Are Apologists for Layoffs Actually Just Bad Economists?

by cv harquail on February 26, 2009

Why Not?

Here’s a post in honor of my friend Ian Ayres, a law & economics scholar who celebrates a big birthday today. Ian is constantly challenging academics of all stripes to stretch their thinking by asking themselves hypothetical questions. His favorite rhetorical tactic always seems to include two words: Why Not? Ian eschews any line of thinking that keeps us engaged in the same old ways of solving problems. “Why not,” Ian asks, “just think about it differently?” “Why not” come up with different way to look at the question, so that you can be inspired to find new ways to attack a problem?

Ian is so committed to this tactic that he literally (co-)wrote the book on it: “Why not?”

In honor of Ian, I’ll literally take a page from his book and use it to get a different insight into the problem of mass layoffs. Instead of thinking like a management expert and sticking with the management expert’s evidence-based argument against layoffs , “why not” think like an economist?

Why not think less like “Chainsaw Al” Dunlop, and more like John Maynard Keynes?

(n.b. For those non-management types out there, “Chainsaw Al”, born Albert John Dunlop, is a professional corporate downsizer. His other nickname? “Rambo in Pinstripes”.)

What happens if we think about layoffs the way Keynes might?keynes

If we take the perspective of an economist like Keynes, we can see more easily a subtle market dynamic triggered by mass corporate layoffs. This feature becomes prominent only in  situations like the one we’re in now, where so many organizations seem to want to shore up their stock price by laying off workers. And, you can see this feature of layoffs only if you think like an economist.

What does an economist like Keynes see when looking at mass corporate layoffs? S/he sees that:

Corporate layoffs during a national recession trigger a business & organizational-level cycle that contributes to The Paradox of Thrift.

The Paradox of Thrift

The gist of Keynes’s Paradox of Thrift is that, if individuals save money during a recession, there is not enough money being spent by these individuals collectively to power an economic recovery. The private virtue of an individual saving his or her money becomes a public problem when everyone does it. What seems good for the individual is actually bad for the collective.

What we’ve got right now, with organizations left and right laying off their employees to cut costs, is a corporate-level situation analogous to the individual vs. collective dynamic in Keynes’s Paradox of Thrift. Instead of the ‘private virtue’ of individuals being thrifty, the ‘private virtue’ of corporations is prioritizing the company’s stock price. Ultimately, the public problem is the same– not enough spending by organizations to fuel a collective economic recovery.

Adding insult to injury, while thrifty individuals build a balance in their savings accounts, corporations that execute large layoffs don’t get much of a bump in share priceespecially over the long term even in the best of times. In these current times, it’s hard to believe that executives’ actions are having much of a positive impact on share price at all. [[Think about it… Exactly how many CEOs made bad decisions on Monday, and exactly what did these CEOs “do”, that caused the Dow to plunge on Tuesday? But I digress …]]

How to address The Corporate Paradox of Thrift?

Instead of taking for granted the myths about mass layoffs as a cost-saving strategy, organizations should look for and experiment with alternatives. For reducing payroll costs, consider “‘flexible downsizing”, across the board paycuts, and restructured benefits packages.

Organizations could also look for actions analogous to the ‘saving while spending’ recommendations for thrift-minded individuals to help the collective avoid The Paradox of Thrift. Specifically, organizations should look for ways to invest now (by keeping their workers employed) and then focusing these workers on cutting costs by improving work processes.

Any of these alternatives avoids the “Us versus ‘Used to be Us’ ” dynamic, where the status quo is sustained for some, while all costs are born by the rest. For example:

As Cisco announced yesterday, “Instead of major workforce reductions to control costs, Cisco is focusing on reducing expenses by $1 billion by the end of fiscal year 2009.” (Alas, that’s in addition to laying off 5,000 workers. More on that tomorrow.) Unfortunately, this “cost cutting” is to be achieved by deferring spending and canceling business trips … not by improving Cisco’s overall processes. Still, it’s a step in the right direction and should save some jobs. For more examples, check out Cali Yost’s Downsizing Flexibility Champions: Alternatives to Layoffs Honor Roll over at FastCompany.

It’s complicated.

I’m not an economist, and I don’t play one online, so I don’t know the full extent of macro-economic issues that are triggered by mass layoffs … and what complexities await us if many organizations choose the same alternatives to layoffs. Certainly, nation-wide wage cuts may lead to “debt deflation”, and improving processes that require cash investment now to reduce costs over the longer term may lead organizations to take on too much debt (if corporations can find anyone to lend to them). It’s a complicated picture.

Or is it really that complicated?

Why not . .. take a look at this (now infamous) chart and ask, is this really our best of bad alternatives?

Why not … see these mass layoffs as being caused by a callous lack of creativity, rather than as the “inevitable” result of executives making ‘hard’ choices?

jobsrecessions

Why not … conclude that apologists for layoffs are actually just bad economists?

{ 2 comments }

schmutzie March 3, 2009 at 5:35 pm
Joseph Logan March 4, 2009 at 8:26 am

Excellent, excellent post. Couple of thoughts:

1. I recall seeing a CNN story recently on companies that never lay off employees (AFLAC was one, if memory serves). With absolutely no hard data to back this up, I remember having a very positive image of the ones I recognized. At least for me, that would translate into choosing to do business with them.

2. Most business people are probably very bad economists. Economists sometimes say that morality shows how things should be, while economics shows how they are. I expect executives get the two confused with the rationalizations for their actions.

3. Having been on both sides of the “downsizing” equation, I can attest that these decisions are generally not driven by a systemic view or thought process. The form this often takes is top management handing down an arbitrary challenge (cut budgets by 30%, for example), middle management going through rounds of meetings with spreadsheets and PowerPoint slides to decide where to trim, and HR receiving the orders to sort it all out with employees.

All this is to say, there is benefit in that “why not” question: it exposes what it would take to make a company truly great, and it opens up those systemic ways of thinking.

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