Something to think about

Two good reads I would like to point out:
1) Steven Pearlstein – From Old World To Real World – — on globalization and strategic trade:

Consider Intel’s recent announcement that it would build an advanced, $2.5 billion chip fabrication plant in Dalian, on China’s northeast coast.
We can all agree this plant will be a boon to the Chinese economy. And we can be pretty sure it will be in the interests of Intel shareholders. But is it really in the best interests of the U.S. economy?
It would be one thing if the Chinese had developed the capacity to make advanced microchips on the basis of their own investment and ingenuity. But it is quite another when the technology for the chips and chip production has been created by American researchers and American companies, and transferred wholesale to a developing country that makes no secret of its intention to use that knowledge and experience to improve its own industry.
By what reasoning is this a net plus for an American economy that is supposed to prosper in this globalized world on the basis of its high-tech know-how? Can you really say that, in such a high-value-added industry, the lower cost of imported computer chips will offset the foregone economic output — jobs and profits — that Intel’s move entails?
As it turns out, the reason it will be cheaper for Intel to make those chips in China has little to do with lower-cost labor. That’s because chip factories aren’t particularly labor intensive. In fact, a study by the Semiconductor Industry Association found that 90 percent of Asia’s cost advantage over U.S. production is attributable to government subsidies and tax breaks. In the case of Intel’s new plant, I’m reliably told that those subsidies amount to about $500 million. That’s a sum well beyond anything available to Intel in the United States. And it hardly fits into any common-sense notion of free trade or fair and open competition.
. . .
Contrary to what you hear from editorial writers and other free-trade ideologues, it is not “protectionist” for the United States to impose countervailing duties on imports from a country that subsidizes exports and keeps its currency pegged to the dollar.
It’s not “anti-business” to toss out a tax code that encourages multinational corporations to invest overseas and replace it with one that gives tax preferences to companies that create high-value-added jobs in the United States.
And it is not “class warfare” to raise taxes on those who have benefited from globalization to pay for health care, wage insurance and retraining of workers who have lost their jobs as a result of globalization.

2) James Surowiecki’s It’s the Workforce, Stupid!: Financial Page: The New Yorker:

In the nineteen-nineties, with U.S. corporations in the midst of what the Times called “the downsizing of America,” a new term appeared: the “seven-per-cent rule.” It was a simple formula: when a company announces major layoffs, its stock price jumps seven per cent. No one worried too much about whether the rule was accurate—it was a catchy way of expressing a basic assumption about corporate layoffs: downsizing is an easy way to make Wall Street happy. So when, recently, two companies with lagging stock prices—Circuit City and Citigroup—announced major job cuts, one might have expected their stock to soar. Instead, Circuit City saw its stock price tumble four per cent the day after it announced it was getting rid of thirty-four hundred of its most experienced sales associates, and Citigroup’s stock barely budged when it said it would be cutting seventeen thousand jobs.
This may have surprised the executives who had planned the cutbacks, but it shouldn’t have. Over the past decade, many academics have looked at how layoffs affect stock prices, and they’ve found that the seven-per-cent rule is bunk. Instead of rising sharply, the stock of companies that trim their workforces is likely to fall. A recent meta-study that surveyed research from several countries, covering thousands of layoff announcements, concluded that, on average, markets had “a significantly negative” reaction to job cuts. Individual companies, of course, sometimes see stock prices jump after layoff news, but there’s no evidence that downsizing is a guaranteed hit with investors.
. . .
The increasingly short-term nature of C.E.O.s’ jobs, along with the pressure on them to deliver results quickly, doesn’t help matters. The average C.E.O.’s tenure today is just six years, long enough to see the benefits of downsizing (like a lower payroll) but not long enough to suffer costs that may appear in the long term. And the lack of job security means executives have to worry more about what shareholders and analysts are saying. While the market as a whole may be skeptical about downsizing, many powerful people on the Street aren’t. Before Citigroup announced its layoffs, for instance, it had to contend with a chorus of critics—including its biggest shareholder—insisting that the company was a bloated giant that needed to get its costs under control. Even if the job cuts didn’t move the stock price, they were at least a sign to those critics that the company was listening.
On top of all this, a C.E.O. is likely to look to layoffs as a solution because that’s what almost everyone else does, too. The word “downsizing” wasn’t even invented until the mid-seventies. The waves of layoffs that began at the end of that decade and peaked after the recession of 1990-91 were largely a response to crisis on the part of manufacturing companies swamped by foreign competitors and stuck with excess capacity. More recently, however, downsizing has become less a response to disaster than a default business strategy, part of an inexorable drive to cut costs. That’s why Circuit City can proclaim, “Our associates are our greatest assets,” and then lay off veteran salespeople because they earn fifty-one cents an hour too much.
There’s nothing wrong with costcutting, and in any dynamic economy layoffs will be necessary. The problem is that too many companies today define workers solely in terms of how much they cost, rather than how much value they create. This is understandable: after downsizing, it’s easier to measure a lower wage bill than it is to see the business the company isn’t getting because it has too few salesmen, or the new products it isn’t inventing because its R. & D. staff is too small. These lost opportunities may be hard to measure, but over time they can have a huge impact on corporate performance. Judging from its reaction to layoff announcements, the stock market understands this. It’s time executives did, too.

As I said, something to think about.


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