The Anti-Economist — October 10, 2012, 8:48 am

Why Jack Welch Knows About Changing Numbers

The dust-up that former General Electric CEO Jack Welch caused last week caught me by surprise. “Unbelievable jobs numbers..these Chicago guys will do anything..can’t debate so change numbers,” he tweeted. As America now knows, the unemployment rate fell last week to 7.8 percent, the first time it has dropped below 8 percent during Obama’s term as president. (Nice news to offset the drubbing Obama took in the debate.)

Who would bother to take seriously Welch’s accusation that Obama’s team was manipulating the jobs data? Only those who don’t know much about him, I’d have thought. What surprised me is that that seemed to be just about everybody. Even Paul Krugman used his column to defend the estimable Bureau of Labor Statistics; pieces otherwise critical of Welch nevertheless referred to him as a great executive.

But the accusations fit Welch’s profile. He thinks as he does because he himself was often cited as one of the leading book-cookers of his era. Why would he think anyone would approach numbers any differently?

As one of his executives told me while I was researching my book Age of Greed, “Jack always advised me to keep a nickel in your pocket.” In case your earnings per share fall a bit short, in other words, always have something hidden somewhere to boost them. For years, Wall Street bought his charade of increasing profits every calendar quarter to show what a strong and predicable company GE now was, and how it continued to grow under any and all conditions.

GE was a strong profit-generator—but not that strong. Yet Welch’s legend grew, and GE’s stock price soared.

Welch was considered the best corporate executive of his time. He was talented and charismatic. He was also ruthless, and proud of it. He was the man who insisted that every department cut the bottom 10 percent of its staff every year. In the two years after he became CEO in 1980, he gutted or sold businesses that employed 70,000 workers, 20 percent of GE’s workforce. Five years later, some 130,000 of GE’s 400,000 workers were gone. They started to call him Neutron Jack, after the bomb that killed people but didn’t destroy buildings.

Welch was selling stale manufacturing businesses, in his mind, like the venerable appliances division, which made toasters and irons. In their stead he bought RCA, owner of NBC, and eventually Kidder Peabody, a soon-to-be-troubled investment bank. He handled neither investment well.

He was managing in the new fashion, like a takeover artist or leveraged-buyout partner, buying companies that could turn handsome profits with fewer workers and selling older ones rather than trying to remake them. He had not always been like this. When he started out, he was an engineer with a Ph.D., bent on innovation. He oversaw the development of new plastic products early in his career, and made a big successful bet on CT scanners, overseeing major innovations in the technology.

But then innovation was pushed aside at America’s manufacturing giants in favor of buy-and-sell. No one saw it that way for quite a while. Welch preached new managerial methods. He encouraged people to talk back. But a strategic shift was taking place in corporate America, often in emulation of him. As the media, Wall Street analysts, and not a few mainstream economists were lauding the new lean-and-mean corporate America, the nation’s manufacturers were mostly taking the easy way out—stripping down companies, foregoing real innovation, and riding the financialization wave, exploiting securities bubbles along the way.

Nobody did that better than Welch. He turned the greatest manufacturing company in the world into a bank, essentially, his GE Capital Division providing half or more of the company’s profits at a time when banks were printing money—that is, until 2008. Welch retired in 2001. GE’s profits rose ten times, to $13 billion, over his tenure. In 1980, GE was the ninth most-profitable company in America. During the 1990s it was always first, second, or third. At $500 billion, its shareholder value was greater than that of any other company in the nation.

Before Welch got the CEO job in 1980, he’d had to write a long essay to GE’s then chairman, Reginald Jones, about how he would run the company. Under Jones, the company’s goals had been long-term, but Welch argued that times had changed. Stock prices had been down across the board for a decade and had made all kinds of companies vulnerable to takeover. Welch had his eye on the market. “What we have to sell as an enterprise to the equity investor is consistent, above-average earnings growth throughout the economic cycle,” he wrote. “The discipline to balance both short and long term is the absolute of such a strategy.”

