Capitalism, Unions, and Offshoring (Part VI): Recession

In the last installment of this series, Egalitarius’ management instituted several aggressive cost-cutting measures to offset the cost of more expensive unionized labor, and Meritocratus’ management moved its production facilities offshore.

This scenario starts before Egalitarius’ strike begins.

As both companies fought for market share, the global economy was hit by a crippling recession. Most industry analysts projected widget demand to drop across the industry by 10% in 2012.

Investors began withdrawing capital from widget companies, resulting in a market multiple decline of 1.0x across the industry. Egalitarius and Meritocratus now traded at 8.5x and 11.0x 2012 earnings, respectively. Egalitarius stock was down nearly 43% on the news, while Meritocratus shares fell by a little over 29%.

The recession spared neither company. However, both firms were likely to survive the crisis intact.

At least, of course, until Egalitarius’ workforce decided to strike…

Below is a spreadsheet showing a comparison of both companies after unionization of Egalitarius’ workforce, Egalitarius’ aggressive cost-cutting measures, the offshoring of Meritocratus’ workforce, and the 2012 recession.

Source: ©2011 Reflections of a Rational Republican

In the next installment of this series, we will explore the lessons learned from these six scenarios.

About Sean Patrick Hazlett

Finance executive, engineer, former military officer, and science fiction and horror writer. Editor of the Weird World War III anthology.
This entry was posted in Business, Finance and Economics, Investing, Mathematics, Policy, Politics, Predictions, Taxes, Unions and tagged , , , , , . Bookmark the permalink.

12 Responses to Capitalism, Unions, and Offshoring (Part VI): Recession

  1. Pingback: Capitalism, Unions, and Offshoring (Part V): Offshoring | Reflections of a Rational Republican

  2. Ya know, Sean, if we wanted to know about a fantasy world where right-wing ideas make sense, we could all go read Ayn Rand or watch the classic Jack Abramoff film Red Dawn

    • I’m just showing mathematically why corporations behave the way they do. It is fairly logical. To get corporations to hire more people domestically, they need the right incentives to do so. Unfortunately, the corporate tax code is structured in such a way that makes doing business overseas more profitable. My view is if you lower the corporate tax rate, but close tax loopholes, you can create more jobs here. In fact, I think this is the Obama Administration’s current policy.

      Then, of course, there are the unions…

      • The problem with the economy right now isn’t our near-lowest-in-the-OECD corporate taxes, it’s low demand.

        Two hypothetical firms on a hypothetical planet are a poor substitute for grappling with actual data on unions & taxes from the actually existing industrialized world.

        • Where our corporate taxes stand in the OECD is irrelevant. We aren’t shipping jobs to Europe — it is too expensive. What is relevant is that US corporations shift production to emerging market countries that offer them tax holidays. Malaysia is a key example.

          If you are looking for the correlation of high union membership rates and lackluster economic performance, I have plenty of data in my posts that have the “unions” category tag.

        • Malaysia is cheaper because it’s poorer, not because of tax differences.

          Taxes are, to be sure, part of the incentive structure that firms face. But our low tax rates are not the main issue with our economy right now– it’s the absence of demand.

      • “My view is if you lower the corporate tax rate, but close tax loopholes, you can create more jobs here.”

        I agree with that larger point.

        I’m only saying that creating imaginary unions that demand (and receive!) 20% pay raises stacks the deck and avoids the more difficult policy questions here.

        • Admittedly, this exercise is highly stylized. Even if the unions struggled for a won a meager wage increase of 1% over a number of years, ceteris paribus, the firm would be worse against the competition.

          The main purpose of this exercise is not to demonize either side, but to present how a rational management team would conduct operations based purely on financial decision-making.

          I don’t like offshoring or unions, but until corporations have better structural incentives, they will continue to gravitate toward the former and shun the latter.

  3. Vern R. Kaine says:

    Perfect opportunity for someone on the left, then, to post 6-part comprehensive rebuttal, complete with detailed numbers on the companies’ financial performance.

    If not, I’d even settle for a display of any company tied to a large union, or any company in California that’s NOT an Internet company, showing that they’re actually thriving financially under our current tax code.

    Even though hypothetical, I think Sean’s example shows more reality than what the left can ever produce when it comes to business.

  4. Pingback: Capitalism, Unions, and Offshoring (Part VII): Lessons Learned | Reflections of a Rational Republican

  5. Pingback: Private Equity: A Force for Good, or Evil? | Reflections of a Rational Republican

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