Cisco: When healthy companies fire people

One of the things that happens in a very bad economy is that even profitable, healthy companies lay people off. Cisco (CSCO) fired about 700 people at its headquarters yesterday, and cut more people at other locations.

Cisco is also doing well in the stock market. Its shares trade just over $20, not far from their 52-week high of just over $25. The stock is up more than 20 percent so far this year, out-performing the NASDAQ.

The government has not made any attempt to get the most healthy firms to keep employees that they can afford, which is probably a mistake. Weak companies rely on lay-offs to stay in business. Strong companies do it to improve margins and please shareholders.

The Obama administration and Congress have a unique opportunity to give tax credits to firms that are profitable and keep all their workers. This may seem like a way to get less revenue to the IRS, but that view is likely to be inaccurate. Some of the hundreds of people leaving Cisco will not be paying taxes anytime soon. They may default on mortgages and credit cards. In short, when added to the other people fired by successful companies, like IBM (IBM), they become a major drag on the economy.

Cisco did not have to lay-off a single person, but it did not have any incentive not to.

Douglas A. McIntyre is an editor at 24/7 Wall St.

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