One way—perhaps the key way—Welch pushed up earnings “consistently” as CEO was to make last-minute financial trades in GE Capital just before the close of the calendar quarter. As CNN Money pointed out, (euphemistically calling Welch’s actions “earnings management”), “Though earnings management is a no-no among good governance types, the company never denied doing it, and GE Capital is the perfect mechanism.” Welch never made the kinds of aggressive manipulations that brought down Enron or Worldcom, but he was part of an era in which honest accountants were laughed out of town.

After Welch left GE, by the way, the company went downhill. Its banking business was clobbered in the financial crisis—it was heavily invested in subprime mortgages—and Welch’s successor, Jeffrey Immelt, is still struggling to reshape the company, partly by returning to manufacturing. Among his most conspicuous sales was NBC. GE’s stock price is still not nearly as high as it once was. Its stock-market value isn’t even close to today’s leader, Apple, which makes real products.

Welch’s legacy will no doubt continue to fade. He has no moral right to make accusations against one of the U.S. government’s most forthright agencies. He sees in the government what he himself was.

Share
Single Page

More from Jeff Madrick:

Context July 16, 2015, 12:59 pm

A Deeply Integrated Europe

The euro and its discontents

Context July 10, 2015, 10:15 am

How Germany Reconquered Europe

The euro and its discontents

From the February 2014 issue

How Germany Reconquered Europe

The euro and its discontents

Get access to 167 years of
Harper’s for only $45.99

United States Canada

CATEGORIES

THE CURRENT ISSUE

December 2017

Destroyer of Worlds

= Subscribers only.
Sign in here.
Subscribe here.

Crossing Guards

= Subscribers only.
Sign in here.
Subscribe here.

“I am Here Only for Working”

= Subscribers only.
Sign in here.
Subscribe here.

Dear Rose

= Subscribers only.
Sign in here.
Subscribe here.

The Year of The Frog

= Subscribers only.
Sign in here.
Subscribe here.

Dead Ball Situation

= Subscribers only.
Sign in here.
Subscribe here.

view Table Content

FEATURED ON HARPERS.ORG

Article
Destroyer of Worlds·

= Subscribers only.
Sign in here.
Subscribe here.

In February 1947, Harper’s Magazine published Henry L. Stimson’s “The Decision to Use the Atomic Bomb.” As secretary of war, Stimson had served as the chief military adviser to President Truman, and recommended the attacks on Hiroshima and Nagasaki. The terms of his unrepentant apologia, an excerpt of which appears on page 35, are now familiar to us: the risk of a dud made a demonstration too risky; the human cost of a land invasion would be too high; nothing short of the bomb’s awesome lethality would compel Japan to surrender. The bomb was the only option. Seventy years later, we find his reasoning unconvincing. Entirely aside from the destruction of the blasts themselves, the decision thrust the world irrevocably into a high-stakes arms race — in which, as Stimson took care to warn, the technology would proliferate, evolve, and quite possibly lead to the end of modern civilization. The first half of that forecast has long since come to pass, and the second feels as plausible as ever. Increasingly, the atmosphere seems to reflect the anxious days of the Cold War, albeit with more juvenile insults and more colorful threats. Terms once consigned to the history books — “madman theory,” “brinkmanship” — have returned to the news cycle with frightening regularity. In the pages that follow, seven writers and experts survey the current nuclear landscape. Our hope is to call attention to the bomb’s ever-present menace and point our way toward a world in which it finally ceases to exist.

Illustration by Darrel Rees. Source photographs: Kim Jong-un © ITAR-TASS Photo Agency/Alamy Stock Photo; Donald Trump © Yuri Gripas/Reuters/Newscom
Article
Crossing Guards·

= Subscribers only.
Sign in here.
Subscribe here.

