CASINO

Putting the MGM corporate axe in perspective

TAGs: Editorial, MGM, MGM Resorts

Putting the MGM corporate axe in perspectiveAustrian School economist Friedrich Hayek called the idea that man can shape the world around him according to his wishes the “fatal conceit”. The idea is echoed in many different disciplines and religious philosophies, particularly Buddhism or meditative philosophies generally, which question the idea that man really knows anything.

I’m not going full Buddhist monk here because on a very limited and controlled scale, it does seem apparent that humans can know certain very circumscribed things. Not completely, but well enough to, you know, build certain reliable things that act in predictable ways, like this computer. But even in the most careful and exact experiments in the hard sciences, the level of detail in execution of experiments must be extremely fine-tuned. Every control must be exact in order to test how a single variable changes the outcome.

The problem arises when we try to replicate the style of the scientific method without adhering to its extremely exacting standards. We see a perceived injustice, A, link it to something else that strikes us as ‘probably’ connected, B, and then just assume that if we change B, only A will be affected and for the better and everything else will be fine. We gather “studies”, send out links that nobody reads, and sound like we know what we’re talking about. In reality though, A and B are only a tiny part of a nearly infinite interconnected array of other interlocking causes and effects that are chaotic in nature and cannot come close to ever being controlled as they are in a hard science lab.

The late physicist Richard Feynman talked about this in the early 1980’s, doubting the pseudoscientific conclusions of the social sciences in general because while they follow the forms, they haven’t actually demonstrated anything with any scientific rigor. See this short two minute video for the basic idea here.

So let’s talk about MGM axing 2,000 employees as our example here. MGM is one infinitesimal part of an enormously chaotic system called the global economy, or “the market”. One could reasonably (at least superficially in terms of public perception) posit that firing 2,000 employees is unjust and wrong and look to blame it on some other thing perceived as unjust and wrong. I could say something like, “Instead of MGM pouring $2B into a share repurchase program, the money could have been used to retain these employees.” And then just leave it at that.

Maybe so. But there are consequences to that. We’re talking about the butterfly effect here, a chaotic system of infinite causes and effects stemming from every single human being involved in the market. What would have happened if, instead of buying back shares, MGM would have just retained 2,000 employees? Well, all else being equal the share price would have been lower than it is now, affecting who knows what down the line. Someone has a margin call somewhere that spills into some other market, causing even more layoffs somewhere else. We do not know. Expenses end up higher than otherwise, preventing investment in other places, pushing others out of jobs that would otherwise have been created or at least retained. It’s completely impossible to determine. And if jobs are cut somewhere else because something didn’t happen that otherwise would have, the causal chains are too convoluted so you just blame it on something else or say it’s unrelated or just completely ignore it, not even realizing that there is a connection in the first place.

Alternatively we could blame the labor unions instead of share repurchase programs. In June last year, MGM agreed to a pay raise for 24,000 workers of somewhere between 2.8% and 4.2% a year for 5 years, after being threatened with a strike. That’s a lot of money. Assuming an average hourly wage of $23 an hour for a Las Vegas unionized worker, that’s about $210M in pay raises over 5 years. How many jobs would that have saved? We cannot know.

What we can know though is that unlike share repurchase programs, the agreement with the unions last year was not entirely voluntary. Threatening to violate private property if you’re part of a union is legal, and actual violence is often tolerated by law enforcement, whether by picketing or outright destruction of property in a strike. Would 2,000 layoffs have been made had the implicit threat of violence last year not been state-sanctioned? Maybe, maybe not.

Or is this all just a matter of perception? MGM has a total of 83,000 employees (page 7) as per its latest earnings release. Last year they had 78,000. Now they’re letting go 2,000, which means they’re still up 3,000 for the year. Had MGM hired only 3,000 last year instead of hiring 5,000 and then cutting 2,000, would anyone be upset now? Or would MGM be lauded for refusing to fire any of its loyal workforce? Might MGM now be more reluctant to hire people in the future if it isn’t absolutely sure it needs the added workforce in order to save some negative press down the road? We do not know. But it is possible. How much is knocking MGM now costing future jobs? Is it at all? To imagine we know for sure is the fatal conceit.

Here are some other facts we can actually know. SG&A expenses surged 25.6% last year, way more than any other operating expense save corporate expenses up 30%, 66% of which was due to Empire City Casino acquisition related costs, and those weren’t even the costs of the actual acquisition, but transfer taxes and regulatory advisory fees, all state-related stuff.

Speaking of the Empire City Casino acquisition, we can go full circle here. $260 million of that deal was financed by MGM common stock, which was at the price it was at partly due to share buybacks. So much of that money ended up in the hands of the Empire City Casino people. And where did they put it? Maybe some of them sold some of it, or sold something else because of their new holdings and bought some biotechnology stock that helped finance some medicine through clinical trials to find a cure for some disease or other, and then you have MGM buybacks ultimately saving lives. Or not. But nobody talks about even the possibility because it’s not readily apparent to our extremely short attention spans and willingness to follow causal chains.

The point is, it’s impossible to make value judgments on voluntary corporate decisions because nobody knows where they lead and who or what is affected in the end. All we can do is try to determine for ourselves if we think they will make money or lose money for the company and speculate accordingly. Maybe we will be right, maybe wrong, but in the end it’s our own money staked and only ourselves who will lose if we are incorrect. If we take the path of more force, more laws, more regulations to try to combat a free choice like layoffs that we personally think is unjust, we are entering the Butterfly Effect with unknown consequences. As long as we are aware of this, then fine. It is legitimate at least to speculate that because of these layoffs, the company will be worse off, or better off, or whatever. Place your bets, and if you win, you win. But pretending to know that MGMs decision makes more people worse off than otherwise and calling for more intervention comes at our own peril. Ultimately, only the market decides who is right through profit and loss.

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