Wednesday, January 14, 2009

The Tightening

Last week, we had a "belt tightening" meeting at work. Travel restrictions, a hiring freeze, warnings of lower pay raises and profit sharing pay-outs, training cuts, and possible elimination of employee recognition events were all mentioned. And we were all encouraged to watch ever expense. A tough message to hear no doubt, but much better than the alternative which at this point in time would mean layoffs.

All of these measures are a prudent response to the current economic conditions. And the economic impact from our company taking these steps is not significant. But when you consider that thousands of other businesses across the country--world in fact--are doing the exact same thing you can see that the consequences for airlines, hotels, restaurants, service providers, etc. can be quite drastic indeed. And for the broader economy the fact that companies are no longer hiring is having a huge impact.

Because with some firms laying workers off and most others not adding to their payrolls, the individual consumer is pulling back as well. Paying off credit card debt, saving more from each paycheck, putting off planned purchases, and learning to live without some of life's little luxuries are some examples of this. Again, these are prudent responses given the current conditions. But like the business belt tightening, these cutbacks by millions of consumers have a cascading impact on the economy.

It's difficult to see how any government stimulus--even with tax cuts--is going to break either of these downward cycles, especially consumer spending. No company or individual is going to start spending and investing again until there is some restoration of confidence. Counting on government spending to be the springboard to bring that back seems like a pretty slim hope.

UPDATE-- Philip Levy is skeptical of the economic impact of stimulus spending:

Our government announced one plan and implemented the other. When it added this uncertainty to the unpredictability of the broader economic environment, it was hardly a recipe for encouraging private activity. An $800 billion tax-and-spending package would likely rework incentives in many parts of the economy.

In other words, there is very little science behind arguments that an additional $800 billion stimulus should do the trick.

A pragmatist might contend that this is no time to quibble about economic theories. We need measures that get proven results. If so, the record of discretionary fiscal spending -- the stimulus spending beyond the deficits we naturally get in a falling economy -- is pretty weak.

Despite all the recent cries of "Shovels at the ready!" it is very difficult to agree on and disburse emergency spending quickly and effectively. Fiscal stimulus is among the weakest tools available to counteract a contraction. Japan's failed attempt to spend itself out of recession in the 1990s and the U.S.'s futile stimulus of last year underscore the point.

Atomizer Sez: There's no belt tightening going on here at the southeast field office of Fraters Libertas. In the past two weeks we've purchased a new car, a new washer and dryer and have booked a trip to Florida see a few Twins spring training games. Consume like hell... that's our motto.

The Elder Applauds: Atomizer, I don't use the word "hero" very often, but you are the greatest hero in American history. Keep on a consumin' baby. And maybe try to throw a post together every month or so.

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