Jack Welch, financialization, and the true force behind US deindustrialization

Watch the video clips of 3 apostles of capitalism at the end, one unfortunately was not fictional

Hua BiN

When I studied business in the mid-90s, there was no company more revered than General Electric and no CEO more respected than Jack Welch.

For years, GE was honored as the most admired company in the world and was the most valuable by market cap.

Jack Welch was the idol corporate chieftain case-studied in every business school and emulated by aspiring “corporate leaders”. He pioneered “the GE Way”.

GE had an array of world leading businesses from aircraft engines, turbines, health care, NBC, Universal Studios, to refrigerators and light bulbs. GE Finance led in aircraft leasing and financing of capital goods produced by GE’s industrial units.

GE executives were widely courted as corporate superstars.

When Welch retired in 2001 and Jeff Immelt took over as CEO, several frontrunners to succeed Welch immediately were headhunted to run other major corporations – Robert Nardelli at Home Depot, Jim McNerney at 3M and then Boeing, David Cote at TRW and then Honeywell.

Welch, a.k.a. Neutron Jack, was a ruthless cost cutter and famously claimed for any business GE was in, it should be either No. 1 or No. 2 or get out.

He was the original Wall Street darling, laser-focused on quarterly earnings and stock price. Welch aggressively offshored and outsourced manufacturing overseas to reduce labor costs and taxes.

Most importantly, Welch prioritized GE Finance over the legacy industrial and consumer BUs and turned GE essentially into a financial company by the time of his retirement.

In its height, Welch and GE were lionized with books such as his own memoir Straight from the Gut and Robert Slater’s Jack Welch and the GE Way.

Fast forward to today, GE has become a footnote in American business and its stock price is lower than 2001 when Welch retired.

The company was broken apart into three separate businesses.

Few b-school students know anything about the company and if any case studies were done on the company, it is to show how the mighty have fallen.

In 2018, as the ultimate coup de grace, GE was ousted from the Dow Jones Index and replaced by Walgreen.

GE’s fall symbolizes the fall of industrial America and the rise of financial capitalism.

Welch famously quipped “GE is not in the business of making engines or light bulbs, it is in the business of making money”.

This has become the ethos of Wall Street and high street.

Money making alone has become the yardstick to measure success, permeating into popular culture through movies like Oliver Stone’s Wall Street and Norman Jewison’s Other People’s Money.

Also books like Tom Wolfe’s novel The Bonfire of Vanity and Michael Lewis’ true account Liar’s Poker.

While these movies and books were critical of the money culture of the go-go 1980s, many people took them up as inspirations to make a killing by learning from the characters played by Michael Douglas and Danny de Vitto.

Lewis, the greatest financial chronicler and satirist of our time (he was also the author of The Big Short), said in an interview that he received thousands of letters when The Liar’s Poker was published in 1989.

While the book was a sharp and hilarious critique of his former employer and Wall Street bond king Soloman Brothers, most of the letters asked Lewis how to get in Soloman Brothers, taking the book as a how-to guide.

A side note, I loved the book when I first read it in the 90s and still consider it the best memoir about Wall Street ever. Not even Jordan Belfort’s The Wolf of Wall Street is close. Still worth reading today.

The story of GE and the rise of Wall Street symbolizes the financialization of the US economy.

Financialization is the increasing dominance of financial markets, incentives, and institutions over the “real” economy of production and services.

Financialization orients economic activity toward generating profits through financial channels, such as trading and speculation, rather than through traditional manufacturing and production – activities that used to be called “an honest day’s work”.

The rise of modern financialization started in the 1970s, following the end of the Bretton Woods monetary system under Richard Nixon, the single most important event in US economic history after WW2.

Subsequent governments, especially under President Reagon, opened the financial deregulation floodgate with predictable results -

• Growing financial sector: the size and influence of the financial sector have increased relative to the total economy. Financial assets have grown to vastly outstrip the output of the real economy.

• Shift in corporate behavior: Even non-financial companies now earn a larger share of their profits from financial activities rather than from their core business. GM regularly makes more money from its financing arm than from selling cars.

• Shareholder value doctrine: The focus on maximizing shareholder value has led to practices like stock buybacks, often at the expense of long-term investments in production or R&D.

