Why this recession will be differentPosted: February 28, 2008 | |
There seems little doubt that the US economy is in some form of recession. Whether that recession is impacting all the states and all parts of the economy is another matter. The auto industry seems to be getting hit while tech remains relatively strong. Perhaps that has something to do with the fact that modern cars will last decades, whereas computers still seem to need replacing every three or four years. Anyway, that’s a whole other subject.
What I’ve been giving thought to is how this period of economic change will differ from the time of the dot com crash. One item really stands out to me and that’s stock options. When the dot com market was booming tech companies were giving staff relatively large amounts of stock and lower basic salaries. As a result when the crash happened staff were left with big tax bills on stock that wasn’t worth anything and salaries that were artificially low. This made many employees nervous about accepting options as a form of compensation even in companies that had good prospects. Couple this with changes in accounting rules that made the idea of issuing stock options less attractive and you had a situation where companies have been forced to look at more traditional rewards. They have also had to sell people on the idea that the job they were offering would actually be worth taking.
So if we assume that the market does take a beating at stocks drop 15%, the impact on the economy could be quite different. Last time around, those with stock in public companies were trying to sell fast before their tax burdens grew too great. This time around the magnitudes are so different that the rush to sell shouldn’t be as dramatic. Also, this time around people are earning higher basic salaries. This has two implications: 1. People are less dependent on stock for compensation so a bad day on the market won’t mean as much 2. If companies need to trim costs they shouldn’t need to lay as many people off in order to achieve the same cost saving.
As you can probably tell, I’m no economist but I do believe that the relative absence of stock options in the current economy could have a big bearing on how a recession plays out.