Todd Henderson insightfully observes that it’s a collection of well-organized 1%’s.
Archive for the ‘politics’ Category
Krugman on private equity
Posted by Larry Ribstein on December 10, 2011
Paul Krugman, writing in Thursday’s NYT, sees Romney as a real life version of Oliver Stone’s Gordon Gekko in the film Wall Street. He characterizes Romney and his private equity ilk as job-destroyers, and argues that they should be taxed (and presumably also regulated) accordingly. He contrasts this with the supposed position of the GOP “to canonize the wealthy and exempt them from the sacrifices everyone else is expected to make because of the wonderful things they supposedly do for the rest of us.”
I earlier wrote on the NYT’s previous attempt to make political hay out of Romney’s business career. The story focused a lot of unfavorable rhetoric on one of Bain’s deals. I pointed out that, clearing away the rhetoric, although there was some short-term job and salary loss, the restructured company ultimately
became an industry leader, just as Bain Capital had intended. With its overseas acquisition, the company’s labor force swelled to 7,400 workers. The business invested in and refined products, like a test that rapidly detects whether a heart attack has occurred, that became widely used. From 1995 to 1998, Dade’s annual sales rose to $1.3 billion from $614 million. Its assets grew to $1.5 billion from $551 million. But another number was climbing just as fast — Dade’s long-term liabilities, which surged to $816 million from $298 million.
There was a bankruptcy after Romney was no longer associated with Bain, but
In 2007 it was sold to Siemens for $7 billion — 15.5 times the price paid in 1994 for an “ailing” orphaned division of a big corporation. The article concludes with the suggestion that the “painful” layoffs “ultimately worked.”
In short, the story’s details don’t support its slant. Romney’s “brand of capitalism” seems to have worked in this instance, even if its success was colored by events that occurred after he left Bain. Although I’m not suggesting that Romney should or would run the country the way he ran Bain and Dade, I’m also not troubled by his history as a deeply invested owner and manager of Bain. True, he and the other “elites” at his firm made a lot of money. But if every deal was like Dade, it’s not clear society as a whole, including the working class, came out worse.
Now along comes Krugman with his own take on Romney-the-job-destroyer. Krugman seeks to support his point by comparing Romney to a fictional character.
Now, I’ve spent more than a little time deconstructing Hollywood’s anti-capitalist bent in general and Oliver Stone’s fanciful Gekko invention in particular. One would think that a Nobel laureate could do a little better than to draw support for his criticism of an industry from a cartoonish portrayal of it, even if the laureate in question has traded academic journals for the editorial pages.
In fact, Krugman does do a little better by citing a “recent analysis of “private equity transactions” as concluding that, while they both create and destroy jobs, “gross job destruction is substantially higher.” Based on this evidence Krugman concludes:
So Mr. Romney made his fortune in a business that is, on balance, about job destruction rather than job creation. And because job destruction hurts workers even as it increases profits and the incomes of top executives, leveraged buyout firms have contributed to the combination of stagnant wages and soaring incomes at the top that has characterized America since 1980. * * *
The truth is that what’s good for the 1 percent, or even better the 0.1 percent, isn’t necessarily good for the rest of America — and Mr. Romney’s career illustrates that point perfectly. There’s no need, and no reason, to hate Mr. Romney and others like him. We do, however, need to get such people paying more in taxes — and we shouldn’t let myths about “job creators” get in the way.
There are a number of holes in this “analysis.” Let’s start with the evidence Krugman relies on. Curiously, he omits one of the main findings of the paper. In the paragraph immediately following the quote about gross job destruction the authors observe:
While noteworthy, these results make up only part of a richer and more interesting story about the employment effects of private equity. Using our ability to track each firm’s constituent establishments, we estimate how employment responds to private equity buyouts on several adjustment margins, including job creation at greenfield establishments opened post buyout. This aspect of our analysis reveals that target firms create new jobs in greenfield establishments at a faster pace than control firms. Accounting for greenfield job creation erases about one-third of the net employment growth differential in favor of controls. Accounting for the purchase and sale of establishments as well, the employment growth differential is less than 1 percent of initial employment over two years.
