00:00:00
Look into the
background of any complaint
00:00:02
about modern American
working life
00:00:03
and you'll see a common
thread.
00:00:05
Things
00:00:05
started to go downhill
or uphill
00:00:06
if you're a C-suite
executive or shareholder.
00:00:08
starting roughly around
00:00:10
1980, insanely high CEO pay?
00:00:12
1980. Income inequality.
00:00:14
1980.
00:00:15
Wage stagnation. 1980.
00:00:17
And the weakening of unions.
00:00:19
1980.
00:00:20
You can point
to a lot of culprits
00:00:22
for this erosion of middle
class wealth and power.
00:00:24
And there are a couple
of common ones.
00:00:26
Ronald
Reagan is a common one.
00:00:27
The way he busted unions.
00:00:29
The economy generally
focusing
00:00:30
on outsourcing
and globalization, etc..
00:00:32
but various experts,
including the author
00:00:34
of this book, face
00:00:35
intentionally obscured,
00:00:37
make a pretty
compelling case
00:00:38
to lay a lot of the guilt
00:00:39
for our modern working woes
00:00:41
at the feet of two men.
00:00:42
These two men.
00:00:43
One was the brains
of the operation
00:00:45
who dreamt up a new,
00:00:46
more cutthroat version
of American capitalism.
00:00:49
And the other made
that dream a reality.
00:00:50
General Electric,
one of the nation's
00:00:52
most iconic,
wealthy, successful,
00:00:54
powerful
companies of all time.
00:00:55
This guy, perhaps more than
any other, is responsible
00:00:57
for shaping the economy
into what it is today.
00:01:00
For us to learn
why work sucks
00:01:01
so much today,
Let us first understand
00:01:03
when it used to not suck
and why.
00:01:05
Frankly,
a nice work environment
00:01:07
is the exception,
not the rule.
00:01:08
19th century factories
00:01:10
were a nightmarish dystopian
meat grinder
00:01:11
for most of the population.
00:01:13
Meanwhile, robber
barons in industries
00:01:14
like oil, rail,
00:01:16
banking, sugar, etc.
00:01:17
became so wealthy that we
literally called this era
00:01:20
the Gilded Age
00:01:21
This started to change
in the 20th century.
00:01:23
There were efforts
in the 19th,
00:01:24
but really by the 20th,
00:01:25
in fits and starts and
with a whole lot of effort
00:01:28
on the part of working class
00:01:29
people, Americans secured
00:01:30
better
pay and working conditions.
00:01:32
And even executives
themselves
00:01:33
seem to agree
that a solid, prosperous
00:01:36
middle
class was a good thing.
00:01:38
World War Two
00:01:38
really cemented this shift.
00:01:40
So many other industrialized
00:01:41
nations who used to compete
with the United States
00:01:44
were absolutely decimated
by the war.
00:01:46
So the U.S.
00:01:46
basically had
the global economy
00:01:48
on its knees, lacking
any real competition.
00:01:50
American corporations became
00:01:51
huge juggernauts
that could afford
00:01:53
to be extremely generous.
00:01:55
Side note,
00:01:55
whether this postwar
00:01:56
“we're
all in this together” vibe
00:01:58
was because executives
had a genuine interest
00:02:00
in maintaining
the social fabric
00:02:01
because they just needed the
00:02:02
plebs
to buy a lot of products
00:02:04
or just because
they had plenty of profit
00:02:06
going around
that they could be super
00:02:07
generous is up for debate.
00:02:09
Ascribing intent is a near
impossible
00:02:10
task, especially
to historical figures.
00:02:12
Like what was in Henry
Ford's heart when he decided
00:02:14
to shorten work hours
and increase pay in 1914?
00:02:17
Impossible to know for sure.
