Economics of Killing the Golden Goose, Part 1

Economics of Killing the Golden Goose, Part 1

We recently started following and engaging with #QU4ARK, a radio show on WIRN: World Internet Radio Network, and were asked about money and economic sustainability by two of the hosts. As I thought about this, I thought of Aesop’s fable: The goose with the golden eggsand how there are parallels to what is happening today in the United States and many other developed countries.

If you don’t remember the fable, here’s a summary:

One morning a poor man wakes up and finds a golden egg in the nest of his favorite geese. The once poor man is thrilled with his new wealth. The next morning he rushed to the nest and found a second golden egg. This continued every morning as he went from very poor to very rich. As his wealth increased, he changed. He became greedier. He wanted more than one egg a day. He thought there must be more gold in the goose. In an attempt to have it all now, the man killed the goose to get all the gold, only to learn that he had killed the source of his wealth.

The man no longer had a steady income, but he continued to spend until he was broke.

The reason I am reminded of this story when I think about money and economic sustainability is because of the way companies, CEOs, shareholders and activist investors act towards the goose that is laying its golden eggs today.

Their golden eggs are the income and profits they make from their businesses and investments. At its core are the employees who make up their company and the consumers who are their customers.

Today we are witnessing tireless attempts to extract as much profit from companies as possible. I don’t blame entrepreneurs, managers or investors if they only receive rewards for their efforts, risks or investments. In many ways I am a capitalist. I want businesses to grow and believe that a free market is the best way to spread wealth. However, I am concerned about the pursuit of profit at all costs. Over the next few weeks, I will examine these efforts and their impact on the shrinking middle class.

Dividends and share buybacks

Dividends and share buybacks can be beneficial for companies. They enable successful companies to return the wealth they create to company owners and employees. It’s the same as a sole proprietor who sells a product or service and takes some of that money as personal compensation.

The Golden Goose occurs when companies either decide or are forced to increase their dividend payments or increase their stock buybacks at the expense of business reinvestments such as research and development and wages.

According to CNBC, $900 billion was returned to shareholders in 2014 in the form of stock buybacks and dividends. That’s almost $1 trillion. What would be the impact if that money was spent on something other than shareholders? What if half of that money was invested in research and development? How many jobs would be created? What if smart people were hired to create new, more desirable products, like Apple did with the iPhone and iPad?

What if half of that $450 billion went to creating jobs, which, including benefits, would cost companies $75,000 per job per year? Most large companies pay around 20-30% of total salary in benefits. In other words, a job that pays $60,000 costs a company between $72,000 and $78,000.

How many jobs would be created? At $75,000 per year, 6,000,000 jobs would be created in one year. What would happen to the US economy if 6,000,000 jobs (500,000 per month) paying $60,000 per year in take-home wages were created?

Jobs should not be created just to create jobs. Jobs should meet a business need. Imagine what business needs would arise if there were an additional one to six million people earning above-average salaries? What kind of economic growth would occur?

The economics of jobs versus shareholders

Some might argue that shareholders are putting money back into the economy, but I don’t entirely agree. I know that some of the money that flows in the form of dividends and buybacks goes back into the economy. However, the majority are buying more stocks. Most dividends are reinvested.

Most wealthy people can’t spend all of their money. They invest more than they earn and let their money work for them wisely. On the other hand, someone who earns $60,000 a year spends most of their money on daily living expenses.

What impact does it have on the economy when shareholders take most of a company’s profits? The economy is shrinking. The profits buy more shares. The opposite is true when a company invests profits in research and development and employees.

What do you think? Is business killing the goose? Is the company using smart or bad economics? Is there accidental or intentional starvation of the goose?

Are companies destroying the economic engine?

I know this sounds vague, but something I heard on the radio several years ago had a profound impact on my economic understanding. I was listening to American Public Radio’s MarketPlace and a biographer was talking about the economic climate at the time (2008 or 2009, beginning of the Great Recession). She was interviewed about a biography she had written about a late and well-known economist. I don’t remember the author or the economist’s name, but what she meant to say was that there were significant layoffs and she said that this economist would be ashamed of what business leaders were doing. Companies laid off people in droves to protect their profits, even though the long-term needs of the country should have been put above a company’s short-term profits. She suspected that what this economist was writing about would highlight the short-sightedness of companies that are afraid to accept a quarter or two of lower profits and lower stock prices to keep the economy going at a macro level. Essentially, their theme would have shifted some of the blame for the deteriorating economy to business leaders, who were quick to lay off workers to support stock prices and their own pocketbooks.

Do layoffs kill the golden goose?

Today, the same business leaders increase stock prices by cutting costs, such as layoffs. This is often done with a short-term focus. These companies seek rapid quarterly stock appreciation through layoffs. When a company announces layoffs, they are typically rewarded by Wall St. investors, who see layoffs as a way to cut costs and improve profits and stock prices. Who will be rewarded? Business leaders and investors are rewarded.

What happens to those laid off? What happens to this source of income for the economy? It is transferred from employees to shareholders. Of course, there are times when it is not possible to offer every employee a job. Layoffs are part of the economic cycle.

Do layoffs make sense when a company is doing well? What happens to the goodwill, word of mouth, and direct revenue that employees generate for a company when it lays off employees during good financial times? How would you like to support a company that fired you when it announced record profits?

The goose is dead

The economic engine

Let’s say there are two people in business, you and me. You own a company, I work for you, and we both buy the one product our company makes. Everything is going well until one day they fire me to reduce costs and increase sales. The company’s profit increases immediately because you don’t have to pay my salary. The first quarter looks good. What will happen next quarter? Since I don’t have a job, I have no income. The company is suffering from the fact that the economy is now generating less income.
Many of you may say, but David, that’s not how the real world works. True, in the real world I would hopefully find another job that paid about as well as before, and I would continue to contribute to the economy.

However, what happens when more companies are laying off than hiring? We revisit the years 2008 to 2012, when fewer companies thought about the long-term needs of the country than about the short-term profits of their company. The biographer said this would have shamed her subject.

Are business leaders killing the golden goose? Despite increased profits, are long-term sales sacrificed for short-term share prices?

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