In other words, private equity doesn’t destroy jobs, but reallocates them from less productive uses to more productive uses in new, or “greenfield,” businesses. This point is emphasized in the abstract of a much more recent version of the paper Krugman chose to ignore, released last summer (emphasis added):
Private equity critics claim that leveraged buyouts bring huge job losses. To investigate this claim, we construct and analyze a new dataset that covers U.S. private equity transactions from 1980 to 2005. We track 3,200 target firms and their 150,000 establishments before and after acquisition, comparing outcomes to controls similar in terms of industry, size, age, and prior growth. Relative to controls, employment at target establishments declines 3 percent over two years post buyout and 6 percent over five years. The job losses are concentrated among public-to-private buyouts, and transactions involving firms in the service and retail sectors. But target firms also create more new jobs at new establishments, and they acquire and divest establishments more rapidly. When we consider these additional adjustment margins, net relative job losses at target firms are less than 1 percent of initial employment. In contrast, the sum of gross job creation and destruction at target firms exceeds that of controls by 13 percent of employment over two years. In short, private equity buyouts catalyze the creative destruction process in the labor market, with only a modest net impact on employment. The creative destruction response mainly involves a more rapid reallocation of jobs across establishments within target firms.
Krugman’s analysis has other holes in addition to its evidence deficit. First, it is fair to say that private equity’s objective isn’t to create jobs but to make money. One hopes that the two will go hand in hand, but there are many reasons why they may not, including government policy. In other words, there’s a problem when employing people costs firms money, but private equity is only the messenger. The point of my earlier blog post on this is that Romney’s experience restructuring firms gives him a lot better idea than many politicians, including the current president, of what government needs to do to fix the underlying problems.
Second, Krugman seeks to leverage his analysis of private equity into criticism of the 1%, concluding that “we do. . . need to get such people paying more in taxes.” Even if you are willing to conclude that private equity destroys jobs and shouldn’t get any breaks, this is far from killing the argument that business as a whole would thrive if less burdened. This could include some of the businesses that Bain profited by restructuring.
The bottom line is that one shouldn’t read Krugman without a grain, or perhaps a whole tub, of salt.
Posted in politics, private equity | 8 Comments »
Let Congress trade!
Posted by Larry Ribstein on December 2, 2011
I have previously discussed here and here the policy arguments against a broad ban on Congressional insider trading (this is apart from Steve Bainbridge’s serious problems with the proposed legislation).
Now Todd Henderson and I have weighed in on Politico with more on why we should let Congress trade (while imposing strong disclosure duties). It’s obviously not a popular position these OWS and politician-bashing days. But we think it’s a sensible one that deserves serious consideration.
Update: Bainbridge responds. He focuses on the perverse incentive problem, which Todd and I acknowledge. Unfortunately, he ignores our argument for disclosure as a way of dealing with that issue, and the serious problems of having the SEC enforce a Congressional insider trading ban. Consideration of these issues caused me to change my views on banning Congressional insider trading. I think it’s inconsistent to focus on enforcement problems in banning private activity (as both Bainbridge and I do) and not do so in banning public conduct, where enforcement is even trickier.
Posted in insider trading, politics | 1 Comment »
The NYT on Romney @ Bain
Posted by Larry Ribstein on November 13, 2011
A long front page article in today’s NYT tries to make political hay out of Romney’s time at private equity firm Bain Capital. The article supports the White House’s efforts to, as the article says, “frame Mr. Romney’s record at Bain as evidence that he would pursue slash and burn economics and that his business career thrived by enriching the elite at the expense of the working class.”
To do this, the NYT picks one transaction, medical company Dade International, from the 150 handled by Bain during Romney’s 15-year tenure (financing Staples as a startup is mentioned in passing). The Times says the “deal shows the unintended human costs and messy financial consequences behind the brand of capitalism that Mr. Romney practiced for 15 years.” The Times summarizes the transaction as follows:
At Bain Capital’s direction, Dade quadrupled the money it owed creditors and vendors. It took steps that propelled the business toward bankruptcy. And in waves of layoffs, it cut loose 1,700 workers in the United States, including Brian and Christine Shoemaker, who lost their jobs at a plant in Westwood, Mass. Staggered, Mr. Shoemaker wondered, “How can the bean counters just come in here and say, Hey, it’s over?”
Apart from the question of whether the Dade transaction was typical, what does the Times show about the Dade transaction? Let’s review the facts in the NYT story.
In 1994, Bain led a buyout group in purchasing the Dade, which the Times describes as “ailing” and “rife with problems,” from Baxter International.
