Corporate profits up. Employment levels stagnant. Greed?
Recent news stories from the last few weeks have observed a rise in corporate profits and a corresponding (or non-corresponding) lack of improvement in reported unemployment rates.
Naturally, some have expressed concern that large corporations are hoarding profits instead of spending, expanding, and hiring new workers, accusing business leaders of greed and cash hoarding. Unfortunately, this topic comes with unnecessary political baggage and finger-pointing, with so-called liberals and conservatives blaming each other for our current state of affairs.
I tend to avoid direct political references on this blog because major party- and popular ideology-oriented discussions cause otherwise rational people to retreat to shallow talking points and noisemaking. It’s like yelling “fire” in a crowded theater. The result is paranoia, panic, and screaming.
A recession’s purpose is to eliminate inefficiencies created during times of prosperity, which unfortunately means that not all jobs lost since 2008 will return as not all them were necessary (thus, inefficiencies), thus the need for personal flexibility, mobility, and retraining in a market economy.
The reality of the situation is much simpler, less emotional, and far less political.
Economic recoveries happen in stages:
1. A recession causes lower revenues and greater losses, so non-essential workers are laid off as non-essential business units are closed or sold. Layoffs are followed by profits due to greater efficiencies and a stronger focus on core products and services.
2. Profits are paralleled by growth and increased productivity which leads to…
3. …reexpansion and hiring.
This quarter (Summer 2011), we are on the tail end of step 2. Until owners of capital resources feel confident in the economy’s ability to sustain a predictable level of growth, step 3 will be delayed.
The brief gap between step 2 and step 3 is often interpreted by the layperson as corporate greed: “Why aren’t you hiring if you’re so profitable?”
I empathize with the millions of unemployed eagerly waiting to rejoin the workforce, but the accusation is a bit misguided. This is not to suggest that “greed” [for this discussion, lets accept the popular negative connotation of the word] is entirely absent from decision-making processes, however, it is not the core motivator behind top-level managerial decisions.
Before making the choice to expand and grow, a large organization’s shareholders and managers must feel confident that taking a risk will result in sustainable growth. This means that the macroeconomic outlook must be reasonably stable and predictable otherwise the business will be needlessly vulnerable. The consequences are costly — revenue losses immediately followed by additional layoffs.
In other words, forward-thinking corporations are generally motivated to hire and expand. Capital resources, especially labor, are necessary to increase market share and develop new products and services. Unfortunately, until the waves caused by this recent recession settle, expansion is on hold. Our military involvement in Iraq and Afghanistan has created an unstable geopolitical environment which has cast a cloud of uncertainty over a significant portion of the global economy. Additionally, massive government spending, rising fixed and variable costs, high energy costs, and aggressive global competition have contributed to slower levels of expansion.
Despite these uncertainties, industries that often serve as indicators of economic health, especially the auto industry, have demonstrated recent growth. Ford, Chrysler, and General Motors as well as the North American arms of Honda, Toyota, Daimler AG, BMW, Hyundai/Kia, and Nissan have been on a hiring spree, recruiting new graduates as well as longtime professionals who were laid off by the now-smaller Detroit Big Three.
Reduced employment capacity in Michigan has shifted labor demand to the Southeastern United States. Foreign automakers have opened new plants and corporate offices in that region to avoid high labor costs and expand US market share.
Although part of the industry’s explosive sales growth is due to pent-up demand caused by 2009’s “Autopocalypse” [aptly coined by Jalopnik], the automotive sector should be sustained by stronger competition, new technologies, and the public’s desire to transition to more efficient vehicles.
The recession officially ended in the summer of 2009, but after two years the global economy has failed to return to pre-recession levels of growth. Frustration is expected, but we should avoid using our emotions to draw irrational conclusions about the macroeconomic environment.
There are indeed real villains who have contributed heavily to this recession. Unethical greed backed by government-supported growth bubbles have had a severely negative impact on economic stability. But the recovery, while slow, is indeed progressing. Focus on yourself professionally to be better-prepared for an economic upturn.
Good times are ahead. Have a chocolate milk.
http://www.usatoday.com/money/perfi/stocks/2011-07-10-earnings-season-starts_n.htm
http://www.huffingtonpost.com/grant-cardone/economic-recovery-stages_b_234134.html
While your overall article is likely correct, it’s hard not to see a little bit of greed at play, considering how many employees are essentially doing jobs that used to be done by two or more employees. Typically these employees are on salary and don’t get compensated for the additional workload or hours worked, but are afraid to quit as they fear they’ll not be able to find another job in the near future.
This is par for the course though when the job market favors the employer — especially for middle management as they see it as an easy way (for them at least) to make their departments look more efficient. Ironically, in many corporations, these “efficiency improvements” often earn those middle managers bonuses.
As a result many critical positions that are vacant are never filled even though they should be. The work is still being done, but in a less efficient manner by one overworked individual who can’t go out of town for the weekend without having to take their laptop with them so they can log in via VPN from their hotel WiFi and spend several hours working while being “on vacation”.
Then the higher ups wonder why they have critical people quit “out of the blue”.
I didn’t claim an absence of greed. I simply made it clear that greed is not the core motivator behind typical top-level managerial decisions.
As for middle management, they’re the first to be dismissed in staff reductions. The functional level is more essential to daily operations, so higher-level management is burdened with more functional level people to manage. Anyone in between is removed as the organization attempts to slim its bureaucracy.
[Think of the scene from Office Space where the ‘middle man’ being interviewed by The Bobs gets frustrated, tries to kill himself, and invents the Jump To Conclusions Mat.]
Productivity gains are realized quickly after staff reductions because existing functional level workers endure an increased workload, but improvements tend to plateau as returns diminish, and the result is hiring and expansion.
If greed [as narrowly defined in the context of the public’s misguided outrage] was the core motivator, short-sighted decision making would result in no hiring, no growth, and no value for shareholders.
The challenge of top-level management is balancing these choices against the demands of owners (the board/shareholders), the need to retain quality people (HR issue), and the high costs of turnover (another HR issue).
This is what happens on a broader, macroeconomic level, which is what this topic is about since we’re addressing the recession and its ongoing recovery. Anything more specific is left to a microeconomic discussion covering specific organizations or sectors.
Main idea: The recovery is slow-going but moving nonetheless.
In other words: Your point is completely valid, but you’re addressing a different subject.
Side note:
We’re using an intentionally narrow pop-culture definition of “greed” to limit the scope of the article and the breadth of the discussion. If we define greed simply as intense self-interest, then we’re all greedy.
If I see a movie instead of donating $10 to the homeless, it could be interpreted as greed. If I fire 500 people to avoid losses for the quarter, is it greed? If I hire 500 excellent people to keep my competitors from acquiring who I believe are the best available employees, am I being greedy and hoarding capital resources? If I take a one-hour leisure drive and create additional and unnecessary demand for fuel (and place very light upward pressure on prices), am I being greedy?
The word “greed” is nebulous, as its denotation uses the word “excess” which is highly subjective depending on the subject matter and the perspectives of the parties involved.
This introduces a larger ethical and philosophical question, best left to philosophers in academia rather than a two-bit blog about cars and cheeseburgers. 🙂