Here’s my quandary.
From an investment point of view, do I consider the fact that companies are, once again, laying people off as a good thing and therefore worthy of my investment dollar, or, is the downsizing a sign that the company’s business is faltering, and therefore, not worthy of my investment dollar?
The Keynesian and current Wall Street position is that the less workers, the bigger the profit. They call that productivity, and theoretically, it’s great for stock prices.
The recent announcement by American Express of 5,400 workers being let go brings to mind the massive layoffs just a few short years ago.
At that time, it was called cutting the fat.
After the obvious downsizing of the low-hanging fruit (The One Hour Survival Guide for the Downsized by yours truly is available upon request) came the changes in sales strategies, product adjustments, accounting gimmicks, and a host of other business tactics in order to maintain a profitable bottom line.
Having almost exhausted every trick available, reality is once again setting in.
Namely, that lower sales equate to lower profits, and therefore, theoretically lower stock prices.
The dramatic decrease in capital expenditures, the transference from reserve to balance sheet, and the ever-exhaustive search for reduced expenses will give way to the resurrection of increased productivity.
Whether its finance, soft drinks, or technology, the pink slip will once again rear its ugly head, which will ultimately require cutting the muscle and then chopping the bone.
In fact, this recent news regarding American Express reminded me of my college days back in 1964 and a very interesting conversation that I had with my well-known Keynesian economics professor, John Kenneth Galbraith.
Regarding the topic of downsizing, I asked Dr. Galbraith, “What happens to the people that lose their jobs?
He responded, “They get other jobs.”
I replied, “What if there are no jobs?”
He looked incredulous and said, “There are always jobs, we’re America, and after all, this is 1964.”
He also said that’s what makes American companies successful; they know when to match the workforce with the product flow.
This is all great information, but as I now think about Eastman Kodak, Circuit City, Blockbuster, and Motorola, I remembered that these companies continued to cut their employees quarter-after-quarter and year-after-year.
Had I followed the professor’s advice and invested because of the American business strategy of matching employment with product flow, I would have been a very disappointed investor to say the least.
Obviously, a lot of water has gone over the dam since that day when Galbraith, the John F. Kennedy and Lyndon Johnson economics advisor, instructed a 17-year-old kid on how business and employment in America worked, or at least how he said it should have worked.
Knowing that it’s now 2013 and not 1964, I’ll ask once again, is the strategy of slashing 5,400 jobs a good thing for both an investor and American Express, or not?