Romney himself was “quite knowledgeable about the business” according to Dade’s then CEO. The article describes how Bain imposed the discipline on Dade that was a key innovation of the private equity industry. I summarize the incentive mechanisms that private equity employed here and in Chapter 8 of Rise of the Uncorporation. The Times article suggests this is how Bain operated in running Dade:
Dade employees could always tell when Bain Capital executives were in town: their bosses worked longer hours. “The thing Bain brought was urgency,” Mr. Brightfelt [a former Dade president] said. “It was 24 hours a day. It never stopped.” At Dade’s headquarters, the men from Bain — young, nattily dressed Bostonians — exerted themselves in ways big and small as the new owners. They took a majority of seats on the board of directors. They interviewed candidates for high-level jobs. They negotiated crucial contracts with suppliers. And they requested reams of data.
This clearly wasn’t a slash-and-run takeover. Bain expanded Dade rather than just firing the workers and selling out for a profit, based on Romney’s desire to “double down on Dade.” As a result, the company
became an industry leader, just as Bain Capital had intended. With its overseas acquisition, the company’s labor force swelled to 7,400 workers. The business invested in and refined products, like a test that rapidly detects whether a heart attack has occurred, that became widely used. From 1995 to 1998, Dade’s annual sales rose to $1.3 billion from $614 million. Its assets grew to $1.5 billion from $551 million. But another number was climbing just as fast — Dade’s long-term liabilities, which surged to $816 million from $298 million.
So what’s the problem? While the article wants to make a lot of the overleveraging of Dade, during Romney’s tenure debt apparently increased in line with assets. The firm also cut some salaries. But the article doesn’t discuss aggregate salary data, just the reduction of one particular employee’s salary, and the replacement of his “generous pension plan” by a 401(k) — a common practice in industry at this time.
The biggest horror story in the article was layoffs in a plant owned by one of Dade’s acquisitions. Although the story focuses on one worker’s personal tragedy, a former Dade SVP is quoted as saying, “It’s not done because they love cutting jobs. It ultimately made those companies stronger.” If layoffs and salary cuts make the business stronger, workers as a whole can benefit even as some suffer. The owners hurt themselves if they make the business weaker by depreciating the labor force.
The article concludes with a discussion of a transaction that occurred in April, 1999, two months after Romney retired from Bain, in which “it pushed Dade to borrow hundreds of millions of dollars to buy half of Bain’s shares in the company — and half of those of its investment partners.” Romney evidently benefited from this transaction via an increase in the value of his 16.5% interest in Bain. We are not told whether he had any role in approving in the increased debt.
We learn that Dade cut more jobs in 1999, evidently after Romney had left. Three years after Romney’s departure, when Romney no longer had a financial interest in Bain, and after other events weakened Dade (increased interest rates, declining euro, delays in constructing a new distribution center), Dade filed for bankruptcy. But Dade left bankruptcy two months later and went public. In 2007 it was sold to Siemens for $7 billion — 15.5 times the price paid in 1994 for an “ailing” orphaned division of a big corporation. The article concludes with the suggestion that the “painful” layoffs “ultimately worked.”
In short, the story’s details don’t support its slant. Romney’s “brand of capitalism” seems to have worked in this instance, even if its success was colored by events that occurred after he left Bain. Although I’m not suggesting that Romney should or would run the country the way he ran Bain and Dade, I’m also not troubled by his history as a deeply invested owner and manager of Bain. True, he and the other “elites” at his firm made a lot of money. But if every deal was like Dade, it’s not clear society as a whole, including the working class, came out worse.
I understand what the OWS crowd will make of this story. But they need to persuade me why this story should make Romney look worse than the typical presidential candidate who has spent his life in politics and whose job history has consisted mainly of engineering wealth transfers from weak interest groups (e.g., taxpayers) to more powerful ones (e.g., big banks).
Like this:
Posted in business, politics, private equity | 4 Comments »
Where the jobs are
Posted by Larry Ribstein on October 20, 2011
The WSJ reports:
Washington, D.C., nosed out San Jose, Calif., as the nation’s highest-income metropolitan region, fueled mainly by its army of attorneys, consultants, lobbyists and outside government contractors.
Census data for 2010 show median household income was $84,523 in the D.C. area, compared with $83,944 for the San Jose region, the epicenter of Silicon Valley. Both numbers are well above the median income of about $50,000 for the nation as a whole. While Washington’s incomes in 2010 were lower than in 2009, paychecks in the D.C. region have been more stable overall. * * *
While government work helps account for Washington’s lower jobless rate, its heftier income level is due to the lawyers, lobbyists and contractors whose salaries far outstrip their public-sector counterparts.
Now of course one could reasonably say that these Washington workers are high-paid because they are intelligent, well-trained, and have valuable expertise. The problem is that all these intelligent, well-trained experts are being funneled into government.