The Ambassador Bridge arcs over the Detroit River, connecting Detroit to Windsor, Ontario, the southernmost city in Canada. Driving in from the Canadian side, where I grew up, is like viewing a panorama of the Motor City’s rise and fall, visible on either side of the bridge’s turquoise steel stanchions. On the right are the tubular glass towers of the Renaissance Center, headquarters of General Motors, and Michigan Central Station, the rail terminal that closed in 1988. On the left is a rusted industrial corridor — fuel tanks, docks, abandoned warehouses. I have taken this route all my life, but one morning this spring, I crossed for the first time in a truck.

Illustration by Richard Mia
Article
“I am Here Only for Working”·

= Subscribers only.
Sign in here.
Subscribe here.

But the exercise of labor is the worker’s own life-activity, the manifestation of his own life. . . . He works in order to live. He does not even reckon labor as part of his life, it is rather a sacrifice of his life.

— Karl Marx

Photograph from the United Arab Emirates by the author. This page: Ruwais Mall
Article
The Year of The Frog·

= Subscribers only.
Sign in here.
Subscribe here.

To look at him, Sweet Macho was a beautiful horse, lean and strong with muscles that twitched beneath his shining black coat. A former racehorse, he carried himself with ceremony, prancing the field behind our house as though it were the winner’s circle. When he approached us that day at the edge of the yard, his eyes shone with what might’ve looked like intelligence but was actually a form of insanity. Not that there was any telling our mother’s boyfriend this — he fancied himself a cowboy.

“Horse 1,” by Nine Francois. Courtesy the artist and AgavePrint, Austin, Texas
Article
Dead Ball Situation·

= Subscribers only.
Sign in here.
Subscribe here.

What We Think About When We Think About Soccer, by Simon Critchley. Penguin Books. 224 pages. $20.

Begin, as Wallace Stevens didn’t quite say, with the idea of it. I so like the idea of Simon Critchley, whose books offer philosophical takes on a variety of subjects: Stevens, David Bowie, suicide, humor, and now football — or soccer, as the US edition has it. (As a matter of principle I shall refer to this sport throughout as football.) “All of us are mysteriously affected by our names,” decides one of Milan Kundera’s characters in Immortality, and I like Critchley because his name would seem to have put him at a vocational disadvantage compared with Martin Heidegger, Søren Kierkegaard, or even, in the Anglophone world, A. J. Ayer or Richard Rorty. (How different philosophy might look today if someone called Nobby Stiles had been appointed as the Wykeham Professor of Logic.)

Tostão, No. 9, and Pelé, No. 10, celebrate Carlos Alberto’s final goal for Brazil in the World Cup final against Italy on June 21, 1970, Mexico City © Heidtmann/picture-alliance/dpa/AP Images

Chances that a gynecologist in Italy refuses to perform abortions for religious reasons:

7 in 10

A newly discovered microsnail can easily pass through the eye of a needle.

Moore’s wife published a letter of support signed by more than 50 pastors, and four of those pastors said they either had never seen the letter or had seen it before Moore was accused of sexual assault and asked to have their names removed.

Subscribe to the Weekly Review newsletter. Don’t worry, we won’t sell your email address!

HARPER’S FINEST

Report — From the June 2013 issue

How to Make Your Own AR-15

= Subscribers only.
Sign in here.
Subscribe here.

By

"Gun owners have long been the hypochondriacs of American politics. Over the past twenty years, the gun-rights movement has won just about every battle it has fought; states have passed at least a hundred laws loosening gun restrictions since President Obama took office. Yet the National Rifle Association has continued to insist that government confiscation of privately owned firearms is nigh. The NRA’s alarmism helped maintain an active membership, but the strategy was risky: sooner or later, gun guys might have realized that they’d been had. Then came the shootings at a movie theater in Aurora, Colorado, and at Sandy Hook Elementary School in Newtown, Connecticut, followed swiftly by the nightmare the NRA had been promising for decades: a dedicated push at every level of government for new gun laws. The gun-rights movement was now that most insufferable of species: a hypochondriac taken suddenly, seriously ill."

Subscribe Today