Destruction and Creation

Governor Rick Perry, amongst others, has been denigrating Governor Mitt Romney over Mr Romney's participation in Bain Capital—all those jobs lost.  Exactly.  The problem is, those were jobs that probably needed to be lost so that other jobs could be added to the economy.  Mr Romney was doing just what he was supposed to be doing.  I have laid off people, when the work went away—I didn't lay them off precipitously, but I did lay them off.  In fact, some left before I had to lay them off, because we had talked about it and they understood that they should seek alternatives.  On went to hike over mountain trails.  His wife has a great job and one well paying.  Two others found good jobs elsewhere.  Those I actually had to lay off did find jobs, including a couple of people in their fifties.  It is the way of our system.

To look at it from the point of view of the overall economy, rather than that of your next door neighbor, who was laid offtop down, we can read this article, by Mr David P Goldman, a Columnist for Asia Times Online.  He begins:

Want to see what America would look like without private equity?  Move to Detroit and contemplate the ruins of a city ruined by the placid conformity of auto industry executives.  The  economic impact of the corporate takeover business can’t be measured by the outcome of takeovers as such.  Private equity transformed the way American business thought about the world.  If managers did a lousy job, outside investors could raise money (a lot of it from trade union pension funds as well as university endowments) and kick them out.

Newt Gingrich and Rick Perry should be ashamed of themselves for bean-counting Bain Capital’s record on job creation.  Any investment firm operating over decades of rapid employment growth will be able to show that the companies it bought added jobs over time.  That’s what the academic studies on private equity show in any event, as Jordan Weissmann reports at The Atlantic.  More relevant is the alternative. We’ve been there, done that, and don’t want to do it again.  Corporate America in the 1950s and 1960s coasted on the postwar monopoly enjoyed by American companies after the destruction of European and Japanese industries.  Detroit in the late 1960s had African-American neighborhoods stretching for miles with well-kept single-family homes and manicured lawns; by the end of the 1970s it had turned into a moonscape.  The rust belt still hasn’t recovered from the laziness of American capital a generation ago.

Private equity takes money from institutional investors who otherwise would passively invest in public securities, and gives them the chance to exercise direct ownership of companies whose management fails to exploit their potential.  It creates competition where no competition existed before.  As in every business, there are ten wannabees for every visionary.  A lot of the success of private equity derives from the fact that equity values rose steadily from 1983 through 2000, and anyone who had a chance to own equity with borrowed money did exceptionally well.  One can argue that many of the players who got rich during the boom years simply rode the big wave.  (Bain Capital, though, was one of the first in, and throughout one of the smartest, and one of the least reckless about using excess leverage.)

This is the way of capitalism.  This is as opposed to command economies, (such as Communist or Fascist economies), where bureaucrats make the decisions as to where to invest.  Experience suggests that a system based upon a capital market is more efficient, and thus produces more and better jobs.

This final quuote sums it up for me:

Romney understands that the American economy runs from the bottom up—that risk-taking and innovation and the stubborn desire to win are what make companies succeed.

As an aside, this does seem to be a different understanding than what Senatorial Candidate Elizabeth Warren believes.

Hat tip to the Instapundit.

Regards  —  Cliff