• Financialization of daily life: Households have become more intertwined with financial markets through home mortgages, consumer debt, student loans, payday loans, and defined-contribution retirement plans like 401(k)s. This transfers financial risks from corporations and the state to individuals.

• Deregulation and “innovation”: Beginning in the 1980s, financial deregulation and the rise of technology enabled new financial products and markets, including complex derivatives, securitized assets, and high frequency trading. These “innovations” facilitate greater speculation and systemic risk.

I don’t know about you, but I still can barely understand the CDOs (collateralized debt obligations), CDSs (credit default swaps), or synthetic CDOs after reading The Big Short book twice and watching the movie three times.

Even Margot Robbie failed to make it clear. And I thought I had a decent education in finance.

Financialization has been linked to a rise in income and wealth inequality.

Executive compensation, often tied to stock performance, has grown dramatically, while financial speculation has disproportionately benefited high-income earners who own financial assets.

US CEOs regularly make 300 to 400 times the total comp of average employees today, compared with 20 – 30 times in the 1960s.

The University of Chicago neoliberal economics thinkers, led by the eminent Jewish economic philosopher Milton Friedman, have provided the intellectual support and rationale for such corporate greed by telling the world the financial market is the most efficient in “allocating capital”. (Watch the other people’s money video clip at the end on Friedman’s pontifications on economics).

Such endorsement is supposed to reassure the population “in Wall Street we trust”.

Haven’t they monopolized Nobel economics prizes since 1976? How could anything go wrong in the steady hands of policy makers schooled in such economic wisdom?

Politicians in the West like to accuse China and other developing countries to steal jobs and cause deindustrialization.

No one seems to ask: has anyone put a gun on the heads of these multinational companies to offshore and outsource? Doesn’t the market know the best?

Greed alone drives the behavior of these businesses in the capitalist system. After all, making money is the lone purpose of a business, as Welch proclaimed.

When Gordon Gekko pronounced “Greed is Good”, he illuminated for us: “greed, for lack of a better word, is fundamentally good, right, and essential for progress, clarifying, and capturing the evolutionary spirit, driving mankind’s upward surge for life, money, love, and knowledge, and ultimately saving failing entities like Teldar Paper… and the USA”.

Greed is to be celebrated, not denounced. Elon Musk, Jeff Bezos, and Larry Ellison are crowned as the Colossus and Oracle (no wonder they picked these grandiose names for their businesses).

General Electric’s 1953 annual report boasted that the firm’s “biggest payday ever” was the record sum it had paid for labor, because prosperity shared with workers was judged a source of national strength.

That made GE one of the most progressive and responsible corporate employers.

However, in the twenty years Jack Welch was the CEO, he eliminated more than 100,000 GE jobs, shuttered dozens of US factories, moved production abroad, and transformed the company from an industrial titan into a quasi-bank whose largest profit engine was the unregulated lending arm GE Capital.

For his trouble, Jack Welch received a severance pay of $417 million when he retired in 2001, reportedly the largest such payment in business history at the time.

Welsh supplied a playbook that hundreds of other corporations copied, helping to hollow out America’s industrial base and shift the economy’s center of gravity from the factory floor to the trading floor.

Welch turned GE into both the emblem and the engine of America’s transition from a society that built things to one that trades paper claims on the value others create.

The Welch era marked a hinge moment in US economic history: the moment when deindustrialization and financialization became conscious corporate strategy rather than unavoidable fate.

The ruins of that model—industrial ghost towns, a shrinking middle class, and an economy prone to financial crisis—are the enduring legacy of the man once hailed as “Manager of the Century.”

Another gift from Jack Welch to corporate America is short-termism, a.k.a. quarterly capitalism.

Since R&D and CAPEX take a long time to yield results, they are abandoned in favor of projects that generate returns in the next quarter.

If financial engineering boosts the P&L immediately, why bother with real engineering?

The philosophy is adopted in the political world as well. Why would any politician build a highspeed rail network if such an undertaking will take 2 decades? The cost will be upfront and the benefits only come much later.

Will any rational term-based politician make such long-term planning today? The US inter-state highway system was built between 1956 and 1992, nearly 4 decades. Would such long-term whole-of-nation endeavor be possible today?

King Louis XV said out aloud his governing creed: “Après moi, le déluge”. It is practiced by the capitalists – the corporate aristocracy – now.

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Source: Hua's Substack