These are interesting economic times for sure, and rarely a day goes by where there aren't some statistics that say it wasn't that extreme for the last 30 years, or since we started collecting data.
What strikes me though is that in how we react to this crisis hasn't fundamentally changed from how we got into it - short sighted, self centered, unimaginative, risk averse thinking and acting - or in short continued incompetence.
Let's explore this on the topic of layoffs. We have lost a lot of jobs in the last few months. In fact this graph by Nancy Pelosi (courtesy via Consumerist: Just How Bad is this Recession) paints the picture visually and thus much more impactful than the daily barrage of news ticker stories. And few are talking about a few jobs lost here or there. Most of the time we round to the closest 1,000 if not 10,000. That element alone shows that this is a numbers game - because otherwise there would be rational that these 9,845 people aren't doing projects supported by their NPV and thus should be restructured.
I find it hard to believe that all these companies really have that many people to lay off. Sure some are on the brink of bankruptcy and don't have enough cash in the bank to pay people. Circuit City was at the end of the road, and their employees bet on the wrong horse and there's no way around it. Car sales are down 50% YoY, and that means you simply need fewer people on the production line because there aren't enough cars to be built for that demand. So some capacity cuts are unavoidable.
But even in the case of the car companies, a slightly longer term view might be advisable. With nobody buying cars right now, that means the average age of everyone's car is going up, a few more cars are being nursed by mechanics to stay in service through this downtown which may otherwise have landed in the recycle bin. That means once we work our way through this, there will be a spike in demand for new cars as everyone finally gets around to a much needed upgrade. Once that spike hits, companies will be hard pressed to find skilled workers to do the job, and a lot of time will be spent training and re-integrating workers, potentially missing a key market opportunity. Instead some companies could take this downturn as a window of opportunity to redeploy these workers and do some much needed technology upgrades and other research that will put them in a perfect spot when things turn around. But that would require long-term perspective, would require guts and imagination, would require willingness to take some risk, show some leadership.
Take the case of Microsoft which recently announced 5,000 layoffs, the first mass layoff in the company's history. Given the total size of the company, the gross margin of the company, and the enormous amount of cash on hand, I find it hard to believe that a layoff of 5,000 people makes even a noticeable dent in the cash balance. Microsoft can afford to keep these 5,000 people without even blinking. Whether they should for a whole host of other reasons is different discussion for another day. Here we're simply looking on the basis of economic need to lay people off because of cash flow.
Back to my assertion that this is short sighted: every person laid off right now, is a person that is cutting back spending. They won't buy the next car, they won't buy the next computer, a new suit, or whatever else they would spend money on. That is consumer demand that is gone. Yet it's that very same money that drives the economic activity that all these companies rely on. And even if the employee doesn't directly buy a company's product, he/she goes to restaurants, whose workers in turn may buy these products. There is a lot of downstream economic activity that is being impacted with every layoff. And for every person laid off, 10 of his/her friends fear for their job, and instead of spending their money, they hang on to it just in case they're the casualty of the next short-sighted executive move. It's a self-reinforcing downward spiral.
The end-result? Everyone is shooting themselves in the foot. Actually, no, in both feet. Unless you have to, the absolutely last thing any executive should be doing right now is to lay another person off. They should look at their balance sheet, and if they can sustain the current workforce levels through at least part of this turn-around, keep folks employed, it will make the downturn shorter for everyone. Redeploy people and invest in things that in the bustling days of two years ago you just didn't have resources to get around to. That is a the right investment to make at this time.
But alas, reading the daily news appears to be just a case 'Hey, I managed to lay 10,000 people off, I'm bigger than you!'. After years of CEOs growing their companies at rapid pace over the objections of the bean counters, this is the year of the CFO, who finally has the power of balance and can get rid of all these people he never thought should have been hired in the first place. Yes, Wall Street is watching, and doing a few token layoffs is thought by some to show signs of making the 'tough decisions' that will re-ensure investors and avoid a free fall of the stock price. Well, recent trends haven't proven that. In fact there are some stories that show that this correlation no longer holds, and in fact produces no results, but vastly erodes the confidence and trust in our executive leadership. At the Davos World Economic Forum the key question was what can CEOs do to recapture the trust in their leadership? First answer: stop short-sighted layoffs. That would truly be a 'tough decision' to make that would be newsworthy for once.
There is always need for leadership, in good times and in bad times.