Elon Musk has made all the headlines with his demand that the civil service shape up or ship out. The Trump administration has sent emails to more than 2 million workers with a request to know five things they did last week.
It was a mild request for a performance report that some people have said was a kind of “proof of life” test, too. The Trump administration suspects that quite a number of people on the payroll don’t even look at email, much less show up to the offices. Now they are finding out what’s what.
The actions are precisely what one would expect in the private sector, particularly in small businesses that have to economize on labor resources.
But what about big business and finance in particular? They too have become wildly blown up without justification, saddled down by insane bureaucratese, weighed down by HR overlords, top-heavy with C-suite management, and packed with credentialed do-nothings who expect high salaries as payment for their willingness to pretend to work.
The number of professional management positions has only gone up and up even as the labor-force participation rate has kept falling. Something is seriously distorted here.
Notice how all corporate layoffs affect management and almost never anyone with a customer-facing role? Starbucks is laying off 1,100 more people but, of course, exclusively from the management end, not from the retail end. This has been true for all large corporate layoffs over the past several years. All Fortune 500 companies have a massive problem with bloat. Everyone knows it.
Economic reality is forcing a change. It’s long past due.
To be sure, all this bloat in the private sector is of a different character from that of the public sector because it does not extract revenue by force, unlike the government. That said, it is still a result of terrible market distortions and has no underlying justification in economic reality.
How did we get here? Please permit me a slightly boring explanation that has to do with monetary policy, two words that cause people’s eyes to glaze over. In reality, the explanation is hugely important. The bottom line is that after 2000 and especially after 2008, the Federal Reserve drove interest rates to zero and below and kept them that way.
All the wild distortions were caused by making borrowed money as cheap as possible, even cheaper than saved capital. It became foolish for business just to run on a pay-as-you-earn basis. Only chumps did that. The corporate sector became wildly blown up mostly with high labor costs, as it habitually threw human beings with fancy résumés at every conceivable problem and wish list.
There seemed to be no end to the lavish funding that became available via soaring financials and cheap money. That made it easy to justify huge expenditures on fattened payrolls. Need marketing? Hire 20 new people for a new marketing team. Need analytics? Hire 20 people for a new analytics team. Need better branding? Hire 20 people for a new design team. And so on it went. Any new management buzzword conjured up the existence of new divisions and sectors, packed with people with spiffy résumés and good connections.
The crucial turning point was 2008 and its quantitative easing. The great fear at the time was that monetary easing would produce inflation. When that didn’t seem to happen, and most of the newly printed money ended up locked away in the Fed’s bank vaults, the concerns all evaporated. People figured that Fed Chair Ben Bernanke had performed some strange magic trick and all would be well.
What was actually happening was just as damaging as inflation, but it took a different form. The artificially low interest rates shifted the attention and direction of capital away from short-term projects and consumer-facing business toward huge capital expenditures in big business and finance.
Why is this? Consider the whole point of the interest rate. It is a price placed on money lent and borrowed. The more credit that is available because of saved resources (deferred consumption), the lower the rates. The less that is available to be lent, the higher the rate paid by borrowers. But not all loan contracts operate on the same maturity date. There are short-term rates and long-term rates. In a normal yield curve, the rates slope upward and to the right because of more uncertainty and risk.
The interest rate is as sensitive as any price to distortions. If eggs suddenly fell today to $2 per dozen in your local store, the word would spread rapidly and they would be sold out in a few hours. If all eggs had a price ceiling of $2, there would be widespread shortages. So too if they had a price floor of $20: There would be surpluses and rotten eggs everywhere. This is why market-based pricing is so important.
It works with interest rates, too. A rate that is artificially low subsidizes the borrower, particularly in capital goods industries that are looking to expand over longer time periods. A rate that is low due to Fed intervention creates the look and feel of an economy with excess savings to lend. In reality, such savings do not exist. A rate held low by a central bank creates what F. A. Hayek cleverly called “forced savings.”
From the 2008 crisis through the COVID-19 crisis, big business expanded as never before, adding to payrolls and creating a wholly new culture of work. Or rather, it created a culture of nonwork.
Books began to appear about the existence of thousands of jobs that didn’t seem real because they asked almost nothing from the job holder other than to comply with rules. The multiplication of roles seemed out of control, with whole teams created to monitor other whole teams that in turn were monitoring other teams.
The absurdities of this were finally revealed to the world with the COVID-19 pandemic lockdowns of 2020, which sent so many among the professional class home, where they earned the same salary and no longer even had to pretend to work. This went on and on for one, two, three, and four years, all in the interest of staying safe from a respiratory infection. The bloat born of low interest rates gradually mutated into a hypochondria that spread throughout whole sectors of the professional class.
The turning point came when Musk took over Twitter (which he later renamed X). He had seen the many online videos from workers there who bragged about how they showed up late, hung around the latte bar, took long lunches, worked out at the gym, and headed out early for a late night on the town to spend their six-figure salaries. All of this was and should be deeply offensive to any owner or manager, but nothing was being done.
When he showed up as the new boss, he went after the labor costs first and ended up sending four out of five people home. The rest of corporate America collectively held its breath to see what would happen. Many people intuited the results: The app would get better. But we waited for the proof. Sure enough, it arrived in weeks. The newly branded service was better than ever.
Many people at the time underestimated the implications of that real-time experiment. It was like a bomb went off throughout the whole of the corporate sector. At that moment, everyone knew the good times of endless labor-force padding were over. These days it is much harder to land six-figure no-show jobs, as many fired bureaucrats are discovering.
The structure of production in a modern economy with capital markets is a delicate and brilliant balance of time preferences, production plans, and elaborate financial indicators that can be easily disrupted by central bank interventions.
These interventions lasted nearly two decades and dramatically contorted the uses of scarce resources, ballooning the white-collar sector at the expense of everyone else. This is sometimes called financialization, and it is very real.
In the end, however, reality has a tendency to reassert itself regardless of these interventions. The reassertion has only begun to show itself. The private sector, too, is insanely bloated with management structures and useless employees and needs a good cleaning, just like the cleaning Musk is giving the public sector at the federal level now. It is coming to the state and local governments, too.
The private sector will not be spared this culling. Artificial intelligence will speed it up, but it would have happened regardless. The coming few years are going to serve as a great reminder of what is real and what is just the product of the hall of mirrors created by the Fed.
If you know how to make a great latte and smile for customers, you are secure. If you sit in a corporate office or at home and just find ways to pass the time while collecting a huge salary, you might have to face abrupt change, and soon.
