How Jay Leno is Contributing to Our Awful Economy

On Monday, NBC Universal chief executive Jeff Zucker told weary investors at an industry conference that the network was determined to cut costs. His comments came as the company laid off 500 employees and annnounced it would move Jay Leno to its 10 pm weekday time slot. This makes sense for NBC: Every hour of scripted programming costs about $5 million — for fleets of writers, directors, cinematographers, actors, editors, and everyone in between. Leno’s compensation is hefty but not nearly $5 million an hour, and his live show costs a fraction of that. (Big-name stars come to hawk their latest films and books for free.) The Wall Street Journal estimates the move will save NBC as much as $25 million a week, minus Leno’s larger takehome pay.

It’s happening all over the economy now. Star players are being moved to where they can do the work of many others, who are being laid off in large numbers. The stars earn more yet the companies save big because they decimate payrolls. It’s done to improve profits and thereby calm anxious shareholders.

Somehow, though, it’s not working. Shareholders are still anxious — and becoming ever more so. Why? Because all the payroll cuts, multiplied across the economy, are reducing the capacity of consumers to buy goods and services. Which is why advertising budgets are being slashed. And with less advertising, NBC’s profits will continue to plummet even as it cuts its costs.

What’s rational for an individual company and wonderful for its star players turns out to be irrational for the economy as a whole. It’s not Jeff Zucker’s fault or any other executive armed with an axe. But this does suggest why smart government policies are critically important, especially now, and why a very large stimulus package is in the interest of everyone — including Jeff Zucker and Jay Leno.

Originally published at Robert Reich’s blog and reproduced here with the author’s permission.

2 Responses to "How Jay Leno is Contributing to Our Awful Economy"

  1. David   December 12, 2008 at 9:47 am

    Let’s go back to econ 101, which I’m guessing Prof. Reich hasn’t taught in a while…consumers can only buy goods from others to the extent that they produce goods themselves that can be given in exchange. (In the short term the government can confiscate goods from those that have them and distribute them to those without, but the total amount of consumption in an economy can only equal the total amount of production.) So the goal can’t be to allocate goods to people who have produced nothing of value themselves; the goal must be to maximize overall production. If one star worker can produce the goods of 500, that’s a huge win for the economy as it frees the 500 to go on and do something else (maybe even something that they are comparably better at). So for a couple months there will be a transition whereby the 500 former writers, directors, and actors who have been replaced by the one Jay Leno find work on other tv shows or change professions. Any interference by the government in mandating that they remain employed in the first place or subsidizing them to take a longer transition period is only bad for the overall economy as it decreases overall production. Also of note, with a fixed money supply the prices of all goods will go down as workers are re-allocated to more productive occupations- in aggregate more goods are producers, so each individual good costs a smaller percentage of the fixed money supply.By the logic of Prof. Reich’s article, we could have the 500 get to work straight away on building some pyramids so they maintain employment and are able to consume as much as the professor would like.What’s rational for an individual company, or individual agent, turns out to be rational for the economy as a whole.

    • Prof Rob   December 20, 2008 at 9:38 am

      With respect to David’s 12/12 comment, I suppose – yes – it is rational for the economy as a whole to let things take their own course – but of course you have to buy into the possibility of soup kitchens and Hoovervilles as a part of the natural rationality of an adjusting economy. But even conceding that, the two most interesting points of Mr. Reich’s are that (1) we’re in a classic social dilemma in which cutting spending makes each individual (or corporation) better off, but when spending cuts are pursued by everyone, it makes us all worse off, and (2) given such a down-spiraling effect, there are lots of Econ 101 reasons to try to reverse things by pump-priming spending through an economic stimulus. Unfortunately, no one actually knows whether the pseudo-Darwinian or socioeconomic activist tacks will give the more desirable result.