Look into the background of any complaint about modern American working life and you'll see a common thread. Things started to go downhill, or uphill if you're a C-suite executive or shareholder, starting roughly around 1980. Insanely high CEO pay? 1980. Income inequality? 1980. Wage stagnation?
But various experts including the author of this book, Face Intentionally Obscured, make a pretty compelling case to lay a lot of the guilt for our modern working woes at the feet of two men. These two men. One was the brains of the operation who dreamt up a new, more cutthroat version of American capitalism.
And the other made that dream a reality at General Electric, one of the nation's most iconic, wealthy, successful, powerful companies of all time. This guy, perhaps more than any other, is responsible for shaping the economy into what it is today. For us to learn why work sucks so much today, let us first understand when it used to not suck and why. Frankly, a nice work environment is the exception, not the rule.
19th century factories were nightmarish dystopian meat grinders for most of the population. Meanwhile, robber barons in industries like oil, rail, banking, sugar, etc. became so wealthy that we literally called this era the Gilded Age. This started to change in the 20th century.
There were efforts in the 19th, but really by the 20th, in fits and starts and with a whole lot of effort on the part of working class people, Americans secured better pay and working conditions. And even executives themselves seemed to agree that a solid, prosperous middle class was a good thing. World War II really cemented this shift. So many other industrialized nations who used to compete with the United States were absolutely decimated by the war.
So the US basically had the global economy on its knees. Lacking any real competition, American corporations became huge juggernauts that could afford to be extremely generous. Side note, Whether this post-war we're all in this together vibe was because executives had a genuine interest in maintaining the social fabric, because they just needed the plebs to buy a lot of products, or just because they had plenty of profit going around that they could be super generous, is up for debate.
Ascribing intent is a near impossible task, especially to historical figures like what was in Henry Ford's heart when he decided to shorten work hours and increase pay in 1914? Impossible to know for sure. And why in a 1953 annual report did General Electric brag about how much it paid in taxes and how 37% of all of its sales were paid in taxes? went to employee pay and benefits?
Because they were genuinely proud of it or because it helped their reputation or some other reason? Can't know, probably a mixture. The point is that post-war corporate culture was pretty different than it is today.
At places like IBM, General Motors, Coca-Cola, and our poster child for this video, General Electric, the culture was cradle to grave. You get a job there and you're pretty much set for life. Your wages will rise with inflation, much of company profits went to salaries or benefits or research and development, and unless you do something egregiously bad, you won't fear unemployment. In fact, between the 1920s and the 1990s, IBM didn't lay off a single employee.
You might be retrained or shuffled around, but you would always have a job until you chose to retire. Across the whole American economy and at these individual companies, this ethos worked really well. Productivity skyrocketed, wages rose with inflation, and GE specifically was extremely successful.
Thanks to consistently substantial investments in research and development, GE's products like toasters, fans, fridges, TVs, light bulbs, garbage disposals, and more filled houses across the nation and the world. So again, they're all generally super successful and super generous with their employees. Regardless of where all that generosity came from, it was just a fact.
But what's not up for debate is the absolute disdain with which our first star of the show regarded all this corporate welfare. It's time to meet Milton Friedman. Friedman was a 20th century economist primarily based at the University of Chicago.
He was the vanguard of a group of economists who had some thoughts on corporate welfare and the execs who practiced it. he wrote that they were preaching pure and unadulterated socialism. This whole op-ed is absolutely scathing and worth a read, so peep the description box below for that and all of our other sources. But the summary is this.
In Friedman's view, business people who think they have any obligation other than making as much money as possible for shareholders need to grow up and put on their big boy ties. If that idea doesn't shock you, viewer in 2024 and beyond, That's because it's basically the prevailing economic theory in boardrooms across the country today. This line right here, the one that tracks the value of a company's stock, it must go up at all costs. It is all that matters. It's such a powerful dogma that there's a common myth that CEOs are legally bound to put shareholder profits above literally any other consideration.
They're not. So back in 1970, Friedman's idea was anathema to how a lot of business people saw themselves and their responsibilities. It flew in the face of general corporate culture. And then...
The rest of the 70s happened. People who want to work but can't find jobs. They will reduce oil production.
That decade put a ton of pressure on American companies to change up what they were doing and how. Inflation, the Vietnam War, repeat oil shocks, super high domestic spending, and new competition from other countries like Germany and Japan who had finally reached a stable post-war recovery. So the stage was set for a dramatic shift in how American companies went about their business, and the man in the starring role put Friedman's ideas into brutal practice when he took over as CEO of General Electric in 1981. Meet Jack Welch. Longtime employees at GE who were banking on the cradle-to-grave philosophy were in for a rude awakening upon Jack Welch's accession to CEO.
Welch planned on moving fast and breaking things in pursuit of skyrocketing profits. literally breaking things. Like the time he inadvertently caused the explosion of a GE plastics factory because he wanted development of a new plastic to go faster.
Yeah, I was some smart fellow and I popped it. I mean nobody died, but when factory explosion guy becomes your new boss, you better gird your loins. Welch quickly implemented a series of reforms to cut costs, which I've broken up into four overarching categories.
And brace yourselves for number four. First up, layoffs. GE employment peaked in 1980 at 411,000 people.
By the end of 1983, Welch had shed 72,000 of them. Again, if you're watching this in 2024, this is not shocking to you. We get news of mass layoffs, usually in the tech industry, what feels like every other day. But at the time, this was wild and not even strictly necessary because GE was doing pretty well.
