The downturn and silent socialism

Job losses are part of the recessionary landscape, right? Just imagine if the social security financial consequences fell on private industry, not on taxpayer dollars.

I was going to talk about CEOs and the ridiculous remuneration that is hosed down the drain on their retention and release – but in the meantime something else occurred to me.

Do you ever have the experience of seeing something that you have taken for granted over a long period of time (sometimes your lifetime) and suddenly you see it differently? It often happens when people see a property for sale at a ridiculous price and think there must be something wrong with it. Suddenly someone buys it and makes a fortune and you think: “Why didn’t I see that opportunity?”

Well, it suddenly occurred to me today that we have it all wrong. We live in the belief that it is the age of capitalism. Some people say that capitalism has run amok and others say that we are actually in the post-capitalist society. Whatever it is, we have got it wrong (I am not sure about the grammatical construction of the last sentence but it is representative of where we are with the commercial enterprise called “the market”).

There was hell to pay when Paulson (The US Secretary of Treasury) wanted to tip in a cool $US700 billion of taxpayers’ money to bail out the banks. “We are socialising the banks; we are surrendering the free market system; for heaven’s sake, capitalism is going down the drain and we will become a socialist state!”

So today, when I caught the tram back from acupuncture and the meditative dream with which it is associated, it suddenly struck me that we have been a socialist state for years– if not ever since the industrial revolution.

What happens when there is an economic slowdown (translation from the English, “recession” or “depression”)? Employers sack employees and reduce their payroll and the people who are sacked go on the dole with the result that the responsibility for them passes from the private to the public sector.

It is called “downsizing” and is an acceptable managerial technique that is rampant throughout the western world. Why should we be obliged to continue to employ people when people are not buying our stuff? “Let the government pick up the pieces until the good times roll again and we are able to make some money.”

So, why do sales drop off in a recession and more so in a depression? The answer is that people have either been downsized or are frightened that they are going to be “downsized”. The people who are “downsized” don’t have any spare cash to spend and the people who aren’t “downsized” are frightened that they might receive the pink slip, so they put their pay packet in the bank and don’t spend their money.

What happens when they don’t spend their money? Yep, companies downsize because no one is buying their product and when they downsize, less people are going to buy their product. In the meantime they pass the responsibility of looking after these people to the government.

The government’s receipts are down because businesses are making less money but their expenditure increases because of the people who have been “downsized” are knocking on the door of Centrelink for their unemployment benefits.

This scenario is so traditional and is such an accepted process that we just take it that this is how things should be. In the end, the people at the bottom of the feeding trough are the ones who miss out on the meal and have to scrape by on the benevolence of the taxpayer (of which they were one until recently).

It doesn’t matter which way you look at things, when the proverbial hits the fan who takes the hit? The taxpayer and the people least able to survive. This preserves the income and capital of the listed company but decimates the balance sheet of the government.

How would it be if we changed the formula? In good times the government gives tax relief to companies that employ people and when tough times come along, employers continue to employ people rather than “downsize” them.

In this scenario, people would feel confident that they had a job and wouldn’t have to put every cent in the bank for a rainy day. This would mean that people would buy stuff and companies would not need to downsize and the government wouldn’t have to shell out for unemployment but would pay out a lesser amount by compensation to companies for continuing to provide full employment.

This scenario doesn’t fix the “promoters”. (Some people think of them in terms of “gangsters” who think up these miraculous financial instruments that send people broke, but if we got our thinking right, the damage that these guys do might not be quite as great.)

Nor does it overcome the inability of the Reserve Banks around the world to get their interest rate policy right (just look at the graphs of interest rates in Australia over the past 20 years and you will wonder whether it is Mickey Mouse orchestrating the changes in interest rates).

Capitalism in its traditional concept of risking money in the production of goods and services that are of social benefit is still a driving force in the minds of many, but the business-school formulas that have evolved to help business pass off their problems to the taxpayer, while retaining all the goodies to themselves, must come under ever increasing scrutiny.

The bail out of the banks is nothing to what the cost of unemployment benefits will be in the case of an “economic downturn”. If the cost of that were not nationalised but was a burden that had to be borne by major employers, the likelihood is that we wouldn’t have an economic downturn.

Anyway, that is what occurred to me on the tram back from acupuncture. You ought to try it sometime.

Louis Coutts left law and became a successful entrepreneur. His blog examines the mistakes, follies and strokes of genius that create bigger, better businesses. Click here to find out more.

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