How Capitalism Will Save Us (13 page)

D’Souza emphasizes that these luxuries have proliferated not because there are more rich people, but because middle-income people have more buying power:

Look what’s happened to luxuries: they’re cheaper.
Wired
magazine found that the real, inflation-adjusted prices of a number of luxury goods and services have declined dramatically over the last twenty-five years. The inflation-adjusted cost of chartering a plane, for example, has declined nearly 40 percent between 1980 and 2004. An around-the-world cruise on the QE2 declined 45 percent. A BMW 3 series that cost $40,945 in 1995 was 25 percent less expensive in 2004. Even dinner at New York’s tony 21 Club, which cost an average of $114.66 in 1987, costs 23 percent less today in inflation-adjusted dollars.
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McMansions are a reflection of the fact that capitalism allows more people to enjoy luxuries once reserved for the rich. Isn’t that good—indeed moral? Over the last thirty years, free markets have made life better for people on all rungs of the social ladder. That doesn’t mean everyone will have the best of taste. The controversy over McMansions is emblematic of the social tensions that typically occur when large numbers of people move up the income ladder, causing discomfort to those both above and below.

Should there be laws against McMansion building in a free market? We will see in
chapter 5
that regulation of the free market often ends up producing unintended consequences. By restricting property sales and development, anti-McMansion laws can discourage prospective home buyers, bringing down property values in an entire neighborhood. Efforts to outlaw such homes have also been criticized for being arbitrary. Exactly how does one define a McMansion, anyway?

The story of Ira Rennert suggests that not only can McMansions be excessive, but the passions against them can be, too. Since building his monster house, Rennert has faced a bruising bankruptcy of a subsidiary and the loss of millions to Bernard Madoff. Meanwhile people are less angry about his home. A decade later, some of those who once opposed it admit they got carried away. A local newspaper editor, Dan Rattiner, so regretted the brouhaha that he actually published a letter of apology. It turned out that the house was a family residence and not a religious retreat, as Rennert had contended. Rattiner acknowledged that, thanks to
a “forest” later planted on Rennert’s property, even the most diligent curiosity seekers today can hardly see the place.

Love ’em or hate ’em, McMansion building began to slow even before the housing bust. People are increasingly opting for quality amenities instead of sheer space. In other words, the very free market that critics blame for McMansions has begun to encourage higher standards and a cooling of the trend toward monster homes.

C
apitalism could not have seemed more brutal during the 2009 recession, with companies like Caterpillar laying off tens of thousands. “These days mass layoffs are sadly unsurprising,”
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Randy Cohen, ethics columnist of
The New York Times Magazine
, grimly acknowledged. But are they ethical?

His view: “They are not, at least until more benign tactics have been exhausted. Caterpillar may not simply pile a bunch of unwanted workers into a van, drive across town, drop them on the doorstep of a flourishing company, ring the doorbell and run away.”
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Cohen’s belief is shared by many—and it is especially understandable at a time of increased mass layoffs and high unemployment. Layoffs carried out by highly paid executives can be especially difficult for some to accept. University of Arkansas finance professor Craig Rennie found that CEOs who laid off employees between 1993 and 1999 got 13 percent more in total pay than the CEOs of firms that did not have layoffs.
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Layoffs are immensely disruptive to lives, families, and communities. They seem cruel and unfair. And they are all of these things. However, not
to lay off people means a company or industry may not survive—in either the near or the long term. And, sooner or later, there will be fewer jobs.

We see this playing out today in the collapse and downsizing of the Detroit automakers. Their inability to lay off people is one of the reasons why GM and Chrysler ended up in bankruptcy in 2009—and why a government bailout was necessary to keep them alive.

One widely acknowledged reason that the U.S. auto industry lost its competitive edge was the burden of billions of dollars of “legacy costs”—including union-pleasing programs that force companies to hang on to unneeded employees. The
Wall Street Journal
told of the Jobs Bank, a win-dowless room where employees who otherwise would have been laid off are paid six-figure salaries to sit idle. The program cost the auto industry as much as $2 billion annually.

Traumatic though they may be, layoffs can often be the only way a company can survive in a competitive market. A corporation may have to cut its workforce after revenues decline in bad times. Or else it may need to reallocate resources—shut down one division so it can start a new one that requires a new workforce with different skills. Either way, the cuts protect the vast majority of jobs.

Of course, not all layoffs succeed in saving companies. Even when they do, that may be cold comfort if you’re unemployed. So what if a layoff helps the guy sitting next to you keep his job? But if CEOs could not respond to economic conditions, you would be less likely to get another job because fewer new ones would be created elsewhere.

The ability of U.S. companies to respond to a changing market and lay off people is one reason our economy is more flexible, better able to respond to change—and, as a result, a far more robust job creator than the sluggish nations of Western Europe. A study by the International Monetary Fund in 2000 found that “strong systems of job protection,” which make it more difficult to lay off people, tend to decrease a nation’s ability to create new jobs. The United States, with its flexible workforce, was far and away the biggest job creator. Nations with worker-protection laws, such as Germany and France, ranked on the bottom half of the list. Sweden was dead last. IMF researchers observed that America’s level of job creation was especially remarkable, considering the high level of low-skilled immigration to this country.

Until the 2007–2009 economic slowdown, U.S. unemployment had been lower than in most developed countries.

Allowing companies to lay off people during a recession can help a company bounce back and enable a downturn to end sooner. History provides numerous examples of corporations that have made major comebacks and hired new people after laying off thousands. One recent example: Boeing, which closed plants and laid off thousands in order to divert resources into the design and production of its 787 Dreamliner. Despite production delays, the plane has been a major financial success, possibly the biggest-selling plane ever, outselling competitor Airbus.

An even more compelling example is IBM. For decades, Big Blue dominated the mainframe computer market and was enormously profitable. It was immensely powerful—the Microsoft or Google of its day. But in the 1980s the company faltered because of the rise of mini computers and PCs. By 1993, IBM had one foot in the corporate graveyard, having lost $16 billion in three years. A desperate board of directors brought in an outsider, Lou Gerstner, who had formerly turned around American Express credit card operations and RJR Nabisco. Among his moves, Gerstner laid off sixty thousand workers. He fundamentally changed the company. IBM became profitable and innovative. As the company’s fortunes improved, Gerstner was able to add new jobs. By the time he retired in 2002 he had hired sixty-five thousand people. Not only did Lou Gerstner save IBM, but the company had more employees at the end of his tenure than it had at the beginning.

Ethics columnist Randy Cohen acknowledges the necessity of layoffs in hard times. But he asserts that they shouldn’t be “a panicky response to an economic downturn.”
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A company should try everything else first—cutting stockholder dividends and executive pay, for example.

Cohen admits that Caterpillar took some of these steps before its own layoffs. Robert Sutton, author and management professor at Stanford School of Engineering, believes Cohen’s criticisms are unrealistic.

Sutton admits that he once shared Cohen’s view—until he studied the Real World challenges faced by corporate management. He recalls: