Saturday, September 03, 2011

Jeff Madrick Reminds Us How We Got Here

There's s pair of stories in the middle of Jeff Madrick's  Age of Greed that capture a central thread in this absorbing (if uneven) account of our recent past   The first involves Jack Welch, "neutron Jack," who vaporized 130,000 of General Electric's 400,000 jobs in the first five years of his incumbency as CEO of GE.  Jack particularly disliked the old-fashioned metal-bashing businesses like major appliances--he cut employment by more than half--and toasters: he sold  the toasters biz outright.  But among the great mixed bag of businesses he inherited when he became CEO, Welch did find "GE Credit," up to then "an adjunct to the equipment businesses for GE customers to finance their purchases..."  Welch immediately liked what he saw:
"My gut told me that compared to the industrial operations I did know,the business seemed an easy way to make money.  You didn't have to invest heavily in R&D, build factories, or bend metal. . . .  The business was all about intellectual capital--finding smart and creative people and then using GE's strong balance sheet."  In 1977, GE Capital, as it was later called, generated $67 million in revenue with only seven thousand employees, while appliances that yer generated $100 million and required 47,000 workers.   He hired better managers and supplied GE Credit with a lot of capital, and he had built-in scale--meaning large size--due to GE's assets size and triple-A credit rating.  In time, GE Capital became a full-fledged bank, financing all kinds of commercial loans, issuing mortgages and other consumer loans, and becoming a leader in mortgage-backed securities.  By the time Welch left in 2000, GE Capital's earnings had grown by some eighty times to well more than $5 billion, while the number of its employees did not even double.  It provided half of GE's profits.
--Jeff Madrick, Age of Greed, 191-2 (2011)

The other is a telling comparison/contrast between SamWalton's Wal-Mart and Bill Gates' Microsoft:
Wal-Mart earned almost as much as Microsoft in the mid-2000s, about  $11 billion in profits, but from a far higher level of sales.  It had roughly 1.1 million employees, full-time and part-time, compared to Microsoft's forty thousand workers. To put it another way, even if Wal-Mart paid out all its profits to workers, the work was so labor-intensive each worker would make only slightly more.
Id. 131

The stories aren't identical: Welch made a lot of money for GE by squeezing the lifeblood out of the workforce; so also (in a different way) Walton.  Certainly not Microsoft: indeed Gates in the 90s probably coined new millionaires at a rate like nothing seen since the creation of the steel cartel at the beginning of the 20th Century.   But Gates, while he didn't squeeze the workforce, solved the same problem in a different way: he just didn't hire them in the first place. So the common theme here is: employees are a nuisance.   Don't hire 'em if you can avoid it; get rid of 'em if you've got them; or if you must keep 'em, squeeze 'em until the pips squeak.  I don't mean to sound indignant or preachy here; the  hell of it is they may be exactly right.

Fn.:  Earlier I called it Infectious Greed--but that is Frank Partnoy's fine book about his life as a trader. Apologies all round but like I've said before, these titles do get to be fungible

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