Hot take on layoffs

[jducoeur]

A lot of discussion going around Mastodon asserts that the tsunami of layoffs happening right now is all about Bossism -- that people are being laid off to crush any idea that workers might have any power.

There's probably a bit of truth to that -- I'm sure that there are some billionaire-scum CEOs who have wet dreams of following Elon Musk's example of completely crushing the will of his employees -- but I honestly think that's probably mostly not it.

Much of this seems to be coming less from the corner office, and more from the investor set -- in particular, from activist investors who are buying into companies, and then massively pressuring them to cut costs, especially through layoffs. The question is, why?

The most obvious answer is of course the simplest: they think that stripping costs will goose the share price, so they can flip the stock for a profit. That's one form of traditional vulture capitalism (one of the nastier forms of market failure, IMO, since it rewards short-term gains over long-term value), and I'm sure some people are motivated that way, but AFAICT it's fairly dumb if done that crudely: most of what I've seen says that the boost to the stock is brief at best (and sometimes counter-productive) unless you couple it with root-and-branch restructuring that actually makes the company better. (Which very little of this appears to be doing.)

The conspiracy-theorist side of my brain (because who doesn't like a good conspiracy?) has been pondering another, much subtler motive: what if it's all about inflation? This is going to get a bit long, but hear me out if you're curious.

We're in the middle of the most serious period of inflation in decades. A lot of folks just brush that off, but it really is bad, particularly for the general populace. If prices are rising unstably, odds are pretty good that your income is going to lose ground unless you have enough leverage to keep getting raises that are equal or better than the inflation rate. (Which most folks don't.) It's easy to pooh-pooh inflation as a detail that only economists care about, but beyond a certain fairly modest and stable level, it tends to hurt most people over time.

The uber-rich don't care as much about inflation from that POV -- their money is mostly parked in assets, whose prices are theoretically rising at vaguely the rate of inflation, so it doesn't matter so much. But what they do care about is the Fed.

The thing is, the Federal Reserve has a mandate to keep inflation under control, so that the government doesn't wind up with riots on its hands. But they don't have many tools to use. Mostly, what they can do is raise interest rates, which tends to hurt stocks, in order to take some air out of the economy -- to cool things off. In a perfect world, they do this just enough to calm things down and reduce inflation; in practice, they usually wind up overshooting and causing a recession. (Not out of malice -- it's just hard.)

Now the thing is, what the Fed is mostly worried about is entrenched inflation. Supply shocks and stuff like that are bad, but if it's just a six-month spike and then things get back to normal, nobody really cares. The real issue is when:

• Labor (collectively) look at the current state of inflation
• They demand salary increases that are a little higher than that
• They have enough bargaining power to make it stick
• Management gives in (see "bargaining power")
• Management raises prices to match the extra salary they are paying
• Lather, rinse, repeat

Basically, you can wind up in a gradually-rising spiral of inflation, which is where the real damage tends to come in.

(A little bit of stable inflation is a non-issue. Most economists think that 2% of steady inflation is generally good; there's plenty of reason to believe it could be more like 4% without any harm. The main thing is that it's steady, and everybody knows that it's steady. The upward spiral is where it gets dangerous.)

Anyway -- like I said, the Big Money don't care quite so much about the rate of inflation, since they aren't salary-oriented. But what they do care about is those stock prices. Remember the stock prices? The Fed raising interest rates tends to hurt the stock prices. When stock prices go down, billionaires get poorer.

So what if the billionaire investors decided to cut out the middleman? The Fed's goal is to cool things off economically. So how would the investors do that themselves, without hurting their stocks so much?

Well, if the doom-loop scenario shown above depends on labor having power, why not just axe that directly? If you have a bunch of cynical billionaires who want to cool off the economy on their own, they might:

• Buy into a bunch of overheated companies
• Force management to lay off tons of people -- not because it makes the stock stronger, but just to increase unemployment
• Lots of unemployed people floating around will weaken the position of Labor, and deflate the economy
• Now you can argue to the Fed that they can stop raising interest rates, and leave your precious stock alone

That... doesn't not match what we're seeing today. It's kind of Machiavellian, but it kind of makes sense, which is more than I can say about most explanations for these idiotic layoffs, at least some of which don't appear to make any business sense.

Do I believe it? I dunno. Like I say in the title, this is very much a hot take. But I couldn't quickly come up with a reason to dismiss the idea, and it's sometimes worth exploring "evil" (or at least "cynical and self-interested") as an alternate explanation to "stupid".

Comments

[andrewducker]

It's an interesting idea.

But it may well be that the cost of borrowing money is higher right now, so companies don't want to fund things that aren't core to their business.

And if your people costs are about to go up by 10% then an easy way to bring that back down is to lose 10% of your people.

[hudebnik]

That's the take in this NY Times analysis: low interest rates encouraged over-hiring, and this year's rising interest rates encouraged companies to pull in their horns.

But I think there are other mechanisms at work too. Google, for example, is in no immediate cash crisis: it could have shut down some projects and shifted personnel to other projects (as it does regularly), it could have continued with its hiring-near-freeze, it could even have taken advantage of layoffs at other tech companies to hire some good people at a discount. But then investors might have fled from Google to the other tech companies that did announce layoffs.

[jducoeur]

Yeah. I mean, the over-hiring is certainly a big element (indeed, almost everyone says that explicitly in their public statements), and I'm sure that many companies are quietly over-leveraged at the moment. But the relatively consistent across-the-board 10%-ish cuts, even among companies that are still hugely profitable despite having grown a touch fast, is just plain weird.

Really, it's the degree of consistency across many companies that largely inspired this post. I'm entirely willing to believe that it's just everyone running with the herd and panicking together in reaction to interest rates, but it provides some room for entertaining speculation otherwise...

