Pension funds and most other investors are getting - undeservedly - a large part of the blame for the drive by corporations to downsize, with the resulting layoffs of millions of workers. Critics claim demands by pension funds and other investors for investment performance have put undue pressure on corporations to raise their stock prices.
To some observers, this has meant companies have raised stock prices at any cost, casting out millions of hard-working employees, perhaps ruining their careers and, worse, their lives. Some 43 million jobs have been eliminated since 1979, more than a third of all the jobs in the U.S. work force today, according to a recent report. That figure is real. Are investors to blame for the job losses?
The ultimate issue is job growth, not loss. Some 70 million jobs have been created in the same period, a net gain of 27 million. If investors deserve blame for the job losses, then they deserve credit for the job gains.
Far from being evil, pension funds and other investors are a fount of good. But much of the news focuses on the job losses. AT&T Corp.'s elimination of 40,000 jobs is easier to see than the creation of 40,000 jobs by hundreds of small companies. And this drives an apparent wedge between the interests of employees and shareholders. It seems if shareholders gain, the employees must suffer.
In fact, a key measure of a dynamic economy is job creation - how quickly the businesses can expand or start. As some businesses decline, others form and grow. Economist Joseph A. Schumpeter called this process "creative destruction." For that, the economy has to stay vibrant and constantly transform itself. Otherwise, it risks declining.
Government can't create productive jobs, but it can create a climate that either encourages or discourages job creation. The recent excise tax proposal by some senators on any security sold within two years of purchase would ultimately hurt jobs. It would certainly discourage investors from putting their money into high-risk start-up companies. Investors put money into these companies hoping for long-term returns but knowing they can bail out if something goes wrong. The excise tax would increase the cost of making such an investment.
An excise tax would discourage investors from providing capital for the types of dynamic businesses an economy needs to stay vigorous; and it would discourage investors in companies like Apple Computer Inc. or Kmart Corp. that need to rebuild, causing even more job losses.
Sometimes a company like General Motors Corp. needs a long horizon and patient investors. But sometimes it needs impatient investors who will kick it into a needed change of direction, as they did a few years ago. Investors are more likely to risk money when they can get out without a penalty.
Government can foster job creation by fighting inflation, lowering and simplifying taxes, and reducing regulation. It cannot increase regulation and expect companies to create more jobs.
Pension funds and other institutional investors will serve workers best - not by investing in no-furlough but ultimately uncompetitive, declining businesses - but by sticking to their mission to invest for retirees in dynamic, competitive companies, and demanding efficiency from those companies. The best guarantee of employment for any worker is a dynamic, competitive, growing economy.
