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Fat and happy in a bubble.

The middle and late 1990's appeared to be prosperous, of course. But that was fake money from the stock market bubble. Borrowed money, which is fake because it exists only on a promise to pay, drove inflated stock valuations which couldn't be cashed in all at once.

When the bubble burst, like other bubbles huge amounts of money which had existed only on paper just disappeared. Paper showing a lot of money became paper showing substantially smaller amounts of money.

During the bubble odd things happened, like AOL using the fake money in its stock valuation to buy Time Warner. You're right that companies also spent money on R&D and didn't worry about inefficiency because they thought they had the money to pay for it.

(The following concerns companies that didn't just disappear with the fake money.)

Then executives were faced with the major problem of what to do when the fake money drained away. They were faced with reductions in the amount paid to them. They went into crisis mode.

Many were paid on the basis of stock price. So they did anything they could to drive up or at least maintain the stock, including fraud in some cases.

They also became psychologists of Wall Street.
They noticed that money went to companies that laid people off. Wall Street believes that any number of people, no matter how few, can do all the work that needs doing.
So executives laid off massive numbers of people, including those who were productive in the company's real business, making/inventing and selling products.
They also made sure that any research was going to produce products that would gladden Wall Street instantly.

The executives took their huge payouts and left before the companies' weakness became too glaring.

Boards saw how the companies were being robbed, so they changed the executive compensation to profits in many cases.

When the economy improved companies could have made more money by expanding, hiring, and doing more R&D. But this would have lowered proofits initially. So executives sat tight, waiting to see how long the employees could be overburdened, and thus increase profits at no additional expenditure.
Hence the jobless recovery.

That group of executives left with huge amounts of money, and the next batch allowed companies to grow, but as little as possible.

The executives knew that dollars of personnel costs are hatred by Wall Street more than any others. And high stock prices don't hurt, even if they don't directly produce higher executive pay. So they outsourced everything possible when hiring was necessary.

When this group of executives departs there will probably be a change in executive compensation plans, and the economy will change in response. Because of the unrealism about value, including counting financial juggling as better than production, don't expect additional work by additional employees.

In short, the decline you're seeing is the result of an economy run primarily to maximize executive compensation.
Hey, if you're an executive, it's a wonderful world.

Posted by: Anton Philidor   Posted on: 06/03/05 You are currently: a Guest | Members login | Terms of Use

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