Note to President Obama: Research Shows that Private Equity Investments Create Jobs

One of the more irritating features of electoral politics is the disinformation that politicians spew with regard to their records and those of their opponents. President Barack Obama obviously intends to ride class warfare back into the White House this fall. One tactic of this class warfare strategy is to assert that private equity companies like Bain Capital that Mitt Romney headed back in the day destroyed jobs while enriching vulture capitalists. Unfortunately, recent economic research contradicts the president's claims that private equity firms destroy jobs.  

For example, consider a 2010 National Bureau of Economic Research 2010 study, Private Equity and Economic Performance [PDF], by researchers from Columbia and Harvard Universities and the Swedish Institute for Financial Research. They report: 

Industries where PE [private equity) funds have been active in the past five years grow more rapidly than other sectors, whether measured using total production, value added, or employment. In industries with PE investments, there are few significant differences between industries with a low and high level of PE activity....

PE industries appear to grow significantly faster in terms of labor costs and the number of employees. The annual growth rate of total labor cost is 0.5 to 1.4 percentage points greater for PE industries, and the number of employees grows at an annual rate that is 0.4 to 1.0 percentage points greater. These findings are particularly surprising, since a common concern is that PE investors act aggressively to reduce costs with little concern for employees. This concern is not necessarily inconsistent with our results. Despite initialemployment reductions at private equity-backed firms, the greater subsequent growth in total production ... may lead to subsequent employment growth in the industry overall.

Considering the specifications with PE activity quartiles, industries with more PE activity appear to have more rapid growth of total labor costs, but the growth rate of the number of employees is fastest in industries with more moderate levels of PE activity. Regardless of the level of PE activity, however, the PE industries’ growth rates of labor costs and employment always exceed the rates for non-PE industries.

When will the president and his advisors get it through their heads that in the long-run propping up badly managed companies is not the way to create more jobs? 

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  • Masturbatin' Pete||

    One tactic of this class warfare strategy is to assert that private equity companies like Bain Capital that Mitt Romney headed back in the day destroyed jobs while enriching vulture capitalists.

    Well that's not really the argument. Or rather, it's not the refined, walked-back argument. It's more like...

    "Private equity is bad!" - oh wait, Obama gets a lot of money from PE. Okay, then...

    "Bain Capital is bad!" - hold up, maybe not. Seems to be a pretty good company. Well in that case...

    "When Romney was at Bain Capital, it did some bad things!" - Slow down there, Action Jackson. The stuff you're complaining about had nothing to do with Romney, and didn't really take place while he was there. FINE! We're just go with...

    "Romney destroys jobs."

  • Auric Demonocles||

    When will the president and his advisors get it through their heads that in the long-run propping up badly managed companies is not the way to create more jobs?

    When the union workers stop propping up badly managed governments in return.

  • Anomalous||

    FTW!

  • VG Zaytsev||

    The Bain type of PE firm probably did result in net job loss.

    And so what?
    That's actually a good thing.

    The role that Bain and like firms play is in restructuring failing firms. That is accomplished by reorganizing their operations including closing unprofitable division and dead wood employees.

    The words that describe this activity are efficiency and productivity as in doing more with fewer inputs. That is the basis of our modern standard of living.

    These attacks on Bain et al are modern versions of Luddism. As demonstrated by Obama's critique of ATMs as causing job losses.

    We need to stop arguing that Bain really created jobs. They didn't. And it would have been a failure if they had.

  • John||

    Exactly. Venture capital funds create jobs. PE firms create productivity, which is just as good but not the same thing.

  • Auric Demonocles||

    The argument was that over the long term they create jobs, by allowing the money to be spent more wisely.

  • Ron Bailey||

    AD: you are correct - short run perhaps fewer jobs but in the long run more jobs - that is what the referenced study finds.

  • John||

    True. but they don't directly create jobs. VG is right about that. In the short run they destroy jobs, but save others by saving the company.

    The funny thing is that after all of the whole "created or saved" bs over the stimulus, PE firms actually do save jobs. If no one bought these companies, they would go out of business and everyone would lose their jobs.

  • niobiumstudio||

    Not only that, but short term PE prevents A LOT of jobs from being lost. A lot of these LBOs are companies that are on the brink of bankruptcy or are doing very, very poorly and circling the drain (otherwise, why would they be open to a non-hostile takeover). People always forget that without PE, a lot of times the companies would have died and ALL the jobs would have been lost - they just focus on the temporarily lost jobs...

  • Montani Semper Liberi||

    I look at is as saving jobs since without restructuring, everyone would lose their jobs. At least with downsizing there will be some jobs left.

  • Ice Nine||

    And as soon as voters read those National Bureau of Economic Research reports this sleazy Obama tactic will crash and burn. Just watch.

  • AlmightyJB||

    Is it a picturebook? Are they about Linsey Lohan?

  • Mike M.||

    When will the president and his advisors get it through their heads that in the long-run propping up badly managed companies is not the way to create more jobs?

    Never going to happen, Bailey. Obama is a fanatical true believer; he really believes all the bullcrap that comes out of his mouth.

    But honestly, what the hell would you expect from a guy who has been surrounded by communists from the day he was born? You might as well expect a bird to not act like a bird.

  • ||

    Sure Obama doesn't seem to have a grasp on economic concepts beyond knee-jerk class warriorism, but he more than makes up for it with his vast knowledge and respect for the US Constitution.

  • Whiterun Guard||

    Why should he have a grasp on it? It has no relevance on any of his goals.

    That would be like me studying the works of Jane Austen.

  • ||

    True, or like Sherlock Holmes knowing that the Earth rotated around the Sun.

  • ||

    Ssssssh, do't tell him that! Knowledge would only take the bloom off his naivete

  • دردشه عراقية||

    Thanks

GET REASON MAGAZINE

Get Reason's print or digital edition before it’s posted online

  • Video Game Nation: How gaming is making America freer – and more fun.
  • Matt Welch: How the left turned against free speech.
  • Nothing Left to Cut? Congress can’t live within their means.
  • And much more.

SUBSCRIBE

advertisement