00:02:18
and why in a 1953
00:02:20
annual report
did General Electric brag
00:02:22
about how much it paid
in taxes and how
00:02:24
37% of all of its
00:02:25
sales went to employee
pay and benefits
00:02:27
because they were
genuinely proud of it
00:02:28
or because it helped their
00:02:29
reputation
or some other reason.
00:02:31
Can't know.
00:02:31
Probably a mixture.
00:02:32
The point is that postwar
corporate culture
00:02:34
was pretty different
than it is today.
00:02:36
At places like IBM,
00:02:37
General Motors, Coca-Cola
and our poster child
00:02:39
for this video,
General Electric,
00:02:41
the culture
was cradle to grave.
00:02:43
You get a job there
and you're
00:02:44
pretty much set for life.
00:02:45
Your wages will rise
with inflation.
00:02:47
Much of company profits
went to salaries
00:02:49
or benefits
or research and development.
00:02:50
And unless you do something
egregiously bad,
00:02:52
you won't fear unemployment.
00:02:54
In fact, between the 1920s
00:02:55
and the 1990s.
00:02:56
IBM didn't
lay off a single employee.
00:02:58
You might be retrained
or shuffled around, but
00:03:00
you would always have a job
until you chose to retire.
00:03:02
across
the whole American economy.
00:03:04
And at these individual
companies,
00:03:06
this ethos worked
really well.
00:03:07
Productivity skyrocketed,
wages rose with inflation,
00:03:10
and GE specifically
was extremely successful,
00:03:12
thanks to consistently
substantial
00:03:13
investments
in research and development.
00:03:15
GE's products like toasters,
00:03:17
fans, fridges, TVs,
light bulbs, garbage
00:03:19
disposals
and more filled houses
00:03:21
across the nation
and the world.
00:03:22
So again, they're all
generally super successful
00:03:24
and super generous
with their employees.
00:03:26
Regardless of where all that
00:03:27
generosity came from,
it was just a fact.
00:03:29
But what's not up for debate
is the absolute disdain
00:03:31
with which our first star
00:03:33
of the show regarded
00:03:34
all this corporate welfare.
00:03:35
It's time to meet Milton
00:03:37
Friedman.
00:03:38
Friedman
00:03:39
was a 20th century
economist,
00:03:41
primarily based at
the University of Chicago.
00:03:43
He was the vanguard
00:03:44
of a group of economists
00:03:46
who had some thoughts
on corporate
00:03:48
welfare and the execs
who practiced it.
00:03:51
He wrote that
they were preaching pure
00:03:53
and unadulterated
00:03:55
socialism, This whole op ed
00:03:56
is absolutely scathing
and worth a read.
00:03:58
So peep the description
box below for that
00:04:00
and all
of our other sources.
00:04:01
But the summary is this.
00:04:02
In Friedman's
view, business people
00:04:03
who think
they have any obligation
00:04:05
other than making
as much money
00:04:07
as possible
for shareholders, need
00:04:08
to grow up and put on their
big boy ties.
00:04:10
If that idea doesn't shock
00:04:12
you viewers in 2024
and beyond,
00:04:14
that's
because it's basically
00:04:15
the prevailing
economic theory
00:04:16
in boardrooms
across the country today.
00:04:18
This line right here,
the one that
00:04:20
tracks the value
of a company's
00:04:21
stock,
it must go up at all costs.
00:04:24
It is all that matters.
00:04:25
It's such a powerful dogma
that there's a common myth
00:04:27
that CEOs are legally
00:04:29
bound to put shareholder
00:04:30
profits above literally
any other consideration.
00:04:32
They're not.
00:04:34
Back in 1970,
00:04:35
Friedman's idea was anathema
to how a lot of business
00:04:37
people saw themselves
and their responsibilities.
00:04:39
It flew
in the face of general
00:04:40
corporate culture,
00:04:41
and then the rest of
the seventies happened.
00:04:44
People want to work but
00:04:45
can't find jobs...
