Will Layoffs Cause a Double-dip Recession?

BY busadmin  August 18, 2010 at 4:39 PM EDT

Question: Paul, companies have been reporting large profits on sluggish revenue growth. The profits are from cost cutting efforts by managers who have accomplished this by reducing labor costs. Could the managers of companies be the cause of a double dip recession by laying off workers who are consumers who make up 2/3 of GDP? By laying off workers are managers ruining their companies’ future revenue growth by laying off workers who consume products of other companies and vice versa?

Paul Solman: That’s certainly a key danger emphasized by Keynesian theory, Jason, as we’ve tried to explain numerous times on the program and this page: that insufficient demand can lead an economy down a spiral of layoffs/less spending/lower profits/more layoffs. It’s an idea that predates Keynes (Malthus, the population paranoid, made a similar point) and it’s the justification for renewed stimulus spending, being debated as you read this.

But it’s a little unfair to blame managers, don’t you think? They’re just following the economic metric of the past few decades: maximizing shareholder value by maximizing profits. If you were a manager of a publicly traded company, wouldn’t you? Wouldn’t you have to?