Why hasn't top line growth occurred in American businesses. Perhaps we should revisit John Donne's famous essay. Cutting costs by firing people has consequences which cannot be avoided by anyone. In an effort to eliminate losses businesses have been reducing costs. A material part of that effort has come in the form of what is referred to as “RIFs” or reductions in force. On the face of it (except for those personally affected) it sounds like a good idea. Get those businesses more efficient so they can stem those losses and perhaps return to profitability. So intuitively it does sound like the right thing to do. Free market capitalism at work. Sever the employee, pay the severance, account for it, show that as a loss right now but thereafter show an improvement in your costs and thereby your profit. You bet. But show an improvement in your top line (revenues). Absolutely not. Short sighted and stupid.
Let me suggest that contrary to intuition this is exactly what we should not be doing now. Drill down a little bit and I believe that you will see that every action in that direction reduces aggregate demand including the demand for the goods and or services of the very business that engages in the action. Several hundred years ago, John Donne in his Mediation XVII* very articulately described the human predicament in this regard.
If it were just one concern that engaged in RIFs and other draconian expense cuts such actions would not materially effect aggregate demand and hence our economy (or that firm itself). That is simply not the case in a recession. It is on this basis that I propose that business efficiency efforts should be accomplished under normal market conditions and by firms that under such normal conditions need to do so**-not in an economic downturn. You see you simply cannot act as if you are in a vacuum – you’re not. Permit a simple example. Suppose you have a Citi employee who has a Citi mortgage. Then suppose you RIF that employee. Does it matter if you alternatively change employers and lenders? It does not.
We should advocate that during a recession, policy makers (both in the private and public sectors) engage in actions which are designed to prevent the deterioration of demand for the goods and services we produce – not encourage it. By way of example, making someone unemployed, and by doing so making others afraid of the same consequence, during a recession (and therefore likely unable to become reemployed) causes them to cease to be active participates in our economy as consumers – for all practical purposes they stop spending. Such cost efficiency during a recession isn’t efficiency; it’s more akin to the purge cycle of Bulimia Nervosa. Just like the disease, the RIF (Purge) is not a cure for the condition; it’s an integral part of the condition.
The simple way to prevent this self fulfilling phenomenon is to engage in activity during an economic downturn that reassures people that they will remain employed (perhaps at a diminished level of income). We have not done that. Instead what we have done is to adopt an all or none approach, RIF people during an economic downturn from businesses that in large part were efficiently employing people (both in number and activity) during a normal business environment. We then react by enacting policy to reemploy people in different jobs in different industries (thereby creating, among other problems, a massive need for retraining people for jobs that will not be permanently needed when the business environment returns to normal).
Once employees are RIF’d from a business that business may become efficient for the level of demand for its goods and services which existed at the time the RIF’s were planned. It will not remain efficient if the level of demand changes and that most assuredly is what will happen. More RIFs create more unemployed people and intensifies the fear in those remaining employed thereby further reducing demand. Even after the economy hits its lowest point and although it may stay there for a period of time it will eventually improve and then those same businesses will become inefficient again, this time in the opposite direction. Binge and Purge, Purge and Binge.
Indeed recently business commentators have been in essence echoing this sentiment. Many of them have cautioned that although we have seen improvement in corporate earnings that improvement has been only comparative (from disastrous to lousy) and not favorable in "real" terms. They go on to say that cost cutting can only go so far in terms of reversing the economic outlook and that until there is real "topline" growth no real recovery will occur. I agree. What I disagree with is that it was necessary to cut those costs in the manner and to the extent we did and were encouraged to do so. I might add that in terms of cutting costs in the near term by RIFs is not in a real time cost savings. Accounting rules which govern how we treat expenditures for severage packages exacerbate this unfourtunate tendancy.
We can enact policy initiatives which are no more expensive (and probably less) than the policy initiatives we currently have in place. The ones in place do not specifically target or encourage employee retention. Our policy initiatives can and should encourage businesses to retain employees which would be retained but for the recession. If we do not change then we will continue the binge and purge cycles in our economy that so closely resemble the eating disorder I mentioned above.
In summary, making RIFs and taking draconian cost reductions during an economic downturn is worse that just being a day late and a dollar short. It is a self fulfilling and self destructive phenomenon. Policy, both public and private should be to avoid this at all, excuse the pun, costs.
*In part here is Mediation XVII: “No man is an island entire of itself; every man is a piece of the continent, a part of the main; if a clod be washed away by the sea, Europe is the less, as well as if a promontory were, as well as any manner of thy friends or of thine own were; any man’s death diminishes me, because I am involved in mankind. And therefore never send to know for whom the bell tolls; it tolls for thee.”
Nunc Lento Sonitu Dicunt, Morieris
Yes I am aware that it's text is euro centric and sexist, however, the text was written for a contemporary audience n 1623.
**The domestic automotive industry is an example of an industry that was not efficient under normal market conditions.
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