00:04:46
They will reduce
oil production That decade
00:04:48
put a ton of pressure
on American companies
00:04:50
to change up
what they were doing
00:04:51
and how The Vietnam
00:04:52
War, repeat oil shocks,
00:04:54
super high domestic
spending and new competition
00:04:56
from other countries
like Germany and Japan,
00:04:57
who had finally reached
a stable postwar recovery.
00:05:00
So the stage was set
for a dramatic shift
00:05:02
in how American companies
went about their business.
00:05:04
And the man
in the starring role
00:05:05
put Friedman's ideas
00:05:07
into brutal practice
when he took over
00:05:09
as CEO of General Electric
00:05:11
in 1981. Meet
00:05:13
Jack Welch.
00:05:14
Longtime employees at GE
who are banking
00:05:16
on the cradle
to grave philosophy.
00:05:18
We're in for a rude
awakening upon Jack Welch’s
00:05:21
ascension to CEO.
00:05:22
Welch planned on moving fast
and breaking things
00:05:24
in pursuit
of skyrocketing profits,
00:05:26
sometimes literally
00:05:27
breaking like the time
he inadvertently
00:05:29
caused the explosion
of a GE Plastics factory
00:05:32
because he wanted
development of
00:05:33
a new plastic to go faster.
00:05:34
I was some smart fellow
00:05:37
and I popped it
00:05:38
I mean, nobody died.
00:05:39
But when factory explosion
00:05:40
guy becomes the new boss,
00:05:42
you better gird your loins.
00:05:43
Welch quickly implemented
a series of reforms
00:05:45
to cut costs,
which I've broken up
00:05:47
into four overarching
categories.
00:05:49
And brace yourselves
for number four.
00:05:50
First up, layoffs.
00:05:52
GE employment peaked in 1980
00:05:54
at 411,000 people.
00:05:56
by the end of 1983.
00:05:58
Welch
had shed 72,000 of them.
00:06:00
Again, if you're
00:06:01
watching this in 2024,
00:06:02
this is not shocking to you
when you get news of mass
00:06:05
layoffs, Usually
in the tech industry,
00:06:06
what feels like
every other day.
00:06:08
But at the time,
this was wild
00:06:09
and not even strictly
necessary
00:06:11
because he was doing
pretty well.
00:06:12
But this concept
00:06:14
stuck and morphed
into the practice
00:06:16
known as Rank and Yank.
00:06:18
or ranking
all your employees in terms
00:06:19
of their productivity
and firing the bottom 10%.
00:06:23
Next step Outsource
00:06:24
as many tasks as possible
00:06:25
and preferably offshore
00:06:27
them to cheaper locales.
00:06:28
Workers
who helped GE function,
00:06:29
like janitors,
cafeteria workers,
00:06:31
security, etc.
00:06:32
were replaced with cheaper,
00:06:33
non-unionized contract
employees.
00:06:35
Reagan had already broken
00:06:36
the air traffic controller
00:06:38
union earlier in the decade.
00:06:39
So the general power
was on the side
00:06:41
of the anti-union folks
00:06:43
like them.
00:06:45
Even better than outsourcing
00:06:46
was offshoring
00:06:47
In the late 1980s and early
1990.
00:06:50
GE’s overall
employment levels
00:06:52
pretty much stayed the same,
But its geographic
00:06:54
distribution
changed drastically as Welch
00:06:57
chased cheaper wages,
00:06:58
fewer regulations
00:06:59
and tax breaks.
00:07:01
Third method gobble up
00:07:02
companies like Packman.
00:07:03
Welch kicked off a new era
00:07:05
of mergers and acquisitions,
00:07:06
especially in GE's finance
division.
00:07:08
This book's author describes
GE's finance division
00:07:11
as a bunch of disparate
financial undertakings
00:07:13
that don't make
a ton of sense
00:07:15
for a titan of manufacturing
like GE.
00:07:17
But that Welch nonetheless
cobbled together
00:07:19
into a hydra headed monster.
