The Governor of the Reserve bank, Ian Macfarlane, expressed concern last week that major Australian companies might react in a knee-jerk way to any signs of a downturn in the economy. He warned them against wielding the scalpel to workforces if profits looked like falling. He said chief executives might think that being tough with lay-offs would protect share prices because the market would think well of such conduct. It might be true if only one company did it, but if a lot of major companies did it, it would be an error. Earnings were meant to fall off in economic circumstances like those at present, but the more jobs were cut the deeper the downward cycle would be. There would be fewer people out there spending.
It was all standard economics. Indeed, similar words are used by economic historians to describe the lead into the Great Depression. But there are differences. We have better economic information gathering these days, so we are in a position to take pre-emptive action. And this is precisely what Mr Macfarlane has done. Last week the Reserve Bank reduced interest rates by a quarter of one per cent, and indicated another cut was possible early in the new year. That should encourage companies to accept that earning can fall in the short term without needing to cut jobs. However, in a fairly ruthless, market-driven world, we cannot expect individual boardrooms to act in the broad community interest, despite the urgings of the Reserve Bank Governor.
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