A Contradictory Economy Driven by Steady Investors
Revealing signposts to a contradictory economy:
The stock market’s big gains last year increased investor wealth by $2 trillion, an amount greater than one-fourth of the economy’s annual output.
The fastest-growing specialty in law, possibly one of the country’s fastest-rising industries, is wrongful dismissal. Lawsuits over layoffs are up more than 300% in the last 20 years.
But it’s not a simple world. Despite highly publicized layoffs, notably the 40,000 announced by AT&T; this month, jobs for managers are increasing and labor shortages are cropping up in some parts of the economy.
No wonder the stock market is fluctuating wildly and people can’t agree whether we’re prosperous or poor. Blighted Christmas sales, for example, were blamed on corporate layoffs or fear of them.
Yet that doesn’t add up. Announced layoffs last year totaled 439,000, down sharply from the two previous years. If insecurity affected holiday shopping in 1995, why not in the previous years? And besides, if investors made $2 trillion in the market, why didn’t they flock to the malls?
In the answer lies the secret to the economy today--and tomorrow: an aging population saving for retirement. Unless you note that $6 billion to $8 billion a month is flowing into 401(k) plans, you don’t understand the driving force behind the rising stock market and the whole economy.
The fastest-growing segment of the population, now and for the next five years, are the 45-to-55-year-olds. They are pouring money into 401(k) plans, whence the money flows into mutual funds.
Add some $3 trillion of investments from the traditional pension funds, and you have a force of institutional investment that accounts for two-thirds of the trading in New York Stock Exchange issues and a big chunk of the Nasdaq stocks too.
Critics pillory “Wall Street” as if plutocrats from another age were manipulating the economy. But retirement savers rule the markets.
So when corporations say they’re restructuring to increase “shareholder value,” they’re responding to demands from retirement savers or investment managers representing their interests.
In many cases, the investor and discontinued employee are the same person. The AT&T; managers who get lump-sum payments of vested pension benefits will roll them over into individual retirement account investments.
That’s no consolation to the unemployed, but it’s an indication of what’s really going on. And it’s important for understanding the issues in a time of widespread emotion and ideology. Labor Secretary Robert Reich suggested after AT&T;’s announcement that corporations be given tax relief for keeping on more employees than they need. Even Eastern Europe has given up that kind of thinking.
The words “shareholder value,” to be sure, cover a multitude of sins and virtues. Investors kept IBM’s stock price low until it reduced corporate bureaucracy. AT&T; is adjusting for new business realities; local telephone companies will be doing likewise.
Shareholders also liquidate companies. They applauded the restructuring of Scott Paper Co. as it was prepared for sale to Kimberly-Clark Corp. last month. But the Scott case, as detailed in BusinessWeek, also involved abuses. The company chairman and corporate officers lined their pockets with millions while employees lost jobs, incomes and, in some cases, pension benefits.
“They didn’t create value, they redistributed income from employees and the community to the shareholders,” says Peter Cappelli, head of the management department at Wharton School, the business school of the University of Pennsylvania.
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Cappelli and many others these days are calling attention to a serious issue: the breakdown of the contract that used to exist between employers and employees. Whether contracts were explicit, as in union agreements, or implicit, as in white-collar workers’ job security, both kinds have eroded in recent years.
But there is no action without an opposite reaction. An estimated 25,000-plus wrongful-dismissal lawsuits were brought last year. And workers’ compensation suits--”the poor man’s wrongful-dismissal litigation” one labor expert calls it--are rising nationwide. Legal proceedings--replete with lawyers, courts, generous jury awards in many cases--are an expensive and inefficient way to deal with grievances.
Labor unions and employee committees were far more amenable to negotiation than is the law. And so a return of influence to labor unions is widely predicted.
“Something will come back, perhaps brought in by voters,” says economist Albert Wojnilower of Clipper Group, an investment management firm. “Reform won’t bring back the job as property right, but there will be a redress of balance.”
Meanwhile, we should keep the current situation in perspective. Some 15 years ago, restructuring hit the factory workers of Detroit, Pittsburgh and other manufacturing centers a lot harder. There was 11% unemployment in a fierce recession.
Today, with 5.6% unemployment in a growing economy, the average period out of work after a corporate layoff is 3.39 months, according to Challenger, Gray & Christmas, a Chicago outplacement firm.
“Overtime and use of temporary employees is down. Employers seem to be recognizing the need for skilled employees and continuity,” says professor Daniel Mitchell of UCLA’s Anderson School of Management.
So, through imposed reform or natural development, the problems of eroding contracts will work themselves out in this adaptable economy. The new companies that are leading the economy--the Microsofts and such--make stock ownership for all employees a standard practice, giving everybody a share in the risks and rewards.
But even among older companies, we should be aware that true shareholder value is not a one-year spike in stock price, but long-term progress in a well-managed business. An example is Kimberly-Clark, the firm that is buying Scott Paper.
The maker of Kleenex, Kotex and Huggies diapers, Kimberly-Clark has introduced and adapted new products, earned steady 20% returns on investors’ capital and increased employment about 1% or so each year.
To buy Scott, Kimberly-Clark was able to use its high-priced stock, which investors have bid up by some 350% over the last 10 years because they recognized value in continuity and skill. That’s another signpost in a complex economy.
