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Hiring Makes the Economy Go Round

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“It’s made round to go round.” I don’t know if that counts as a proverb, but it was something I heard a lot regarding money—and the art of spending it—when growing up in Scotland. At its core, it suggests that cash is for one thing, and one thing only: spending. And it encapsulates the simple notion that spending is what makes the economy go round.

There are two problems with that saying in this day and age—one major and one minor. First, obviously, is that the majority of money is no longer round. Second, as a New York Times report made clear this weekend, it’s no longer going round either: while many companies are reporting bumper profits during this earning cycle, revenues are still slumping. What gains companies are making are based largely on cost cutting—with a large proportion of that coming from reductions in head count.

Of course, no one can fault companies for managing to raise profits during a downturn—and after 2008 and 2009, it’s a joy to see companies reporting any profits at all. But while doing right by their shareholders in the short term, the Times report suggests that firms are setting the economy up for a fall over time:

“In some ways, the ability to raise profits in the face of declining sales is a triumph of productivity that makes the United States more globally competitive. The problem is that companies are not investing those earnings, instead letting cash pile up to levels not reached in nearly half a century.”

By hoarding cash, companies are effectively sitting on their hands and attempting to wait out the current unrest. While that’s not necessarily a bad tactic on an individual basis, collectively it induces an element of stagnation into the economy: markets can’t grow if people aren’t earning. And people can’t earn if companies don’t hire or invest in new infrastructure and product development.

The Times piece does find some kind of a positive spin for the defensive behavior, with one source pointing out that resurgent companies such as Ford are “shrinking the business to a size that’s defendable, and growing off that lower base.”

But the unemployment figures speak for themselves at the moment: if corporations don’t start hiring—and putting the money they’re stockpiling to use—there’s no chance that work forces will recover.

Executives, then, are faced with a choice: play it safe, or put your company’s cash—and some willing Americans—to work. The latter option might seem like a risk at a time like this, but bear that saying about cash in mind: the economy can’t go round without it.

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Written by Phil Stott

July 27, 2010 at 1:23 pm

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