The rise of Washington vis a vis Silicon Valley is a trenchant commentary on modern life.
Posted in politics, regulation | 5 Comments »
Manifesto
Posted by Larry Ribstein on October 9, 2011
Michigan Avenue, Chicago, 10/8/11.
Posted in politics | 1 Comment »
Is there a Steve Jobs of government?
Posted by Larry Ribstein on October 6, 2011
No, at least not in the U.S.
And this is a good thing, rather than a reflection on the quality of people who enter the two fields of business and government.
In business, investors want to delegate power to executives, especially to imaginative executives like Steve Jobs. Letting investors do this entails potential costs. But Steve Jobs’s life reminds us why the costs of the occasional error are worth incurring, particularly given efficient markets and portfolio diversification.
In government, the people want to make sure that government works for them. This hampers creativity, but democracy is more important.
Imposing more bureaucracy and investor democracy on business will mean fewer Steve Jobs’s. As we celebrate the incredible amount of value he created, let’s remember the other influential entrepreneurs and try not to forget the conditions that enable them to flourish.
Obama’s Fatal Conceit
Posted by Thom Lambert on September 21, 2011
From the beginning of his presidency, I’ve wanted President Obama to succeed. He was my professor in law school, and while I frequently disagreed with his take on things, I liked him very much.
On the eve of his inauguration, I wrote on TOTM that I hoped he would spend some time meditating on Hayek’s The Use of Knowledge in Society. That article explains that the information required to allocate resources to their highest and best ends, and thereby maximize social welfare, is never given to any one mind but is instead dispersed widely to a great many “men on the spot.” I worried that combining Mr. Obama’s native intelligence with the celebrity status he attained during the presidential campaign would create the sort of “unwise” leader described in Plato’s Apology:
I thought that he appeared wise to many people and especially to himself, but he was not. I then tried to show him that he thought himself wise, but that he was not. As a result, he came to dislike me, and so did many of the bystanders. So I withdrew and thought to myself: “I am wiser than this man; it is likely that neither of us knows anything worthwhile, but he thinks he knows something when he does not, whereas when I do not know, neither do I think I know; so I am likely to be wiser than he to this small extent, that I do not think I know what I do not know.”
I have now become convinced that President Obama’s biggest problem is that he believes — wrongly — that he (or his people) know better how to allocate resources than do the many millions of “men and women on the spot.” This is the thing that keeps our very smart President from being a wise President. It is killing economic expansion in this country, and it may well render him a one-term President. It is, quite literally, a fatal conceit.
Put aside for a minute the first stimulus, the central planning in the health care legislation and Dodd-Frank, and the many recent instances of industrial policy (e.g., Solyndra). Focus instead on just the latest proposal from our President. He is insisting that Congress pass legislation (“Pass this bill!”) that directs a half-trillion dollars to ends he deems most valuable (e.g., employment of public school teachers and first responders, municipal infrastructure projects). And he proposes to take those dollars from wealthier Americans by, among other things, limiting deductions for charitable giving, taxing interest on municipal bonds, and raising tax rates on investment income (via the “Buffet rule”).
Do you see what’s happening here? The President is proposing to penalize private investment (where the investors themselves decide which projects deserve their money) in order to fund government investment. He proposes to penalize charitable giving (where the givers themselves get to choose their beneficiaries) in order to fund government outlays to the needy. He calls for impairing municipalities’ funding advantage (which permits them to raise money cheaply to fund the projects they deem most worthy) in order to fund municipal projects that the federal government deems worthy of funding. (More on that here – and note that I agree with Golub that we should ditch the deduction for muni bond interest as part of a broader tax reform.)
In short, the President has wholly disregarded Hayek’s central point: He believes that he and his people know better than the men and women on the spot how to allocate productive resources. That conceit renders a very smart man very unwise. Solyndra, I fear, is just the beginning.
Posted in Hayek, Knowledge Problem, politics, taxes | 71 Comments »
My Reflections on The Senate CFPB Hearing
Posted by Josh Wright on September 9, 2011
[Cross-posted at PYMNTS.COM]
Richard Cordray’s nomination hearing provided an opportunity to learn something new about the substantive policies of the new Consumer Financial Protection Bureau. Unfortunately, that opportunity came and went without answering many of the key questions that remain concerning the impact of the CFPB’s enforcement and regulatory agenda on the availability of consumer credit, economic growth, and jobs.