00:07:21
This helped push GE stock
00:07:22
to new heights
and keep it there.
00:07:24
But it also made it
into a bizarre
00:07:25
and unstable conglomerate
00:07:26
of random businesses
that overshadowed
00:07:28
the core of what
GE always did well.
00:07:30
Manufacturing.
00:07:31
One example
from after Welch left,
00:07:33
GE became a major
holder of subprime mortgages
00:07:35
Right
before the 2007, 2008 crash.
00:07:38
And finally, step four,
00:07:40
stock buybacks.
00:07:41
This is a phenomenon
by which companies
00:07:43
give their own stock prices
00:07:44
a boost by buying back
their own shares, using
00:07:47
whatever profits
they have available.
00:07:49
It's a simple, direct way
00:07:50
to get the line to go up
00:07:51
and make the shareholders
happy.
00:07:53
Par for the course today,
but again,
00:07:55
not back then.
00:07:56
From 1934 to 1982,
00:07:58
this practice
was essentially outlawed
00:08:00
It wasn't explicitly
illegal per se,
00:08:02
but the Securities Exchange
Act of 1934
00:08:05
barred companies,
from doing anything
00:08:06
to manipulate their own
stock price.
00:08:07
So buying back
their own stocks could draw
00:08:09
the ominous eye
of the Securities
00:08:11
and Exchange Commission.
00:08:12
Kind of like a
00:08:13
fiscal regulation
00:08:15
edition
of The Eye of Sauron.
00:08:16
Nobody move. Nobody move.
00:08:18
So it was just safer
to not do it.
00:08:19
it also was just considered
bad business.
00:08:21
One CEO of U.S.
00:08:22
Steel described it
as eating your own mother
00:08:25
or in less
colorful language,
00:08:26
sacrificing long term
stability in favor of short
00:08:29
term gain by not investing
00:08:30
in the people or products
00:08:32
that actually make
the company great.
00:08:33
But then remember, the 1970s
00:08:35
were a really
tumultuous time
00:08:36
that put a lot of pressure
on companies
00:08:38
to adapt and change.
00:08:39
So Ronald Reagan
00:08:40
won the presidency in 1980.
00:08:42
And in 1982,
he appointed a guy
00:08:44
named John
Shad to run the SEC.
00:08:46
That appointment led to this
00:08:48
rule 10B-18.
00:08:50
It sounds dreadfully dull,
but it's really important.
00:08:52
So hear me out.
00:08:53
Rule 10B-18
00:08:54
provided
a safe harbor for companies
00:08:57
who wanted to do
stock buybacks.
00:08:58
And boy, howdy.
00:09:00
Did Jack Welch take
00:09:01
his announcement
00:09:02
in 1989 of a five year
00:09:04
plan to spend
$10 billion on stock
00:09:06
buybacks
made big news in part
00:09:09
because the financing for it
came partly
00:09:11
from all the savings
that he got from laying off
00:09:13
all those people
earlier in the decade.
00:09:14
The line went up, but
the overall cost was high.
00:09:17
That's $10 billion that GE
00:09:18
didn't spend on employee
benefits and pay
00:09:20
or critically research
00:09:21
and development
during Welch's tenure.
00:09:23
And beyond GE's reputation
00:09:25
as the gold standard of
00:09:26
domestic products crumbled.
00:09:27
A quick sidebar here.
00:09:28
Stock
buybacks are controversial
00:09:30
even among economic experts.
00:09:31
here, a professor
at the London Business
00:09:33
School makes the case
for buybacks in an article
00:09:35
that's both short
and simple enough
00:09:37
for non-experts
like myself to follow.
00:09:38
The gist is that stock
buybacks can kind of run
00:09:40
the gamut from careful
and useful, i.e.
00:09:43
by providing
ultimately more value
00:09:44
to the company
than investments
00:09:46
elsewhere would careless
and damaging, i.e.
