It has been for sometime now standard management theory that slow sales
are answered with layoffs to cut cost and to maintain quarterly overall
profit by increasing ahorterm profit margin over diminished sales
volume.
Price reduction is acceptable strategy only for increasing long term
market share, but never for increasing short term profit. Any manager
who deviates from these theories in practice will not manage for long in
the current corporate culture.
In the modern economy, prices or pricing policy decisions tend to be
system-wide because while retail customers are localized, wholesale
distributors can always buy from the lowest-priced supplier. Layoffs,
on the other hand, tend to be localized, concentrated on one or a few
problem plants saddled with overcapacity or products with weak market
demand.
Thus we have a system in which corporate well-being works against
systemic well-being.
A useful question can be posed as to whether this conventional downward
spiral trade off is necessary or good economics.
Greenspan has proudly pointed out more than once that the US economy
performs better because American corporations can change its cost
structure more quickly as compared to European and Japanese
counterparts, through its ability to shed workers with lower cost and at
a faster pace, free of restrictions prevalent in social democracies.
Aside from the issue whether it is fair to make workers who had no role
in management decisions to bear the blunt of the result of bad
management decisisons, one can ask whether this regime is in concert
with free enterprise principles. The layoff workers are passed off the
to the State, or the public sector (to make it sound better), to collect
unemployment benefits which in the US are financed by payments required
by law from employed workers.
The macroeconomic effect of layoffs is to reduce aggregate demand from
both consumers (for products) and producers (for material), while the
government budget is stressed. This leads to a downward spiral. There
were indication that the stagflation of the 1980s was in part caused by
the management theory. The word is that the Fed is currently faced with
a dilemma of lingering fears of unflation amid a sharp slowdown of the
conomy. December data on manufacrurer prices registered a disturbing
rise while layoffs in ten of thousands were reported very week by major
corporations. Friday's unemployment figure is privotal in influencing
Fed decision on interest rates. The bottom line is that the Fed's
"balance of risk" (former called bias) between inflation and recession
may well be a useless coeffieicent, the fact being that a balance of
risk for both inflation and recession is very real.
Suupose a management theory is adopted to favor cutting prices instead
of instant layoffs, there is logic to suppose that this would be a
preferred systemic option. The organization of labor for production is
the
fundamental asset of a corporation. It seems illogical to reduce this
asset at the first sign of trouble. What is needed then is micro
analysis to show that this approach of preserving labor as a fundamental
corporate asset is also good for the individual enterprise. To do this,
a rethink of social and business accounting definitions and principles
needs to be done, to devise a new tax incentive to make layoffs
unprofitable even in the short term and price cutting profitable for
companies. This is what Congress should be focusing on in dealing with
the Bush II tax cut proposal and Wall Street analysts should focus on in
evaluing share value.
Henry C.K. Liu
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