Layoff Capitalism

My cousin Norman is a retired housing developer who has faced many economic ups and downs during his successful career. How did he handle layoffs?  “I didn’t,” he said. “I avoided them because I always wanted to keep my team together. We found a way. We cut back on time and salaries, if necessary, rather than let anyone go. Loyalty mattered to me…and to my business.”

Jeff Bezos, not a cousin, is the second richest man in America. He has a net worth of $161 billion accumulated primarily from his ownership of Amazon. How does he handle layoffs?  With gusto!  This year so far 27,000 Amazon employees have been canned, and another 240 are set to be laid off at the Washington Post — which he also owns. 

These comparative differences are not just a question of enterprise scale.  There are much deeper cultural and structural issues at play, as well as changes in public policies.

Norman is a relic, a child of the 1950s. Back then mass layoffs were viewed as a sign of management failure, something to be avoided at all costs. Sure, steep recessions might force temporary layoffs, but not during periods of economic prosperity.    

Bezos embodies the spirit of today.  During good times and bad, mass layoffs are a basic feature of our financialized economy. In researching Wall Street’s War on Workers, our Labor Institute team estimated that since 1996 about 30 million working people have experienced mass layoffs (defined as 50 or more workers let go at one time.)

That kind of capitalism first took hold in earnest in the 1980s.  Often, it is called Reaganomics, or trickle-down economics, but really a more accurate name would be layoff capitalism – a virulent new set of structures and cultural norms in which loyalty to workers means nothing at all.

I came upon an historical artifact -- a 1983 New York Times article, “Lifetime Employment, US Style” — from the period when the worker-oriented business model was rapidly being replaced by mass layoff capitalism.

“High unemployment has put greater importance on job secu­rity, and the handful of large companies—including Eli Lilly, I.B.M. and Hewlett-Packard—that shun layoffs has drawn some of the attention that usually goes to Japan for its “lifetime employment” policies. In fact, because major Japanese compa­nies only guarantee jobs for men, and workers may be forced to retire in their 50’s, some American companies provide greater job security. American plans protect all employees and permit later retirement.”

The article also notes that “most no-layoff programs have been in place for decades and are part of a program aimed at using workers as efficiently as possible.”

In the article, Sheldon Weinig, chairman of Materials Research Corpo­ration, claimed that lifetime employment was a major part of his business model, along with heavy investment in research and development.

But clearly the pressure was mounting to weaken such long-term commit­ments to workers. “Mr. Weinig faced constant criticism,” the New York Times reported. “Stockholders lectured him on his responsibilities to maximize profits.

A cover story in BusinessWeek a few years later, “The End of Corporate Loyalty?” (1986), captures the accelerating mass layoff trend, especially the impact on salaried workers.

“What’s new is the growing willingness of some of the most successful corporations to slash jobs. In troubled industries these staff reductions are often needed to survive. But plenty of healthy companies are paring away, too.”

What brought on this employment carnage? 

The deregulation of Wall Street unleashed a torrent of leveraged buyouts and then wave after wave of stock buybacks.  In a leveraged buyout, the Wall Street corporate raider (today we politely call them hedge funds and private equity companies) uses borrowed money to buy up a corporation and then sticks the debt on the purchased company. Layoffs usually follow to increase the cash flow, which is needed to service that debt, and to pay handsome fees to the raider.

John Shad, Reagan’s Securities and Exchange Commission (SEC) chair, identified this disastrous trend in 1984 when he said, “The more leveraged takeovers and buyouts now, the more bankruptcies tomorrow.”  (The Reagan administration made sure Shad didn’t act on his warning.)

Meanwhile Shad unleashed a plague upon the U.S. economy by legalizing stock buybacks through a new SEC rule -- 10b-18. In effect, this permitted corporations to use as much of their earnings as they wished to purchase back their own shares, something that formerly was considered stock manipulation. A stock buyback reduces the number of shares in circulation thereby making each share more valuable. Economist William Lazonick refers to this as “a license to loot.”

What does this have to do with mass layoffs?  During this period, CEO pay changed from salary and bonuses to stock incentives.  Also, during this period a new breed of “activist investors” (actually stock sellers) pushed their way onto boards of directors demanding more cash distributions for themselves.  These maneuvers easily could have been halted by government agencies like the SEC, but instead nothing was done.  As a result, CEOs and these aggressive stock sellers used stock buybacks to drive up the share price and thereby enrich themselves as they quickly cashed out.   

How big a change was this?  In 1982, before rule 10b-18, only two percent of corporate profits went to stock buybacks.  Today, buybacks are approaching a whopping 70 percent of corporate profits!  

How does a CEO find more and more cash for stock buybacks, and therefore higher share prices to boost his or her own compensation based on stock incentives?  Mass layoffs, of course.

There may still be a few more like my cousin Norman out there who care deeply about preserving worker loyalty and livelihoods. But the odds are you won’t find them in large corporations or even in non-profit colleges and universities.  Today’s corporate culture demands that top executives show they are tough enough to terminate workers whenever they think it is necessary, and they alone define what is necessary. 

The cover story will always be that layoffs now are absolutely necessary to protect the jobs of everyone else going forward. The heavy debt load from mergers and leveraged buyouts is just viewed as a given – that’s the way modern business is conducted. The stock buyback game is rarely, if ever, mentioned, but we should always remember that the vast majority of layoffs are a policy choice favoring the stock sellers and CEOs ahead of workers.

And we wonder why working people are increasingly distrustful of our basic governmental and corporate institutions?

Les Leopold is the executive director of the Labor Institute and author of the forthcoming book “Wall Street’s War on Worker s: How Mass Layoffs and Greed Are Destroying the Working Class and What to Do About It.”

All proceeds from the book and from Substack subscriptions go to the Labor Institute’s Political Economy for Workers educational projects, including a program for Amazonians United. If you pre-order Wall Street’s War on Workers (from Amazon) here you will be helping to provide stipends for Amazonians United workers to take time off from work to attend these programs.