00:09:48
by focusing way too much on
00:09:50
just like next quarter's
earnings reports.
00:09:53
So when we're all duking it
out in the comments below
00:09:54
this video, let's
00:09:55
try to remember
that little bit of nuance.
00:09:56
Sidebar over.
00:09:57
Okay, so those four steps
explain how Jack
00:09:59
Welch may get into a profits
00:10:01
just machine.
00:10:03
But also partly explains
00:10:04
why it began to fall apart
00:10:06
shortly
after he retired in 2001.
00:10:08
The last 20 years
have not been kind to GE
00:10:10
for a variety of reasons,
00:10:11
including an eventual split
into three
00:10:13
different companies in 2021.
00:10:14
the general consensus
is that Welch
00:10:16
Sheehan economics
00:10:17
set up for a fall
but Welch's
00:10:20
methodology
had already spread
00:10:21
so far and wide
throughout the 1980s
00:10:23
and 1990s that it carried on
00:10:24
well after he retired.
00:10:26
See, other companies really
wanted the Welch touch.
00:10:28
Any executives
who had worked
00:10:29
with or for Welch
00:10:31
or who had attended
his Management development
00:10:33
Institute became so popular
that a company's
00:10:35
stock prices often
got a boost
00:10:37
just by announcing
00:10:38
that they were hiring
one of his proteges.
00:10:40
A few of Welch's most famous
00:10:41
underlings include
00:10:43
Robert Allen of AT&T,
00:10:45
who oversaw the elimination
00:10:46
of 100,000 jobs.
00:10:48
Lou Gerstner
00:10:49
at IBM,
who oversaw the company's
00:10:50
first layoffs in 70 years.
00:10:52
In the 1990s, when he let go
00:10:53
of 60,000 people.
00:10:54
and I'm not kidding
with this one.
00:10:56
Chainsaw
00:10:57
Al Dunlap of Scott Paper.
00:10:59
He got more than a third
of rank and file employees,
00:11:02
three quarters of executives
00:11:03
and half of R&D
00:11:04
before selling out
to Kimberly-Clark
00:11:06
and taking a $100 million
payout for himself.
00:11:09
Get your bag, Chainsaw Al.
00:11:10
Other Welch proteges
wound up running.
00:11:12
A lot of other companies
you've heard
00:11:14
of, such as 3M,
00:11:16
Arctic Cat, Chrysler, Fiat,
00:11:18
Goodyear,
Honeywell, Rubbermaid,
00:11:20
Stanley Discovery,
00:11:21
Polaris, TiVo,
00:11:23
Albertsons,
Home Depot, Boeing
00:11:26
and many more.
00:11:27
Just a flock of mini
Welch's spreading
00:11:29
the gospel of shareholders
00:11:30
who primacy across the land.
00:11:32
Easy evidence is in
the amount of money
00:11:33
spent on stock buybacks
each year.
00:11:35
One analysis in 2018
estimated that
00:11:37
if we reverted back
00:11:38
to the proportions
of corporate profits
00:11:39
that went to employees,
that was common.
00:11:41
In the 1970s,
every worker in the U.S.
00:11:44
could get a 30 $500 bonus.
00:11:46
or there's
the flurry of mass layoffs
00:11:47
taking employees
and social media by storm.
00:11:50
So, yeah,
00:11:51
if you ever find yourself
frustrated
00:11:52
over stagnant wages
00:11:53
or get a stab of panic,
00:11:55
that you're going
to get fired at any moment
00:11:56
or feel some rage
bubbling up inside when you
00:11:58
hear about stock buybacks
00:12:00
or nine figure CEO bonuses.
00:12:01
Thank Milton
Friedman and Jack Welch.
00:12:03
Kind of...It's all nuance.
00:12:05
There's only so much detail
we can get into
00:12:06
in a video on the Internet.
00:12:07
So, peep the sources below
if you want, more nuance
00:12:10
than you
can shake a stick at.
