Sunday, August 1, 2010

Machines Do Not Buy Anything

I have just read the latest issue of Bloomberg's BusinessWeek. Sometimes I wonder if anyone else made the same connections between the articles that I did as I was reading.

Here are key points from various articles. American consumers are nervous about the future. Big business enterprises are sitting on a mountain of cash. Low interest rates in the United States are encouraging investors to put their cash in countries with higher rates of return. Businesses are investing in machinery because they do not have to pay it overtime or pay for its medical coverage. Businessmen are beginning to worry more about a lack of sales than about higher costs. Businesses that focus on consumer sales are more worried than those that sell to other businesses. Consumer sales make up 70% of the American economy. Unemployment and underemployment are high and not falling. Businesses are using uncertainty about employment to drive down labor costs.

Here is the way I see it. Economies do not function well when money gets put into figurative mattresses. That is essentially what is happening now because businesses are piling up cash. Companies led by people who have been trained to believe that employees are all cost and no value are doing all they can to reduce head count while increasing their sales. They cannot figure out why fewer people are buying; apparently they do not realize that many other businesses are led by people who have received exactly the same lessons. When enough companies get into the employment suppression mode, employees lose their confidence in the future.

What business leaders have apparently missed in their education is that a synonym for "employee" is "consumer". They have misunderstood lessons from history that show that confident Americans who believe that they will be able to find work, get raises, and earn promotions like to spend money along the way. They will willingly borrow when they are pretty sure that they will be able to pay back the loans at a time when money is increasingly available to them.

That optimism has made the American market one of the world's most lucrative places to sell goods and services, a status that lasted for many decades. However, businessmen thought that they could earn more money by moving jobs and production overseas or by replacing people with machines. The fault in their logic was that people who do not have jobs or who become afraid that they may not have jobs in the future eventually lose their optimism and their willingness to spend.

Since more and more large businesses are not run by entrepreneurial types who have motives like building communities, employing themselves rather than working for someone else, creating excellent products or even providing employment opportunities for friends and family members there is a groupthink mentality settling in at the top of major corporations that is quite hazardous. Each company believes that their road to increased prosperity is driving out the cost of operation, but they cannot figure out why their sales volume keeps dropping.

I am not sure how America gets off of this downward spiral. Maybe employees can start the process by taking more control of their own assets and selling their investments in companies that keep firing people. Somehow, the market needs to recognize that cost cutting with ever falling sales volume is a bad business strategy that should not be rewarded, even if the net profit numbers tick up every now and then.

(Note: The title of this post is a play on a headline of an article titled "Machines Do Not Earn Overtime" in the print edition of BusinessWeek.)

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