The following is in response to our article, Bruce Greenwald on Structural Problems in the Economy and Unemployment, which was published last week:
Dear Editor:
I think Greenwald’s logic fails in several places. He states:
Imagine that you’ve got basically 1% or 0% GDP growth and productivity growth of 2% to 3% per year. Employment is going to be decreasing by 2% to 3% per year. That means unemployment is going from 10%, where it is now, to 12% to 14%. I don’t think there’s a natural stopping place for that much below 15%.
That’s the potential unemployment picture you are looking at. You are already seeing the political strains that is causing, which are that companies are going to make a lot of money, because they will drastically cut costs and their revenues are going to be constant. The stock market is going to go up. It happens every reporting season; they all exceed expectations. The unemployment situation is going to be a disaster.
Increased productivity has largely come from reducing headcount. In the early part of a downturn, you use the slowdown as an excuse to get rid of borderline employees along with headcount reductions tied to lower demand. That is why data show that the rate of headcount reduction is slowing - it no longer includes the borderline employees. As the economy slows further, you no longer have the bonus savings of those extra workers, so headcount reduction savings are reduced. Also, fixed and semi-fixed costs, like building heat, maintenance, etc, become a bigger percentage of your costs because they are spread over a smaller sales base (Revenues will not be constant as unemployment rises and people save more. Consumers will have less spending money).
Companies are not going to keep beating expectations. Since their sales are going to be dropping at a faster rate than cost savings can be implemented, at some point profits will start going down substantially. Companies that are geared up for a certain level of production cannot be efficient at a lower level because of fixed and semi-fixed costs. Greenwald has obviously never run a production plant. I managed several glass plants that ran continuous shifts, and if sales dropped off such that we could not run all shifts, we quickly became unprofitable no matter how hard we tried to cut costs. That is why a Wal-Mart can force low prices on suppliers; the suppliers need the volumes.
Greenwald is incorrect in saying that profits don't come from innovation, only from doing things better than others. He is correct that successful companies like Toyota do that. But the Microsofts of the world did it through innovation. Microsoft invented a whole new industry. And that is what we need to do now: develop clean renewable energy that we make right here and eliminate the need for imported oil. President Obama knows this and has taken steps in this direction through some stimulus money. But his efforts are too little and pressure for rapid development is not being applied. This push for home-grown clean energy can be the equivalent of the war that Greenwald mentioned got us out of the Depression. It would create a large number of new jobs while reducing our trade imbalance and deficit.
Yours truly,
Warren Brussee
Mr. Brussee is author of The Great Depression of Debt, published by John Wiley
