall St. investors who see layoffs as a means to reduce costs and improve profits and the stock prices. Who’s rewarded? Business leaders and investors are rewarded.
What happens to those laid off? What happens to that source of income to the economy? It is transferred from workers to shareholders. Of course, there are times when it’s not possible to provide every employee with a job. Layoffs are part of the economic cycle.
Are layoffs wise when a company is doing well? What happens to the good will, the word of mouth and direct revenue employees generate for a company when it lays off workers in financially good times? How eager would you be to promote a company who laid you off when it announced record profits?
The Goose is Dead
The Economic Engine
Let’s say there are two people in the economy, you and me. You own a business, I work for you and we both buy the one product our company produces. Things are running fine till one day you lay me off to reduce costs and increase revenue. The business immediately gets a boost in profits because you don’t need to pay my salary. That first quarter looks good. What happens the next quarter? Since I don’t have a job, I don’t have income. The company takes a hit because the economy now generates less revenue.
Many of you may say, but David that isn’t how the real world works. True, in the real world I would hopefully find another job that paid near what I was paid previously and I would continue to contribute to the economy.
What happens, though, when more companies lay off than hire? We have 2008 to 2012 all over again when fewer companies thought about the country’s long-term needs than their company’s near-term gains. This is what the biographer said would have shamed her subject.
Are business leaders killing the Golden Goose? Are long-term revenues being sacrificed for short-term stock prices despite increased profits?
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 four books including 4: The Four Principles of a Debt Free Life available on Amazon now.