The headline in the July 26, 2010 New York Times read “Industries Find Surging Profits in Deeper Cuts.” The article, using Harley-Davidson as illustration of cost cutting practices at many corporations, reports that although sales revenues are falling profits are soaring. For example, Harley-Davidson experienced $71 million profit in the second quarter which is three-times what it had in the previous year.
So what are the practices of many corporations that produce soaring profits from falling sales? According to Ethan Harris, chief economist at Bank of America Merrill Lynch, “companies are squeezing their labor costs to build profits.” This reminds me of a quote from Deming, “beat horses and they will run faster—for awhile.” It’s exploitation on steroids.
Essentially management is simply exploiting those in the workforce, playing on the fear that many have in light of the persistent high unemployment. As noted in the New York Times article the source of these gains “raises deep questions about the sustainability of the growth, as well as the fate of more than 14 million unemployed workers hoping to join the workforce…”
But this is not bad news it is good news! For whom you ask? Wall Street of course! Wall Street is absolutely ecstatic over the benefits to shareholders. The New York Times states, “the mood on Wall Street is so much more buoyant than in households, where pessimism runs deep and joblessness shows few signs of easing.” Pessimism, let’s get real! It is not about having an optimistic versus a pessimistic view of things. This isn’t about a tendency to see only bad things it is realism. People are actually experiencing devastating household economic conditions—its not pessimism, its real.
Consider the following excerpt of a dialogue between a questioner and Adam Smith from It’s the EconoME, Stupid: The cause and solution to many of our difficulties which reveals the underlying belief system represented in the phenomenon of falling revenue but soaring profits:
Q: So those who don’t realize benefit sacrifice for those who do?
S: Well, yes, and in total society is better off.
Q: Well, it might be instructive if we just took a moment to observe some of the effects that the unbridled pursuit of greater and greater wealth has provided.
Dr. Smith, if you were to look back over the last few hundred years and compare then to now, what would impress you about the effects of your system of political economy (i.e., capitalism)?
S: Well, to begin, that my theory of political economy did create wealth. In fact, the application of my theory has created a tremendous amount of wealth—has it not?
Q: It no doubt has, as evidenced by the fact that the United States is one of the most powerful economic nations in the world, with a gross domestic product (GDP) that continues to trend upward. Moreover, other countries that have embraced capitalism have seen wealth accumulate as well. Capitalism is spreading worldwide, like wildfire, with a tremendous amount of wealth created.
S: Unfettered self-interest has done what I knew it would do—create wealth unmatched before in history. How divine!
Q: Also, what you foresaw as remote has in fact been showing signs of developing.
S: What is that?
Q: You had predicted that as a result of the limits of natural resources, capitalism would find that the rate (in growth) of profits would decline. Early in the 21st century many companies are outsourcing labor to foreign lands—less developed countries—in an effort to reduce labor costs and increase profits.
S: But I also said that unintentionally the growth in material wealth would permeate throughout society. And with GDP growing unrelentingly, isn’t society better off?
Q: Yes and no. According to U.S. census data, the family poverty rate has been hovering at just about 10% since 1980. Since, according to your invisible hand theory, wealth trickles down, wouldn’t you have expected that poverty (especially in one of the most industrialized countries in the world) to have nearly disappeared? We have this tremendous material prosperity; it’s just that it is not optimally distributed. What John Stuart Mill envisioned, the elimination of classes as a result of each individual pursuing his self-interest never materialized.
Giving this a bit more thought, we realize that poverty and wealth are the two sides of the same coin—they depend on each other. Accordingly all we have are people striving to acquire and accumulate more. The resultant distribution of wealth is quite uneven with no evidence to suggest a movement toward a fairer balance—trickle down doesn’t! So who is really better off?
As the article notes, while profits are soaring workers’ wages have stumbled. Clearly there is no trickle in trickle-down! Adding insult to injury, the article reports that companies are planning further cuts. Harley-Davidson for instance has announced plans to cut 1,400 to 1,600 more jobs by the end of next year. I suppose soaring profits haven’t soared enough. How much profit is enough profit? Since profit hunger is insatiable, how can the current system provide a better future for all?