Growth Through Attrition

Well, this is interesting. Last quarter corporate profits declined for the first time since the recession ended in 2009:

Corporate profits declined last quarter, ticking down by $6.4 billion or 0.3 percent in seasonally adjusted annual terms. A small decline, yes, but it was also the first decline since the fourth quarter of 2008, when the great recession was still raging.

My explanation for what’s been happening with the U. S. economy over the period of the last twenty or so years goes something like this. Once any organization reaches a certain size it becomes a bureaucracy. Governments. Companies. Hospitals. Churches. You name it. It is the nature of bureaucracies to grow. It is the iron law of bureaucracy.

Bolstered by two consecutive bubbles (first the dot-com bubble then the housing bubble) that concealed the problems we were having under a blanket of credit-driven increases in retail sales, companies were feeling pretty cozy. They did what bureaucracies do: they added employees. Many of these employees had little or nothing to do with the nominal mission statements of the companies that employed them. They were what Tyler Cowen calls “zero productivity employees” and what Jerry Pournelle calls “dedicated to the organization itself”.

When the housing bubble collapsed companies hunkered down in survival mode. They cut employees. They didn’t replace employees that left. I think that many companies over-reacted to a very frightening set of circumstances unlike anything anyone working there had ever experienced before.

Profits increased. That’s what happens when you cut expenses that don’t contribute to marginal productivity.

However, there’s something else that I think is an iron law: no company ever cost-reduced itself to greatness. You can cut costs to increase profits but you can’t cut costs to grow. We may have reached that point.

Or we may just be going into recession again.