Corporate growth in profits by attrition is a temporary fable


http://finance.fortune.cnn.com/2011/08/15/three-headwinds-to-corporate-profit-growth/

More or less the same as the government trying to balance a budget by cuts alone, corporations slashing costs – more often than not in labor to keep up profits in the face of a drop in consumer demand – is a short term gimmick that exacerbates the crisis. The lower wages or less employees of course translate into less consumers and/or consumers spending less. There is also the inescapable loss of confidence.

Now, every corporation sets its course of action independently and if one of them altruistically decided to retain all its workers in the middle of a recession, while its competitors do not, the enlightened firm would see itself at a disadvantage, its stock dropping in value, and the shareholders in revolt.

The existence of the firm itself could be put in jeopardy.

Nonetheless, the “growth’ achieved by reductions is a short-lived panacea and it is certainly not “organic” (real) growth. Furthermore, the savvy investors will see the writing on the wall.

But since we are not a planned economy, it is inevitable that corporations will act individually and follow the laws of economic survival.

Catch22 isn’t it?

That is where the government has a role in revitalizing the economy trapped in the vicious circle of less consumer spending/corporate contraction. The government must use its tax policy to reward the local investments, and that gives government the leverage to assure that the worker/consumer is taken care of until the labor market regains its own balance. To be able to do that, fiscally speaking, the government must spend less on itself; cutting not the public workers that give services but the political class that feeds from the system.

Good governance is not sound-bites, or public relations displays, or being everywhere showing oneself, or steamrolling some hapless dissident.

A note about the photo above. It is from Wikipedia and shows a manufacturing worker during WWII. She is working a lathe, manufacturing what a believe is a manifold or block for a rotary engine, presumably for an aircraft. But she is still a lady and amid all the sooth and grease, her nails are neatly painted. Great image of the time.

 

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