The business cycle, as economists call it, is a series of booms and busts that have happened since the first transaction of trading a part of the meat killed for fire to cook it on. In my lifetime this cycle has turned continuously. The two worst times I can remember is now and back in the late 1970s. I remember well those times, because that is when I was coming out of school and in dire need of a job.
What significance do these cycles have? During boom times, it is almost impossible to not make money. Companies pop up selling their goods to an attentive populace. Established companies see their sales grow exponentially. As sales rise more people are put to work.
Let me use an example. In 1987 a company formed that had a novel idea on sleep. They designed an air chambered bed, that the public seemed to like. During the 90 and early 2000s, this company had average growth per year of 20% or more. From a small concern to large company in a decade, not bad. As they grew they opened stores, hired people to mind these stores, hired managers to manage the stores, executives to watch over the stores, marketers to promote the stores, trainers to train the new personnel, assistants, secretaries, personal assistants, event planners, delivery crews, and many more. In early 2000s, they decided they needed a nice headquarters to house all these functions, and they spent and borrowed to build a building.
In 2008 the market crashed. Oops, see they mismanaged to a degree, they assumed that there would be 20% growth for all of eternity. As people stopped spending, their product was hit pretty hard, since most either considered it a gimmick, or a luxury. Soon they were laying off people. They tried to maintain a good forward face, but behind the scenes people were being laid off. Most of the training staff, including the training executive were gone. Most of the loss prevention staff were gone. Times were bad. At one point they considered selling the company at a discount to a corporate raider, they actually had a deal in hand. Their shareholders said no.
As the economy improved slightly, they of course improved as well. Thing is they learned their lesson. They spent a lot of time saving money, hoping never to have times like that again. They got out of debt, and maintained their current state. They managed to improve their business. This January, they had enough reserves that they purchased their largest competitor in a cash deal.
Bad times, or recessions help the economy. What??? How can that be? it is simple, the economy likes productivity. The more productive we are the better we can do. Recessions are like forest fires, at first they appear catastrophic, but they also foster life. With capital tied up, new things cannot grow. Companies that use capital, but do little in return are not productive. So why is this recession seemingly endless?
I would contend that this recession is longer because of the way government has tried to deal with it. It is the Keynesian economic theory that says government can level the cycles, but it is my contention the opposite is true, with one exception. Let's look at what happened. The government bailed out the auto industry and banking. A lot of people think that that is a good thing. What if GM were allowed to go out of business? I know there is a lot of nostalgia for Chevy, but there was a lot for Desoto too, and what about Willys Jeep? Remember Studebaker? The point is, if GM had gone out of business, there would have been a hole, a market ready to be tapped. Sure maybe some of that market would have been filled by imports, but cars these days are made of foreign and domestic parts, I had a Mustang with a West German clutch back in the 80s. Other companies like Ford might have become stronger. Why did GM come that close to failure? They mismanaged. They like the earlier example assumed that good times were here forever. They were willing to settle labor issues to avoid downtime, overlooking what the consequences might be in bad times. Labor and pensions is what almost downed them.
The point of negotiations should be to further the company and protect the employee. Some times strikes are necessary, as are lock outs. It has to do with productivity. GM became unproductive. Had they failed, labor would have been in surplus, helping other companies be more productive. Look what saving GM has done to Detroit...
And when productivity rises, two things happen. First, sales will start trending up. And, second, Labor will move to equilibrium. There are not many blacksmiths out there today, they moved to other, productive ventures. At one time getting a job with Pullman was considered a very stable job, quick question, anyone know who Pullman is? When I first went to work, I found a job with the #4 retailer nationally (#1 Sears, #2 KMART, #3 JC Penney, and #4 FW Woolworth) There are no Woolworth stores anywhere any more. Notice in the list there is no mention of either Target or Walmart, interesting huh. Three of those four are still there, but they are no longer top, Sears and Kmart merged, and if you read the news Penney's is hurting big time. Walmart and Target are surviving because they are productive.
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Can you imagine no Dime Store Fountain? Ray Crock did. So we bailed out autos. Instead of a productive company, we get a company, that because of government intervention, brought us the Volt. How many Volts have you seen this week on the road? Is that productivity? The corporate undergrowth was not purged, and as a result low productivity is causing our recession to linger.
Don't get me wrong, I do not delight in people's pain. But sometimes a little pain makes the joys ahead more profound. Is it not better to end the worry of the auto worker, and allow them to get on with their life? A life in which they can succeed and grow, and gain for themselves and their families.
Next Post: What booms mean...
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