[danabren]

Math is hard. But I do know that when cat litter was $18 and is now $25, when eggs were $1.29 and are now $6, when pork ribs were $11 and are now $30, there is some back room bullshit happening. I don't have a fix, and I don't blame China (it's not their fault the USA moved everything overseas) but I do know that the American people are being blatantly lied to; "We have to raise prices because of inflation and also this is our most profitable quarter again!"

[jducoeur]

Granted, but keep in mind that there are a lot of factors here. For example, the egg thing probably has less to do with bullshit, or even inflation -- that one is heavily because we're in the middle of a massive avian flu epidemic that most people haven't even heard of because the media are more interested in sexy political stories.

And supply chain crises are still very much a part of this -- regardless of whether you blame China or not (I certainly don't blame the Chinese people, but I do blame de-facto-emperor Xi for a lot of mistakes), the reality is that the paroxysms caused by endless covid lockdowns, followed by an insanely casual reopening, have fucked things up worldwide.

So yes, there's a ton of greed involved here. But a lot of it is just facts on the ground, coupled with basic economics of supply and demand. (And, yes, companies in some industries -- especially oil -- taking absolutely full advantage of the mess.)

[danabren]

I knew about the avian flu, and the supply issues, but I am still going to dump most of the blame on megacorps gleefully picking over corpses while gazing heavenward in feigned innocence.

[cvirtue]

Agree re: eggs

And the rest is complicated.

[mindstalk]

I think avian flu has also increased chicken prices, which could spill over to pork as people substitute, especially with beef prices already high themselves.

[hudebnik]

I've been assuming it's all about stock prices, one way or another. Sundar Pichai said more than once in Monday's town meeting that "upper management would see significant cuts in their yearly bonuses", at which I and my work teammates wondered how those cuts compared to what those executives had made in stock appreciation just on Friday.

It seems clear that Google's decision to cut 12,000 jobs was directly driven by, or inspired by, or suggested by, investment company TCI's public statement in November that Google has way too many employees and pays them too much, and in specific should "lose at least 10,000 headcount". Apparently TCI has been corresponding with Sundar in the past week or two and basically saying "12,000 is a good start."

It also appears that the layoff is largely about numbers of employees: that they decided for some external reason that the number would be 12,000, and then started coming up with lists of names. The names are all over the place, from people with weeks or months on the job to people with fifteen years, from people with lousy performance reviews to people with excellent performance reviews, from software engineers to program managers to salespeople. Sure, Google wants to shift emphasis from some projects to others, but for the most part the technical differences aren't so big that existing employees couldn't be reassigned. But that wouldn't serve the goal of announcing a large, round number of layoffs. A near-freeze in hiring started last June, but that doesn't make headlines either.

There's also probably a certain amount of groupthink, both in the flurry of hiring during the pandemic and in the wave of layoffs in recent months. "All the other big tech companies have announced layoffs; if we don't, investors will think we have our heads in the sand."

The suggestion that the whole wave of layoffs is not a bunch of independent attempts to raise this or that company's stock price, but a coordinated effort to raise all stock prices (especially but not exclusively tech companies'), seems reasonable. That could happen in at least three ways: (a) as you point out, announcing layoffs almost always causes an immediate, short-term stock rise; (b) layoffs decrease labor leverage, which allows companies to hire more cheaply and make more profit; and (c) as you suggest, unemployment reduces inflation and increases downward pressure on the Fed. How the actual effect is distributed among these three mechanisms I don't know.

[jducoeur]

Yep. From what I can tell (fortunately, I don't really have any information that isn't public), the same seems to be true of Salesforce -- lots of external pressure to cut ~10% off the top, forcing hurried decisions that don't appear to be particularly performance or tenure based.

The thing that's mystifying is that it appears to be really, really dumb. All the evidence I've seen says that crude layoffs like this do little to help with stock prices beyond a relatively brief blip. If the investors want to quickly flip and move on, sure -- but AFAICT that's not all that common.

Reducing leverage is a plausible excuse, but if the companies are just going to turn around and rehire soon (which many have to -- if the fundamentals are still good, then they're going to find themselves over-stretched) then that is also probably idiotic -- yes, you can probably hire a bit more cheaply, but the turnover costs, and the less of institutional knowledge, probably mean that any cost benefit from that will take years to recoup, if ever.

Hiring freezes make lots of sense, but mass layoffs are probably, on the whole, just a bad idea...

[ilaine]

My father in law had a story after his company was bought by Raytheon. some exec came walking through and randomly pointed out people to be fired. My FIL wasn't one of them, but every person on a particular big contract was cut. Deadlines were not met because there was nobody left who knew about them let alone what to do. customer was irate. There were expensive penalties in the contract.

[alexxkay]

I have been observing for years that the biggest failure of modern capitalism is its relentless focus on this quarter's earnings, to the exclusion of any longer view of time. Which is how you wind up with so many decisions that are *guaranteed* to lose significant money down the line. Or, y'know, risk ending human civilization. As long as it happens further out than next quarter, it might as well be never.

[brooksmoses]

Yup. Though one of the things to note about this is that, at least at Google, the severance packages are such that there is probably not going to be much if any cost savings from this for most of 2023.

[kihou]

Yeah, based on behavior it does seem like Google's priorities were more (a) keeping layoffs from leaking in advance, (b) making it hard to predict from these layoffs who would be affected by future layoffs, and (c) having a big number to announce. Priorities were clearly not (a) short-term cost savings, (b) smoothing continuation of projects/planning, or (c) morale. Why these were the priorities, I can only speculate. It does seem short-sighted, but in a less clearly-understandable way than "this quarter's earnings".