The Consumer Financial Protection Bureau’s critics, including myself, [1] have expressed concerns that the CFPB— through enforcement and regulation—could harm consumers and small businesses by reducing the availability of credit. The intellectual blueprint for the CFPB is founded on the insight, from behavioral economics, that “[m]any consumers are uninformed and irrational,” that “consumers make systematic mistakes in their choice of credit products,” and that the CFPB should play a central role in determining which and to what extent these products are used. [2] The CFPB’s recent appointment of Sendhil Mullainathan as its Assistant Director for Research confirms its commitment to the behaviorist approach to regulation of consumer credit. Mullainathan, in work co-authored with Professor Michael S. Barr, provided the intellectual basis for the much debated “plain vanilla” provision in the original legislation and advocated a whole host of new consumer credit regulations ranging from improved disclosures to “harder” forms of paternalism. The concern, in short, is that the CFPB is hard-wired to take a myopic view of the tried-and-true benefits of consumer credit markets and runs the risk of harming many (and especially the socially and economically disadvantaged groups in the greatest need of access to consumer credit) in the name of protecting the few.
To be sure, there is absolutely no doubt that there are unscrupulous and unsavory characters in lending markets engaging in bad acts ranging from fraud to preying upon vulnerable borrowers. Nonetheless, it is critical to recognize the positive role that lending markets and the availability of consumer credit has played in the American economy, especially in facilitating entrepreneurial activity and small business growth. Taking into account these important benefits is fundamental to developing sound consumer credit policy. I had hoped that the hearings might focus upon Mr. Cordray’s underlying philosophical approach to weighing the costs and benefits of credit regulation and how that balance might be struck at his CFPB. They did not, instead focusing largely upon another important issue: the precise contours of CFPB authority and oversight.
Currently, the unemployment rate is over 9 percent and all of the available evidence suggests the CFPB’s approach will run a significant risk of overregulation that will reduce the availability of consumer credit to small businesses and thus further depress the economy. Therefore, getting hard answers concerning how the CFPB views and will account for these risks in its enforcement and regulatory decisions is critical. Certainly, the nomination hearing offered small hints toward this end. We learned that under Mr. Cordray’s watch, CFPB enforcement will involve not only lawsuits but also a “more flexible toolbox” that includes “research reports, rulemaking guidance, consumer education and empowerment, and the ability to supervise and examine both large banks and many nonbank institutions.”
The job of protecting consumers in financial products markets—the domain of the new CFPB—extends to all such consumers. The benefits of healthy markets and competition in consumer credit products has generated tremendous economic benefits to the most disadvantaged as well as to small businesses. If the CFPB agenda were limited to educating consumers about the costs and benefits of various products and improving disclosures, there would be far less need for concern that it will be a drag on consumers, entrepreneurial activity, and economic growth. However, the CFPB’s intellectual blueprint suggests a more aggressive and dangerous agenda, and the authority it has been granted renders that agenda feasible. The CFPB must account for the benefits from lending markets and balance them against its laudable objective of preventing deceptive practices when crafting its enforcement and regulatory agenda. Unfortunately, after Tuesday’s nomination hearing, the CFPB’s approach to this complex and delicate balance remains an open question.
—–
[1] David S. Evans & Joshua D. Wright, The Effect of the Consumer Financial Protection Agency Act of 2009 on Consumer Credit, 22(3) Loyola Consumer L. Rev. 277 (2010).
[2] Oren Bar-Gill & Elizabeth Warren, Making Credit Safer, 157 U. Pa. L. Rev. 1, 39 (2008).
Posted in consumer financial protection bureau, consumer protection, cost-benefit analysis, credit cards, economics, politics | 8 Comments »
“Argentina’s government has filed criminal charges against the managers of an economic consulting firm, escalating its persecution of independent economists.”
Posted by Josh Wright on July 9, 2011
Some context (HT: WSJ):
The criminal complaint, initiated by the Commerce Secretariat, is the harshest in a series of legal measures against economists. The credibility of Indec’s data has been questioned ever since former President Nestor Kirchner replaced longtime civil servants with political appointees in early 2007.
So far this year, the Secretariat has fined at least nine economic research firms 500,000 pesos ($122,000) each. This week, the Secretariat also slapped a second fine on Orlando J Ferreres & Asociados.
“They fine us for saying how much prices have risen,” Mr. Ferreres, director of his eponymous firm, said. “They could seek criminal charges against all of us. We don’t know how far they’re willing to go.”
Mr. Ferreres said the legal actions are part of a strategy to prevent independent economists from publishing potentially negative information during an election year.
Posted in economics, politics | 1 Comment »
