The Downside of Downsizing

Have pity on “Ol’ Lonely,” he just got a whole lot lonelier. The star of countless television commercials -- known better as the Maytag repairman -- stands watch over a company that just announced that it is slashing 1,100 jobs, or about 20 percent of its workforce. According to company reports, Maytag hopes to speed decision-making and save costs by restructuring, typical corporate-speak under such circumstances.

Maytag isn’t alone in using mass layoffs as an excuse to spur operations, joining the thousands around the nation that have taken similar steps. The continuous wave of corporate layoffs is not only undercutting any real economic recovery, but it is also exacting a heavy emotional toll on people forcibly put out of work.

In an election year, with all signs pointing to a close presidential race, the state of the economy will play a critical role in determining the next president. Both President Bush and Democratic challenger John Kerry are using the economy to rally voters in the so-called swing states, which makes downsizing and the psychological burden that accompanies it even more important.

Currently, the general perception is that the economy is improving, as evidenced by factors ranging from the upcoming red-hot Google IPO to rising business productivity and increased corporate spending.

In defining the state of the economy, the Bush administration places great emphasis on the national unemployment rate, which has dropped to a miniscule 5.6 percent. Some critics question the figure, derived from a monthly survey, called the Current Population Survey (CPS). The survey began as a Work Projects Administration project and has been conducted monthly since 1940.

The calculation has drawn fire because only those people “actively looked for work in the prior four weeks, and are currently available for work” are considered “unemployed.” Last month, there were almost 5.4 million people in the “Persons Not in the Labor Force,” but “currently want a job” category. This is a significant factor considering that the government based its percentage on 8.2 million it deemed “unemployed.” Simply adding the two numbers reveals that there are actually 13.6 million people unemployed.

While the Bush administration and business pundits would like the public to believe better economic days are already upon us, the seemingly constant barrage of corporate layoff announcements undercuts this rosy outlook. According to Chicago-based outplacement firm Challenger, Gray & Christmas, companies cut more than 145,000 jobs in April and May alone and a total of 408,392 in the first five months of 2004.

Even more daunting, the Department of Labor’s Bureau of Labor Statistics (BLS) released figures revealing that from January through April 2004, the total number of “layoff events” (the catchy BLS euphemism for number of downsizing occurrences) numbered 5,747, leading to 573,523 initial unemployment insurance claims.

These figures are actually lower than in the January to April 2003 quarter (6,466 and 624,833), but hardly the earth-shattering gains that Bush alluded to recently on his visit to Rome, when he declared that the latest job figures showed the economy, “vital and growing.”

The numbers speak for themselves, but obviously, the American economy is still reeling when anywhere from 80,000 to 160,000 people a month are being downsized. Yes, the economy is generating 250,000 to 350,000 jobs a month, but these figures pale in comparison to the 13.6 million people searching for work. According to economist Jared Bernstein, with the Washington-based Economic Policy Institute, there are also 1.3 million fewer Americans collecting paychecks now than in March 2001, when the recession began.

Numbers alone, however, have never been the most important factor when it comes to mass layoffs. On a deeper level, forced unemployment demoralizes individuals, families, and entire communities. In a small town, like North Canton, Ohio, that will take the brunt of Maytag’s cuts, the effects can be devastating. We cannot begin to calculate the emotional toll these people endure. At the current rate, it is like wiping an entire city off the national employment sheet each month.

In a country built on rags-to-riches tales of success and filled with people constantly striving to achieve the mythical “American Dream,” the cumulative effect of mass downsizing not only threatens the nation economically, but eats at the soul of those who are deemed unworthy. We are taught to consider ourselves a nation of equals, so few life events are more troubling than wearing the unemployed label.

Although the exact origins of downsizing are open to interpretation, it has been part of the American business lexicon for several decades. The practice has even become part of popular culture, showing up as a topic on the syndicated hit television show Roseanne and the ever-popular Dilbert cartoon strip, which frequently mocks the downsizing in the more than 2,000 newspapers that carry it.

When future historians look back on the late twentieth and early twenty-first centuries, they may determine that the period earns the title “the downsizing era.” In 1996, when the New York Times ran a series of articles looking at the phenomenon, the paper used BLS reports to conclude that 43 million people lost their jobs through layoffs between 1979 and 1995. In comparison, from 2000 to 2003, after the dot-com bust, another 5 million workers were downsized.

As these historians reassess our era’s business world from a distance, one of today’s most admired corporate leaders -- former General Electric CEO Jack Welch -- is going to be exposed. Welch’s early tenure at GE in the early 1980s institutionalized downsizing. Under his direction, the company eliminated more than 100,000 jobs, thus earning Welch the nickname “Neutron Jack” -- like the bomb, turning people into dust, but leaving buildings still standing.

Single-handedly, Welch overturned GE’s corporate culture and turned the business world on its ear. Wall Street rewarded Welch by pushing GE stock up, which in the elephant herd mentality of Corporate America, caused other leaders to follow his lead. Soon, the world viewed Welch as a brilliant business strategist. No one much cared about the bodies left in his wake.

Obviously, taking on Welch and his esteemed place among twentieth century business leaders will be difficult. The GE chief’s supporters would argue that Welch’s moves kept the company competitive and enabled it to streamline operations to take on foreign competitors and others competing for its market share.

Welch’s brand of corporate capitalism, in which shareholder return is the only measure of success, also set in motion a cruel system of constant dread -- fear about job loss and the economic and psychological destruction it causes. Such large-scale cuts always involve personalities and office politics, far from the high-minded “talent” considerations that leaders use to justify the layoffs.

Welch’s sole focus on shareholder return and hitting or surpassing analyst expectations each quarter won him rave reviews as a tough-minded leader. However, when examined in the future, these pursuits may be seen as a magician’s bag of tricks. An obsession with quarterly earnings ahead of long-term planning, led GE to cut corners and not think about the environmental consequences of dumping PCB (polychlorinated biphenyls) into the Hudson River.

Welch’s personal aggressiveness replicated throughout GE, implementing a winner-take-all attitude that rewarded profit and nothing else. Following the Welch lead, other corporate execs began using mass layoffs as a way to cut costs, take restructuring charges against earnings, and meet quarterly earning estimates. The tick upward in stock price benefited those with the largest number of shares…almost always the current leadership team.

Welch’s downsizing initiatives made GE, its stockholders, and its executives wealthy. Welch became Fortune magazine’s “Manager of the Century” and a celebrity in his own right. The 100,000 downsized GE workers and the millions more that followed at other companies based on Welch’s moves…let’s hope they were able to pick up the pieces of their shattered dreams.

Welch opened the door for other corporate executives to follow. Mass layoffs are now routine events designed to impress Wall Street analysts and cause short-term gains in stock price. Few people ask how 1,000 or 10,000 employees suddenly become expendable. Who hired, trained, and brought these (now-worthless) employees into the company in the first place? Perhaps the very people now responsible for the terminations?