The Jack Welch Effect – The New York Times

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If you look at historical data on the U.S. economy, you often notice that something changed in the late 1970s or early ’80s. Incomes started growing more slowly for most workers, and inequality surged.

David Gelles — a Times reporter who has been interviewing C.E.O.s for years — argues that corporate America helped cause these trends. Specifically, David points to Jack Welch, the leader of General Electric who became the model for many other executives. I spoke to David about these ideas, which are central to his new book on Welch (and to a Times story based on it).

How do you think corporate America has changed since the 1980s in ways that helped cause incomes to grow so slowly?

For decades after World War II, big American companies bent over backward to distribute their profits widely. In General Electric’s 1953 annual report, the company proudly talked about how much it was paying its workers, how its suppliers were benefiting and even how much it paid the government in taxes.

That changed with the ascendance of men like Jack Welch, who took over as chief executive of G.E. in 1981 and ran the company for the next two decades. Under Welch, G.E. unleashed a wave of mass layoffs and factory closures that other companies followed. The trend helped destabilize the American middle class. Profits began flowing not back to workers in the form of higher wages, but to big investors in the form of stock buybacks. And G.E. began doing everything it could to pay as little in taxes as possible.

You make clear that many other C.E.O.s came to see Welch as a model and emulated him. So why wasn’t there already a Jack Welch before Jack Welch, given the wealth and fame that flowed to him as a result of his tenure?

This was one of those moments when an exceptional individual at a critical moment really goes on to shape the world.

Welch was ferociously ambitious and competitive, with a ruthlessness that corporate America just hadn’t seen. In G.E., he had control of a large conglomerate with a history of setting the standards by which other companies operated. And Welch arrived at the moment that there was a reassessment of the role of business underway. The shift in thinking was captured by the economist Milton Friedman, who wrote in The Times Magazine that “the social responsibility of business is to increase its profits.”

Was Welch’s approach good for corporate profits and bad for workers — or ultimately bad for the company, too? You lean toward the second answer, based on G.E.’s post-Welch struggles. Some other writers point out that many companies have thrived with Welch-like strategies. I’m left wondering whether Welchism is a zero-sum gain for shareholders or bad for everyone.

Welch transformed G.E. from an industrial company with a loyal employee base into a corporation that made much of its money from its finance division and had a much more transactional relationship with its workers. That served him well during his run as C.E.O., and G.E. did become the most valuable company in the world for a time.

But in the long run, that approach doomed G.E. to failure. The company underinvested in research and development, got hooked on buying other companies to fuel its growth, and its finance division was badly exposed when the financial crisis hit. Things began to unravel almost as soon as Welch retired, and G.E. announced last year it would break itself up.

Similar stories played out at dozens of other companies where Welch disciples tried to replicate his playbook, such as Home Depot and Albertsons. So while Welchism can increase profits in the short-term, the long-term consequences are almost always disastrous for workers, investors and the company itself.

Welch was responding to real problems at G.E. and the American economy in the 1970s and early ’80s. If his cure created even bigger problems, what might be a better alternative?

An important first step is rebalancing the distribution of the wealth that our biggest companies create. For the past 40-plus years we’ve been living in this era of shareholder primacy that Friedman and Welch unleashed. Meanwhile, the federal minimum wage remained low and is still just $7.25, and the gap between worker pay and productivity kept growing wider.

There are some tentative signs of change. The labor crisis and pressure from activists has led many companies to increase pay for frontline workers. Some companies, such as PayPal, are handing out stock to everyday employees.

But it’s going to take more than a few magnanimous C.E.O.s to fix these problems. And though I know it’s risky to place our faith in the government these days, there is a role for policy here: finding ways to get companies to pay a living wage, invest in their people and stop this race to the bottom with corporate taxes.

American companies can be competitive and profitable while also taking great care of their workers. They’ve been that way before, and I believe they can be that way again.

More about David Gelles: He was born in New York and got his first full-time job in journalism working for the Financial Times, where he interviewed Bernie Madoff in prison. His book about Welch is called “The Man Who Broke Capitalism.” He recently spoke about the media’s role in celebrating Welchism.

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THE WEEK AHEAD

What to Watch For

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