Saturday, June 16, 2012

Great (But Not Good) Expectations

With the numerous and deep layoffs of 2008-2010, it's no wonder corporate profits have reached peak levels never seen before in history. And yet with profits at such extreme highs, why no hiring?

Two reasons come to mind, the first being the obvious one: no demand for goods/services. Real wages remain low and continue to trend lower. Unemployment continues to remain high. Government spending at the state and local level has been near nonexistent, with hundreds of thousands of layoffs as a result. The federal stimulus was woefully too small given the severity of the economic decline (worst since the Great Depression). Many continue to be saddled with too much debt. And the ever-expanding gap between rich and poor has never been wider. All of these things have contributed to keeping consumer demand in a perma-low state, with income repressed and future prospects uncertain.

Typically, to fill the void under such circumstances, government is expected to step-in and provide fiscal stimulus to help offset the lack of demand in the private sector -- and in this case, would be a bargain since interest rates are near zero (actually negative in real terms). But we have a Republican Party that chooses to put politics ahead of country in hopes of insuring conditions remain poor so that Obama is a one-termer.

A second reason why companies are not hiring is not often mentioned. It has to do with expectations. With profits soaring, earnings per share also dramatically increase, with most companies successfully surpassing Wall Street analysts expectations. As a result, the stock price more often than not rises.

However, herein lies the circle-jerk dance whereby company management must continue to exceed expectations -- expectations that continue to elevate with each earnings per share beat. When the next fiscal quarter comes around, if management fails at outperforming Wall Street estimates, the stock will get punished, more often than not severely.

With a continued lack of demand in the economy, translating into scarce demand for products/services, management is left with few alternatives to boost earnings. Although unfortunate, in an effort to cut costs the easy choice becomes employee layoffs, with another being accounting finesse or tricks. But with layoffs comes further income repression, meaning further demand repression -- rinse & repeat as the ugly cycle spirals its way lower.

Thus hiring people becomes an out-of-the-question proposition and it will remain so until demand returns -- assuming it ever does. And it's why, to paraphrase a famous quote, we all need to become Keynesians, sooner rather than later!

Reminder: Keynes was not for permanent government spending, not at all. Instead he advocated that government needed to spend during times like now, when the economy was in serious recession or depression, to provide a floor and provide the needed fuel to turn the economy around. In due course, the private sector feeds off this changing of the tide and a full-fledge recovery is in motion. When the economy is back on its feet and by all accounts heading in the right direction, it's at this time that you focus on debt reduction (as did Bill Clinton in the late '90s).

So please do not allow right-wingers to obfuscate matters with misinformed, alarmists cries about Keynesian = endless government spending. It's simply not true. In fact, over the last thirty years, what we've had are two presidents each presiding over enormous government spending during good economic times (Reagan & GW) and one president (as already mentioned, Clinton) who followed Keynes' advice and reduced the deficit when the time was right.

But of course, deficits only matter as a topic of serious concern when a Democrat resides in the White House.

1 comment:

Anonymous said...

Since Joe and Jane Average have to cut back on spending, ALL levels of Government MUST do the Same.

It Isn't True, But Joe and Jane Average STILL Believe that it Is.

We Always end up doing the Right thing, But only AFTER Everything Else has been Tried and Failed.