Lessons from GE

No central banker wants to be caught dead talking about deflation or depression, and Fed head Ben Bernanke is no different. Although he knows more about what happened during the Great Depression than most people, because it was his field of economic study, he would rather not talk about d-words like depression and deflation but the Federal Reserve has embarked on the great experiment of our time, quantitative easing; also known as monetization of the debt; also known as creating money out of thin air - to buy U.S. Treasuries in a desperate effort to stop deflation.

During depressions, many businesses make a fatal mistake: They lay off employees. Some businesses have no choice; if the product or service is related more to quantity than quality, then perhaps there is no alternative. But many businesses are far better served by keeping their employees and simply reducing compensation. That way, they can continue to serve customers with full quality and stand ready to lead the competition when the next economic expansion arrives. Surely most employees would rather endure an across-the-board salary cut than risk being laid off.
In the 1930s, General Electric polled its workers on this very question, and the majority agreed that they would rather endure salary reductions. A few years later, when the economy recovered, GE had all of its employees in place and did not have to spend years recruiting new people. It shot out of the gate in full operating mode. Moreover, the company had made progress improving designs and making plans during the lull. When business picked up, so did salaries. In the end, it was win-win for everyone.

Take, for example, a news service that needs to reduce costs. Instead of cutting staff by 50 percent, thereby forcing a radical reduction in the scope of the news coverage, it would make more sense to cut salaries by 50 percent and retain full service. If lowering the price of the service would keep the subscriber, viewer or listener base steady, or if reducing the cost of advertising would keep the support base steady, it would be better to make one of those moves rather than cutting staff. Either program would maintain quality and serve to keep the service in the forefront among news providers. Inflexible competitors would go out of business, thereby helping the survivors.

If an airline is in trouble, it should not cut routes and service while holding prices and salaries up. It should cut salaries and prices and continue serving the highest possible number of customers. That way, it will be the carrier of choice for many fliers when the economy returns to expansion mode. Again, everyone wins, including the employees.

This idea would work well for any business that does not have long term contracts—such as with labor unions or high-level employees—guaranteeing salaries. Even in such a case, negotiating reductions would be smarter than going bankrupt. This approach could work for many kinds of businesses: airlines, manufacturers, newspapers, shippers and sports teams, to name a few. If you work for a business for which this plan would serve, mention it to those in management. Even they would probably prefer a reduction in income to none at all.