But this concept stuck and morphed into the practice known as Rank and Yank, or ranking all your employees in terms of their productivity, and firing the bottom 10%. Next step? Outsource as many tasks as possible.
and preferably offshore them to cheaper locales. Workers who helped GE function, like janitors, cafeteria workers, security, etc, were replaced with cheaper, non-unionized contract employees. Reagan had already broken the air traffic controller union earlier in the decade, so the general power was on the side of the anti-union folks.
Like them. Even better than outsourcing was offshoring. In the late 1980s and early 1990s, GE's overall employment levels pretty much stayed the same, But its geographic distribution changed drastically as Welch chased cheaper wages, fewer regulations and tax breaks.
Third method, gobble up companies like Pac-Man. Welch kicked off a new era of mergers and acquisitions, especially in GE's finance division. This book's author describes GE's finance division as a bunch of disparate financial undertakings that don't make a ton of sense for a titan of manufacturing like GE, but that Welch nonetheless cobbled together into a Hydra-headed monster.
This helped push GE's stock to new heights and keep it there, but it also made it into a bizarre and unstable conglomerate of random businesses that overshadowed the core of what GE always did well, manufacturing. One example from after Welch left, GE became a major holder of subprime mortgages right before the 2007-2008 crash. And finally, step four, stock buybacks. This is a phenomenon by which companies give their own stock prices a boost by buying back their own shares using whatever profits they have available.
It's a simple, direct way to get the line to go up and make the shareholders happy. Par for the course today, but again, not- back then. From 1934 to 1982 this practice was essentially outlawed.
It wasn't explicitly illegal per se, but the Securities Exchange Act of 1934 barred companies from doing anything to manipulate their own stock price. So buying back their own stocks could draw the ominous eye of the Securities and Exchange Commission. Kind of like a fiscal regulation edition of the Eye of Sauron.
So it was just safer to not do it. And it also was just considered bad business. One CEO of US Steel described it as eating your own mother.
Or in less colorful language, sacrificing long-term stability in favor of short-term gain by not investing in the people or products that actually make the company great. But then remember, the 1970s were a really tumultuous time that put a lot of pressure on companies to adapt and change. So, Ronald Reagan won the presidency in 1980, and in 1982 he appointed a guy named John Shad to run the SEC. That appointment led to this.
Rule 10b-18. It sounds dreadfully dull, but it's really important, so hear me out. Rule 10b-18 provided a safe harbor for companies who wanted to do stock buybacks.
And boy howdy did Jack Welch take advantage. His announcement in 1989 of a five-year plan to spend 10 billion dollars on stock buybacks made big news. In part, because the financing for it came partly from all the savings that he got from laying off all those people earlier in the decade. The line went up, but the overall cost was high. That's 10 billion dollars that GE didn't spend on employee benefits and pay, or critically, research and development.
During Welch's tenure and beyond, GE's reputation as the gold standard of domestic products crumbled. A quick sidebar here, stock buybacks are controversial even among economic experts. Here, a professor at the London Business School makes the case for buybacks in an article that's both short and simple enough for non-experts like myself to follow.
The gist is that stock buybacks can kind of run the gamut from careful and useful, i.e. by providing ultimately more value to the company than investments elsewhere would, to careless and damaging, i.e. by focusing way too much on just like next quarter's earning reports. So when we're all duking it out in the comments below this video, let's try to remember that little bit of nuance. Sidebar over.
Okay, so those four steps explain how Jack Welch made GE into a profits just machine, but also partly explains why it began to fall apart shortly after he retired in 2001. The last 20 years have not been kind to GE for a variety of reasons, including an eventual split into three different companies in 2021. But the general consensus is that Welchian economics set GE up for a fall. But Welch's methodology had already spread so far and wide throughout the 1980s and 1990s that it carried on well after he retired. See, other companies really wanted the Welch touch.
Any executives who had worked with or for Welch, or who had attended his Management Development Institute, became so popular that a company's stock prices often got a boost just by announcing that they were hiring one of his protégés. A few of Welch's most famous underlings include Robert Allen of AT&T, who oversaw the elimination of 100,000 jobs, Lou Gerstner at IBM, who oversaw the company's first layoffs in 70 years in the 1990s when he let go of 60,000 people, and I'm not kidding with this one, chainsaw Al Dunlap of Scott Paper. He cut more than a third of rank-and-file employees, three-quarters of executives, and half of R&D. before selling out to Kimberly-Clark and taking a $100 million payout for himself.
Get your bag, Chainsaw Al. Other Welch protégés wound up running a lot of other companies you've heard of, such as 3M, Arctic Cat, Chrysler, Fiat, Goodyear, Honeywell, Rubbermaid, Stanley, Discovery, Polaris, TiVo, Albertsons, Home Depot, Boeing. And many more. Just a flock of mini-welches spreading the gospel of shareholder supremacy across the land. Easy evidence is in the amount of money spent on stock buybacks each year.
One analysis in 2018 estimated that if we reverted back to the proportions of corporate profits that went to employees that was common in the 1970s, every worker in the US could get a $3,500 bonus. Or there's the flurry of mass layoffs taking employees and social media by storm. So yeah, if you ever find yourself frustrated over stagnant wages or get a stab of panic that you're gonna get fired at any moment, or feel some rage bubbling up inside when you hear about stock buybacks or nine-figure CEO bonuses, thank Milton Friedman and Jack Welch.
Kind of. It's all nuance. There's only so much detail we can get into in a video on the internet, so peep the sources below if you want more nuance than you could shake a stick at.