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Huge corporations are gearing up their “layoffs.” Goldman Sachs is reportedly targeting 4,000 for dismissal; whether that is 4,000 more than had previously been sent on their way or including them isn’t clear. To varying degrees, so are Morgan Stanley
That’s finance. In tech, Amazon
If you’re in cryptocurrency, it’s probably only a matter of time, but then it always was.
To misquote Charles Dickens: Merry Christmas to all, and to all a goodbye.
Companies are being proactive in reacting to their certainty of an economic downturn, looking around, and realizing that the fault, dear Brutus, is not in our stars nor in ourselves, but in our direct and indirect reports. And while reducing headcount has often been popular at year’s end holidays, it’s time for some linguistic and historical corrections.
First, these aren’t layoffs. A layoff historically was when a manufacturer like an auto company faced tough times, sent a bunch of union workers home for an extended period of time, and eventually brought them back when business picked up. As Merriam-Webster defines it, “to cease to employ (a worker) often temporarily.”
That final qualifier is long gone. Today, a layoff is a mass firing, no more and no less. Employers don’t ask the laid-off employees to return — unless you’re Elon Musk, ending the employment of thousands from Twitter, only to realize that some of them were the only ones who knew how to run things, so issuing a “sorry, my bad” and hope they’d come back and bail you out. Probably only to fire them again.
This has been a distressing and deeply angering line in business and, just as importantly, economics for many years. Too many economists who damned well should know better at this point still hold to a theory called the Phillips Curve, which claims an inverse, teeter-totter relationship between inflation and unemployment rates. Want one to go down? Plan on the other going up.
Originally, economist A.W. Phillips, who looked at U.K. labor markets, found an inverse relationship between wages and unemployment, as the Federal Reserve Bank of St. Louis notes. “Since his famous 1958 paper, the relationship has more generally been extended to price inflation,” the St. Louis Fed writes. And there seemed to be the more general relationship in the 1950s and 1960s. But in the 70s (with stagflation), 80s, 90s, and beyond, that cozy connection is blurred at best, as this graph from the Fed shows.
Unemployment rates and personal consumption expenditures.
“Federal Reserve Chair Jerome Powell has been asked about the Phillips curve, including during his July 2019 testimony before Congress,” the St. Louis Fed wrote. “He noted that the connection between economic slack and inflation was strong 50 years ago. However, he said that it has become ‘weaker and weaker and weaker to the point where it’s a faint heartbeat that you can hear now.’”
Wait, someone must have delivered an enhanced stethoscope to Powell and the rest of the full Federal Reserve, because they sure seem to hear the connection between economic slack and inflation now. The Fed has repeatedly mentioned labor and the need to bring down wage growth. As Powell said less than three weeks ago, “Because wages make up the largest cost in delivering these [core services other than housing], the labor market holds the key to understanding inflation in this category.”
Holding wages down is a key to a pair of incentives for corporations, as well. First, profits. Labor is a significant cost to companies, but apparently not so outrageous that they can’t continue an overall run of unchecked profitability, as the graph of overall corporate profitability, from the St. Louis Fed again and based on Bureau of Economic Analysis data, shows below.
Corporate profits after taxes.
The less share of profits that go to employees, the more that go to shareholders. Milton Friedman in 1970 helped set off a pile of nonsense with his assertion that the only social responsibility businesses had was to increase profits. Spoken as a true economist who never had to help run a company and balance the wide range of interests that make one work well. Friedman’s claim has no basis in morality, ethics, legality, or intelligent management. The logical conclusion of his claim is to maximize profits at the expense of everything and everyone else, including workers, yes, but also business partners, communities, and customers.
Idiotic.
But investors as well as managers who are greatly enriched by share prices embraced this lunacy because they are greedy beyond bounds or common sense.
Then there is the second incentive, which is the instillation of fear. Too many corporate managers, in the face of a pandemic that is still continuing (Covid-19 is the third leading cause of death in the U.S.), want to bring people back into the office. For “culture” or “innovation” or “efficiency,” they claim. Maybe. Work from home and a tight labor market not only gave employees greater bargaining power but showed how productive people could be without the stalkerish control that many managers and executives like to display. They want their ultimate employers to know how useful and important that they are. If things could run well without their dedicated and collar-close oversight, maybe those executives didn’t need all the perks and pay they’ve grown used to.
As a number of well-connected people in corporate real estate have told me of late, many CEOs think that a tight economy could set “layoffs” into motion (even with continuing high profits) and that would begin to scare employees, who would flock to the office again.
Maybe it’s all a coincidence, eh?
