As was mentioned in the earlier incarnation of this forum, it is instructive to look at Amazon as a counterpoint to the prevailing tendency of Wall Street to favor short-term gains over long-term investment. I’m not sure how they got away with low or nonexistent earnings for so many years besides having a founder with large share holdings, but now all their investment is really starting to pay off. Amazon is poised to dominate in multiple verticals and I would not be surprised if they become the most valuable and profitable (non-SOE) company in history. I would be very eager to imbibe any insights you could distill from them.
The company I work at currently, UTC, recently spent several years and billions of dollars developing a new engine platform for Pratt & Whitney. The stock performance has been mediocre, but I wouldn’t characterize it as being punished by Wall Street. I think they did a good job on a few fronts: educating analysts on the opportunity; attracting a new investor base (it is substantially different from when this investment cycle started); and being a conglomerate that was able to largely self-fund with cash flows from other business units. So, I think this is another company worth studying to try to write a playbook for how to convince investors to be patient and allow companies to focus on their long term strategy, planning and investing for the future rather than next quarter’ earnings report.
I think this is a classic tragedy of the commons situation. Individually each company benefits from reducing headcount and suppressing wages to boost profits, but our overall economy suffers from unemployment, underemployment, economic inequality, and a consumer base with lower disposable income. I’m not sure what the tipping point is, but at some point I think this phenomenon could seriously contract the economy and accelerate a deflationary spiral.
Addressing this problem requires meaningful industry collaboration and/or government intervention because only coordinated action can overcome this dilemma. And frankly, I think only government has the power and resources to make a real impact on increasing labor demand and improving labor supply. Policies could include tax incentives; changing accounting rules to favor labor expenses; mass employment programs such as those during the Great Depression; a mandatory draft and reimagining of the military’s mission to include vocational training and post-service employment readiness; universal basic income; expansion of SBA and other lending programs to provide abundant and inexpensive capital for job-creating investments; block grants for state and local economic development (with elimination of zero-sum competition for corporate relocations); large investment in infrastructure not only to create jobs but also to improve people’s ability to commute and participate in larger labor markets; free or highly subsidized college tuition and vocational training; programs to relieve caretaking burdens (child, elderly, disabled) so caretakers can go back to work; sensible immigration reform; enabling people receiving public assistance, including public housing, to easily transfer benefits between states in order to facilitate labor mobility; creating large grant programs to fund technology commercialization from universities and government labs; and requiring public disclosure of employee headcount and related data for all entities public and private.
In sum, I think it is challenging to overcome the raw microeconomic calculus of profit maximization that places downward pressure on employment at individual firms, but with the right macroeconomic policies in place to incentivize new firm creation, labor participation, and employee education, a more robust labor market and confident consumer base can emerge.
I think we are experiencing underinvestment in three areas: corporate R&D, infrastructure, and human capital. The first two are pretty well understood so I want to focus in on human capital. My personal experience is that the vast majority of companies do not have the willingness — and thus the capability — to train employees. We have more unfilled job openings than ever because companies are unwilling to hire smart, motivated people and invest in teaching them the skills they need to be productive. They want every job candidate to exactly fit the job description. Anecdotally, I know of several job openings at various companies that have literally been unfilled for years. Think of the opportunity cost and economic waste! During this time they could have hired someone, addressed their skills gap, and been more productive. This unwillingness to train people also contributes to widening inequality. You have a group of people who are lucky or smart enough to get some experience under their belt in a desirable skill set early on in their careers and then become part of a scarce supply of labor for those jobs. The demand keeps going up but the supply remains steady so their wages increase rapidly while equally bright people who didn’t get on the career track early enough are shut out due to the Catch 22 of no one hiring someone without prior experience.
Companies are externalizing the cost of training and workers are often picking up the tab. People who cannot afford to pay for certifications, degrees, training, or education fall behind. This system is also particularly brutal for entrepreneurs. The cost of entrepreneurial failure is compounded when the labor market is unwilling to absorb ex-entrepreneurs who do not fit the mold of employees they are looking for. And if these entrepreneurial folks are unable to cycle through corporate America to recover, inject their ingenuity into companies, and try again to build new businesses then we all suffer from the loss of corporate innovation and new business formation.
We have seen in recent years the advent of coding academies and I am hopeful that the emerging academies with success-based fees will expand rapidly. These academies do not require up-front payment and instead take a percentage of the students’ salaries at their new jobs. These companies are cleverly taking advantage of the arbitrage opportunity created by companies’ unwillingness to invest in human capital, and I sincerely hope that their business model is emulated across every industry, role, and skill set where there is an inefficient labor market heretofore unable to invest in human resources and bridge the gap between potential and productivity.