ASSAULT ON PRIVATE EQUITY
FORTY years ago, corporate America was bloated, sluggish and losing ground to competitors in Japan and beyond. But then something astonishing happened. Financiers, private equity firms and bareknuckled corporate executives initiated a series of reforms and transformations.
The process was brutal and involved streamlining and layoffs.
But, at the end of it, American businesses emerged leaner, quicker and more efficient.
Now we are apparently going to have a presidential election about whether this reform movement was a good thing. Last week, the Obama administration unveiled an attack ad against Mitt Romney’s old private equity firm, Bain Capital, portraying it as a vampire that sucks the blood from American companies.
Then Vice President Joe Biden gave one of those cable-TV type speeches, lambasting Wall Street and saying we had to be a country that makes things again.
The Obama attack ad accused Bain Capital of looting a steel company called GST in the 1990s and then throwing its workers out on the street. The ad itself barely survived a minute of scrutiny. As Kimberly Strassel noted in The Wall Street Journal, the depiction is wildly misleading.
The company was in terminal decline before Bain entered the picture, seeing its workforce fall from 4,500 to less than 1,000. It faced closure when Romney and Bain, for some reason, saw hope for it in 1993. Bain acquired it, induced banks to loan it money and poured $100 million into modernisation, according to Strassel. Bain held onto the company for eight years, hardly the pattern of a looter.
Finally, after all the effort, the company, like many other old-line steel companies, filed for bankruptcy protection, in 2001, two years after Romney had left Bain.
This is the story of a failed rescue, not vampire capitalism.
But the larger argument is about private equity itself, and about the changes private equity firms and other financiers have instigated across society. Over the past several decades these firms have scoured America looking for underperforming companies. Then they acquire them and try to force them to get better.
As Reihan Salam noted in a fairminded review of the literature in National Review, in any industry there is an astonishing difference in the productivity levels of leading companies and the lagging companies.
Private equity firms like Bain acquire bad companies and often replace management, compel executives to own more stock in their own company, and reform company operations.
Most of the time they succeed.
Research from around the world clearly confirms that companies that have been acquired by private equity firms are more productive than comparable firms.
This process involves a great deal of churn and creative destruction.
It does not, on net, lead to fewer jobs. A giant study by economists from the University of Chicago, Harvard, the University of Maryland and the Census Bureau found that when private equity firms acquire a company jobs are lost in old operations. Jobs are created in new promising operations.
The overall effect on employment is modest.
Nor is it true that private equity firms generally pile up companies with debt, loot them and then send them to the graveyard. This does happen occasionally (the tax code encourages debt), but banks would not be lending money to private equity-owned companies, decade after decade, if those companies weren’t generally prosperous and credit worthy.
Private equity firms are not lovable, but they forced a renaissance that revived American capitalism.
The large questions today are: Will the US continue this process of rigorous creative destruction. More immediately, will the nation take the transformation of the private sector and extend it to the public sector? While American companies operate in radically different ways than they did 40 years ago, the sheltered, government-dominated sectors of the economy – especially education, health care and the welfare state – operate in astonishingly similar ways.
The implicit argument of the Republican campaign is that Mitt Romney has the experience to extend this transformation into the public sphere.
The Obama campaign seems to be drifting willy-nilly into the opposite camp, arguing that the pressures brought to bear by the capital markets over the past few decades were not a good thing, offering no comparably sized agenda to reform the public sector.
In a country that desperately wants change, I have no idea why a party would not compete to be the party of change and transformation.
For a candidate like Obama who ran an unconventional campaign that embodied and promised change, I have no idea why he would want to run a campaign this time that regurgitates the exact same ads and repeats the exact same arguments as so many Democratic campaigns from the ancient past.