« The best reason to live in New York City | Home | Stirtla »
December 12, 2004
Why I wasn't an econ major
"BBC Says It Will Cut 2,900 Jobs Over 3 Years" - that was the headline over a story in Wednesday's New York Times.
"Colgate Announces Job Cuts" - that was the headline of a Washington Post story the same day.
"GM Confirms 12,000 Job Cuts in Europe" - that was the headline over a CNN story Thursday.
News that these bulwarks of the economy are cutting 10% to 20% of their work forces over the next 2-4 years is greeted with approval and increases in the price of their stock, if they're private companies.
But here's the thing that's mystified me for years: how - if there's no one to buy what you make - can you make money?
If you fire everyone, and they have no jobs and no money, then what good is it for you to offer your wares for sale?
I dropped the only economics course I ever signed up for about a week into the semester; it seemed to have no bearing on the real world.
Just goes to show, I guess, that testing reality's never been one of my strengths.
But that's OK, 'cause there's plenty of other people happy to do it for me.
December 12, 2004 at 10:01 AM | Permalink
TrackBack
TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c5dea53ef00d8346dd2f569e2
Listed below are links to weblogs that reference Why I wasn't an econ major:
Comments
They were going to lay my cousin off last month because of slow sales at this hardware store in SC. My cousin told his manager, "Don't expect me to come back to work here for you when business picks up." The hardware store manager was surprised,--"But why not?" My cousin said, "Because I'm dependable, and I've made money for you in the past, and I can get a job somewhere else where I'm appreciated." The hardware store manager changed his mind and asked what it would take to keep my cousin on . . . -- Don't we wish all executives would finally wise up?
Posted by: tom | Dec 13, 2004 8:13:12 AM
But then again, you probably knew this already.
Posted by: tward | Dec 12, 2004 12:56:13 PM
Ah yes - the infamous "job cut stock bounce".
This isn't Wall Stret economics. It's gambling. (OK - "speculation").
Your view - that cutting jobs is killing off part of your manufacturing engine - is economically true and has been proven in the field. A study a few years ago (I think in the Harvard Business Review) on the success rate of companies a few years after cutting jobs showed that companies that cut jobs were far worse off in future years than they were before cutting jobs.
So why does a company do this? In the short term (as in this quarter and the next quarter) it increases the bottom line of a company, creating the illusion of a better run company with greater profitability. Firing people is the fastest way to cut expenses. And if you have a fair amount of unsold inventory, the sales channel won't notice for a few quarters. So the stock price goes up as the "herd" buys on "good" news of greater profitability. The stock price will eventually drop again - the hang-over after the party.
There is profit to be made buying stocks like this on the news and selling after the quarterly results come out. Thus we get the "job cut stock bounce".
And here's a cool added benefit. Senior officer compensation packages are often tied to stock performance. Making a job cut announcement and getting a stock bounce right before compensation packages are computed means more bonus money for the senior officers.
Sometimes all it takes is the announcment of a job cut plan to (1) raise the stock price for a while, (2) get employees to work harder for fear of being put on the job cut list, and (3) to convince Wall Street that you are a cut-throat competitor unafraid to fire your own people in the search for profit for them. You don't even have to follow through with the plan later (by siting improved business conditions).
Posted by: tward | Dec 12, 2004 12:49:50 PM
Probably something to do with the tragedy of the commons; you as an individual employer benefit by firing people, but if "everyone" did it, then no one could survive. Our fates are tied enough together in this global age that I doubt the practice will live much longer...
Posted by: Bob | Dec 12, 2004 12:22:03 PM
The comments to this entry are closed.
