Lowe’s layoffs expose the rot at the heart of our economic system
Lowe’s, one of Canada’s largest hardware retailers, announced this week it was closing 34 of its stores across the country.
You might expect that store closures signalled trouble with the company. Far from it. Last year Lowe’s brought in $3.4 billion USD in profit, and its share price has spiked over the past couple days.
Lowe’s is a healthy, growing, profitable business. So why are hundreds — could be thousands — of workers about to lose their job?
The answer is simple: our economic system pushes corporations to do whatever it takes to eke out an extra dollar of profit in the short-term. If a CEO of a company can scrape up a few extra bucks for the people who own the company, they do it. Even when it means firing thousands of people, shutting down stores, and undermining the long-term economic health of the business.
This is not how most people understand business to operate. Sell something, make a profit, hire workers, grow — that’s the standard story of a successful business. In this telling, everyone appears to win. But this isn’t how the corporate world actually functions anymore.
What actually happens in our economy often starts with something called private equity. A private equity firm is a business with a big pool of money. They take a chunk of that money and borrow cheap credit against it to do a “leveraged buyout” of another business. Usually they target a large company that is profitable but growing slowly.
Once they own the company, the private equity firm installs a friendly management team who will do what they say. Then they saddle the newly-acquired business with much of the debt they took on to buy it in the first place.
The new managers then go about “cutting costs” — what this means in reality is firing people, closing stores, and delivering a lousier product.
In the short term, this all works great: profits go up. But in the long term, customers get sick of bad customer service and products. They take their business elsewhere. Meanwhile, the business can’t invest in growth or expansion because of their new debt load and it enters into a death spiral. Its losing customers and can’t invest to bring them back.
This process of decay can take years. By now, the private equity firm that ran the business into the ground has likely resold the company at a healthy profit. In a worst case scenario they have taken fees and profits every step of the way and still come out ahead.
If this story sounds familiar, it might be because this is exactly what happened to Sears. Throughout the 90s, Sears was a profitable retail business, though it struggled to compete with emerging competitors. An American hedge fund owned by Eddie Lampert purchased it in 2005, and immediately set about “cutting costs”.
Lampert’s cuts boosted profits in the short-run, but customers began leaving Sears because of bad customer service and dilapidated stores. At the same time, Lampert’s fund loaded Sears up with $2.6 billion in debt and took back $400 million of interest and fees.
The end result of this strategy? Sears lost nearly $6 billion in its last 5 years. Lampert closed 1,000 stores and fired 175,000 people. Then Sears filed for bankruptcy, and welched on its pension obligations. It left thousands of retirees with nothing.
Lampert and his hedge fund made out fine, of course, with any losses from the bankruptcy more than offset by the interest and fees they took from their “loans” to Sears.
The Lowe’s story is somewhat different, but contains important similarities. Across our economy, corporate owners are sacrificing the long term health of the business and the economy to create short term profits for themselves.
“Get rich quick, and screw everyone else” is the mantra of capitalism in 2019. Nobody benefits from this except for the tiny number of people who own the vast majority of corporate shares.
But there is no law of physics that says profitable businesses need to lay off workers and close stores to become a little bit more profitable. There is no commandment written in stone that says the principles of vulture capitalism are the only ones on which an economy can be organized.
The closure of 32 Lowe’s stores is not a natural disaster, impossible to predict or prevent. It’s a perfectly natural consequence of how we have organized our economy. If we want these things to stop happening — if we want our economy to be guided by principles other than “make the rich even richer” — then we need to change the rules of the game.
We have forgotten that the economy is not imposed upon us by some higher power, infallible and unchangeable. We make the rules, and we decide how it works and who it benefits. Right now, we have setup our economy to distribute most of the money to a very small number of people at the top. We could decide otherwise.