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Nothing Wrong with Cost-Cutting

In today’s Wall Street Journal a reader expresses an opinion that I frequently encounter in discussions of free trade. The letter is about a recent WSJ story on the Electrolux Co.’s decision to close a plant in Greenville, Michigan, and produce instead in Mexico.

Here’s the letter’s core:

From the Jan. 20, 2004, edition of the Detroit Free Press: “The Greenville plant is a profitable operation, and Electrolux is a profitable company. During intensive talks on how to save these jobs, the company never once claimed this plant — or the corporation as a whole — was losing money. They just said they aren’t making as much money as they need to suit their corporate strategy.”
The latest balance sheet of David Sikora’s company, as posted by Yahoo Financial, reflects $47 million of current assets (mostly cash and short term investments), $10 million in current liabilities and no long-term liabilities. He has a very strong balance sheet and profits, yet he is outsourcing jobs and transferring them to India. His earnings statement reflects a 85% gross profit, which is extremely high by any measure.

William Kingston, CPA
West Bloomfield, Mich.

There are errors-in-reasoning here aplenty. One is that the letter-writer ignores what will happen tomorrow to Electrolux’s balance sheet (not to mention its income statement) if it bypasses today’s opportunities to lower its costs, leaving to its rivals an exclusive access to these opportunities. These opportunities will not remain unexploited. Competition abhors a vacuum.

More fundamentally, I would ask this letter-writer the following: When you buy a new car, do you seek out the best deal? Or do you pay a few thousand dollars more than you have to pay just because you can afford to do so? When mortgage-interest rates fall, do you refinance your mortgage even though you obviously can afford to pay the higher interest rate?

Each of us does indeed sometimes knowingly pay more than we must – say, to help a friend who is a local retailer. But none of us spends our money in this way as a general policy. Why should business firms be held to a different standard of (faux) morality?

In fact, it might be more dangerous for firms to bypass cost-cutting opportunities than it is for consumers to do so. In chapter five of his book The Gifts of Athena, Joel Mokyr argues that competitive pressures to adopt best-practice techniques are more acute on business firms than on households.