Cost-cutting is bad for the economy

I don’t know if you have heard of this amusing lime—rick. There once was an economist named Wayne, whose fringe theories were considered insane, with the markets in recession, his life was an obsession, to prove that a loss was a gain.

No, I’m not talking about a certain Economics PhD in Malacañang trying to convince us to see light in the shadows of our economic landscape. Actually, that’s economics for you. There are supposed laws like supply and demand which are simple enough. There are also so-called paradoxes that are guaranteed to spin our minds. Here’s one I just picked up from an article in The New York Times.

William Dudley, chief domestic economist at Goldman Sachs, was interviewed on the concept of "the corporate paradox of thrift." I thought the concept is fairly simple if you read it off a textbook. But try dealing with it if you have to make pesos and centavos decisions as an entrepreneur and also want to do the right thing for the country’s economy.

What is it? "If everyone tries to cut costs and save more, no one saves more. If you and everyone else cut costs, costs do indeed go down, but revenue also goes down, so profits eventually go down, too. Collectively, we can’t cut our way to prosperity."

In other words, while cost-cutting can lift a single company or two, when practiced widely enough it can pull down an economy. In the end, it will also pull down even that company that momentarily increased profits by cost-cutting. That seems to be happening today.

You still don’t get it? The NYT article used the analogy of two hamburger joints. Consider what happens in an imaginary country where Burger King and McDonald’s are the entire business sector and the total national output – 100 hamburgers a day, evenly divided between the companies – matches the demand from this nation’s consumers.

Demand and sales revenue, however, stay flat. So Burger King lays off two workers and uses the saved wages partly to fatten profits and partly to discount prices by just enough to take sales and revenue away from McDonald’s. And McDonald’s responds in kind.

But soon, the four laid-off workers, with little money to spend, buy fewer hamburgers, and the nation’s total consumption drops to 95 hamburgers a day. That sets off another round of cost-cutting and price discounting, and our imaginary nation sinks gradually into stagnation or deep recession.

In a way, this is what’s happening with our economy today. Companies struggling to keep heads above water are laying off workers, increasing the pool of the unemployed and decreasing the aggregate buying power of consumers. What makes the situation even worse is that government can’t pump up the economy by giving tax breaks or spending more in ways that put money into the hands of mass consumers. That’s because government is watching a budget deficit growing every minute and spooking potential investors.

What is saving the day is the infusion of buying power from outside the economy in the form of OFW remittances. That’s the only way the economy can still buy the 95 to 100 hamburgers even with the layoffs. Without it, local businesses will end up in the self destructive cycle of cost-cutting and price-cutting. Our economy is just not producing more jobs to absorb those being laid off, those just entering the labor force and those who had been looking for a job for years.

There is no doubt that for some companies, today’s cost cutting exercises will increase productivity and in the future contribute to a stronger economy. But that’s in the long term. In the short term, there will be a lot of anguish and gnashing of teeth. And government, the natural spending machine for times such as these, can only watch helplessly.

Jobs

Last week, I picked up a report going around the Biñan-Sta. Rosa area of Laguna that Nestlé is almost ready to throw in the towel and move its manufacturing facilities out of the country. I asked Mar Roxas about it and he said he had not heard of it. I guess, the report must have something to do with the never ending labor problems of Nestlé’s, thanks to a militantly disruptive labor union.

Hopefully, the report about Nestlé moving out of the country is just part of the bargaining process. We cannot afford an investment black eye as large as a Nestlé pullout at this time. In fact, it is time that our so called militant labor unions come to terms with the reality of the labor market in the region. They must realize that we are up against our neighbors in Asean. As if the Asean competitors aren’t enough, we have to deal with China, the biggest competitor for the kind of jobs they are driving away.

Think China. It is still officially a communist country but it has adopted its policies and systems to take full advantage of the realities in the regional labor market. I doubt if Crispin Beltran will even survive a day in China without landing in jail. And mind you, that’s a communist country, something these KMU types want this country to turn into.

In fact, labor leaders almost everywhere have become more realistic with their expectations. In the United States, the powerful labor unions in the automotive industry have scaled down their demands to what is affordable by the industry. The equally powerful unions in the airline industry are now working with management to save some of America’s largest airlines. Nothing like staring into the eyes of bankruptcy to drive home the message that they are all in this together.

The scorched earth strategy of the local communist- inspired labor unions will only make the lot of Filipino workers worse. The problem is, they don’t care if Nestlé goes to Thailand or Malaysia or if Toyota abandons its factory here for Vietnam. They are not after the welfare of the workers as much as they are after creating the political environment conducive for a communist takeover of government. At some point, Ate Glo’s strong Republic must show it is not helpless to defend itself.

In the meantime, let it be the responsibility of every Filipino not just to create jobs but to preserve jobs. We need every job we can muster in these islands. If it means we will buy locally manufactured products from toothpaste to clothes and start using the national airlines for our foreign trips, let us all make it a point to do just that. If it means being reasonable in negotiating collective bargaining agreements, let us do that too. We are all in this together, unless of course, some of our so called labor leaders are really working for a triumphant return of Joma Sison and being a labor leader is just a cover for now.

Leverage

I can’t relate to Dr. Ernie E’s joke for today. That’s because I am going to a pediatric dentist who is so gentle on those drills. Last week, I managed to doze off while she was drilling on a molar. And to think I used to see a dentist only when the pain of seeing one was less than the pain of not seeing one. But here’s Dr. Ernie anyway.

There’s this woman who goes to the dentist. As he leans over to begin working on her, she grabs his crotch.

The dentist says, "Madam, I believe you’ve got a hold of my privates."

The woman replies, "Yes. Now, we’re going to be careful not to hurt each other, aren’t we?"

(Boo Chanco’s e-mail address is [email protected])