Almost nothing bad is left to be said about Republican presidential candidate Mitt Romney’s tenure at the buyout firm Bain Capital. His Republican primary opponents already said it earlier this year. The private-equity business, according to Newt Gingrich, is filled with “rich people figuring out clever, legal ways to loot a company.” According to Rick Perry, its practitioners “take companies apart so they can make profits and have people lose their jobs.”
President Barack Obama subsequently launched Bain-driven attack ads against Romney, no doubt with more to come.
What we have here is an old argument getting a new twist. Politicians have debated for generations about whether economic efficiency comes at the cost of social justice.
Our own view is that the two principles can, and must, co-exist. Eliminate the former and you make the latter unaffordable (See: Europe, 21st century). For America to prosper, it needs to embrace efficiency and provide a social safety net.
The private-equity business is part of this nation’s efficient business ecosystem, not a force for evil. That doesn’t mean, however, that the acolytes of efficiency ever will be popular. People resent them, and by extension Romney. His opponents believe that his personal success can be turned into a political liability, and they’re on to something.
Private-equity has a bad name for reasons that go beyond the Gingrich- and Perry-style superficialities — reasons that Romney can’t do anything about, because they’re facts of economic life:
—Private-equity both eliminates jobs and creates jobs, but it cuts more visibly than it creates.
In a noteworthy research paper last year, the University of Chicago’s Steven Davis and four colleagues tested the popular idea that leveraged buyouts bring huge job losses.
Analyzing 3,200 deals over 25 years, they concluded that employment at targeted companies does indeed fall — by an average of 3 percent over two years and 6 percent over five years, compared to employment at comparable companies that weren’t bought out. They also found, though, that target firms create more jobs by opening new locations and new lines of business. Taken together, the net job loss amounts to no more than 1 percent to 2 percent, depending on how you count post-buyout acquisitions and divestitures.
Here’s the rub: Bigger deals involving the takeover of well-known public companies led to much larger, swifter job losses than buyouts of small, privately held firms. Almost no one hears about modest investments that help little-known businesses get their start and grow. The big, public transactions get the most attention, and turn out the worst for the employees directly involved.
—Private-equity creates jobs, but typically not for the same people it cuts.
Employees at companies bought out by private-equity firms stand a relatively high risk of losing their jobs. Those same target firms often go on to create new jobs thanks largely to private-equity money and know-how.
As a result, jobs are, in the language of economists, re-allocated. The net loss overall is modest — unless it was your job, and you were unable to find another. It’s small comfort to those paying a steep personal price that the economy as a whole may benefit from their sacrifice. The individual cost is real: Research shows that people laid off in recessions, especially, rarely manage to earn as much in the future as they did before they lost their jobs.
—Private-equity does its work in an arrogant fashion.
No one likes a know-it-all. People who spend a career learning how to do business resent being told to do it differently. Yet one of private-equity’s most valuable functions is to sweep out old assumptions, old ways of doing business, and usher in the new.
When Romney told a crowd on the campaign trail that he likes “being able to fire people” who don’t do their jobs to his satisfaction, he was wearing his career on his sleeve. Private-equity depends on “up-or-out” performance. Do the job, with urgency, or make way for somebody who will. It’s pure capitalism, intended to produce a return on investment for those who put their money on the line.
If you don’t like the sound of that, we’ll sympathize but not empathize. That’s the way the economic world works best. America has the biggest economy because it is more flexible and efficient than those of many other nations. It embraces its inner Romney — providing big rewards for those who put capital at high risk of loss when opportunity knocks.
Romney won’t win any popularity contests based on his tenure at Bain, but neither should he shrink from it. American voters have a genius for seeing beyond the sound bites.
Between now and Nov. 6, they have plenty of time to evaluate the candidates based on a deeper understanding of what they’re all about — their approach to private-equity included.
