Over the course of the "Great Recession", economic devastation has seeped into all corners of our country, and a large portion of the globe. It is clear that the hardest hit have been the middle and lower classes, as well as the elderly. However, there have been a few winners who have actually benefited from the catastrophe. Who are the lucky ones? Looking at individuals, it is clear that those in the upper echelon of society haven't really had to make many adjustments, in fact a large majority have gotten even richer. But who (or what) has gained the most? Large corporations. Now, it may seem contradictory that a reduction in consumer spending, tightened credit conditions, and general overall reduction in economic activity can actually benefit any kind of business. It is not. Do not confuse the corporations I am referring to to the mom and pop businesses, or even small corporations. No, no, no. I am talking about large corporations, especially those with heavy exposure in foreign markets. How do these corporations come out on top? Lets explore...
1. When a downturn begins in an economy, the effects are felt almost immediately by any company manufacturing a product or providing a service to consumers. They begin generating less revenue as demand plummets, and thus they begin the snowball effect. When a business generates less revenue, and has less demand, they also demand less from their suppliers in the supply chain. This continues on and on. Now, what is one of the first things these companies will do to offset losses? Well, they can bargain with their suppliers, or even switch to a lower cost provider. Honestly, this can be a headache and not all that cost effective, so generally the first thing done is a reduction of employed hours. The companies employees are asked to take a reduction in hours, in pay, or in benefits. If that cannot offset costs, then employees are laid off. Of course, this also feeds into the snowball cycle and produces even greater reduction in demand. So how does this benefit any business you may be wondering. Simple: As more and more workers enter the unemployment lines, wages begin to fall. As I have written previously, labor is a market similar to any other in that it reacts to the laws of supply and demand. When there are millions more unemployed workers, the pool of labor grows and the supply is high. Logically, this leads to a decline in the price of labor, as it would with the price of any other product. Of course, one would expect that when the economy returns to normal all else would return to normal as well. However, this is not the case. The truth is that the pay and benefit reductions tend to remain in place long after a business recovers. Why would they pay you more now, when you have been doing the work for cheaper for the last two years? Eventually, to remain competitive in terms of employing skilled workers, the wages and/or benefits would have to rise, but someone has to be the first to get the ball rolling and most are unwilling until absolutely necessary. Think of it like this, you wouldnt pay more for a product than your neighbor did for no reason. You would have to believe that you would become less likely to attain that product if you didnt pay more before you would become willing. This is the law of scarcity.
2. To expand upon the point I made above, lets look even closer. As employees hours are reduced, or as other employees are laid off, those still employed are expected to pick up any slack created. Higher productivity is expected out of every employee, because if you aren't willing to do it, there are 100 people waiting to take you job. The same theory can be applied to workplace disputes or harrassment. Would you be willing to confront your boss about how he has been treating you if you had just watched 1,000 of your co-workers walk out the door after being laid off? I highly doubt it. So lets roll this altogether. The employees of a company first have their wages and benefits reduced. Then they watch their co-workers get laid off, creating fear among those who remain. The fear leads to employees being forced to work harder and take on a larger load, while being paid less. Can they complain? Nope. Basically, at some places, it becomes damn near sweat-shop conditions. Refer to IKEA story.
3. In the beginning of this post I stated that it was mainly large, transnational corporations that came out of the recession squeaky clean. The situations I described above could be applied to any business, not just large corporations. Lets finally get to the good stuff where it becomes obvious who the real benefactors of a recession are. Like I said, businesses first cut costs by reducing labor costs and demanding higher productivity with less complaining. When you are a company with revenues in the billions, this can add up, but its not the most significant gain. In this past recession, not every country had as dramatic an upheaval as the United States. The BRIC's (Brazil, India, China, and Russia), along with Germany fared pretty well. What does this mean for a transnational corporation? It means the demand simply shifts from the typical Western countries to these new "emerging economies". Of course I make it sound a little more simplistic than it really is. Regardless, these transnationals don't see the same shock as a corporation or small business that deals only domestically or in a very limited markets. This also means that the larger corporation will see a much greater benefit as it reduces costs, since its lost revenue isn't as great.Now, as demand has fallen slightly for the larger corporations, and dramatically for the smaller corporations, stock prices fall. Generally, a stock is priced based on metrics like a price-to-earnings ratio or some sort of benchmark to gauge its worth. Since revenues (earnings) are down, obviously this causes the prices of the stocks to fall. Since the small corporations see a more dramatic decline in revenue, they also see a more dramatic decline in their stock price. Does this mean the business is any less effective or innovative? Not really. It is really just a reaction by the players in the market to bad news. As human beings, we tend to overreact and this leads to a great opportunity for these larger, transnational corporations. Since the stock prices of the smaller corporations have been hammered, they become a commodity to the larger corporations. The transnationals swoop in and make an offer to buy the struggling business for pennies on the dollar. A transnational may choose to buy a company to increase its existing market share, eliminate competition in said market, or expand its operations into another market. This also allows these transnationals to operate on a larger economy of scale, thus reducing its production or service delivery costs. Since there is also a lot of overlapping of duties in the office or the production floor, workers are laid off. Refer yourself to the first and second items.
4. There are also benefits to large corporations in a recession even if they choose to do nothing. Let's say there is a large corporation that finds itself sitting on a pile of cash, yet there are no businesses to merge with. What do they do? Nothing. They pay their shareholders a dividend, and reinvest whatever they can into existing operations. The other smaller businesses that weren't appealing enough may see such a sharp decline in revenue that they are forced to close their doors. This, of course, leads to less competition in the market. In the end what do we end up with? A large, transnational corporation that pays its workers pennies, demands more work from them, gobbles up the competition, waits for the rest to fall to the wayside, and it emerges from the recession a giant conglomerate that used to be referred to as a monopoly (think General Electric), but thank Mr. Ronald Reagan and every President that has followed for not enforcing any of the Sherman Anti-Trust Act.
5. The final benefit partially benefits any corporation, fully benefits transnationals, and s--ts on small business. I am of course talking about the inevitable changes to corporate tax codes. In a recession, it is common for the government to provide tax incentives of all kinds to various businesses. Some are targeted, such as tax incentives for wind turbine manufacturers, others are broad, such as a general reduction in the overall corporate tax rate. Any broad reduction in taxes obviously benefits any and all corporations (no benefit to small business). However, tax incentives such as the "repatriation tax holiday" benefit only the largest transnationals. It is claimed that $1 trillion of foreign earned income is sitting off shores in corporate accounts doing nothing. Why? Because these corporations don't want to bring home the money and pay the corporate tax rate on their earnings. Makes sense. If you ran a corporation, you would exploit these loopholes too! But what do some lawmakers want to do to alleviate the "problem"? They want a tax holiday which basically eliminates any taxes on this money to "bring home" these earnings. This is generally refferred to as repatriation. The idea here is that this money will help create jobs. At first glance, this seems like a good idea right? Why not let them bring home more money, and pump it into the economy right? Wrong. This was tried during Bush Jr.s Presidency and it did the opposite of what it was supposed to do. Sure, transnationals brought home the money...then they did mergers and acquisitions (remember item 3?) They then used the money to award huge bonuses to undeserving executives, and finally, what did they do with the rest of the remaining pile of cash? They built plants in China, told you to f--k off, and shipped your job offshore.
Hopefully this all made sense. I did not cover everything in this post either. Things like ridiculous tort reform like we have seen in Wisconsin, as well as the union busting efforts seen across the nation are just further examples of how these transnationals come out of a recession just fine. After examining the facts, its is indeed easy to see who has and will always come out of a recession the winner. I promise you it will never be the middle class.
Vote Bauer