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?
Gregory Gull 
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If revenues fall and profits rise, it means that the collective worker is getting an increasingly smaller share of a shrinking pie. But as that happens, as revenues continue to fall, there must come a point at which profits fall as well. Then the already diminished social investment in labor (I mean professional and managerial labor as well as the more familiar kind) falls further, and the decline in consumption accelerates, leading to the need for more government bail-outs and spending, then inflation, which impoverishi\es the already impoverished still more. Who knows where the breaking point is? But there has to be one, and if it is reached…who knows what the political consequences will be? Marx had some well-known ideas about this eventuality.
If we are talking about the domestic economy of the US here, there are some trends in place, and measures that could be taken that could stop this downward spiral, at least for our time. China’s wages are increasing, and if the growing national debt produces inflation, this will render foreign imports more expensive. Further, if wage and salary rates lag behind inflation, it will have the effect of lowering them. These two trends should make US domestic labor cheaper, relative to the world market. A little bit of tariff protection on top of that could produce a revitalization in US manufacturing, which would put people back to work and reverse the trend of declining revenues. Wages and salaries would then begin to rise because of increased demand. That could put a drag on the rate of profit. But it doesn’t have to.
There is a large–for lack of a better word–“volume” of untapped productive potential in the “collective worker.” But the only way to get at it is through–again, for lack of a better word–“leadership.” The job of a leader is to align the inner truths of the people he/she leads with a larger, more inclusive purpose than just surviving, just keeping one’s job, just receiving a paycheck. The job of a leader is to provide direction and context for the activities of those who work for him/her, the better for them to find their personal meaning in what they are doing and learning in their jobs. If there were more of this kind of leadership, most especially at the front-line management level, there would be off-setting productivity gains: Improvements in return on human capital assets of 20% or more are quite realistic, if the leadership work is properly focused. Then, at least for a time, everyone could have more.
That’s my two cents in answer to your query, Gregory. Thanks for raising such a stimulating question.
Rick, the type of leadership you describe is surely needed for all of us to realize a better future; progress will not be possible otherwise
Unfortunately, until you create a currency system based on karma, rather than cold hard cash, it is unlikely that any such leader will ever materialise.
Is that pessimism or realism?
If anyone’s interested, I’ll quite happily expand on my ‘karma credits’ economy theory…
Ed, I would be interested in hearing more about your karma credits economic theory. But I would also like to point out that the leadership work I described in my comment on Gregory’s post is generative of cold, hard cash. It isn’t just about being “nice.” The self-styled Attila the Huns of this world incur opportunity losses with their approach.
In many respects I am not surprised that profits grow when whilst revenue falls. The reason is that many companies will have quickly jumped out of any market sector that does meet its profit quota. They are in farming parlance sticking to their old “Cash Cows” and are not breeding any replacements. A bit like a poor rancher sending his breeding stock off to the meat yards.
It is not a situation that can be sustained for ever.
You mentioned Harley Davison an iconic brand, perhaps out of interest I should mention that last week while attending a function at one of the major hotels, in Kuala Lumpur I was amazed to see many hundred Harley Davidson lined up outside the hotel, the car park was also filled to capacity with them. The local owners club was holding a convention. In Asia, I actually believe Harley Davison could sell everything it produces and cost or selling price would not be an issue, in fact in could be a very big negative if potential buyers find out it is not completely American made. The consumer here is demanding US made apple pie not Asian apple pie no matter how good it is I say stick on another $5000 dollars for US made and they would still be selling all they could make.
I am a small business person engaged in many diverse activities I operate in South East Asia Long term I can not understand any European or American Corporation setting up plants in China or else where unless the intention was to serve and supply those markets. The cheap labour is a poisonous carrot which should not be followed.
Gregory I normally agree with you on most things but be careful of the poverty index I am not sure how it is calculated in the US, but in the UK and most of Europe it is a relative index and basically defines poverty in terms of a statistic rather than some bench mark of living standard or quality of life. So even if a family has all the basic needs met, a roof over their head, food, clothes, heating access to education and health care etc they can still be defined as living in poverty. The poverty I see in Asia is very real and very different.
With respect to poverty and wealth, I believe the mechanism is very different from how many economists or politicians would like to define or analyse the situation.
My belief is generally is that physical and mental or intellectual effort is what generates wealth in the work place.
I also believe that wealth is accumulated and preserved by spending on the long term tangible rather than on the short term disposable. The shocking thing about this recession is that people who were previously long term high earners have been wiped out very quickly even after only very few short months of unemployment. Some people decry Suze Orman but part of what will come to the rescue of the US and Europe is that it that it not just the banks and governments who need to get their houses in order. We, the masses must also mange our own long and short term finances for a sustainable future.
In the US and Europe there will be many millions of new people with out jobs, who have never been in that situation before and will be wondering what is happening to them. Life will be incredibly difficult but I think long term they will prevail. Necessity is the mother of invention and in the absence or not of trickle down I feel many of people will thrive if they are given a chance to preserve their dignity and families and communities stick together.
Long term Poverty is actually created by a different mechanism, when I return to the UK on my trips I am often shocked by the growing size of the underclass. These are people who you could not employ to do even the most menial of work. The UK has spent billions of $ extra over recent years on education, yet a bigger percentage than ever are leaving school unable to read and write or do simple sums. Factors causing this are divorce and family breakdown, mental breakdown, drug addiction, crime etc I could go on. Put simply in my home land, the UK, we are generating a class of people who even before these economic hard times were unable to make very little economic contribution to society. If the good times return it will make no difference to them at all.
I do not decry these people they are victims of a social engineering experiment that has gone hideously wrong.
On the other side of the coin I also see a set of people whose expectations are so unreasonably high, we will be never able to satisfy them.
I can not blame big business for the whole of this situation. In part it is why big business is going abroad to look for labour, not only cheap labour but any labour at all.
It is a symptom of a wider malaise and compounding a bigger problem as money flows out of our communities and nations to elsewhere in the world
The issue is not poverty versus wealth–these are two sides of the same coin–but rather the gap between the wealthy and the poor (i.e. the inequality in income). In those societies where the inequality is the greatest correlatively you find the greater number of human health and social problems–the U.S. and U.K. are among the worst in this regard.
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