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Short-Circuited by Layoffs?

By John Tamny

Amidst all the hand-wringing in the past week over Circuit City's announcement that it would lay off 3,400 workers, no one bothered to consider the employment prospects of its other employees, which will arguably be enhanced by the company's pre-emptive move. That 39,000 Circuit City workers kept their jobs apparently wasn't deemed fit to print by the major media.

What the New York Times editorial page missed along with other large print outlets that decried the move, is that companies thankfully exist for the pleasure and hoped-for profit of their shareholders. Some would call this heartless, but without the savings offered up by investors, there would be 42,359 people out of work, rather than 3,400.

For those laid off, no one, including the Circuit City executives who had to make the painful decision, is pleased when people are put out of work. Companies are created to expand, and if the layoffs are indicative of reduced growth prospects for Circuit City, everyone within the firm will face the negative economic consequences of that slower growth.

It should also be remembered that even if we lived in what is only a theoretical utopia where shareholders and profits didn't matter, Circuit City would have done neither those laid off nor the broader economy any favors had it kept them on the payroll for purely charitable reasons. Labor is wasted and the overall economy less vibrant when people are employed in unproductive ways. If, as is assumed, increased use of Internet shopping made the workers superfluous, the existing Circuit City employees along with those who sadly lost their jobs will ultimately be better off.

The reasons are twofold. The money saved by Circuit City won't simply vanish into thin air; instead it will serve as capital for new, job-creating investments within the firm, or it will accrue to the wages of those still employed. If the move is cheered by investors, Circuit City and its employees will further benefit from more capital provided by investors seeking opportunities where capital and labor are utilized most productively.

For those laid off, capital always flows to economies and companies where it's treated best, and deployed most profitably. That U.S. firms can hire and fire with profits in mind is a signal to markets of proper capital utilization such that U.S. capital accounts (the flipside of our trade deficit) are regularly growing. Without capital, there is no job creation, so if companies kept workers on without regard to the broader economic implications for the firm, investment in those companies would soon dry up.

Indeed, it is due to the willingness of U.S. companies to shed workers that U.S. unemployment levels are so low; 4.4 percent as of last Friday. If this is doubted, one need only check the unemployment rates of Germany (7.5%), France (8.6%), and Belgium (11%) where the firing of workers is so difficult that companies are reluctant to hire at all.

In an editorial on Monday, the New York Times said "Circuit City seems to have missed the point;" that contrary to assumptions suggesting Americans increasingly embrace the online shopping experience, there is a big move afoot by Apple and others to create "experience stores" that offer the consumer "customer service provided by knowledgeable salespeople." If this is true, then companies like Circuit City will ultimately pay with reduced market share, and the supposedly knowledgeable workers it let go will be even better off for new employment opportunities offered by firms who decide more workers is better when it comes to expanding profits.

Ultimately the shareholder will happily decide who is right, as investors offer up capital to those companies which strike the correct balance between customers and salespeople. In the week since the layoffs were announced, Circuit City shares were off 8 cents, meaning the jury on its decision is still out. That customers drive the profits that investors crave, it seems the customer will be the biggest beneficiary over the long-term.

John Tamny is an editor at RealClearMarkets. He can be reached at jtamny@realclearmarkets.com.

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